The Income Tax Appellate Tribunal, Kolkata, has delivered a significant ruling affirming that reassessment proceedings under Section 147 of the Income Tax Act cannot be initiated on the basis of borrowed satisfaction derived from investigation wing reports without independent verification. This judgment reinforces the procedural safeguards required before reopening assessments and sets a clear boundary against mechanical reliance on third-party inputs.
Background & Facts
The Dispute
The appellant, Zilaxo India Pvt. Limited, a private company engaged in Ayurvedic treatment and wellness services, filed its income tax return for Assessment Year 2019-2020 on 28.10.2019, declaring a total income of Rs. 17,95,430. The company’s deemed total income under the Alternate Minimum Tax (AMT) was calculated at Rs. 22,10,954. Subsequently, the Income Tax Department reopened the assessment under Section 147, alleging that the company had claimed bogus purchases of Rs. 26,35,000 from M/s. Karanpriya Commercial Pvt. Limited, a company identified as a shell entity by the Investigation Wing.
Key Facts
- The assessee claimed advertisement expenses of Rs. 26,35,000 paid to M/s. Karanpriya Commercial Pvt. Limited during FY 2018-19
- The company provided invoices, ledger entries, bank payment records, audited financial statements, and TDS deduction certificates in support of the transaction
- The Investigation Wing, under DDIT (Investigation), Unit-2(1), Kolkata, submitted a sworn statement by Sri Niraj Nathani dated 20.01.2022, admitting to operating a network of shell companies for providing accommodation entries
- Niraj Nathani admitted that M/s. Karanpriya Commercial Pvt. Limited was a shell company used to fabricate expenses
- The Assessing Officer issued notice under Section 148 on 12.04.2023
- A notice under Section 142(1) and a subsequent show-cause notice dated 07.01.2025 were issued, but the assessee did not respond
- The Assessing Officer added Rs. 26,35,000 as unexplained expenditure under Section 69C and further added Rs. 1,31,750 (5% commission) as unexplained expenditure
- Total taxable income was determined at Rs. 45,62,180
- The Commissioner of Income Tax (Appeals) upheld the addition of Rs. 26,35,000 but deleted the Rs. 1,31,750 commission addition for lack of evidence
Procedural History
- 28.10.2019: Original return filed for A.Y. 2019-2020
- 20.01.2022: Sworn statement of Sri Niraj Nathani recorded under Section 131
- 12.04.2023: Notice under Section 148 issued
- 07.01.2025: Show-cause notice issued requiring explanation for purchases
- 08.10.2025: Order of CIT(Appeals) passed, upholding Rs. 26,35,000 addition, deleting Rs. 1,31,750
- 07.05.2026: ITAT Kolkata pronounces order on appeal
The Parties' Positions
For the Appellant
- The reopening was based solely on information copied from the Investigation Wing without independent verification
- The assessee had submitted documentary evidence including invoices, bank statements, and TDS records
- The Assessing Officer did not conduct any independent inquiry, nor did he examine Niraj Nathani
- The addition of Rs. 26,35,000 amounts to double taxation as the amount was already offered to tax
- The surcharge at 25% under Section 115BBE was wrongly applied as the total income was below Rs. 2 crores
- The demand notice of Rs. 37,30,930 contradicted the computation sheet showing tax payable of Rs. 27,86,238, with no explanation for the Rs. 9.5 lakh discrepancy
For the Respondent
- The assessee claimed expenses through a shell company identified in a sworn statement by a known accommodation entry operator
- The assessee failed to respond to notices under Section 142(1) and the show-cause notice
- The burden of proving genuineness lay with the assessee, which was not discharged
- The CIT(Appeals) correctly upheld the addition of the purchase amount
Relief Sought
The appellant sought:
- Quashing of the reopening under Section 147
- Deletion of the addition of Rs. 26,35,000 as unexplained expenditure
- Deletion of the addition of Rs. 1,31,750 as commission
- Cancellation of the demand notice dated 28.02.2025 for Rs. 37,30,930
- Cancellation of penalty proceedings
- Relief from levy of interest
The Legal Issue
The central question was whether a reassessment under Section 147 of the Income Tax Act can be validly initiated when the reasons for reopening are based entirely on information received from the Investigation Wing without any independent application of mind or verification by the Assessing Officer.
Arguments Presented
For the Appellant
The counsel for the assessee relied on the settled principle that reopening under Section 147 requires the Assessing Officer to form an independent opinion based on tangible material, not merely adopt the findings of the Investigation Wing. He cited CIT v. Kelvinator of India Ltd. and CIT v. Rajendra Prasad Agarwal to argue that "borrowed satisfaction" is legally insufficient. He emphasized that the assessee had submitted invoices, bank records, and TDS certificates, which were ignored without rejection of books of account. He further contended that the surcharge under Section 115BBE was inapplicable as the total income was below Rs. 2 crores, and the demand notice contained a clear arithmetic discrepancy of Rs. 9.5 lakhs.
For the Respondent
The Departmental Representative argued that the assessee had failed to rebut the findings of the Investigation Wing, which had established M/s. Karanpriya Commercial Pvt. Limited as a shell entity. He contended that the non-response to notices shifted the burden to the assessee, and the addition under Section 69C was justified. He did not address the procedural defects in the reopening or the surcharge computation.
The Court's Analysis
The Tribunal conducted a meticulous review of the reasons recorded under Section 148A(d) and found them to be verbatim copies of the Investigation Wing’s report. The order contained no reference to any independent inquiry, no examination of the assessee’s documents, and no attempt to verify the authenticity of the transaction beyond relying on Niraj Nathani’s statement.
"The reasons recorded are nothing but cut and paste of the information received by the ld. Assessing Officer from the DDIT(Investigation). The ld. Assessing Officer has done no independent enquiry... blind reliance has been placed on information... this being so, the reopening is found to be invalid and consequently the same stands quashed."
The Tribunal held that mere possession of information from the Investigation Wing does not constitute "reason to believe" under Section 147. The Assessing Officer is statutorily obligated to apply his mind independently, even if the information is prima facie credible. The Tribunal noted that the assessee had produced documentary evidence supporting the transaction, and the Assessing Officer neither rejected the books of account nor provided any reason for disregarding them.
The Tribunal further observed that the addition of Rs. 1,31,750 as commission was rightly deleted by the CIT(Appeals) for lack of evidence, and the surcharge under Section 115BBE was legally unsustainable as the total income was below the Rs. 2 crore threshold. The discrepancy between the computation sheet and the demand notice was deemed fatal to the validity of the assessment.
The Verdict
The appeal of the assessee was allowed. The Tribunal quashed the reopening under Section 147, set aside the assessment order dated 08.10.2025, and cancelled the demand notice dated 28.02.2025 for Rs. 37,30,930. The additions of Rs. 26,35,000 and Rs. 1,31,750 were deleted. Penalty proceedings were cancelled, and the assessee was granted relief from interest. The Tribunal directed the Assessing Officer to pass a fresh order in accordance with law within 8 weeks.
What This Means For Similar Cases
Independent Application of Mind Is Non-Negotiable
- Practitioners must challenge reassessments where reasons are copied from investigation reports without independent verification
- The burden shifts to the Revenue to prove that the Assessing Officer applied his mind independently, not merely adopted third-party findings
- Merely citing a CID report or investigation statement is insufficient to satisfy the "reason to believe" requirement under Section 147
Documentary Evidence Must Be Addressed, Not Ignored
- If an assessee submits invoices, bank statements, and TDS records, the Assessing Officer must either accept them or explicitly reject the books of account under Section 145
- Disallowance under Section 69C without rejecting books of account is legally impermissible
- Silence by the assessee does not automatically validate the Revenue’s assumptions if documentary evidence exists
Surcharge and Demand Notices Require Precise Computation
- Surcharge under Section 115BBE applies only if total income exceeds Rs. 2 crores; any levy below this threshold is ultra vires
- Demand notices must match the computation sheet; unexplained discrepancies invalidate the demand
- Practitioners should routinely cross-check demand notices against assessment orders for arithmetic and statutory errors
