Radhu Developers Pvt. Ltd. vs ITO – Reopening of Assessment Invalidated for AY 2006-07

Case Summary: Radhu Developers Pvt. Ltd. vs ITO – AY 2006-07

This detailed analysis covers the proceedings and the final judgment delivered by the Income Tax Appellate Tribunal (ITAT) Delhi in the case of Radhu Developers Pvt. Ltd. versus Income Tax Officer, Ward-20(4), New Delhi. The appeal, filed under case number ITA 6693/DEL/2019 for the assessment year 2006-07, was heard and decided on October 5, 2020.

Background and Reason for Filing the Case

Radhu Developers Pvt. Ltd., a company based in Delhi, filed its return of income for the assessment year 2006-07 on November 26, 2006, declaring NIL income. The original assessment under Section 143(3) of the Income Tax Act, 1961, was completed on November 21, 2008, at NIL income. However, subsequent information received from the office of the Director of Income Tax (Investigation), New Delhi, indicated that the assessee had received accommodation entries amounting to Rs. 75 lakhs from various parties, leading to the reopening of the assessment under Section 147/148 of the Act.

Reopening of Assessment and the Assessee’s Challenge

The Assessing Officer (AO) initiated reassessment proceedings based on the information from the DIT(Inv.), and notice under Section 148 of the Act was issued on March 22, 2013, with the prior approval of the CIT, Delhi-5. The assessee responded by stating that the original return filed should be considered as a response to the notice under Section 148. The AO proceeded to add Rs. 75 lakhs as unexplained investment, holding that the amount credited in the books was not satisfactorily explained and was likely to be bogus accommodation entries. The reassessment was completed on March 26, 2014, making the addition to the income of the assessee.

The assessee challenged this reopening on multiple grounds, including the legality of the notice issued under Section 148, the validity of the reopening, and the merits of the additions made by the AO. The case was taken up by the CIT(A), who upheld the AO’s order, leading the assessee to file an appeal before the ITAT.

Proceedings Before the ITAT

The appeal was heard by a bench comprising Shri H.S. Sidhu, Judicial Member, and Shri Anil Chaturvedi, Accountant Member, through video conferencing due to the pandemic.

Arguments Presented by the Assessee

The learned counsel for the assessee, Mr. Suresh K. Gupta, argued that the reopening of the assessment was illegal, without jurisdiction, and in violation of the principles of natural justice. The primary contention was that the approval granted by the CIT for issuing the notice under Section 148 was mechanical and lacked application of mind, making the entire reopening process invalid. The counsel also challenged the additions on merits, arguing that the AO had not provided sufficient evidence to support the claim that the entries were bogus.

Contentions by the Revenue

The Departmental Representative (DR), Mr. Sunil, defended the order of the CIT(A) and the AO, arguing that the reopening was based on specific and credible information regarding accommodation entries. The DR contended that the CIT’s approval was given after due consideration and that the assessee had failed to discharge its onus under Section 68 of the Act, justifying the additions made by the AO.

ITAT’s Examination and Ruling

The ITAT carefully examined the submissions made by both parties, the records of the case, including the reasons recorded for reopening, and the approval granted by the CIT. The Tribunal noted that the approval granted by the CIT-5, New Delhi, for issuing the notice under Section 148 of the Act was merely a single-line statement: “I am satisfied with the reasons.” The Tribunal found this approval to be mechanical and lacking any detailed examination of the facts or application of mind.

The ITAT emphasized that for the reopening of an assessment under Section 147/148, the CIT must apply their mind to the material and reasons put forward by the AO before granting approval. The absence of such detailed examination renders the approval invalid, making the subsequent proceedings void.

Invalidation of Reopening and Quashing of the Assessment

The ITAT held that the reopening of the assessment in the case of Radhu Developers Pvt. Ltd. was invalid due to the mechanical and non-application of mind by the CIT when granting approval for the notice under Section 148. Consequently, the Tribunal quashed the reassessment order for AY 2006-07.

In addition, since the quantum appeal was quashed, the penalty appeal filed under ITA 6693/DEL/2019 was also allowed, as the penalty was directly related to the additions made in the invalidated reassessment.

Conclusion and Implications

The ITAT’s ruling in Radhu Developers Pvt. Ltd. vs ITO, Ward-20(4), New Delhi serves as a significant precedent in cases involving the reopening of assessments. The judgment reinforces the principle that the approval for issuing notices under Section 148 must be given after a thorough and reasoned application of mind by the approving authority. Mechanical approvals without proper consideration can lead to the quashing of the entire reassessment process.

This case highlights the importance of adhering to procedural requirements in tax assessments and reassessments. For taxpayers, it underscores the necessity of challenging procedural lapses that can affect the validity of reassessment proceedings. For the tax authorities, it serves as a reminder to exercise due diligence and ensure that all steps in the reassessment process are carried out with due care and legal compliance.

In summary, the ITAT’s decision to quash the reassessment and allow the penalty appeal marks a victory for the assessee, Radhu Developers Pvt. Ltd., ensuring that procedural justice prevails in the income tax assessment process.

Radhu Developers Pvt. Ltd. vs ITO – Reopening of Assessment Invalidated for AY 2006-07