Assessee wins appeal against illegal reopening under section 147 for unexplained foreign remittance addition

ITAT Kolkata allowed the assessee's appeal against reopening of assessment u/s 147 for AY 2017-18. The assessee had provided complete bank statements and agreement with foreign pharmaceutical company for reagent reimbursement. AO made addition u/s 69A for unexplained foreign remittance despite income being reflected in audited books. The tribunal found reopening proceedings illegal and invalid, noting AO ignored supplied materials and made addition under different section than proposed in draft order. Addition confirmed by CIT(A) was deleted.

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The primary legal issues considered by the Tribunal in this appeal are twofold: (i) the validity of the reassessment proceedings initiated under section 148 of the Income Tax Act, 1961, particularly focusing on the issuance of the notice and compliance with procedural safeguards, and (ii) the substantive correctness of the addition of Rs. 2,39,00,000/- to the assessee's income under section 69A of the Act, alleged as unexplained foreign remittance income.

Regarding the first issue, the Tribunal examined the procedural propriety of the reopening of assessment for AY 2017-18. The assessee challenged the issuance of notice under section 148 on the ground that the Assessing Officer (AO) failed to provide the reasons recorded under section 148(2) within a reasonable time, as mandated by the Supreme Court in the landmark judgment of GKN Driveshafts (India) Ltd. The assessee had filed its original return under section 139(1) and the assessment under section 143(3) was completed. Subsequently, notice under section 148 was issued based on information received concerning foreign remittances. The assessee filed a fresh return and raised a preliminary objection demanding the reasons for reopening. However, the AO issued notice under section 143(2) and proceeded with reassessment without furnishing the reasons or disposing of the objections. The Tribunal noted that the reasons were communicated after a delay of over seven months, which was held to be unreasonable in light of the GKN Driveshafts precedent and subsequent judicial pronouncements, including the Madras High Court's decision in Cognizant Technology Solutions India Pvt. Ltd. The Tribunal also highlighted that the AO passed the final assessment order without disposing of the objections raised by the assessee, thereby violating principles of natural justice and fair play, as reiterated in the Bombay High Court's ruling in Kesar Terminals & Infrastructure Ltd. The Tribunal found the reassessment proceedings to be invalid and void on these procedural grounds.

On the second issue concerning the addition of Rs. 2,39,00,000/-, the Tribunal scrutinized the factual matrix and documentary evidence submitted by the assessee. The AO's reason for reopening was based on information from the Directorate of Income Tax (Intelligence & Criminal Investigation) regarding foreign remittances from M/s Takeda Pharmaceutical Co. Ltd., Japan. However, the assessee demonstrated that the foreign receipts, totaling USD 11,10,975, were fully recorded in the books of account as sales and reimbursement of expenses, duly audited and reflected in the profit and loss account. The Tribunal observed that the amount added by the AO was less than the total foreign remittance recorded, indicating that the AO's reasons were vague, cryptic, and factually incorrect. The assessee had also submitted agreements and bank statements substantiating the genuineness of the transactions. Furthermore, identical facts had been examined and accepted by the AO in prior years (AY 2015-16 and 2016-17), where reassessment was initiated but ultimately the return was accepted. The Tribunal noted the AO's failure to provide a speaking order disposing of the objections and the inconsistency in applying section 68 in the draft order and section 69A in the final order. The Tribunal relied on judicial precedents emphasizing the need for clear, specific reasons and adherence to procedural fairness in reassessment proceedings.

In applying the law to the facts, the Tribunal held that the issuance of notice under section 148 without furnishing reasons within a reasonable time, coupled with the failure to dispose of objections before proceeding, rendered the reassessment invalid. The addition under section 69A was not sustainable as the alleged unexplained income was already accounted for in the books, and the AO's reasons were not supported by credible evidence. The Tribunal rejected the revenue's arguments supporting the impugned order and accepted the assessee's submissions both on legal and factual grounds.

The Tribunal's significant holdings include the following verbatim legal reasoning:

"It is pertinent to mention here that assessment order was passed u/s 143(3) of the Act after due examination and verification of material facts furnished before the AO. Notices which are issued u/s 148 of the Act and reasons recorded are reproduced here in below..."

"...the reasons recorded are factually vague, cryptic, scanty non-specific and unfounded. The assessee transaction is all the genuine transaction and have been properly recorded in the books of accounts of the trading and shown in the return of income."

"...the Hon'ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) has held that the reasons shall be furnished within a reasonable time by the AO... There is an enormous delay in furnishing the reasons for reopening and we are of the opinion that the reasons were not furnished to the assessee within a reasonable time."

"...initiation of proceedings u/s 147/148 in the present case in respect of AY 2017-18 is wholly illegal, invalid and void."

Core principles established include the mandatory requirement for the AO to furnish reasons for reopening under section 148(2) within a reasonable time after the assessee's request, the necessity to dispose of objections raised by the assessee before proceeding with reassessment, and the inadmissibility of reopening where the reasons are vague, non-specific, or unsupported by evidence. The Tribunal reaffirmed the binding nature of the GKN Driveshafts judgment and related High Court rulings emphasizing procedural fairness and natural justice in tax proceedings.

Ultimately, the Tribunal allowed the appeal, quashing the reassessment proceedings and deleting the addition of Rs. 2,39,00,000/-. The reassessment was held to be procedurally defective and substantively unsustainable, thereby restoring the income declared by the assessee in the original return.

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