Bangalore ITAT Quashes Reassessment Order Due to Non-Supply of Recorded Reasons — Sarita Shetty vs DCIT

Case Background and Overview

The Bangalore bench of the Income Tax Appellate Tribunal recently delivered a significant ruling in Sarita Shetty Vs DCIT (ITAT Bangalore) concerning Assessment Year 2015-16, wherein a reassessment order was quashed on account of the Assessing Officer's failure to supply the recorded reasons for reopening the assessment, despite explicit and repeated requests from the assessee.

This decision reaffirms a well-established procedural safeguard under the reassessment framework and underscores that non-compliance with the mandatory procedure laid down by the Hon'ble Supreme Court renders a reassessment order legally unsustainable, irrespective of the merits of any underlying addition.

Facts of the Case

Investment Background

The assessee, an individual, had originally invested ₹21 lakh in 700 unsecured convertible bonds of Mysore Polymers and Rubber Products Private Limited at ₹3,000 per bond back in June 2011. These bonds were subsequently converted in July 2014 into 7,000 equity shares at a price of ₹34 per share, comprising both face value and premium.

Trigger for Reassessment

Information was subsequently received by the department indicating that the fair market value (FMV) of those equity shares at the time of conversion was ₹65.85 per share, significantly higher than the conversion price of ₹34 per share. Accordingly, the differential amount — being the difference between the FMV and the actual conversion price across 7,000 shares — was computed at ₹25,09,500.

On this basis, the Assessing Officer initiated reassessment proceedings under Section 147 of the Income-tax Act, 1961, issuing a notice under Section 148 dated 30 March 2021. The assessee filed a return of income on 27 April 2021 in response, declaring total income of ₹28,32,350, the same figure declared originally.

Addition Made by the Assessing Officer

The Assessing Officer invoked Section 56(2)(vii)(c) of the Income-tax Act, 1961, treating the differential amount of ₹25,09,500 as taxable income under the head "Income from Other Sources", on the ground that the assessee had received shares at a price lower than their FMV. A reassessment order dated 30 March 2022 was passed under Section 147 read with Section 144B, determining the total income at ₹53,41,850.

First Appellate Proceedings

Aggrieved by the reassessment order, the assessee appealed before the National Faceless Appeal Centre (NFAC), Delhi. The learned CIT(A), however, upheld the action of the Assessing Officer, leading to the present appeal before the Bangalore ITAT.

Grounds of Appeal Raised Before the Tribunal

The assessee raised multiple grounds before the Tribunal, the most critical being:

1. Ground No. 2 — The reassessment order passed under Section 147 was bad in law and void ab initio since the reasons recorded for reopening were never furnished to the assessee despite specific requests, in violation of the procedure mandated by the Hon'ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (259 ITR 19).

2. Without Prejudice — The reopening was also challenged on the ground that no income had actually escaped assessment under the facts and circumstances of the case.