ITAT Mumbai Strikes Down Rectification Order Under Section 154 Post Section 270AA Immunity: Finality of Assessment Cannot Be Disturbed

Overview of the Case

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, adjudicated upon the matter of Nilgiri Dairy Farm Private Limited Vs DCIT, setting aside a rectification order that had been passed under Section 154 of the Income-tax Act, 1961. The Tribunal's decision addresses a crucial intersection between rectification jurisdiction, immunity provisions, and the applicability of deemed income provisions — making it an important precedent for assessees who have accepted assessment orders and obtained immunity under Section 270AA.

At the heart of the dispute was whether, after an assessee voluntarily forgoes appellate remedies and secures immunity under Section 270AA, the Assessing Officer retains jurisdiction to invoke Section 154 to substantially rewrite the tax consequences of the original assessment — specifically by treating an ad hoc disallowance as unexplained expenditure under Section 69C and taxing it under Section 115BBE.

Background and Factual Matrix

Nilgiri Dairy Farm Private Limited had filed its return of income for Assessment Year 2017-18, declaring a business loss of Rs. 31,90,20,163/-. During scrutiny proceedings, the Assessing Officer examined the Profit & Loss Account and noted that the assessee had debited "other expenses" amounting to Rs. 35.54 crores, as compared to Rs. 33.29 crores in the immediately preceding year.

The Assessing Officer observed a significant year-on-year increase and called upon the assessee to furnish party-wise details of such expenditure. When the assessee expressed its inability to produce the requisite details before the completion of assessment proceedings, the Assessing Officer proceeded to disallow 5% of the said expenses on an estimated basis, arriving at a figure of Rs. 1,77,70,000/–.

The Critical Labelling Error in the Original Assessment

What made this case legally complex was the manner in which the Assessing Officer characterised this ad hoc disallowance in the original assessment order. Rather than treating it as a routine estimated disallowance under general computation provisions, the Assessing Officer erroneously labelled the disallowed amount as "unexplained expenditure" under Section 69C of the Income-tax Act, 1961. The relevant extract from the original assessment order reads as follows:

"During the course of assessment proceedings, on perusal of the Profit & Loss Account, it is noticed that during the year under consideration the assessee has debited an amount of Rs. 35,54,00,000/- towards other expenses as compared to earlier year of Rs. 33,29,00,000/-. This shows a huge hike in the other expenses. The assessee company was asked to produce the party wise details of expenses but the assessee company shows its inability to submit the required details in respect of other expenses and till date of passing the order, failed to produce the same. Hence, in the absence of documentary evidences, expenses shown by the assessee company remains unverified. In this circumstance, an amount of Rs. 1,77,70,000/- (being 5% of Rs. 35,54,00,000/-) is hereby treated as unexplained expenses u/s 69C of the Income-tax Act, 1961 and added to the total income of the assessee company."

Despite this characterisation under Section 69C, the Assessing Officer adjusted this addition against the current year business loss during the computation of assessed income, ultimately arriving at a reduced assessed loss of Rs. 30,12,50,163/-. Simultaneously, the Assessing Officer initiated penalty proceedings under Section 270A(2) for alleged underreporting of income.

The Section 270AA Immunity Order

Following the completion of the scrutiny assessment, the assessee filed an application under Section 270AA of the Income-tax Act, 1961, seeking immunity from penalty proceedings under Section 270A as well as immunity from initiation of prosecution under Sections 276C and 276CC. In compliance with the statutory conditions, the assessee refrained from filing any appeal against the original assessment order.