2026 (2) TMI 366 - AT - Income Tax

Validity of reopening of assessment for low net profit rate rejected; reassessment held invalid for lack of nexus

Reopening an assessment under section 147 solely because an assessee reported a low net profit rate was held invalid where the assessing officer lacked a ... Validity of reopening of assessment - reasons to believe - low Net profit rate - additions on account of estimation of net profit by applying 2% of the turnover as against the declared N.P. @ 0.28% by the assessee - HELD THAT:- Assessee showing low Net profit rate cannot be considered as valid reasons for escapement of income and reopening the assessment under the provisions of section 147. We are of the view that there is stark absence of live nexus between the tangible material available on record and reasons recorded to take a view that the assessee is showing low net profit. We find that the CIT(A) had confirmed the addition on the basis of Net Profit @ 2.75% on account of the fact that the same was upheld by the CIT(A) in AY 2014-15. It now transpires that the ITAT for AY 2014-15 [2024 (10) TMI 1674 - ITAT DELHI] had deleted the addition on net profit and accepted the net profit shown by the assessee. Thus, reasons recorded for reopening the assessment are not valid and sustainable in law. Decided in favour of assessee. Issues: Whether the reassessment notice issued under Section 148 read with Section 147, and the consequent reassessment framed under Section 143(3), is valid where the only reason for reopening was that the assessee's declared net profit rate (0.28%) was lower than a comparative or benchmark net profit rate (2%/2.75%).Analysis: The Tribunal examined whether the reasons recorded for reopening demonstrate a live nexus between tangible material on record and the conclusion of escapement of income, and whether showing a lower net profit rate by the assessee, in isolation, constitutes a valid reason to invoke Section 147. The Tribunal considered prior orders in related assessment years and the factual matrix showing that an identical addition based on net profit rate was subsequently deleted by the Tribunal in the assessee's own case for a later assessment year. On this basis the Tribunal found an absence of nexus between the material available and the reasons recorded for reopening, and held that mere showing of a lower net profit percentage does not automatically justify reassessment under the statutory scheme.Conclusion: The reassessment notice under Section 148 and the reassessment order framed thereunder are quashed; the appeal is allowed in favour of the assessee.