ITAT Mumbai Quashes Reassessment for Invalid Sanction Under Section 151(ii) in Adarsh Developers Vs ITO

Introduction

The Income Tax Appellate Tribunal, Mumbai Bench, in Adarsh Developers Vs ITO has held that a reassessment initiated beyond 3 years under the new reassessment regime is invalid where the prior approval is obtained from the Principal Commissioner of Income Tax (PCIT) instead of the higher authority mandated under Section 151(ii) of the Income Tax Act 1961.

Since the reassessment notice under Section 148 and the preceding order under Section 148A(d) were sanctioned only by the Principal Commissioner of Income Tax-20, Mumbai, rather than the Principal Chief Commissioner of Income Tax or equivalent specified authority, the Tribunal concluded that the Assessing Officer (AO) lacked jurisdiction to reopen the assessment. Consequently, the entire reassessment was set aside and the assessee’s appeal was allowed.

This decision is squarely based on the interpretation of the new reassessment framework brought in by the Finance Act 2021 and the Supreme Court ruling in Union of India v. Rajeev Bansal [2024] 469 ITR 46.

Background of the Case

Nature of Business and Return Filing

  • The assessee, Adarsh Developers, is a partnership firm engaged in real estate development.
  • For Assessment Year (A.Y.) 2017-18, the assessee filed a return of income declaring Nil income.

Trigger for Reassessment

The AO, based on information available in the records, observed that:

  • The assessee had sold two immovable properties during the relevant year.
  • The declared sale consideration was ₹72,85,000.
  • The stamp duty valuation adopted by the Stamp Valuation Authority was ₹1,42,25,767.
  • The difference of ₹69,40,767 (stamp duty value minus declared consideration) was not disclosed as income.

On this basis, the AO formed a belief that income had escaped assessment and issued notice under Section 148, thereby initiating reassessment proceedings.

Proceedings Before the Assessing Officer

Assessee’s Explanation

During the reassessment, the assessee contended that:

  • The properties in question had been sold in earlier financial years, and
  • Only the registration of agreements took place in Financial Year (F.Y.) 2016-17.

However, as per the assessment order, the AO recorded that the assessee did not furnish sufficient documentary evidence to:

  • Prove the year in which the sale transactions actually took place, and
  • Provide clear bifurcation of the relevant transactions.

Application of Section 43CA and Estimation of Profits

The AO proceeded on the basis that:

  1. The properties constituted stock-in-trade of the assessee’s construction business, and therefore Section 43CA applied.
  2. The differential amount between ₹1,42,25,767 (stamp value) and ₹72,85,000 (declared consideration), i.e. ₹69,40,767, was to be treated as deemed income under Section 43CA.

Further, the AO:

  • Treated the sale consideration of ₹72,85,000 as undisclosed sales,
  • Applied a gross profit (GP) rate of 3.33%, as reflected in the audit report, and
  • Added an amount of ₹2,42,590 as estimated GP on such undisclosed sales.

Completion of Reassessment

The reassessment was completed under Section 147 read with Section 144B, and the total income was determined at ₹71,83,357.

Order of the CIT(A) – Ex Parte Dismissal

The assessee filed an appeal before the NFAC/CIT(A).

Key Features of CIT(A)’s Order

  1. Ex Parte Disposal
    • The appeal was decided ex parte, with the CIT(A) recording that adequate opportunity was granted, but the assessee did not effectively appear.