The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has once again delivered an important judgment protecting taxpayers from invalid reassessment proceedings initiated without following mandatory legal procedures. In the case of Mathew Julius Menezes ITAT Mumbai Case, the Tribunal quashed the reassessment proceedings initiated under Sections 147 and 148 of the Income Tax Act for Assessment Year 2018-19 on the ground that the approval under Section 151 was obtained from the wrong authority.
This decision is highly significant for taxpayers facing reassessment notices issued after 1 April 2021, especially where notices are based merely on Insight portal information, investigation wing reports, alleged accommodation entries, or penny stock allegations without proper independent inquiry by the Assessing Officer.
The ruling also reiterates that reassessment cannot be initiated mechanically on borrowed satisfaction and that statutory approvals under Section 151 are mandatory jurisdictional requirements.
Background of the Case
The assessee, Mr. Mathew Julius Menezes, was engaged in the business of trading in cashew, spices, and pulses under the name M/s Global Impex. The reassessment proceedings were initiated after the Income Tax Department allegedly received information from the Insight system stating that the assessee was a beneficiary of accommodation entries linked to a syndicate led by Shri Naresh Jain.
According to the Investigation Wing, the alleged syndicate was involved in providing bogus long-term capital gains and losses through manipulation of penny stock transactions. The department alleged that the assessee had received accommodation entries amounting to Rs. 12,83,070.
Based on this information, notice under Section 148A(b) dated 24.03.2022 was issued. The assessee responded by denying involvement in any bogus transaction and submitted:
- Demat account statements
- Bank statements
- Details of genuine share transactions
- Capital gain workings
- Supporting documentary evidence
Despite these submissions, the Assessing Officer passed an order under Section 148A(d) and subsequently issued notice under Section 148. Thereafter, reassessment under Section 147 read with Section 144B was completed by treating Rs. 12,83,070 as unexplained cash credit under Section 68.
The CIT(A) upheld the reassessment and the addition, after which the assessee approached the ITAT Mumbai.
Key Legal Grounds Raised Before ITAT
The assessee challenged the reassessment proceedings on multiple legal grounds. The important arguments included:
Reopening Based Only on Insight Portal Information
The assessee argued that the Assessing Officer merely relied upon generalized information available in the Insight portal and investigation reports without conducting any independent inquiry.
It was submitted that no direct evidence existed linking the assessee with any accommodation entry provider.
The Tribunal observed that the Assessing Officer failed to provide:
- Specific transaction details
- Identity of alleged counterparties
- Independent verification
- Tangible evidence
- Nexus between escapement and assessee
The ITAT noted that reopening based solely on borrowed satisfaction is invalid in law.
No Independent Application of Mind by AO
The Tribunal carefully examined the reasons recorded under Section 148 and the order passed under Section 148A(d). It found that the Assessing Officer mechanically reproduced the information received from the Investigation Wing without applying independent judgment.
The ITAT observed that:
- No inquiry was conducted independently
- No verification of demat statements was made
- Documentary evidence submitted by assessee was ignored
- Alleged transactions were not corroborated
The Bench held that reassessment proceedings cannot survive merely on suspicion or third-party reports.
Invalid Approval Under Section 151
One of the most important aspects of the judgment relates to approval under Section 151 of the Income Tax Act.
For notices issued beyond three years from the end of the relevant assessment year, approval must be obtained from the Principal Chief Commissioner of Income Tax (PCCIT) as per Section 151(ii).
In this case:
- Assessment Year: 2018-19
- Notice under Section 148 issued on: 20.04.2022
- Approval obtained from: PCIT Mumbai-17
The assessee argued that the approval should have been granted by PCCIT and not by PCIT.
The ITAT accepted this contention and relied heavily on the Bombay High Court judgment in the case of Vodafone Idea Limited vs DCIT.
The Tribunal held that approval from the wrong authority strikes at the root of jurisdiction and renders the entire reassessment void.
Reliance on Bombay High Court Judgment
The Tribunal referred to the Bombay High Court ruling which clearly stated that for reassessment notices issued after expiry of three years, sanction must mandatorily come from PCCIT.
The High Court had clarified that the proviso inserted in Section 151 from 01.04.2023 would not apply retrospectively.
Therefore, reassessment notices issued during FY 2022-23 required approval from PCCIT and not PCIT.
This technical defect was held to be fatal to the reassessment proceedings.
ITAT Relied on Earlier Tribunal Decisions
The ITAT also relied on its earlier ruling in the case of ACIT vs Mangalam Financial Services.
In that case too, the Tribunal had held that:
- Mere reliance on investigation reports is insufficient
- Independent inquiry by AO is necessary
- Addition cannot be made without direct evidence
- Demat and banking records cannot be ignored
The Bench reiterated that if transactions are routed through recognized stock exchanges and banking channels, additions cannot be sustained merely on generalized allegations.
Addition Under Section 68 Also Held Unsustainable
Although the Tribunal quashed the reassessment proceedings on jurisdictional grounds, it still made important observations on merits.
The ITAT observed that:
- The assessee had submitted demat statements and bank records
- No evidence linked assessee to entry operators
- No cross-examination opportunity was provided
- Addition was based only on third-party statements
The Tribunal reaffirmed the settled legal principle that additions under Section 68 cannot be made merely on the basis of investigation reports or statements recorded behind the back of the assessee.
Importance of Cross-Examination
The Tribunal specifically noted violation of natural justice because no opportunity of cross-examination was provided to the assessee.
Courts have repeatedly held that if the department relies upon statements of third parties, the assessee must be given:
- Copy of such statements
- Supporting material
- Opportunity to cross-examine
Failure to provide cross-examination makes the assessment vulnerable to challenge.
Final Decision of ITAT
After considering all facts and legal provisions, the Mumbai ITAT held that:
- Reassessment proceedings were initiated mechanically
- No independent application of mind existed
- Approval under Section 151 was invalid
- Notice under Section 148 was bad in law
- Entire reassessment proceedings were liable to be quashed
Accordingly, the reassessment order passed under Section 147 read with Section 144B was quashed.
The appeal of the assessee was allowed.
Final Words
The decision in the case of Mathew Julius Menezes is another strong reminder that reassessment proceedings under Sections 147 and 148 must strictly comply with statutory safeguards introduced by the Finance Act, 2021.
The ITAT Mumbai has categorically held that reopening based merely on generalized investigation reports and Insight portal information without independent verification is not sustainable. Further, approval from the wrong authority under Section 151 can invalidate the entire reassessment process.
This judgment provides substantial relief to taxpayers facing reassessment notices issued mechanically after 1 April 2021.
Taxpayers and professionals dealing with reassessment notices should thoroughly examine procedural compliance before responding to such notices.
