ITAT Delhi Quashes Rs. 3.25 Crore Addition Under Section 68 Due to Factually Flawed Reassessment Reasons

Introduction to the Judicial Pronouncement

In a significant judicial determination, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, has nullified a reassessment proceeding initiated against an assessee due to a fundamental factual error in the reasons recorded by the revenue authorities. The case, ITO Vs Allegiance Management Services Private Limited, highlights the critical importance of accurate fact-finding before invoking the extended reassessment jurisdiction.

The tribunal dismissed the revenue's appeal and upheld the decision of the Commissioner of Income-tax (Appeals), which had previously deleted an addition of Rs. 3,25,00,000 made under Section 68 of the Income Tax Act, 1961. The core of the dispute revolved around the assessing authority's failure to acknowledge a previously completed scrutiny assessment under Section 143(3), thereby incorrectly bypassing the stringent conditions laid down in the first proviso to Section 147.

Factual Matrix of the Dispute

Inception and Original Assessment Proceedings

The assessee, Allegiance Management Services Private Limited, was incorporated on 20.04.2010 to engage in consultancy and related business operations. For the Assessment Year (AY) 2012-13, the company submitted its return of income on 31.03.2013. The declared income stood at Rs. 5,63,150 under the normal provisions of the Act, alongside a book profit of Rs. 9,23,115 computed under Section 115JB.

The revenue department initially selected the assessee's case for scrutiny through the Computer Assisted Scrutiny Selection (CASS) mechanism. Consequently, notices under Section 143(2) and Section 142(1) were issued. The assessing authority raised specific queries regarding the receipt of share application money, the collection of share premium, the acquisition of an immovable property in Mumbai, and the reserves and surplus declared in the financial statements.

In response, the assessee provided exhaustive documentation. This compilation included investor confirmations, copies of the investors' income tax returns, balance sheets, and relevant bank statement extracts. Furthermore, the company submitted board resolutions authorizing the share allotment and evidence of filing Form PAS-3 with the Registrar of Companies. The submitted records comprehensively detailed the receipt of share capital and premium totaling Rs. 3,25,00,000 from five distinct entities. After evaluating these submissions, the assessing authority finalized the assessment under Section 143(3) on 22.12.2014, accepting the income as originally returned and acknowledging the tax payment of Rs. 1,75,907.

Subsequent Information and Reassessment Trigger

Several years post the completion of the original scrutiny, the assessing authority received an intimation dated 20.03.2019 from the Investigation Wing. The communication highlighted that the assessee had acquired a property in Mumbai for Rs. 3,00,00,000 during the Financial Year (FY) 2011-12.

The investigation report pointed out a perceived mismatch between the company's financial standing and its transactions. It was noted that the assessee possessed a paid-up capital of merely Rs. 8.71 lakh but showcased general reserves amounting to Rs. 3.17 crore (specifically Rs. 3,17,16,000). The company had allotted 77,500 shares at a premium of Rs. 990 per share, despite having minimal operating revenue. Additionally, summons issued under Section 131(1A) to the directors allegedly indicated a lack of familiarity with some of the investing entities.

Relying on this investigative input, the assessing authority formed a belief that income to the tune of Rs. 3,17,16,000 had escaped assessment.