Compulsory scrutiny and corroboration standards defeat reassessment and unexplained expenditure additions based on an unproved note.

ITAT Indore held that reassessment under section 147 was invalid where a survey case should have been taken for compulsory scrutiny under CBDT Instruction No. 5/2017 and no timely notice under section 143(2) was issued; reopening could not be used as a substitute for the missed scrutiny proceeding. It also held that an addition for unexplained expenditure under section 69C could not rest solely on an impounded handwritten mobile note that did not clearly identify the assessee, the parties, the date, or the payment mode and lacked independent corroboration. Both the reassessment and the addition were deleted, granting full relief to the assessee.

---

---

Issues: (i) Whether reassessment under section 147 of the Income-tax Act, 1961 was valid when the survey case ought to have been taken up for compulsory scrutiny under CBDT Instruction No. 5/2017 and no notice under section 143(2) was issued within time; (ii) Whether the addition of Rs. 14,20,00,000 as unexplained expenditure under section 69C could be sustained on the basis of the impounded handwritten mobile document.

Issue (i): Whether reassessment under section 147 of the Income-tax Act, 1961 was valid when the survey case ought to have been taken up for compulsory scrutiny under CBDT Instruction No. 5/2017 and no notice under section 143(2) was issued within time.

Analysis: The reassessment was founded on material gathered in a survey under section 133A and the assessment year was one for which scrutiny could have been initiated within the time permitted by section 143(2). The CBDT instruction applicable to survey cases required compulsory scrutiny, and the failure to take that course could not be cured by resorting later to section 147 on the same material merely to reopen the matter after the scrutiny time had expired. The cited precedents were applied to hold that reopening cannot be used as an indirect substitute for a scrutiny proceeding that the Department did not timely initiate.

Conclusion: The reassessment initiation under section 147 was held invalid and the assessee succeeded on this issue.

Issue (ii): Whether the addition of Rs. 14,20,00,000 as unexplained expenditure under section 69C could be sustained on the basis of the impounded handwritten mobile document.

Analysis: The addition rested only on a handwritten note impounded from a mobile phone in another survey proceeding, not from the assessee's premises, and the document did not clearly record the assessee's name, the date, the payer, the recipient, or the mode of payment. The explanation recorded at the time of survey was that the noted transaction never materialised, and the counterparty addition based on the same document had already been deleted and affirmed in appeal. In the absence of independent corroboration, the document was treated as an unproved and uncorroborated loose paper incapable of sustaining the alleged cash-payment addition.

Conclusion: The addition under section 69C was deleted and the assessee succeeded on this issue as well.

Final Conclusion: The reassessment and the impugned addition were both set aside, resulting in full relief to the assessee.

Ratio Decidendi: Where the Department fails to timely select a survey case for compulsory scrutiny, it cannot later use reassessment to make up for that omission on the same material; and an addition cannot rest solely on an uncorroborated loose or digital note that does not by itself establish the transaction alleged against the assessee.

---