The Income Tax Appellate Tribunal ( ITAT ), Ahmedabad, recently delivered a judgment favoring Amey Pravinbhai Brahmbhatt in a case concerning unexplained investments not forming part of the reasons recorded by the Assessing Officer (AO) for reopening the assessment.
The case arose when the AO reopened the assessment for the year 2011-12, alleging that the taxpayer had engaged in transactions involving accommodation entries worth ₹49,10,402 in penny stock shares of M/s. Swarna Sarita Gems Ltd. However, the AO did not make any addition concerning this transaction during reassessment. Instead, an unrelated addition of ₹6,37,000 was made, citing unexplained investment in shares. This action was challenged by the taxpayer, ultimately leading to the ITAT’s intervention.
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The ITAT, after reviewing the case, held that the reopening of assessments must adhere strictly to the reasons initially recorded. The tribunal noted, “When the reason on which the case was reopened was found to be incorrect, the reopened assessment proceeding should have been dropped.” It further emphasized that making additions unrelated to the reasons for reopening creates an “incongruent situation,” as highlighted in the Gujarat High Court’s ruling in CIT vs. Mohmed Juned Dadani (2013) . In that case, it was held that “when on the ground on which the reopening of assessment was based, no addition was made by the AO, he could not make addition on some other grounds which did not form part of the reasons recorded by him.”
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The ITAT observed that the AO’s actions violated the principles laid down in precedent rulings and procedural norms. The tribunal concluded that the ₹6,37,000 addition was invalid and must be deleted. In its judgment, the ITAT stated, “The AO was not correct in making addition in respect of unexplained investment in shares, which did not form part of the reason as recorded by the AO, particularly when no addition was made in respect of the accommodation entry for which the case was reopened.”
Tax authorities cannot use reassessment proceedings to introduce unrelated additions, ensuring protection for taxpayers from arbitrary actions.
Ultimately, the appeal was partly allowed, with the impugned addition deleted.
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