Chennai ITAT on Section 147: Reopening Fails If No Addition on Recorded Reason
Background and Context
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) in Dr. Agarwal’s Health Care Limited Vs DCIT (ITAT Chennai) has reiterated a critical limitation on the powers of the Assessing Officer (AO) under Section 147 of the Income Tax Act 1961.
The Tribunal held that once an assessment is reopened for a specific, recorded reason, the reassessment can survive only if some addition or adjustment is actually made on that very point. If the AO ultimately makes no addition on the issue which formed the basis for reopening, the AO cannot sustain the reassessment merely by making additions on other, unrelated issues discovered later.
In this case, the AO reopened the assessment on the ground that the assessee allegedly suppressed a variable component of professional fees payable to doctors. However, the final reassessment order did not disturb that item at all. Instead, the AO disallowed interest expenditure of Rs. 4,02,20,696/-, which had no nexus to the recorded reasons. Relying on binding precedents of the Madras High Court, the ITAT set aside the reassessment as being without jurisdiction.
Brief Facts of the Case
Original Assessment
- The assessee, Dr. Agarwal’s Health Care Limited, is engaged in the business of providing healthcare services.
- For Assessment Year 2018-19, the assessee filed its return of income on 30.11.2018, declaring:
- Total income: ‘Nil’
- Business loss: Rs. 24,89,49,563/-
- The assessment was completed under
Section 143(3)read withSection 143(3A)andSection 143(3B)vide order dated 16.04.2021. - In that assessment order, the AO determined:
- Total income at ‘Nil’
- Business loss at Rs. 12,06,46,090/-
Thus, a part of the originally claimed loss was disallowed in the regular assessment, but no issue arose at that stage regarding variable professional fees to doctors.
Information Leading to Reopening
Subsequently, the Department received information suggesting that the assessee had not fully disclosed the variable portion of professional fees promised to doctors. The allegation was that such professional fees had two components:
- A fixed component, and
- A variable component linked to gross turnover.
The AO noted the following during this stage:
- Fixed professional fees debited: Rs. 32,64,29,562/-
- Alleged unaccounted variable component: Rs. 2,33,42,650/-
On this basis, the AO formed a belief that income had escaped assessment and issued notice under Section 148 to reopen the completed assessment. A prior Section 148A procedure was followed, in which the assessee was put to notice that disallowance of the variable professional fees could be made.
Reassessment Proceedings and Order
After initiating proceedings under Section 147 read with Section 144 and Section 144B, the AO passed a reassessment order. However, notably:
- No addition was ultimately made towards the alleged suppression of the variable professional fees to doctors.
- Instead, the AO proceeded to disallow interest expenditure amounting to Rs. 4,02,20,696/-.
- This disallowance related entirely to a separate matter and did not figure in the recorded reasons for reopening.
Thus, the reassessment order rested solely on the disallowance of interest, with the originally recorded reason—non-disclosure of variable professional fees—having led to no addition at all.
First Appeal Before NFAC
The assessee challenged the reassessment order before the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), under Section 250.
- The First Appellate Authority (FAA) upheld the reassessment and confirmed the AO’s action, including the disallowance of interest expenditure.
Being aggrieved, the assessee carried the matter in further appeal to the ITAT, raising both legal grounds and grounds on merits of the disallowance.
Grounds Raised Before the ITAT
Original and Additional Grounds
The assessee had filed multiple grounds in the memorandum of appeal and later filed an additional ground dated 10.07.2026. At the time of hearing: