Reassessment order under Section 69 quashed due to AO’s failure to dispose of assessee’s objections to reopening with a speaking order,

By | June 1, 2025
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Reassessment order under Section 69 quashed due to AO’s failure to dispose of assessee’s objections to reopening with a speaking order, violating natural justice.

Issue:

Whether a reassessment order passed by the Assessing Officer (AO) under Section 147 of the Income-tax Act, 1961, making an addition under Section 69 (unexplained investments), is valid if the AO fails to dispose of the assessee’s objections against the reopening of the assessment by passing a speaking order, thereby breaching principles of natural justice and fair play.

Facts:

  • For Assessment Years 2014-15 and 2016-17, the assessee’s case was reopened under Section 147.
  • The basis for reopening was information available in the “Insight portal” of the department, indicating that the assessee had carried out substantial financial transactions with one ‘SV’.
  • The assessee raised objections against the reopening of the assessment, specifically stating that he had not entered into any transaction with ‘SV’.
  • However, the Assessing Officer (AO) proceeded to pass the reassessment order, making an addition under Section 69 (unexplained investments), without first disposing of the assessee’s objections by passing a speaking order.

Decision:

The court held in favor of the assessee. It ruled that since the Assessing Officer had not disposed of the objections raised by the assessee against the reopening of the assessment by passing a speaking order, such a procedure involved breaching principles of natural justice and fair play. Therefore, the reassessment order was quashed.

Key Takeaways:

  • Mandatory Procedure for Objections to Reopening: When an assessee raises objections to the reopening of an assessment under Section 147, the Assessing Officer is legally obligated to dispose of these objections by passing a “speaking order” before proceeding with the reassessment. This procedure was laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO [2002] 125 Taxman 963 (SC).
  • Speaking Order Requirement: A “speaking order” means a reasoned order that addresses all the contentions raised by the assessee in their objections to reopening and provides a clear rationale for either accepting or rejecting those objections. It cannot be a mere formality or a cryptic note.
  • Violation of Natural Justice: The failure to dispose of objections by a speaking order is considered a breach of the principles of natural justice and fair play. It denies the assessee a crucial opportunity to challenge the very basis of the reopening before being subjected to a reassessment.
  • Consequence of Violation – Quashing of Reassessment Order: If the AO proceeds with reassessment without first properly disposing of the objections, the entire reassessment proceedings, including the final assessment order, become invalid and are liable to be quashed.
  • Importance of Information for Reopening: While the “Insight portal” provides information, the assessee’s immediate denial of transactions with ‘SV’ necessitates the AO to address this objection with reasons before proceeding, especially if the reopening is solely based on this third-party information.
  • No Merit Adjudication: The court quashed the order purely on procedural grounds, without delving into the merits of the addition under Section 69, emphasizing that a valid procedure is a prerequisite for a valid assessment.
  • “In favour of assessee”: This outcome is in favor of the assessee because the demand is set aside, but it also allows the revenue to potentially initiate fresh reassessment proceedings, provided they follow the correct procedure from the stage of disposing of objections.
IN THE ITAT MUMBAI BENCH ‘C’
Prasanth Sunil Kumar Bohra
v.
Income-tax Officer
BIJAYANANDA PRUSETH, Accountant Member
and SAKTIJIT DEY, Vice President
IT Appeal Nos.2302 and 2303 (MUM) of 2025
[Assessment years 2014-15 and 2016-17]
MAY  19, 2025
Himanshu Gandhi, AR for the Appellant. Rajendra Joshi, Sr. DR for the Respondent.
ORDER
Bijayananda Pruseth, Accountant Member.- These two appeals emanate from the orders dated 05.03.2025 passed by the Commissioner of Income-tax (Appeals), fNational Faceless Appeal Centre, Delhi [in short ‘CIT(A)’], for the Assessment Years (AYs) 2014-15 and 2016-17 respectively. Since facts of the cases and the grounds taken up in the appeals are similar except variation in the amount, these appeals were heard together and a common order is passed for the sake of convenience and brevity. ITA No. 2302/Mum/2025 is taken as the ‘lead case’.
2. Grounds of appeal raised by the assessee in ITA No.2100/Mum/2025 are as under:
“1. On the facts and circumstances of the case and Law, the Ld. CIT(A) erred in confirming invocation of penalty proceedings under section 274 r.w.s. 271(1)(c) of the Income Tax Act, 1961
2. The appellant craves leave to add, delete, withdraw and/or modify any one/more or all the above grounds of appeal on or before the date of final hearing
3. On the facts and circumstances of the case and law, the learned CIT(A) erred in confirming validity of notice under section 148 of Income Tax Act, 1961 which is bad in law and required to be quashed
4. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that permission obtained under section 151 of Income Tax Act, 1961 is not in accordance with law, as permission is given by PCIT in mechanical manner and on wrong fact. Therefore, resultant proceedings u/s 148 are also bad in law and require to be quashed
5. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that assessment order dated 30.03.2022 passed without disposing objection raised against reason recorded for reopening is bad in law and required to be quash
6. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that addition of Rs. 209,25,755 made under section 69 of Income Tax Act, 1961 by Ld. AO on assumption that appellant had transaction with Shripal Vora is factually wrong as appellant had no transaction with Shripal Vora
7. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that when appellant had no transaction with Shripal Vora then nothing can be added and further section 69 applies when investment is not recorded in books of account, but in present no transaction take place at all
8. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that assessment order passed without considering the reply of appellant is against the principal of opportunity of being heard and makes order null and void.
9. On the facts and circumstances of the case and law, the ld. CIT(A) erred in confirming charging of Interest u/s 234B of the Income Tax Act, 1961.”
3. Grounds of appeal raised by the assessee in ITA No.2303/Mum/2025 are as under:
“1. On the facts and circumstances of the case and law, the learned CIT(A) erred in confirming validity of notice under section 148 of Income Tax Act, 1961 which is bad in law and required to be quashed.
2. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that permission obtained under section 151 of Income Tax Act, 1961 is not in accordance with law, as permission is given by PCIT in mechanical manner and on wrong fact. Therefore, resultant proceedings u/s 148 are also bad in law and require to be quashed
3. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that assessment order dated 3 30.03.2022 passed without disposing objection raised against reason recorded for reopening is bad in law and required to be quash.
4. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that addition of Rs. 1,42,42,100 made under section 69 of Income Tax Act, 1961 by Ld. AO on assumption that appellant had transaction with Shripal Vora is factually wrong as appellant had no transaction with Shripal Vora.
5. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that when appellant had no transaction with Shripal Vora then nothing can be added and further section 69 applies when investment is not recorded in books of account, but in present no transaction take place at all.
6. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to consider that assessment order passed without considering the reply of appellant is against the principal of opportunity of being heard and makes order null and void.
7. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming charging of Interest under section 234B of the Income Tax Act, 1961.
8. On the facts and circumstances of the case and Law, the Ld. CIT(A) erred in confirming invocation of penalty proceedings under section 274 r.w.s. 271(1)(c) of the Income Tax Act, 1961.
9. The appellant craves leave to add, delete, withdraw and/or modify any one/more or all the above grounds of appeal on or before the date of final hearing.”
4. The facts of the case in brief are that the assessee filed his return of income for AY.2014-15 on 17.10.2014, declaring total income of Rs.4,67,100/-. The assessee was carrying on the business of dealing in diamond under the name and style of M/s Vaibhav Laxmi Impex. The case was selected for scrutiny and order u/s 143(3) of the Act was passed on 14.12.2016 determining total income of Rs.5,42,660/-. Subsequently, on the basis of information available in the Insight portal of the department that assessee had carried out substantial financial transactions, the Assessing Officer (in short, ‘AO’) reopened the case on the ground that assessee had not truly and correctly disclosed the quantum of transactions done during the year in the return of income. The AO had reasoned to believe that income chargeable to tax escaped assessment. The assessee had entered into transactions of Rs.2,09,25,755/- with Shripal Vora. The AO observed that genuineness of the said transaction is not conclusively proved; hence, the case was fit for re-opening u/s 147 of the Act. After recording the reasons and obtaining the approval of the Competent Authority u/s 151 of the Act, notice u/s 148 of the Act was issued on 31.03.2021. In response to the said notice, assessee filed his return of income on 27.04.2024 admitting total income of Rs.4,67,100/-. The reasons for re-opening was provided to the assessee vide letter dated 27.09.2021. Thereafter, statutory notices were issued requiring assessee to furnish various details. In response thereto, assessee raised objection that he has not entered into any transaction with Shripal Vora. The assessee also relied on various decisions. The AO did not accept the reply of the assessee and added Rs.2,09,25,755/- u/s 69 of the Act.
5. Aggrieved by the order of AO, the assessee filed appeal before CIT(A) raising various grounds including grounds on re-opening, approval u/s 151 of the Act, passing the final order without disposing of the objection raised by the appellant and merits of the addition. The CIT(A) has reproduced the statement of facts and sustained the addition. He has dismissed the grounds on re-opening of the assessment. However, he has set aside the merits of the addition by directing the AO to examine the nature of transaction and afford opportunity to the assessee to explain the genuineness of the transaction.
6. Aggrieved by the order of CIT(A), the assessee filed appeal before the Tribunal. The learned Authorized Representative (ld. AR) of the assessee at the outset raised a preliminary ground that the objection raised by the appellant to the re-opening was not disposed of by the AO by passing a speaking order as per the guidelines of Hon’ble Supreme Court in case of GKN Driveshafts (India) v. ITO Hence, the assessment proceedings itself is bad in law and is required to be quashed. He also relied on the decision of the Hon’ble jurisdictional High Court of Bombay in case of Kesar Terminals & Infrastructure Ltd. v. Dy. CIT(Bombay) and the decision of ITAT, Mumbai in case of M.R. Diaglobe v. DCIT [IT Appeal No. 6725 (Mum) of 2024]
7. On the preliminary issue, learned Senior Departmental Representative (ld. Sr. DR) for the revenue relied on the assessment orders and submitted that the objection has been considered and decided in the order u/s 147 r.w.s. 144B of the Act dated 30.03.2022 by the AO. He also submitted that CIT(A) has also dismissed the objection of the assessee regarding validity of re-opening u/s 147 of the Act.
8. We have heard both the parties and perused the materials available on record. We have also deliberated upon the decisions relied upon by the parties. The facts in brief may be recapitulated because such facts are relevant to decide the preliminary issue raised by the ld. AR. In response to notice u/s 148 of the Act, dated 31.03.2021, return of income was filed on 27.04.2021. The AO provided the reasons for re-opening on 15.01.2022. The objection of the assessee is at pages 33 to 42 of the paper book. The appellant had stated that the information available with AO is factually incorrect because assessee had not been entered into any transaction with Shirap Vora. Thereafter, notice u/s 143(2) of the Act was issued on 24.11.2021 and the appellant filed reply dated 15.01.2022, stating that he has no transaction with Shipal Vora. Subsequently, notice u/s 142(1) of the Act was issued on 05.01.2022, which was replied to by AO on 18.01.2022. Again, assessee stated that he had no transaction with Shripal Vora, which is clear from the bank statement. Thereafter, AO issued a show cause notice on 27.03.2022, requiring assessee to file compliance on 29.03.2022. The assessee again replied on 28.03.2022, reiterating his submission that he had no transaction with Shipal Vora. Thereafter, assessment order u/s 147 r.w.s. 144B was passed on 30.03.2022 adding Rs.2,09,25,755/- u/s 69 of the Act. It is clear from the subsequence of events narrated above that the AO has passed the order u/s 147 r.w.s. 144 without disposing of the objection raised by the assessee against the re-opening of the assessment. As stated earlier, the appellant had raised objection on 15.01.2022 against the re-opening but the same was not disposed of by the AO by passing a speaking order as per the guidelines issued by the Hon’ble Supreme Court in case of KGN Driveshafts (supra). We also find that Hon’ble jurisdictional High Court in case of Kesar Terminals & Infrastructure Ltd. (supra) has followed the decision of the Hon’ble High Court in the above case and held that where objection of assessee against re-opening of assessment were never disposed of and a combined order disposing of objections and making assessment was made, since assessee’s objection were not disposed of by a separate order nor assessee was granted any reasonable opportunity of questioning order disposing of objections, such a procedure involved breaching principles of natural justice and fair play and, thus, same was to be quashed. The said order has been followed by the Co-ordinate Bench of the Tribunal in case of MR Diaglobe (supra) and appeal of the assessee was allowed. The relevant part of the order is reproduced below for ready reference and clarity:
“6. We have heard the rival submissions and perused the documents available on record. We find that in response to the notice issued under Section 148 of the Act, the assessee duly filed a return of income and requested the reasons recorded for reopening the assessment. Upon receiving the reasons, the assessee Filed objections on 31.07.2023 in accordance with the ruling in GKN Driveshafts (India) Ltd. v. ITO (supra). However, the Ld. AO proceeded with the reassessment without separately disposing of the assessee’s objections, thereby contravening the established legal procedure.
Aggrieved, the assessee raised this issue before the Ld. CIT(A). The Ld. CIT(A), however, ruled against the assessee, relying on the judgment of the Hon’ble Madras High Court in the case of Home Finders Housing Ltd. Madras). In this judgment, the Madras High Court held that while an Assessing Officer is required to dispose of objections raised against a notice issued under Section 148 by passing a reasoned order, failure to do so does not render the reassessment order void ab initio. The Special Leave Petition (SLP) filed against this decision was dismissed by the Hon’ble Supreme Court.
Furthermore, the Ld. CIT(A) also relied on the judgment of the Hon’ble Gujarat High Court in the case of Thakorbhai Maganbhai Patel (supra), wherein a similar view was taken, aligning with the ruling of the Hon’ble Madras High Court.
However, in light of the judgment of the Hon’ble Bombay High Court in Kesar Terminals & Infrastructure Ltd. v. DCIT(Bombay), the primary issue before the court was whether the Assessing Officer’s failure to dispose of the assessee’s objections through a separate order before proceeding with the reassessment violated the principles of natural justice and the procedural mandates laid down by the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (supra). The Hon’ble Bombay High Court observed that the Assessing Officer’s approach of addressing the objections within the final reassessment order, rather than through a separate, reasoned order, contravened the procedural safeguards designed to ensure fairness in reassessment proceedings. The court emphasized that objections raised by the assessee against the reopening of assessment must be considered and disposed of separately before proceeding with the reassessment. This procedural requirement is critical to safeguarding the assessee’s right to challenge the reopening before being subjected to reassessment. Consequently, the Hon’ble Bombay High Court quashed both the reassessment notice and the subsequent order, holding them to be vitiated due to non-compliance with jurisdictional parameters and procedural requirements.
The legal position is well-settled by the Hon’ble Supreme Court in Union of India v. Kamalakshi Finance Corporation Ltd. [1991] 55 ELT 43, wherein it was held that the decision of the Hon’ble Jurisdictional High Court holds a higher precedential value for the Tribunal as compared to the decision of a Non-Jurisdictional High Court. In view of the binding precedent set by the Hon’ble Jurisdictional High Court, it is evident that the Ld. AO failed to comply with the judicial parameters laid down by the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. v. ITO (supra). Accordingly, the impugned reassessment stands quashed and is hereby set aside.
The order is disposed of on legal grounds in favour of the assessee. Consequently, the merits of the case remain only of academic relevance.
7. In the result, the appeal of the assessee bearing ITA 6725/Mum/2024 is allowed.”
9. Since facts of the instant appeal are identical, following the decision cited supra, grounds of appeal are allowed and order of CIT(A) is set aside.
10. In the result, appeal of the assessee is allowed.
ITA No. 2303/Mum/2025 (AY.2016-17):
11. The facts and grounds taken up by the assessee in this appeal are similar as in ITA No.2302/Mum/2025 (AY.2014-15), decided above. Following the reasons given in the said appeal, the order of the CIT(A) is upheld and grounds are allowed.
12. In the result, the appeals of the assessee is allowed.
13. In the combined result, appeals of the assessee are allowed.