Background of the Case

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) recently adjudicated an important issue concerning the grant of additional interest under Section 244A(1A) of the Income Tax Act, 1961 in the case of ITC Infotech India Limited. The assessment for AY 2014-15 was originally completed under Section 143(3) on 23 January 2018, resulting in a refund becoming due to the appellant along with interest under Section 244A(1). Subsequently, the appellant succeeded in appeal before the Commissioner of Income Tax (Appeals), who passed an order dated 08 June 2018 granting relief. However, despite the appellate order, the Assessing Officer passed the consequential appeal effect order only on 02 February 2023. The appellant contended that this substantial delay exceeded the time limit prescribed under Section 153(5) and therefore entitled it to additional interest at the rate of 3% per annum under Section 244A(1A).

Since the CIT(A) merely directed verification of the claim without specifically directing grant of such interest, the matter reached the Tribunal.

Arguments by the Appellant (Assessee)

The appellant argued that Section 153(5) imposes a statutory obligation upon the Assessing Officer to pass an order giving effect to an appellate order within the prescribed time frame. According to the appellant, the appellate order was passed in June 2018, whereas the appeal effect order was issued only in February 2023, resulting in a delay of more than four years beyond the permissible period. The appellant submitted that Section 244A(1A) was introduced specifically to compensate taxpayers where the Revenue fails to implement appellate relief within the stipulated time. It was further contended that the appellant became entitled to additional interest commencing from the date immediately following the expiry of the period prescribed under Section 153(5) until the date on which the refund was actually granted. Therefore, the appellant requested the Tribunal to direct the Assessing Officer to grant the additional interest after verifying the computation.

Respondent’s Response (Revenue)

The Revenue primarily relied upon the order passed by the CIT(A) and submitted that the issue required verification of the appellant’s computation before any additional interest could be granted. While defending the appellate order, the Department maintained that the Assessing Officer should first examine the factual correctness of the claim and determine the amount, if any, payable under Section 244A(1A). The Revenue did not place any specific material on record to dispute the fact that the appeal effect order had been passed after the expiry of the statutory period. Accordingly, the Department supported the direction of the CIT(A) restricting the matter to verification of the claim rather than issuing a categorical direction for grant of additional interest.

Court Findings and Decision

After considering the submissions and examining the material on record, the Tribunal observed that the appeal effect order dated 02 February 2023 had admittedly been passed well beyond the period prescribed under Section 153(5) of the Act. The Tribunal held that once there is a delay in giving effect to an appellate order beyond the statutory timeline, the appellant becomes entitled to additional interest under Section 244A(1A). The Bench noted that these provisions were introduced as a deterrent against administrative delays and to compensate taxpayers who are deprived of timely refunds despite succeeding in appellate proceedings.

Relying upon the decisions of the Karnataka High Court in Wipro Ltd. v. JCIT and the Gujarat High Court in Nima Specific Family Trust v. ACIT, the Tribunal concluded that the appellant was entitled to additional interest at the rate of 3% per annum from 01 November 2018 until the date of actual grant of refund.

Accordingly, the Tribunal directed the Assessing Officer to verify the computation and grant the additional interest in accordance with law, thereby allowing the appeal of the appellant.

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Ms. Ila Jitendra Mehta, vs. Revenue [I.T.A. No. 5219 of 2024]

Background of the Case

The appellant, who faced a penalty imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act for allegedly furnishing inaccurate particulars of income. The penalty amount was substantial, exceeding Rs. 2.28 crores. The issue arose from the appellant’s claim of exemption under section 54F of the Income Tax Act for the assessment year 2013-14, which was later found to be erroneous. During the assessment proceedings, the appellant acknowledged this mistake and submitted a revised computation of income. Additionally, the original income tax return was filed belatedly by the appellant’s accountant using a digital signature. The AO initiated penalty proceedings on the grounds of concealment of income but subsequently levied the penalty for furnishing inaccurate particulars, which became a point of contention in this case.

Arguments by the Appellant

The Appellant contended that the claim under section 54F was made inadvertently and was a bona fide mistake that was promptly rectified during the assessment proceedings by submitting a revised computation along with an explanation for not filing a revised return due to the belated original filing. She maintained that the penalty under section 271(1)(c) should not apply in her case, as there was no deliberate attempt to conceal income or provide inaccurate information. The appellant relied on precedents and emphasized that there was a possible legal interpretation supporting her claim, especially since the Tribunal had previously passed orders favorable to her during the assessment process. She further argued that the penalty proceedings were initiated for concealment but the penalty was imposed for inaccurate particulars, a mismatch that rendered the penalty unsustainable.

Respondent’s Response

The Revenue contested the appellant’s plea by emphasizing that a rigorous application of penalty provisions was necessary and that the exemption claimed was incorrect. They argued that the penalty was rightly imposed due to the furnishing of inaccurate particulars and that the difference between concealment and inaccurate particulars did not absolve the appellant of liability. The AO also pointed to the fact that the penalty proceedings were initiated properly, and the claim of inadvertent mistake did not constitute a valid defense against penalty imposition. The Revenue highlighted that since only a small number of cases are picked up for scrutiny, strict enforcement of penalty provisions should act as a deterrent and prevent misuse of exemptions.

Court Findings and Decision

The ITAT carefully examined the facts and the legal position, noting the clear distinction between concealment of income and furnishing inaccurate particulars, as upheld by higher courts in previous judgments. It observed that the AO initiated penalty proceedings on concealment but levied the penalty on inaccurate particulars without proper satisfaction or notice for the latter. This procedural irregularity was a crucial flaw. The Tribunal accepted the appellant’s explanation that the error was inadvertent and corrected during the assessment, demonstrating bona fide conduct. It rejected the Revenue’s arguments about dilution of penalty provisions due to selective scrutiny, emphasizing that penalties must be based on facts and intention, not the number of cases scrutinized. Ultimately, the penalty was held to be unsustainable both on merit and legal grounds and was accordingly deleted, allowing the appellant’s appeal in full.

Concealment vs Inaccurate Particulars

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Eastspring Investments India Equity Open Ltd. vs. Revenue [I.T.A. No. 1219 of 2025]

Background of the Case

The appellant, is a SEBI-registered Foreign Portfolio Investor (FPI) based in Mauritius, filed its return of income for AY 2022–23 declaring total income of Rs. 1,309.50 crore, including STCG of Rs. 1,96.34 crore (taxable at 15% under Section 111A) and STCG of Rs. 3.16 crore (taxable at 30% under Section 115AD) from the sale of right forms (not subject to STT). It also reported STCL of Rs. 24.24 crore on STT-paid transactions. The appellant followed a set-off mechanism whereby it first adjusted the brought forward STCL against the higher-taxable gains (30% on non-STT transactions), and then adjusted the balance against 15% taxable gains. The Assessing Officer (AO), however, rejected this computation, arguing that losses taxed at lower rates (15%) should not be first adjusted against gains taxed at higher rates (30%).

The DRP upheld the AO’s view and treated the entire Rs. 175.26 crore (Rs. 172.09 crore + Rs. 3.16 crore) as STCG, but taxed it as “Income from Other Sources” at 40%, also initiating penalty proceedings under Section 270A.

Arguments by the Appellant

The appellant argued that under section 70(2) of the Income Tax Act, any short-term capital loss can be set off against any short-term capital gain, regardless of the nature of underlying transactions or the applicable tax rates. It was emphasized that both the gains and losses arose under the same head of income, i.e., “Capital Gains,” and hence were eligible for set-off. The appellant further contended that the entire income from share transactions by FPIs is to be treated as capital gains as per CBDT Circular No. 6/2016 and consistent judicial precedent. They also challenged the AO’s treatment of Rs. 3.16 crores earned from rights entitlement sale as “Income from Other Sources,” asserting that such income, too, arose from a capital asset and must be taxed under the head “Capital Gains.”

Respondent’s Response

The Revenue, on the other hand, took the position that the set-off of brought forward STCL arising from STT-paid transactions should not be allowed against STCG from non-STT transactions. They argued that since different tax rates applied at the rate of 15% for STT-paid transactions under section 111A and 30% for non-STT transactions under section 115AD, the character of the income was inherently different. The Assessing Officer, supported by the DRP, also treated the Rs. 3.16 crores earned from the sale of rights entitlement as not arising from a capital asset and hence taxable under “Income from Other Sources,” disallowing both the set-off and the capital gains classification.

Court Findings and Decision

The ITAT Mumbai bench rejected the Revenue’s arguments and ruled in favour of the appellant. It held that the distinction in tax rates under sections 111A and 115AD does not affect the nature of income under the head “Capital Gains.” The Tribunal clarified that once an income is assessed under the same head, set-off cannot be denied merely due to different applicable rates. It also noted that the rights entitlement sold by the appellant was a capital asset under section 2(14), and therefore the gain on its transfer must be taxed as capital gains. Relying on CBDT Circular No. 6/2016 and past rulings including Platinum Investment Management Ltd., the ITAT concluded that FPIs are to be assessed under the “Capital Gains” head for such transactions, and directed the AO to allow the set-off and rectify the incorrect head of income.

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ITAT Mumbai STCL Set-Off

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Hetal Rakesh Mehta vs. Revenue [Income Tax Appeal No. 1727 of 2024]

Background of the Case

The appellant had filed income tax return for AY 2018-19 on 30th October 2018. Subsequently, a search operation was conducted under Section 132 of the Income Tax Act on 6th November 2019 at the business premises of the assessee located in Pune. Notably, this search took place after the expiry of the time limit for issuing a notice under Section 143(2), which is the normal window for initiating a scrutiny assessment. At the time of the search, the assessment for the year was considered “unabated,” meaning the regular scrutiny process was not pending. During the search, no incriminating documents, evidence, or material relating to undisclosed income were found from the assessee’s premises.

However, the Assessing Officer made an addition by estimating 1% commission on the sales, based solely on a statement recorded from a third party. The AO treated this as evidence of undisclosed income despite the absence of any incriminating material seized during the search. This raised a legal issue about whether such additions could be sustained without direct incriminating evidence in an unabated assessment following a search.

Arguments by the Appellant

The appellant strongly contested the addition and argued that once the time for issuing a notice under Section 143(2) expired, the regular assessment process stood closed and hence, the assessment was “unabated.” In such a scenario, the AO could not make additions solely based on third-party statements, especially when the search yielded no incriminating evidence or documents linking the appellant to undisclosed income. The appellant relied on judicial precedents including the Supreme Court judgment in PCIT vs. Abhisar Buildwell (P.) Ltd. which emphasized that in unabated assessments, no additions can be made without incriminating material discovered during the search.

Furthermore, they cited decisions from various High Courts and the Tribunal, which held that statements recorded under Section 132(4) cannot be treated as incriminating unless corroborated by evidence found during the search. The appellant insisted that the AO’s estimate was merely speculative and based on hearsay, not supported by any tangible evidence or material seized during the search operation.

Respondent’s Response

The Revenue, on the other hand, argued that the addition was justified as it was based on the business practice of charging commission on bogus sales, supported by the statement of the third party who was in possession of relevant financial information. The AO and the CIT(A) had accepted this reasoning and held that the commission amount represented undisclosed income that should be taxed. The Revenue contended that the absence of incriminating documents during the search did not prevent the AO from relying on credible third-party statements to make an addition. They maintained that the AO’s estimate was a reasonable approximation in light of the facts and the information collected during the investigation.

Court Findings and Decision

The ITAT Pune ruled in favor of the appellant and held that the original return was filed before the search and the notice period for scrutiny had expired, classifying the assessment as unabated. The Tribunal reiterated the Supreme Court’s ruling in PCIT vs. Abhisar Buildwell, which clearly states that in unabated assessments, additions cannot be made unless incriminating material is found during the search or requisition. The Tribunal further relied on the Delhi High Court’s judgment in PCIT vs. Harjeev Agarwal, which clarified that statements recorded under Section 132(4) are not incriminating on their own unless corroborated by evidence found in the search. Since no incriminating material was found in the search and the addition was based purely on an estimate from a third-party statement without corroboration, the Tribunal held the addition was unsustainable.

Consequently, the ITAT deleted the addition of 1% commission on sales, setting aside the orders of the AO and CIT(A). This decision reinforces the principle that assessments based on search operations must be supported by concrete evidence and not on mere statements or assumptions, especially when the assessment is unabated.

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Mark Foods vs. Revenue [Income Tax Appeal No.4102 & 4103 of 2024]

Background of the Case

The appellant filed appeal before ITAT Mumbai against reassessment orders for Assessment Years (AYs) 2015-16 and 2016-17. The Income Tax Department had initiated proceedings under Section 147 of the Income Tax Act, 1961, alleging that the company had engaged in bogus purchases and unexplained financial transactions. The Assessing Officer (AO) issued notices under Section 148, seeking to reopen previously concluded assessments. The appellant contested these notices on multiple grounds, including procedural irregularities, lack of proper approval, and violation of natural justice. The case gained significance due to its reliance on key judicial precedents, including the Supreme Court’s rulings in Union of India vs. Ashish Agarwal and Union of India vs. Rajeev Bansal, which dealt with the legality of reassessment proceedings under the amended tax regime.

Arguments by the Appellant

The appellant, raised several critical objections against the reassessment proceedings. For AY 2015-16, the appellant argued that the notice under Section 148, issued 15.07.2022, was time-barred, as the six-year limitation period had already expired on 31.03.2022. They relied on the Supreme Court’s decision in Rajeev Bansal, where the Revenue itself admitted that notices issued after 01.04.2021 for this assessment year were invalid. For AY 2016-17, the appellant contended that the sanction for reopening was granted by an unauthorized authority the Principal Commissioner of Income Tax instead of the higher-ranking Principal Chief Commissioner, as mandated under Section 151(ii) of the amended law.

Additionally, the appellant challenged the reassessment on grounds of violation of natural justice, arguing that they were denied the opportunity to cross-examine witnesses whose statements were relied upon by the AO. They also disputed the double taxation of the same amount, first as unexplained income under Section 68 and then as bogus purchases.

Respondent’s Response

The Revenue defended the reassessment proceedings, asserting that the notices were validly issued under the amended provisions of the Income Tax Act, read with the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). The department argued that TOLA extended the timelines for initiating reassessment due to the COVID-19 pandemic, making the notices legally permissible. For AY 2016-17, the Revenue maintained that the approval granted by the Principal Commissioner was sufficient, as the new reassessment regime did not require a higher authority’s sanction in all cases. They further contended that the reassessment was based on credible evidence of bogus transactions and that the appellant’s objections were merely technical, lacking substantive merit.

The Revenue also emphasized that the denial of cross-examination did not vitiate the proceedings, as the AO had relied on independent material to form his belief about escaped income.

Court Findings and Decision

The ITAT bench of Mumbai ruled in favor of the appellant, quashing the reassessment proceedings for both AYs. For AY 2015-16, the Tribunal held that the notice under Section 148 was barred by limitation, following the Supreme Court’s decision in Rajeev Bansal, where the Revenue had conceded that notices issued after 01.04.2021 for this assessment year were invalid. The Tribunal emphasized that the six-year limitation period had expired before the notice was issued, rendering the reassessment void.

For AY 2016-17, the ITAT found that the sanction for reopening was invalid because it was granted by the Principal Commissioner instead of the Principal Chief Commissioner, as required under Section 151(ii) of the amended law. The Tribunal stressed that strict compliance with statutory procedures was mandatory, and the failure to obtain proper approval made the reassessment legally unsustainable.

Additionally, the ITAT noted that the AO had failed to provide the appellant with a fair opportunity to cross-examine witnesses, violating principles of natural justice. Consequently, the Tribunal allowed both appeals, setting aside the reassessment orders in their entirety.

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Revenue vs. Agfa India Pvt. Ltd. [Income Tax Appeal No. 1857 of 2018]

Background of the Case

This case pertains to the reassessment proceedings initiated by the Revenue for the Assessment Year 2007–08. Agfa India Pvt. Ltd., the respondent had originally filed its return of income for the said year, which was duly assessed under Section 143(3) of the Income Tax Act, 1961. Subsequently, the Assessing Officer issued a notice under Section 148 to reopen the assessment, relying on certain findings made by the Transfer Pricing Officer (TPO) in the respondent’s case for the Assessment Year 2008–09. The TPO had made transfer pricing adjustments in the subsequent year, which, according to the AO, indicated that income might have escaped assessment in the earlier year as well. Based on this reasoning, the AO sought approval and reopened the assessment under Section 147, culminating in an addition being made to the respondent’s income.

Arguments by the Appellant

The appellant, Revenue argued that the reassessment was valid since the AO had “reason to believe” that income chargeable to tax had escaped assessment, triggered by the adjustment made by the TPO in the next assessment year. The department maintained that this constituted fresh tangible material, justifying the reopening under Section 147. It was contended that the AO acted upon credible inputs received through the TPO’s order for AY 2008–09 and that proper sanction for issuing notice under Section 148 had been obtained from the competent authority. The department insisted that the reassessment was neither arbitrary nor mechanical, and that the AO had relied upon relevant information that became available after the original assessment was completed.

Respondent’s Response

In response, the respondent argued that the reassessment was not based on any new material specific to the Assessment Year 2007–08, but merely on findings from a later year, which could not be retroactively applied to reopen a concluded assessment. It was submitted that the AO had not conducted any independent examination of the facts or transactions for AY 2007–08, and the satisfaction recorded under Section 147 was not based on his own judgment, but rather on borrowed conclusions from the TPO and higher officials. The respondent highlighted that the reassessment proceedings were vitiated by lack of application of mind and failure to identify any concrete basis for escapement of income in the year under review. Thus, the reopening of assessment was alleged to be without jurisdiction.

Court Findings and Decision

The Bombay High Court, after examining the records, upheld the findings of the Income Tax Appellate Tribunal and dismissed the appeal filed by the Revenue. The Court observed that the Assessing Officer had failed to form an independent belief that income had escaped assessment in AY 2007–08. The belief was solely based on the TPO’s adjustment in AY 2008–09 and certain communications received from the higher authorities, which could not be construed as fresh tangible material relevant to AY 2007–08.

The Court reiterated that the “reason to believe” under Section 147 must be of the Assessing Officer alone and must be based on material specific to the assessment year sought to be reopened. The absence of such material and the lack of independent application of mind rendered the reassessment invalid. Accordingly, the Court held that the initiation of proceedings under Section 147 was without jurisdiction and dismissed the Revenue’s appeal.

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Bombay HC upholds ITAT order

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Shri Girishkumar Jamnadas Bhalodiya vs. Revenue [Income Tax Appeal No. 914 of 2024]

Background of the Case

The appellant, Shri Girishkumar Jamnadas Bhalodiya filed his ITR declaring a total income of Rs. 6,58,380. During scrutiny, the AO noted cash deposits of Rs. 21.98 lakhs in the appellant bank account during demonetization. The appellant explained that the funds originated from past savings, Provident Fund (PF) withdrawals (Rs. 7.9 lakhs), and cash reserves for house construction and medical emergencies. While the AO accepted Rs. 4 lakhs as explained, the remaining Rs. 17.98 lakhs was treated as unexplained and added to income under Section 69A. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition, prompting the appellant to appeal before the ITAT Rajkot.

Arguments by the Appellant

The appellant contended that he had maintained consistent cash balances, supported by cash books, bank statements, and past income tax returns. Appellant emphasized that the PF withdrawals were intended for house construction but were redeposited due to unforeseen circumstances. As a salaried employee with no other income sources, the AO failed to identify specific discrepancies in his documentation. The appellant relied on the ITAT Delhi’s decision in Om Parkash Nahar (2022), where similar cash deposits were accepted as explained.

Respondent’s Response

The respondent, defended the addition, arguing that a teacher earning Rs. 48,000 to 49,000 per month could not plausibly accumulate such large cash reserves. It stressed that PF withdrawals were meant for specific purposes and should not have been redeposited. The Revenue also highlighted the lack of full reconciliation between withdrawals and deposits, asserting that the appellant explanation lacked credibility.

Court Findings and Decision

The ITAT Rajkot partially ruled in favor of the appellant, and held that the the AO had not pointed out specific flaws in the documents but rejected the explanation on general grounds. The Tribunal held that the appellant cash holdings were plausible given his income history and withdrawals. However, due to minor gaps in reconciling personal expenditures, it restricted the disallowance to 5% of the disputed amount (Rs. 89,900). The Tribunal also directed that the amount be taxed at normal rates, excluding Section 115BBE’s punitive provisions.

ITAT Upholds Claim on Demonetization

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Gramin Vibhag Shramik Shikshan Sanstha Palghar vs. Exemption Ward [ITA No.581/Mum/2025]

Appeared for Assessee by Mr. Yeshwant Gupta a/w Mr. Austin Meachery.

The Income Tax Appellate Tribunal (ITAT) in Mumbai recently ruled in favour of an assessee concerning the denial of exemption under Section 11 of the Income Tax Act for the Assessment Year 2021-22. The assessee, a trust engaged in charitable educational activities, filed its income tax return on March 23, 2022, declaring a total income of Rs.91,290. This return was processed under Section 143(1) of the Act, but the Centralized Processing Centre (CPC) disallowed the exemption under Section 11 to the extent of INR 3,16,97,382, citing the failure to submit registration details under Section 12AB.

The core issue was whether the assessee was eligible for the exemption under Section 11 for AY 2021-22, despite applying for registration under Section 12AB only on March 26, 2022 – a day before filing the return. The CPC argued that the delay in applying within the prescribed timeframe under Section 12A(1)(ac)(i) of the Act rendered the assessee ineligible for the exemption. Thereby, a demand of INR 1,49,51,840 was levied on the assessee trust.

Dissatisfied with this decision, the assessee appealed to the Tribunal. After reviewing the case, the Tribunal highlighted key points:

• The CBDT, through Circular 16/2021, had extended the deadline for filing Form 10A to March 31, 2022. Hence, the assessee’s application on March 26, 2022, was timely and not in violation of any deadline.
• The Tribunal noted that the CPC had erred by not accounting for this extension, which was a correctable mistake under Section 154 of the Income Tax Act.

Consequently, the Tribunal directed the Assessing Officer to grant the exemption under Section 11 for AY 2021-22. The appeal was allowed in favour of the assessee trust, setting a precedent for cases where compliance deadlines are influenced by CBDT notifications.

ITAT Mumbai Section 11 Exemption

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Revenue vs. M/s. Kissandhan Agri Financial Services Pvt. Ltd.  [ITA No. 8734 of 2019]

Background of the Case

M/s. Kissandhan Agri Financial Services Pvt. Ltd., the respondent, is a company engaged in financing agricultural commodities and advancing loans. During the assessment year 2016-17, the company issued shares to its holding company, M/s. Sohan Lal Commodities Management Pvt. Ltd., at FMV of Rs. 22.21 per share against the face value of Rs. 10. The company submitted a valuation report prepared by a Chartered Accountant (CA) using the Discounted Cash Flow (DCF) method to justify the premium.

The Assessing Officer (AO) rejected the DCF method, citing discrepancies between the projected figures used in the valuation and the company’s actual financial performance in subsequent years. Instead, the AO applied the Net Asset Value (NAV) method, determining the FMV at Rs. 11.54 per share. Consequently, the AO invoked Section 56(2)(viib) and made an addition of Rs. 36,03,10,674/- to the company’s income, representing the excess premium received over the FMV.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO’s decision, ruling in favor of the assessee. The Revenue then appealed to the ITAT.

Arguments by the Appellant

The appellant argued that the The AO was justified in rejecting the DCF method because the projected figures used in the valuation did not align with the company’s actual performance in subsequent years. The NAV method, based on the book value of assets, is more reliable and should be used to determine the FMV of the shares. The CIT(A) erred in deleting the addition of Rs. 36,03,10,674/- made under Section 56(2)(viib), as the premium received by the assessee exceeded the FMV determined by the AO.

Respondent’s Response

The respondent stated that the DCF method is a recognized and prescribed method for valuation under Rule 11UA of the Income Tax Rules. The valuation report was prepared by an independent CA, and the AO had no authority to reject it without cogent reasons. Projections used in the DCF method are estimates and cannot be judged based on hindsight. Variations between projected and actual figures are inevitable due to market conditions and other factors.

The shares were issued to the assessee’s wholly owned holding company, and the funds were sourced through foreign direct investment (FDI). There was no evidence of unaccounted money being routed through the transaction.

Court Findings and Decision

The ITAT bench of Delhi dismissed the Revenue’s appeal, confirming that the valuation done by the respondent using the DCF method was in accordance with the law. The DCF method is a recognized and prescribed method for valuation under Rule 11UA. The AO cannot reject a valuation report prepared by an independent expert without substantial evidence of wrongdoing. Projections used in the DCF method are based on estimates and assumptions, and variations between projected and actual figures are inevitable. The AO’s reliance on hindsight to reject the DCF method was unjustified.

Section 56(2)(viib) is an anti-abuse provision and should not be applied mechanically to genuine transactions. The AO’s addition of Rs. 36,03,10,674/- under Section 56(2)(viib) was not justified.

AO’s Rejection of DCF Method

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ITO vs. Mr. Sanath Kumar Murali [Writ Appeal 968 of 2023]

Background of the Case

The Income Tax Department initiated reassessment proceedings against the respondent, Mr. Sanath Kumar Murali, under Section 148A(d) of the Income Tax Act, 1961, based on a conveyance deed showing a sale consideration of Rs. 55 lakh. The department argued that this amount constituted escaped income, exceeding the threshold of Rs. 50 lakh under Section 149. However, the respondent contended that the cost of acquisition should be deducted from the sale consideration, which would bring the escaped income below the threshold. The Single Judge quashed the reassessment proceedings.

Arguments by the Appellant

The petitioner argued that the Single Judge’s order was contrary to the scheme of Section 149, as the sale consideration of Rs. 55 lakh clearly exceeded the threshold of Rs. 50 lakh. The petitioner also contended that the Writ Court’s interference was unwarranted, as the reassessment proceedings were validly initiated.

Respondent’s Response

The respondent argued that the cost of acquisition must be deducted from the sale consideration to determine the actual escaped income. They relied on a Division Bench judgment of the Madhya Pradesh High Court in Nitin Nema v. Office of Principal Chief Commissioner of Income Tax, which had upheld a similar view. The Supreme Court had also dismissed the department’s challenge to this judgment in SLP No. 38708 of 2024.

Court Findings and Decision

The Karnataka High Court agreed with the Single Judge’s reasoning and held that the cost of acquisition must be deducted from the sale consideration to determine the escaped income. The court noted that the Madhya Pradesh High Court’s judgment in Nitin Nema had already addressed this issue, and the Supreme Court had upheld it. The court found no merit in the department’s appeal and dismissed it, stating that the Single Judge’s order was consistent with the law and judicial precedents.

The dismissal of the department’s appeal highlights the judiciary’s commitment to ensuring fairness and adherence to statutory provisions in tax proceedings.  This ruling provides clarity on the application of Section 149 and serves as a precedent for similar cases in the future.

Escapement Quantum of 50 Lakhs

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