Reopening based solely on CBDT directions without independent Assessing Officer satisfaction is void ab initio.

ORDER

Nikhil Choudhary, Accountant Member.- This is an appeal filed by the assessee against the order of the ld. CIT(A), NFAC dated 3.09.2025, wherein the ld. CIT(A) has dismissed the appeal of the assessee, filed against the order of the ld. Assessing Officer passed under section 147 r.w.s. 144B for the A.Y. 2017-18 dated 19.03.2022. The grounds of appeal are as under:-

“1.1 BECAUSE the ld. CIT(A) was not justified in dismissing the appeal by passing the impugned order ex-parte without affording reasonable opportunity of being heard to the appellant.

1.2 BECAUSE the appellant could not make ground-wise submission before the ld. CIT(A) owing to pendency of petition before the CBDT for condonation of delay in filing of income tax returns and further challenge of CBDT’s order rejecting the condonation petition before the Hon’ble High Court and on a due consideration of these facts itself, the matter deserves to be restored to the ld. CIT(A) for deciding the appeal afresh after affording a reasonable opportunity of being heard to the appellant.

2. BECAUSE the ld. CIT(A) while upholding the validity of re-assessment proceedings u/s 147 of the Act failed to appreciate that the assessment proceedings were neither initiated nor concluded as per relevant provisions of law, vitiating the entire proceedings commencing from recording of reason and ending with passing of the assessment order dated 19.03.2022 passed u/s 147 r.w.s. 144B of the Act.

3. BECAUSE the ld. CIT(A), while upholding the validity of re-assessment proceedings u/s 147 of the Act, failed to appreciate that the reasons recorded for initiating the re-assessment proceedings suffered from following infirmities:-

4.1 BECAUSE the ld. CIT(A) has erred in law and on facts in upholding the disallowance of claim of set-off of current year’s income of Rs. 66,19,663/-against brought-forward losses for A.Y. 2013-14 to 2015-16 by disregarding valid returns of income filed u/s 119(2)(b) of the Act for the said assessment years and evidence of the condonation petition on record.

4.2 BECAUSE even otherwise, in the returns of income filed u/s 119(2)(b) and u/s 148 of the Act, the appellant had in fact claimed the set-off of current year’s income of Rs. 66,19,663/- against brought-forward loss of A.Y. 201213 only and not against the losses of A.Y. 2013-14 to 2015-16, which fact escaped the attention of the authorities below while denying the said claim of brought forward loss.

4.3 BECAUSE the ld. CIT(A) erred in upholding the denial of set-off of current year’s income of Rs. 66,19,663/- against brought-forward losses for A.Y. 2013-14 to 2015-16 by not appreciating that the order for condonation of delay in filing the returns had not attained finality as the appellant had decided to challenge the order of rejection of the condonation petition by filing writ petition before the Hon’ble High Court.

5.1 BECAUSE the ld. CIT(A) erred in law and on facts in upholding the disallowance of provision of interest of Rs. 76,49,456/- payable to RBI for non-maintenance of CRR/SLR by erroneously treating it as penalty and as a prior-period item, without appreciating that the liability was statutory and compensatory in nature and had crystallised during the relevant previous year.

5.2 BECAUSE the provision for penal interest amounting to Rs. 76,49,456/-, payable to the RBI for non-maintenance of CRR/SLR, having crystallised during the relevant year pursuant to RBI’s letter dated 09.08.2016 refusing remission and directing payment within 30 days, was deductible u/s 37(1) of the Act as an expenditure incurred wholly and exclusively for business purposes and the authorities below have erred in disallowing the same by completely ignoring the said RBI letter.

6. BECAUSE initiation of penalty u/s 270A of the Act for alleged underreporting of income in consequence of misreporting is on a misconception of the provisions of law and wholly unjustified on the facts of the case.

7. BECAUSE initiation of penalty u/s 271B of the Act is unjustified where no query on audit report was raised during assessment either under section 143(3) or 147 of the Act.

8. BECAUSE the order appealed against is contrary to facts, law and principles of natural justice.

9. BECAUSE each ground taken in appeal is mutually exclusive and without prejudice to each other.

10. The appellant craves leave to add, delete or modify any of the grounds before or at the time of hearing of appeal.”

2. The case of the assessee for the assessment year 2017-18 was selected for scrutiny through CASS. Subsequently, the ld. Assessing Officer noticed that the assessee had not filed return under section 139(1) or section 139(4) of the Income Tax Act, but had filed the same on 28.03.2019, under sction 119(2)(b) of the Income Tax Act. The same had been filed without any condonation of delay by the CBDT and thus, in the opinion of the ld. Assessing Officer, the return was, “nonest”. Since no return of income had been filed, the case could not be subjected to scrutiny and therefore, the proceedings under section 143(3) were dropped. Thereafter, the ld. Assessing Officer opined that the information available in the form of the invalid ITR was a valid piece of information for initiation of proceedings under section 147. Accordingly, a notice under section 148 of the Act was issued to the assessee on 28.03.2021, after seeking approval of the competent authority and in response to the same, the assessee filed a return on 18.11.2021 at an income of Rs. 66,19,633/-, which were adjusted out of brought forward losses of previous years. The case was taken up for scrutiny and notices were issued. The assessee submitted that its case had already been finalized earlier without any addition and therefore, no case was made out for an escapement under section 147. It also submitted that the notice under section 147 had been issued on the instructions of an authorities as contained in CBDT F No.225/333/2019/ITA-II dated 23.11.2019. However, the ld. Assessing Officer did not accept these submissions. He pointed out that the same had been initiated on the basis of tangible information in possession of the ld. Assessing Officer, after recording of reasons and seeking prior approval of the competent authority. Hence, the proceedings were legal and within the framework of law. The ld. Assessing Officer further noted that the assessee was a Cooperative Bank and during the year under question had shown a loss of Rs. 66,19,663/- which had been sought to be set off against the losses of the preceding years. However, he also noted that the none of the returns of the preceding years had been filed under section 139(1) or section 139(4), but they had all been filed on 28.03.2019, with a condonation petition under section 119(2)(b). The ld. Assessing Officer held that simply filing a condonation petition without any order, did not give permission for filing of any return. He quoted from the provisions of section section 80 of the Income Tax Act, which said that no loss which has not been determined in pursuance of return filed in accordance with the provisions of sub section 3 of section 139 shall be carried forward and set off against sub section (1) of sub section 72, or sub section (2) of section 73, or sub section (2) of sub section 73A ,or sub section (1) of sub section (3) of section 74, or sub section (3) of section 74A. He also reproduced the provisions of section 139(3) of the Act, which stated that the person claiming the loss had to furnish a return within the time allowed under sub section 1 of section 139. The ld. Assessing Officer held that if the return had not been filed within the time allowed under section 139(1), then the loss sustained could not be carried forward to subsequent years for setting off. In view of the fact that the returns for the remaining years were filed belatedly i.e. after a delay of almost 5 to 6 years, hence loss sustained could not be determined by the ld. Assessing Officer. The ld. Assessing Officer held that the assessee provided misleading information in “Schedule-CFL” and quoted wrong dates of filing. He also noted that since there was no condonation of delay from the competent authority, there was in fact no return which had been filed and therefore, he disallowed the losses of Rs. 66,19,663/- that were sought to be carried forward and adjusted in this year. Furthermore, the ld. Assessing Officer noted that the assessee had debited his P&L account with an amount of Rs. 86,52,722/- under the head, “other provisions”. In this connection, it was pointed out that no provision out of current year’s receipts were allowable, except provisions for bad and doubtful debts in the cases of banks to a specific extent. On further enquiry, he determined that the same was inclusive of a provision for penal interest of Rs. 76,49,456/- which related to A.Y. 2011-12 and 2012-13. He noted that since the provision had been made for penal interest and such penal interest was not relevant to the year under consideration, but to a prior period, hence the same was not allowable. Accordingly, he made a disallowance of Rs. 76,49,456/- out of this amount.

3. Aggrieved with the said assessment order, the assessee filed an appeal before the ld. CIT(A), NFAC. Before the ld. CIT(A), it was submitted that the re-assessment proceedings were bad in law because they were initiated on the dictates of higher authorities and not on the basis of belief of escapement of income entertained by the ld. Assessing Officer himself, on independent application of mind. Consequently, the re-assessment proceedings were vitiated and the assessment order was bad in law. It was also submitted that the assessment having earlier been done under section 143(3), the initiation of re-assessment proceedings under section 147 with a view to review the same material again, amounted to a change of opinion, which was not permissible in law. It was also submitted that the ld. Assessing Officer was incorrect in recording the finding that there was no evidence of filing of condonation petition dated 6.02.2019, addressed to CBDT under section 119(2)(b), whereas the same had been placed on record and consequently the assessment was perverse on this account. Furthermore, the ld. Assessing Officer had erred in not allowing set off of loss of Rs. 66,19,663/- against current year’s return and also for making disallowance of Rs. 76,49,456/-, by disallowing provision for penal interest payable to RBI for non-maintenance of CRR/SLR as required by sections 18 and 24 of the Banking Regulation Act. The ld. Assessing Officer had failed to observe that the same was not a penalty for infraction of law, but was in the nature of statutory interest payable to RBI and accordingly the same was allowable under section 36 and 37 of the Income Tax Act. Furthermore, since the said expenditure got crystalized in the previous year, he was incorrect in holding it to be a prior period expenditure. The assessee submitted that the delay in the filing of the return was because the RBI vide its notice dated 9.05.2012 under section 35A of the Banking Regulation Act, 1945 had cancelled the license of the assessee for accepting fresh deposits, but permitted the assessee to continue renewal of existing deposit. Subsequently, in order to revive the bank, a grant of Rs. 45,11,00,000/- was provided to the bank from the State Government and subsequently contributions were also received from NABARD, the Central Government and the State Government for revival of the bank. It was submitted that during this period of transition, the bank did not have any permanent management and there was no proper staff. While the bank was not permitted to grant any fresh loans, the expenses of the bank continued in these years including fixed expenses, interests on deposits etc,. It was further submitted that almost all the loans advanced earlier by the bank were NPA and the bank did not earn sufficient funds to meet out its expenses. The profits in the current year were mainly due to interest received on grant amount kept as fixed deposits. Furthermore, this interest could only be used for some specific purpose, as prescribed in the MOU that the bank had signed with Government of India, Government of Uttar Pradesh and NABARD on 16.02.2015. Therefore, no tax was leviable upon such interest income. It was submitted that the details of the income earned by the bank and expenditures incurred by the bank had been furnished by it and subjected to enquiry by the ld. Assessing Officer and the ld. Assessing Officer after conducting such enquiry, had dropped the proceedings by passing an assessment order under section 143(3) on 16.03.2020. Thereafter, it was submitted that the same issues could not be revisited in the proceedings under section 147. It was further submitted that the assessee had objected but its objections had been brushed aside.

4. The ld. CIT(A) records the fact that he issued several notices to the assessee but the assessee did not make compliance to them. It sought adjournment on the grounds that its petition for condonation of delay was still pending for a decision before the CBDT and since the outcome of the said petition would have a vital bearing on grounds taken in appeal, the assessee was not in a position to make effective submission before the ld. CIT(A) till the disposal of the said petition. Accordingly, it was prayed that the appeal may be kept in abeyance. However, the ld. CIT(A) decided to proceed with the appeal ex parte based upon the material on record. He rejected the claim of the assessee that the proceedings under section 147 had been initiated on external dictation. He held that the CBDT guidelines were general guidelines and they did not override the AO’s discretion. As regards, the contention that the matter had already been examined under section 143(3), the ld. CIT(A) pointed out that the initial order was on an invalid return, which was nonest and hence it could not be held to be a change of opinion because such change of opinion could only take place in respect of an assessment concluded on a valid return. He noted that since the condonation petition had not yet been decided in favour of the assessee, the returns filed under section 119(2)(b) could not be regarded as a return under section 139(1) until the CBDT condoned the delay and therefore, he upheld the decision of the ld. Assessing Officer to disallow the losses of Rs. Rs. 66,19,663/-. With regard to the disallowance of provision for penal interest of Rs. 76,49,456/-, he noted that the assessee had not been able to furnish any evidence to demonstrate that the liability of such, “prior period expenses” accrued in this year. In the circumstances, he confirmed the disallowance.

5. The assessee is aggrieved by these orders passed by the ld. CIT(A) and has accordingly come before us. Sh. P.K. Kapoor, C.A. (hereinafter referred to as the ld. AR) took us through the facts of the case and pointed out that the return had been filed under section 119(2)(b) on 28.03.2019 alongwith a condonation petition to the Board to condone the delay in the filing of the return, in view of the circumstances involved. However, even while this condonation petition was pending for a decision, a notice under section 143(2) issued to the assessee on 22.09.2019, whereby the case of the assessee was picked up for scrutiny. In response to the various notices issued by the Department which was placed on record at pages 35 to 38 and 40 to 41 of the paper books, the assessee filed replies on 21.11.2019 and 7.12.2019 in which all the queries were responded to. Subsequent to the issue of notices, the CBDT issued an instruction on 29.11.2019 stating that notices under section 143(2) had been generated in respect of invalid returns filed for 2017-18 through CASS cycle 2018 and as scrutiny of such returns was bad in law, the ld. Assessing Officer’s were directed to drop the proceedings in such cases and reopen the same by issue of notice under section 148 of the Income Tax Act. The ld. AR submitted that the decision to reopen the case was evidently taken on the dictates of the Board and not on independent examination and drawing of satisfaction by the ld. Assessing Officer. He drew our attention to page nos. 79 to 82 of the paper book which contained the reasons recorded by the ld. Assessing Officer, and showed that the ld. Assessing Officer had derived his reason to believe on account of interest income of Rs. 5,16,54,097/- which in his opinion had escaped assessment. The ld. AR pointed out that it was clear from the Circular dated 29.11.2019 that the assumption of jurisdiction under section 147 was on the dictates of higher authorities, without independent application of mind by the ld. Assessing Officer. He, therefore, submitted that the subsequent order was bad in law. He placed reliance on the following case laws:-

The ld. AR further submitted that there was no live nexus between the material available with the ld. Assessing Officer and the reasons recorded. The information on the basis of which the ld. Assessing Officer had reopened the case, was provided by the assessee in the form of a voluntary return, which was held to be invalid and the ld. Assessing Officer had not pointed out any failure on the part of the assessee to disclose any material facts. The sole basis for reopening was recorded, as the return of income being treated as invalid, which cannot by itself constitute an escapement of income. Accordingly, there was no live link between the material available and the belief of an escapement of income. The ld. AR placed reliance on the decision of the Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) for this proposition. The ld. AR further pointed out that the case had been selected for scrutiny through CASS with the reason of investment / advances / loans; disallowance under section 40A(7) (gratuity provision). Thus, the reopening was based on material already available on record during the regular assessment proceedings. These details had been examined by the ld. Assessing Officer during scrutiny proceedings and there was no fresh tangible material that came into possession of the ld. Assessing Officer subsequently. Since there was no new information, the reopening amounted to a review/reappraisal of the same material and was therefore hit by the change of opinion. Reliance was placed on the following decisions as under:-

On account of all these factors, the ld. AR argued that the order of the assessment was bad in law. On the merits of the issue, the ld. AR argued that till the time of the passing of the assessment order, the petition under section 119(2)(b) had not been disposed of by the CBDT. Thus, the ld. Assessing Officer should not have disallowed the assessee’s claim of set off of current year’s income of Rs. Rs. 66,19,663/- against brought forward losses. It was submitted that subsequently, the Pr. Chief Commissioner of Income Tax, vide his order dated 13.05.2024, had rejected the condonation petition filed by the assessee but the assessee had filed a writ petition against the same. It was submitted that the Hon’ble Allahabad High Court, in entertaining such writ had ordered that if any demand was created in the assessment year 2018-19, the same should not be enforced during the pendency of the writ petition. The ld. AR pointed out that the ld. Assessing Officer had further committed an error in disallowing provision for interest payable to RBI for non-maintenance of CRR/SLR by treating the same as penalty and prior period expenditure. The demand for penal interest had initially been raised by RBI vide letter dated 17.07.2012, but the assessee had sought remission of the said liability from RBI vide its letter dated 12.02.2016. The request for remission was finally rejected by the RBI, vide letter dated 9.08.2016 whereby the RBI confirmed the liability and directed the payment of the amount within 30 days of issue of letter. Accordingly, since the liability crystalized only in the F.Y. 2016-17, the provision for interest was therefore, rightly created during the year under consideration. By overlooking the RBI’s letter dated 9.08.2016, the ld. Assessing Officer had wrongly treated the expenditure as prior period expenditure. Furthermore, the levy imposed by RBI for non-maintenance of CRR/SLR was compensatory in nature and not a penalty for any offence or infringement of law. The decision was squarely covered by the decisions of the Hon’ble Kerela High Court in CIT v. Dhanalakshmi Bank Ltd. (2003) 2 KLT 1076 (Ker) and CIT v. Catholic Syrian Bank Ltd. [2004] 265 ITR 177 (Kerala). Accordingly, it was submitted that the disallowance was unjustified. In conclusion, the ld. AR submitted that since the notice under section 148 had only been issued because of the instructions of the Board dated 29.11.2019, it was at the behest of the Board and had those instructions not been there, the 148 would not have been issued. He submitted that the Board could have said that the ld. Assessing Officer should take further action as per law but by directing the issue of notice under section 148, the Board had influenced the ld. Assessing Officer and therefore, rendered the reopening bad in law. Accordingly, he prayed that the entire proceedings should be quashed.

6. Responding to the ld. AR, Smt. Sonal Singh, Addl CIT DR (hereinafter referred to as the ld. DR) pointed out that the invalid return filed by the assessee was there on the system. Therefore, the reason for escapement of income was available with the Department. She submitted that at the stage of reopening, it was only the amount of credits which were required to be seen as the expenditures were something that had to be proved by the assessee. Hence, there was no mistake by the ld. Assessing Officer in taking the entire credits as the income because reasons were recorded only upon prima facie belief. She further pointed out that the earlier return being an invalid return, no assessment was completed and order issued. No processing was done either. Therefore, when the ld. Assessing Officer had simply closed the proceedings on the instructions of the Board, as the proceedings were invalid in law, the assessee could not claim that there was any change of opinion by the ld. Assessing Officer because the ld. Assessing Officer had examined the earlier return and not made any adverse comments with regard to the same. She argued that in fact there was no scope for the ld. Assessing Officer to record such comments in the earlier proceedings. Therefore, this was not a case of change opinion. On the issue of the case being reopened on the directions of the Board, ld. Sr. DR pointed us to the order of the ld. CIT(A) in which ld. CIT(A) had examined the said instruction issued by the Board and pointed out that it was in the nature of a general instruction, but it was always open for the ld. Assessing Officer to examine the material and record his own belief. She submitted that the mere fact that the return had earlier been selected for scrutiny on certain points and the same had not been concluded, was in itself a reason to belief that income had escaped assessments. Furthermore, she pointed out that the ld. Assessing Officer had clearly pointed out that materially wrong information had been furnished in the returns of income because in “Schedule-CFL”, the dates of filing of returns were wrong. She pointed us to para 3.4 of the assessment order, which according to her constituted an explanation for escapement where the ld. Assessing Officer had specifically pointed out losses sustained in earlier years could not be carried forward unless the return of income had been filed under section 139(1) and that in the present case, the assessee had claimed such a loss. On the issue of penal interest, the ld. DR submitted that by the assessee’s own admission, the interest liability had arisen in A.Y. 2013-14 but they had only been confirmed by the RBI vide its letter dated 9.08.2016. Since the demand raised then was reiterated, it had to be held as a prior period expenditure. Furthermore, she pointed out that the CBDT had since delegated the matter of condonation of delay under section 119(2)(b) to the PCCIT and the PCCIT, Lucknow had through a detailed order, which was contained in the assessee’s paper book, rejected the condonation petition of the assessee. In view of the same, the assessee was not eligible to set off losses from previous years either. Accordingly, she prayed that the assessee’s appeal may kindly be dismissed.

7. We have duly considered the facts and circumstances of the case. We are of the opinion that the issue of whether the case has been selected for reopening on account of the directions of the Board or whether it has been reopened on the basis of the independent satisfaction of the ld. Assessing Officer regarding income escaping assessment, has to be examined with reference to the reasons recorded. On consideration of the reasons recorded, which are contained on pages 79 to 82 of the assessee’s paper book, it is noticed that the ld. Assessing Officer has come to the conclusion that the assessee failed to disclose income of Rs. 5,16,54,097/- during the financial year 2016-17 relevant to the assessment year 2017-18, despite huge investment at banks and from this he has come to the conclusion that income amounting to Rs. 5,16,54,097/- chargeable to tax has escaped assessment for the assessment year 2017-18. Now as per the AO’s own records, the assessee had filed a return (which was invalid) in which it had shown earning of interest income of Rs. 5,16,54,097/- and claimed various expenses for payment of rent, interest on deposits, salary expenses, payment of interest on borrowed fund, making of provisions of Rs. 86,52,722/- and thereafter shown a net profit of Rs. 66,19,663/-. Subsequently, this Rs. 66,19,663/- had been set off against losses from previous assessment years, for which returns had not been filed under section 139(1) or 139(4), but under section 119(2)(b) even though the said delay in filing of these returns had not been condoned. There was no material before the ld. Assessing Officer that he brought on record to show that the expenses claimed against the said interest income were wrongly claimed or liable to be disallowed. In such a situation, at this stage, he could only have held that the net profit shown by the assessee had escaped assessment. Thus, by a plain look at the information in the possession of the ld. Assessing Officer, it is clear that there was no information in his possession or brought on record which suggested escapement of income of Rs. 5,16,54,097/-, which could be the basis for the issue of notice under section 148 or enable him to derive satisfaction that the said interest income had escaped assessment. It would therefore appear from a look at the reasons to believe, that the case was reopened solely on account of the Board’s instruction dated 29.11.2019 which were quite clear in directing the AO’s to drop proceedings under section 143(2) of the Act in cases of invalid returns which had been accidentally selected for scrutiny in CASS cycle of 2018 and to reopen the same by issue of notice under section 148. Accordingly, it is held that since the notice issued by the ld. Assessing Officer was not based upon any genuine satisfaction of income escaping assessment but only a perfunctory recording of reasons in order to comply with the instruction of a CBDT dated 29.11.2019, it was a notice issued at the instruction of a higher authority without any independent satisfaction of income escaping assessment by the ld. Assessing Officer and was therefore, vitiated in the eyes of law. Consequently, the resultant assessment proceedings are also rendered invalid as the entire proceedings are found to be void ab initio. Accordingly, ground no. 3 of the assessee’s appeal is held to be allowed and ground no. 4 is held to be partly allowed. In view of the fact that the assessee succeeds on these grounds resulting in the annulment of the assessment order, the remaining grounds of appeal are rendered infructuous and dismissed as such.

8. In the result, the appeal of the assessee is partly allowed.