AO Can Reopen Non-Filer Cases Based on Form 26AS, But Cannot Arbitrarily Estimate Profit Rates.

I. Reassessment Validity: Form 26AS as “Information”

The Dispute: The assessee did not file a return for AY 2010-11. The AO discovered contract income via ITS data and Form 26AS and reopened the case under Section 147.

The Assessee’s Stand: The reasons were vague, and the mandatory sanction under Section 151 was allegedly missing.
The Judicial Verdict (In Favour of Revenue):
- Valid Information: If a taxpayer hasn’t filed a return and 26AS shows income, that is “tangible information” sufficient to believe income has escaped assessment.
- Sanction Process: The court clarified that a letter from a Joint Commissioner mentioning that the Principal Commissioner had accorded approval is sufficient proof of Sanction. The AO doesn’t need to produce a specific “hand-signed” sheet if the internal communication confirms the high-level approval.

II. Year of Taxability: “Buying Peace” is Not a Legal Argument

The Dispute: The assessee received ₹4.37 crores from IGHPL. They argued this income belonged to a preceding year and was only offered in AY 2010-11 to “buy peace of mind” during the audit.

The Judicial Verdict (In Favour of Revenue):
- Burden of Proof: The court held that the assessee must prove that the income was reflected in the accounts and returns of the previous year.
- Self-Contradiction: Since the assessee itself disclosed the net profit on these receipts in the current year’s P&L during the assessment, they cannot later claim it belongs elsewhere without documentary evidence.

III. Estimation of Profits: Rejection of the “12% Rule”

The Dispute: After rejecting the assessee’s books, the AO estimated the profit at 12% of the contract value. The assessee argued for 8% (aligned with presumptive taxation norms like Section 44AD).

The Judicial Verdict (In Favour of Assessee):
- Arbitrary Estimation: The Court set aside the 12% rate. It ruled that the AO cannot “generally dismiss” the taxpayer’s 8% rate without providing a specific comparison or justification as to why 12% is the industry standard.
- The Takeaway: Even if books are rejected, the profit estimation must be based on some rational comparison with similar businesses or statutory benchmarks (like 8%).

IV. Business Expenditure: The “Business Purpose” Test

The Dispute: The assessee claimed deductions for Bank Interest and Bank Charges (finance losses).

The Judicial Verdict (In Favour of Revenue):
- Lack of Nexus: Because the assessee had initially failed to disclose the contract income in their P&L, they couldn’t prove that these bank charges were incurred specifically to earn that contract income.
- Evidence Requirement: Under Section 37(1) (now Section 34 of the 2025 Act), the burden is on the assessee to provide bank statements and loan documents linking the interest paid to the business activity. Failure to produce evidence leads to mandatory disallowance.

Strategic Summary for 2026 Taxpayers

Issue	Legal Status	Strategy for 2026
Non-Filing	High Risk	Form 26AS/AIS data ensures that non-filing will trigger Section 279 (New Act) notices.
Profit Rate	Defensible	If the AO estimates a high profit (e.g., 12%+), challenge it by citing Section 44AD (8%/6%) or industry averages.
Sanctions	Procedural	Courts are now accepting internal “approval communications” as valid Section 151 sanctions.
Expenses	Nexus Required	Always maintain a clear trail between bank loans and contract execution to save interest deductions.

IN THE ITAT AHMEDABAD BENCH ‘A’

Ghanshyam Infrastructure (P.) Ltd.

Deputy Commissioner of Income-tax

Sanjay Garg, Judicial Member
and Smt. Annapurna Gupta, Accountant Member

IT APPEAL No. 1491 (Ahd.) OF 2024
[Assessment year 2010-11]

APRIL 23, 2026

Mahesh Chhajed, AR for the Appellant. Rajenkumar M. Vasavda, Sr. DR for the Respondent.

ORDER

Smt. Annapurna Gupta, Accountant Member.- The present appeal has been filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-12, Ahmedabad (hereinafter referred to as “CIT(A)”), dated 22.12.2023 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2010-11.

2. The appeal is delayed in filing by 176 days. The assessee has filed an application seeking condonation of delay on the grounds that it was unaware of the passing of the order of the Ld. CIT(A) since all communications with the Ld. CIT(A) had taken place on email Id of the Consultant of the assessee who had provided the same to the Department, but, had not informed the assessee of passing of the CIT(A)’ s order. The Director of the assessee company, in a duly sworn affidavit filed before us, has stated that the appeal was filed by the Consultant of the assessee company and had given his email ID in form 35 as advocateisani@gmail.com while the assessees registered email ID in the ITBA portal was notices03.dil@gmail.com and account@dharmadev.net. She stated in the affidavit that the Consultant did not inform of passing of the CIT(A)’ s order and it was only while going through the ITBA portal they became aware of the passing of the CIT(A) order resulting in a delay of 176 days in the filing of the present appeal before us.

3. Ld. DR vehemently opposed the condonation of delay.

4. Considering the averments made by the assessee as above, we are of the view that there was reasonable cause for the delay in filing of the appeal before us and in the interest of justice, therefore, we condone the delay of 176 days in the filing of the appeal before us.

5. Taking up the appeal for adjudication, the assessee has raised following grounds before us:

“1.

The order passed by the Ld. CIT (A) is against law, equity & justice.

The Ld. CIT(A) has erred in law and on facts in upholding validity of order passed by the Ld. AO, when reopening of assessment is bad and illegal.

The assessment order passed by the Ld. A. O. is bad & illegal as reasons for reopening of assessment is not provided to the appellant till finalization of assessment on facts in rejecting books of account U/S 145(3) of the Act.

The Ld. CIT(A) has erred in law and on facts in upholding addition/disallowance made by Ld. AO without issuance of show cause notice before passing assessment order U/S 143(3) r.w.s 147 of the Act.

The Ld. CIT(A) has erred in law and on facts in upholding disallowance made by the Ld. A.O. of Rs 17,59,649/-.

The Ld. CIT(A) has erred in law and on facts in upholding profit estimated by the Ld. A.O. of Rs 52,54, 605/- being @12% of alleged receipt of Rs 4,37,88,379/- of A. Y. 2009-10.

The appellant Craves liberty to add, amend, alter or modify all or any grounds of appeal before final appeal. “

6. Synopsis of arguments in writing were filed before us.

7. The facts relating to the case are that the assessee’s case was reopened and assessment framed u/s.147 of the Act on the basis of information in the possession of the AO from Form No.26AS of the assessee that the assessee was in receipt of contractual income amounting to Rs.4,37,88,379/- from a party M/s. Inter Globe Hotels Pvt. Ltd. This information was reflected in Form No.26AS since the said party had deducted and deposited tax on the said contractual income of the assessee during the impugned year. The assessee was noted to have filed no return of income and, therefore, believing the said income of the assessee to have escaped, the case of the assessee was reopened. During proceedings before the AO, there was not much cooperation by the assessee, and the AO, accordingly, conducted enquiries on his own and issued notice u/s.133(6) of the Act to the party M/s. Inter Globe Hotels Pvt. Ltd. asking to submit all information relating to the contractual receipts paid to the assessee on which TDS was deducted by it. The said party furnished all information in response. The AO noted that the assessee had not reflected the said income in its P&L account, however, in the computation of income filed in response to notice u/s.148 of the Act, the assessee had reflected income from the said contractual receipts, estimating profits @8% thereon amounting to Rs.35,03,070/-. Finding the assessee to have not reflected the said income in its P&L account, he rejected the books of accounts of the assessee and further estimated profits on the said contractual receipts by applying rate of 12% thereon resulting in addition of Rs.17,51,535/- to the income of the assessee. Further, the AO noted the assesse to have claimed losses in the return of income filed to the tune of Rs. 17,59,649/-. The same were noted to be in the nature of finance charges, including bank charges and bank interest. In the absence of any evidence furnished by the assessee demonstrating the said expenses to have been incurred for business purposes, he disallowed the claim of loss of Rs.17,59,649/-. Thus, the AO assessed the income of the assessee at Rs.52,54,600/- as against Rs.17,43,421/- returned by the assesse.

8. The matter was carried in the appeal before the Ld. CIT(A) who confirmed the order of the AO.

9. Before us, the Ld. Counsel for the assessee has challenged the validity of the reopening in the present case on two grounds;

that the reasons were vague/erroneous and

ii.

That the notices u/s.148 of the Act was issued before taking proper sanction/approval of the specified authority as per section151 of the Act.

10. Taking up the first argument that the reasons recorded were vague/incorrect, Our attention was drawn to the reasons recorded in the present case, copy of which was placed before us at paper book page no.21 and which is reproduced hereunder:

“It is seen from ITS Data and Form No. 26AS, that the assessee has received Contract Income of Rs. 4,37,88,379/- from Interglobe Hotels Pvt. Ltd. However, no return of income has been filed by this Company even though it was in receipt of this income of Rs. 4,37,88,379/-

Hence, I have reason to believe that income chargeable to tax for assessment year 2010-11 has escaped assessment within the meaning of provisions of section 147 of the I. T. Act. “

11. As is evident from the above, the AO reopened the case of the assessee forming belief of escapement of income on the basis of information in his possession from the ITS data and Form No.26AS of the assessee for the impugned year that the assessee had received Contract Income of Rs.4,37,88,379/- from Inter Globe Hotels Pvt. Ltd., but, no return of income was filed by the assessee. The fact that Form 26AS of the impugned year reflected receipt of Contract Income of 4.37 Crores of the assessee from Inter Globe Hotels Pvt. Ltd. on which TDS was deducted / paid, is not disputed and also not disputed the fact that no return of income was filed by the assessee. Therefore, there appears to be no infirmity in the reasons recorded by the AO for escapement of income of the assessee when the fact is that the TDS return of the assessee reflected receipt of Rs. 4.37 Crores on account of Contract Income and same was not returned to tax in any way by the assessee who had failed to file any return of income.

12. The contention of the Ld. Counsel for the assessee before us was that during re-assessment proceedings, the AO had issued notice u/s.133(6) of the act to Inter Globe Hotels Private Limited who, in turn, had filed reply from which it was clearly evident that during the year under reference no Contract Income was received by the assessee. He referred to the reply filed by the Inter Globe Hotels Pvt. Ltd. in response to notice u/s.133(6) of the Act reproduced at page nos. 5 & 6 of the assessment order which revealed that the invoice of Rs.4.37Crores had been issued to the assessee on 31.03.2009 i.e. relating to A.Y. 2009-10 i.e. the preceding assessment year.

13. We do not find any merit in the contention of the Ld. Counsel for the assessee for the reason that at the time of recording reasons for reopening of the case of the assessee only fact/information in the possession of the AO was of TDS having been deducted in the impugned year on the Contract Income of Rs.4.37 Crores of the assessee by Inter Globe Hotels Pvt. Ltd. and no return of income being filed by the assessee reflecting the said receipt of the income. The fact of the bill relating to the Contract Income having been raised on the assessee in the preceding year was brought to the notice of the AO only subsequently during re-assessment proceedings. Therefore, on the date of reopening of the case of the assessee, the information in the possession of the AO, we hold, lead to a reasonable belief of escapement of income. Any information relating to the reopening of the case obtained subsequent to reopening does not in any way effect the reasons forming belief of escapement of income of the assessee and, accordingly, the assumption of jurisdiction to reopen the case of the assessee. The contention of the Ld. Counsel for the assessee, therefore, that the reopening was based on incorrect information / vague information is found to be devoid of merits and is, therefore, dismissed.

14. The other contention raised by the Ld. Counsel for the assessee before us was that the notice was issued before taking a valid approval of designated authority as per Section 151 of the Act. The contention of the Ld. Counsel for the assessee was that the notice u/s.148 of the Act was issued to the assessee on 30.03.2017, copy of which placed before us at paper book page no.23. Subsequently, he drew our attention to a document placed before us at paper book page no.22 which he contended was the receipt of approval sanctioned by the PCIT dated 31-03-2017. Ld. Counsel contended accordingly that approval was granted on subsequent to issuance of notice u/s 148 of the Act.

15. On going through the said documents, we do not find any merit in the contention of the Ld. Counsel for the assessee. Undoubtedly, the notice u/s.148 of the Act was issued on 30.03.2017 but the same records the fact of having been issued after approval from designated authority. However, the document referred by the Ld. Counsel for the assessee before us demonstrating the grant of approval for reopening the case of the assessee dated31-03-2017 does not establish the fact that the approval was granted by the PCIT on 31.03.2017. It is a mere communication by Joint Commissioner of Income Tax, Central Range-2, Ahmedabad to the AO of the assesse i.e. the Assistant Commissioner of Income Tax, Central Circle – 2(4), Ahmedabad pointing out the fact that approval has been accorded by the Pr. CIT(C) to take remedial action u/s.147 of the Act. No document has been placed before us to demonstrate the fact that the approval was granted by the PCIT as per Section 151 of the Act on 31 .03.2017. Therefore, this contention of the Ld. Counsel for the assessee that the mandatory approval u/s. 15 1 of the Act for reopening the case of the assessee was not taken by the AO before issuing notice u/s. 148 of the Act, but, was taken subsequently, is found to have not been demonstrated to us on facts and is, therefore, held to be devoid of merits and accordingly rejected.

16. Ground of appeal no.2 raised by the assessee challenging the validity of the reopening in the present case is, accordingly, dismissed.

17. Ground Nos. 3, 4, 5 & 6 relate to the merits of the case and challenging the order of the Ld. CIT(A) in confirming the addition made by the AO of Rs.52,54,605/- being 12% of the receipts of Rs.4.37 Crores from Inter Globe Hotels Pvt. Ltd.

18. The facts relevant to the issue are that the assessee initially had filed no return of income for the impugned year in terms of Section 139(1) of the Act. Subsequently, in response to notice u/s.148 of the Act, the assessee filed return of income declaring net profits from the Contract Income Rs.4.37 Crores @ 8% i.e. Rs.35,03,070/-, reflecting/stating the same as income not included in the P&L account. Against the same, the loss declared in the P&L account Rs.17,59,649/- was set off and net income of Rs.17,43,421/- was returned to tax by the assessee. The computation of the same is reproduced at page 3 of the assessment order as under:

BUSINESS & PROFESSION
Ghanshyam Infrastructure Pvt. Ltd. LOSS As per P&L a/c.	(Rs.17,59,649)
Add: Other Income not included in P&L a/c. a. Net Profit from Contract Income (8 % of Rs.4,3 7, 88, 3 79/-) Rs.	35,03,070
Total Income	Rs.35,03,070 Rs.17,43,421

19. The facts of the case are that in the P&L account of the assessee no Contract Income was disclosed. When the assessee was confronted with the reasons for reopening the case of the assessee, reflecting the fact that there was information in the possession of the AO extracted from Form No.26AS of the assessee that the assessee had earned Contract Income of Rs.4,37,88,379/- on which TDS had been deducted, the assessee separately reflected net profit from the said income in its computation of income. This Contract Income admittedly was not reflected in the P&L account of the assessee, but, only net profit from the same was separately returned to tax in the computation / return of income filed u/s.148 of the Act. Against the same, the loss reflected in the P&L account of the assessee was set off. The AO estimated the gross profit on the same @12% and simultaneously, he disallowed the claim of loss as reflected in the P&L account stating that no nexus was established of the said loss to the business of the assessee. That the assessee had not discharged its onus of proving that the loss pertained to expenses incurred for the purpose of business of the assessee. Accordingly, an addition of Rs.17,51,535/- was made on account of profit on contract receipts and loss claimed by the assessee was disallowed. Both the additions made and the disallowance of losses made by the AO were confirmed by the Ld. CIT(A).

20. The contention of the Ld. Counsel for the assessee before us was that enquiry conducted by the AO by issuing notice u/s.133(6) of the Act to Inter Globe Hotels Pvt. Ltd. itself revealed that income did not pertain to the impugned year. He drew our attention to page nos. 6 & 7 of the assessment order wherein he pointed out that the AO had categorically noted the amount on account of the said contractual income of Rs.4.19 Crores to have been received on 13.03.2007 i.e. in A.Y. 2007-08. He further pointed out that the AO had also noted the fact that the final invoice of Rs.4,37,88,379/- was issued on 31.03.2009 by Inter Globe Hotels Pvt. Ltd., but, the TDS on the same of Rs.9,82,611/- was paid on 08.01.2010. Ld. Counsel for the assessee contended that as per the admitted facts of the case, the Contract Income did not pertain to the impugned year at all, but, in fact pertained to the preceding year. He contended that it was pleaded to the Ld. CIT(A) that the assessee had returned the said income in the impugned year to buy peace of mind.

21. We agree with the Ld. Counsel for the assessee that the AO noted the fact of the bill of Rs.4.37 Crores being issued on 31.03.2009, pertaining to A.Y. 2009-10 while the impugned assessment year before us is A.Y. 2010-1 1. However, at the same time Form 26AS reflects TDS deducted and paid in the impugned year. Which means that the TDS deducting party had acknowledged expense pertaining to the said contract bill in the impugned year. Moreover, the assesse has not demonstrated before us that the impugned amount of contractual income was reflected in its accounts and the return of income of the assessee for the preceding year. On the contrary the assessee itself has disclosed the net profits on the said contractual receipts in the impugned year. The bill may have been issued admittedly in the preceding year, but, unless and until it is demonstrated to have been accounted for in the books of accounts of the assessee also in the preceding year, it does not automatically lead to the conclusion that the income pertained to the preceding year. The bill may have been issued in the preceding year, but accepted by the party on whom raised in the subsequent year. In such circumstances it can be said that the income accrued to the assessee in the subsequent year and not in the year in which bill was issued.

22. Therefore, we do not find any merit in the contention of the assessee that the contractual income pertained to the preceding year and was returned to tax in the impugned year just to buy peace of mind. Accordingly, we agree with the authorities below that the contract income of Rs.4.37 Crores pertained to the impugned year.

23. Coming to the aspect of the applicability of net profit rate for determining the profit earned from the contract receipts, while the assessee has applied rate of 8%, the AO has held a rate of 12% to be justified. No justification has been given by the AO for rejecting assessee’ s rate of 8% applied except a general dismissal of the same stating that 12% rate is justified. In the light of the same, we see no reason to agree with the AO that the net profit rate of 12% on the contractual receipts was justified. The order of the Ld. CIT(A), therefore, confirming the addition made to the income of the assessee on account of application of net profit made of 12% to the contractual receipts is set aside and the application to 8% rate to the contractual receipts, as claimed by the assessee, is held to be justified. The addition, therefore, made to the income of the assessee on account of application of net profit rate of 12% to the extent of Rs.17,51,535/- is directed to be deleted.

24. Coming to the aspect of the disallowance of losses claimed by the assessee, the facts of the case reveal that the assessee claimed losses to the tune of Rs.17,59,649/- which comprised of bank charges of Rs.1,21,957/- and bank interest of Rs. 16,37,692/-. The said losses were reflected in the P&L account of the assessee wherein no contractual income was reflected by the assessee. The Revenue authorities have held the claim of the impugned losses to be not allowable, since, the assessee failed to discharge its onus of proving that the said finance expenses were incurred wholly and exclusively for the purpose of business of the assessee.

25. Before us also, the assessee failed to demonstrate the said fact. In the light of the same, we see no reason to interfere in the order of the Ld. CIT(A) confirming the order of the AO in disallowing the loss of Rs.17,59,649/-.

26. Ground of appeal no.5 raised by the assessee in this regard is accordingly dismissed & Ground No.6 is allowed. No other arguments were made before us, therefore, remaining grounds i.e. Ground Nos.3 & 4 are dismissed.

27. In the result, the appeal of the asessee is partly allowed.