ITAT Rajkot on Reassessment, Unsigned Sanction & Natural Justice in Rolex Rings Limited Vs DCIT/ACIT

1. Background and Outcome

In Rolex Rings Limited Vs DCIT/ACIT (ITAT Rajkot), the Rajkot Bench of the Income Tax Appellate Tribunal examined the validity of a reassessment for AY 2020-21 and the consequential addition of ₹5.40 crore under Section 69A read with Section 115BBE of the Income Tax Act 1961.

The reassessment was triggered by search material and statements obtained during a Section 132 search on the Qutone Group, where Shri Rajesh Janaklal Daftary was alleged to be operating an accommodation entry structure. The Revenue treated Rolex Rings Limited as a beneficiary of cash-based accommodation entries routed through banking channels.

The Tribunal:

  • Set aside the reassessment, holding that the conditions under Section 147 were not met;
  • Declared the sanction under Section 151 invalid as it bore neither manual nor digital signature;
  • Held that denial of cross-examination of the key witness (Shri Rajesh Daftary) violated principles of natural justice; and
  • Deleted the addition of ₹5.40 crore even on merits, finding no direct nexus between the seized material and the assessee.

The appeal of Rolex Rings Limited was allowed in full.

2. Chronology of Key Facts

2.1 Original and Revised Returns

  • The assessee filed its original return of income on 11 February 2021 under Section 139(1), declaring:

    • Total income of ₹49,67,79,690, and
    • Book profit under Section 115JB of ₹72,78,65,802.

  • A revised return was filed on 30 March 2021, revising:

    • Total income to ₹49,47,46,930,
    • While book profit under Section 115JB remained ₹72,78,65,802.

2.2 Search on Qutone Group and Seized Material

A search under Section 132 was carried out on the Qutone Group on 09 August 2022. During this operation, the Department claims to have seized:

  • Diaries and cash books,
  • Tally data and other digital records, and
  • Statements of Shri Rajesh Janaklal Daftary and his daughters (Smt. Bhoomi Vachhani and Smt. Ami Gandhi).

According to the Revenue:

  • The entries in the seized diaries were allegedly unrecorded transactions,
  • They were said to be maintained in coded form (two zeros removed),
  • They purportedly represented an arrangement where unsecured loans were advanced through banking channels while equivalent cash was received back, after adjusting interest and commission.

On this basis, the Investigation Wing relayed information to the Assessing Officer (AO) that Rolex Rings Limited had allegedly received accommodation entries of ₹5,40,00,000 through this mechanism.

2.3 Reopening of Assessment

  • Basing his reasoning on this information, the AO recorded reasons and treated the assessee as a beneficiary of accommodation entries of ₹5.40 crore.
  • A notice under Section 148 was issued on 28 March 2024, stated to be with prior approval of the “specified authority” under Section 151.
  • In response, on 02 April 2024, the assessee filed its return reiterating total income at ₹49,47,46,930 and book profit at ₹72,78,65,802.

Subsequently, the AO issued:

  • Notice under Section 143(2) on 30 June 2024, and
  • Notices under Section 142(1) (including one dated 31 July 2024) calling for details of the alleged transactions.

The assessee furnished computation of income, bank details, list of creditors and debtors, and written explanations.

3. Issues Before the Tribunal

The Tribunal considered the following core questions:

  1. Reopening under Section 147 / notice under Section 148

    • Whether there was any tangible material having a direct and live nexus with the assessee to justify reopening.
    • Whether reopening was based merely on borrowed satisfaction and suspicion.

  2. Validity of approval under Section 151

    • Whether an approval that was neither manually nor digitally signed could be regarded as a valid statutory sanction.

  3. Denial of cross-examination and principles of natural justice

    • Whether reliance on the statement of Shri Rajesh Janaklal Daftary without affording cross-examination vitiated the addition.

  4. Merits of the addition under Section 69A read with Section 115BBE

    • Whether an amount already recorded as a bank loan in the books could be treated as unexplained money.
    • Whether seized third-party records, which did not even mention or bear the signature of the assessee, could lead to such an addition.

4. Assessee’s Contentions

4.1 Challenge to Reopening

The assessee adopted a multi-pronged challenge to the reassessment:

  • Incorrect foundational fact in reasons recorded:

    • The reasons stated that Rolex Rings Limited had taken a loan from Shri Rajesh Daftary.
    • The assessee pointed out that its loan was from a bank, duly recorded in its books and disclosed in its returns, and not from Shri Rajesh Daftary or any concern allegedly controlled by him.

  • No assessee-specific material:

    • The search was on another group (Qutone Group).
    • The seized documents and statements were general in nature, and no seized paper or ledger belonged to or referred to Rolex Rings Limited.
    • Thus, the AO’s belief was based purely on third-party statements without corroboration and without any document linking those entries to the assessee.