ITAT Delhi Quashes Reassessment Under Section 147 for Mere Verification of Trading Receipts

Background of the Dispute

The Delhi Bench of the Income Tax Appellate Tribunal, in the case of Ambica Timber Trade Pvt Ltd Vs ITO, examined the legality of reassessment proceedings initiated under Section 147 of the Income Tax Act 1961 for AY 2012-13. The assessee challenged:

  1. The very initiation of reassessment under Section 147; and
  2. The substantive addition of Rs. 7,39,62,714 made in the reassessment order.

Recognising that jurisdiction is a threshold issue, the Tribunal first addressed whether the reassessment itself was validly initiated. Once it found the assumption of jurisdiction to be defective, it set aside the reassessment order and chose not to examine the merits of the addition.

Facts Leading to Reopening Under Section 147

Original Return and Assessment Position

  • The assessee, a company engaged in the timber trade, filed its return of income for AY 2012-13 on 25.09.2012, declaring total taxable income of Rs. 9,73,470.
  • The income disclosed in the return, including sales credited to the profit and loss account, was accepted by the Revenue at the time of the original processing/assessment.

Information from Investigation Wing and Trigger for Reopening

Subsequently, the Assessing Officer (AO) received an information report from the Investigation Wing, Gurgaon. According to that report:

  • The assessee had allegedly received accommodation entries aggregating to Rs. 7,39,62,714 from entities described as being part of the Spaze Group.
  • The AO treated the monies received from these entities as unexplained accommodation entries not properly disclosed in the income tax return for AY 2012-13.

The AO recorded reasons for reopening the assessment and proceeded to issue notice under Section 147 r.w.s. Section 148.

Parties and Amounts Involved

As per the reasons recorded, the AO listed the following entities and amounts:

  1. M/s Balaji Enterprises – Rs. 3,08,68,468
  2. M/s Sai Kripa Enterprises – Rs. 57,67,484
  3. M/s Nav Durga Trading Company – Rs. 47,50,622
  4. M/s International Agency – Rs. 50,00,000
  5. M/s Mercury Enterprises – Rs. 59,78,478
  6. M/s Shree Ji Lumbers – Rs. 1,83,45,400
  7. M/s B.K. Enterprises – Rs. 15,00,000
  8. M/s Vicky Enterprises – Rs. 48,00,000

Total alleged accommodation entries: Rs. 7,39,62,714

From the reasons recorded, it also emerged that the AO linked these receipts to accommodation entries that, according to the Investigation Wing, pertained to AY 2010-11, yet the AO invoked reassessment for AY 2012-13 to “verify the source” of these sums.

Assessee’s Core Contention on Jurisdiction

Nature of Receipts – Trading Proceeds, Not Unexplained Credits

The assessee argued before the Tribunal that:

  • The sums received from these eight entities were not unexplained cash credits or accommodation entries;
  • They were sale proceeds, representing amounts collected against actual sales of goods made by the assessee to those very parties;
  • The aggregate sales made to these eight entities during the year amounted to Rs. 12,50,45,247;
  • Out of such sales, receipts of Rs. 7,39,62,714 formed part of the trading receipts duly recorded in the books.

To substantiate this, the assessee: