Pune ITAT holds reassessment void for omission of notice under Section 143(2) after return to Section 148 notice

Background of the dispute

The Pune Bench of the Income Tax Appellate Tribunal in Kamlesh Pramod Gandhi Vs ITO examined whether a reassessment framed under Section 147 could survive when the Assessing Officer did not issue a notice under Section 143(2) after the assessee had filed a return in response to a notice issued under Section 148.

The reassessment stemmed from information that the assessee had deposited cash aggregating to ₹30.70 lakh in a bank account. On this basis, the Assessing Officer formed a belief that income had escaped assessment and initiated proceedings under Section 147 by issuing a notice under Section 148.

In response, the assessee filed a return of income declaring a lower figure than in the original return, explaining that the cash deposits related to business activity in automobile spare parts. The crucial controversy before the Tribunal was whether, once such a return is filed (even belatedly), it becomes mandatory for the Assessing Officer to issue a notice under Section 143(2), and whether failure to do so vitiates the reassessment.

Chronology of facts

Original return and reopening

• The assessee originally filed a return of income on 12.02.2015 declaring total income of ₹3,34,250.
• The Department received information that the assessee had deposited cash of ₹30,70,470 in a bank account with Shri Renukamata Multi State Urban Co-operative Society Limited.
• Treating this as tangible material indicating possible escapement of income, the Assessing Officer issued a notice under Section 148 dated 31.03.2021 to reopen the assessment for Assessment Year 2014-15.

Return filed pursuant to Section 148 notice

• In response to the Section 148 notice, the assessee filed a fresh return on 27.01.2022 declaring total income of ₹1,78,652 after claiming deduction of ₹75,012 under Chapter VI-A.
• According to the assessment order and the findings of the CIT(A)/NFAC, this return was stated to have been treated as “invalid” by the system.
• However, the assessee demonstrated before the Tribunal, by placing screenshots from the income-tax e-filing portal, that the return was properly e-verified on 02.03.2022 and treated on the portal as a valid return filed in response to the Section 148 notice.

Additions made by the Assessing Officer

The reassessment ultimately resulted in two distinct additions:

1. Reduction in returned income

   • The Assessing Officer noticed that the income declared in the return filed in response to Section 148 (₹1,78,652) was lower than the income declared in the original return (₹3,34,250).
   • The difference of ₹1,55,598 was added back as unexplained income, after the assessee failed to offer a specific explanation for the reduction.

2. Treatment of cash deposits as unexplained income

   • The assessee explained that he was engaged in the business of trading in automobile spare parts under the trade name M/s. Gandhi Tempo and that:
     • Cash was received over the counter from customers for spare parts,
     • Goods were also supplied through transporters to customers in other locations,
     • In some cases, advances were collected before dispatch of goods,
     • Buyers deposited cash directly into the assessee’s bank account from their respective locations, and
     • Receipts were also through RTGS, cheque transfers and cash deposits by customers.
   • The assessee furnished the bank statement and some related details in support.
   • The Assessing Officer rejected the explanation as unsubstantiated, noting absence of primary records such as sales invoices, vouchers, stock records or VAT returns that could directly correlate particular cash deposits with specific sales transactions.
   • The entire cash deposit amount of ₹30,70,470 was therefore brought to tax as unexplained income.
   • The Assessing Officer computed total assessed income at ₹34,01,720 and passed the order under Section 147 read with Section 144B on 25.03.2022.

Proceedings before CIT(A)/NFAC

Before the CIT(A)/NFAC, the assessee contested:

• The legality of the reassessment on the ground that no notice under Section 143(2) had been issued after the filing of the return in response to Section 148, and
• The substantive additions on account of cash deposits and the difference in returned income.

CIT(A)/NFAC’s reasoning on legality

The CIT(A)/NFAC rejected the legal ground by holding:

• The return filed pursuant to Section 148 had been treated as an “invalid return” by the system.
• Since a notice under Section 143(2) presupposes the existence of a valid return, there was, according to the appellate authority, no obligation to issue notice under Section 143(2).
• The Assessing Officer, therefore, was justified in proceeding on the basis of notices issued under Section 142(1) alone.

Findings on merits by CIT(A)/NFAC

On the substantive additions, the CIT(A)/NFAC agreed with the Assessing Officer that: