Validity of reassessment jurisdiction and ad hoc 10% expense disallowance overturned; reassessment quashed for lacking basis

Validity of reassessment under reopening provisions was examined in relation to an ad hoc 10% disallowance of expenses. The tribunal found that additions outside the subject matter of recorded reasons are permissible under the explanation only if the addition forming the subject matter of reopening is also made; absent such primary addition the reopening is vitiated and reassessment is void ab initio, requiring fresh notice. The AOs reliance on audited books for gross receipts but simultaneous ad hoc disallowance of expenses without rejecting books under applicable accounting provisions was held unjustified, so the disallowance was deleted and the appeal allowed.

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Issues: Whether the Assessing Officer validly assumed jurisdiction to reopen assessment under Section 147 of the Income-tax Act, 1961; and whether the 10% ad hoc disallowance of certain expenses is sustainable.

Analysis: The reassessment was initiated on the basis of information suggesting under-reported sale consideration, but during reassessment the Assessing Officer accepted the audited books with respect to the sale issue and did not make any addition on that ground. The Assessing Officer nonetheless made a 10% ad hoc disallowance of expenses without rejecting the books under Section 145(3). Established authorities require that additions on issues not stated in the reasons recorded (including under Explanation 3 to Section 147) can be sustained only if the addition which formed the basis for reopening is also made. Where the original issue which prompted reopening is not added, the statutory belief underlying assumption of jurisdiction fails. The impugned reassessment therefore lacks the necessary foundation and the ad hoc disallowance made without rejection of books lacks statutory basis.

Conclusion: The reassessment proceedings are quashed as void ab initio and the 10% ad hoc disallowance of expenses is deleted; decision is in favour of the assessee.

Ratio Decidendi: An Assessing Officer may not sustain additions on issues not recorded in the reasons for reopening unless the addition which formed the basis for reopening is itself made; failure to do so renders the reassessment void ab initio and precludes ad hoc disallowance where books of account have been accepted and not rejected under Section 145(3).

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