Escapement of income to be examined in original return, not filed in response to notice u/s 148

Escapement of income is to be examined in the original return and not the return filed in response to notice u/s 148 of the Act – ITAT

In a recent judgment, ITAT Chennai has quashed the reassessment order observing that the issue whether the assessee has underdeclared income in the return filed in response to notice u/s 148 of the Act is not relevant since the escapement of income is to be examined in the original return filed.

ABCAUS Case Law Citation:
4638 (2025) (07) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in upholding the reopening of assessment by the Assessing Officer (AO).

The appellant assessee was a retired employee.  He was granted stock option by allotment of shares in both domestic and foreign company in USA. The assessee had received dividend from USA company during the relevant assessment year.  In the return of income filed u/s 139(1) of the Act, the assessee had declared the dividend as foreign income.  The foreign tax paid was also claimed as deduction.

Subsequently, based on the information with the Department that assessee had received foreign dividend in USD and same having not been disclosed in the return of income, a notice u/s.148 of the Act was issued. 

The assessee pursuant to notice u/s.148 of the Act filed return declaring lesser income than as declared in original return of income. However, the AO completed the reassessment was u/s 147 of the Act by assessing the original income declared in the return of income filed u/s 139(1) of the Act. 

Before the CIT(A), the assessee contended that assessment was reopened for the reason that assessee had earned foreign dividend income but not offered in the return of income.  However, reassessment was completed for a totally new reason that there was difference in the return of income filed u/s 139(1) of the Act and pursuant to notice issued u/s.148 of the Act.

It was submitted that assessee had received dividend in USD for which withholding tax of 25% of USD was deducted.   The assessee in the original return of income had duly disclosed the said dividend income.  Therefore, it was submitted that the AO without considering the return of income filed by the assessee proceeded to reopen the assessment u/s 148 of the Act without any escapement of income.

It was further submitted that pursuant to the notice issued u/s 148 of the Act, assessee had filed return of income and also Form No. 67 for claiming Foreign Tax Credit (FTC).  It was submitted that the reassessment was completed subsequently and assessee was entitled to FTC. 

The CIT(A) however rejected the contentions of the assessee and dismissed the appeal.  The CIT(A) held that assessee had underdeclared foreign income in the return filed in response to notice issued u/s.148 of the Act, hence the reassessment order dated was valid. 

The Tribunal noted that in the reasons recorded it was stated that the assessee did not disclose the foreign income in the return of income filed. However, the assessee had disclosed the entire foreign dividend.  Hence, notice u/s 148 of the Act was issued without any escapement of income. 

The Tribunal further observed that the only difference for the reassessment was assessee was not granted the benefit of FTC.  However, the assessee had filed Form No. 67 along with the return of income filed pursuant to the notice issued u/s.148 of the Act.  The Hon’ble Madras High Court had held that filing of Form No. 67 is only directory and not mandatory.  Similar view has been taken by the Bangalore Bench of the Tribunal. In the instant case, the assessee had filed Form No. 67 along with the return filed and same was available prior to the reassessment being completed. 

The Tribunal held that the issue whether the assessee had underdeclared foreign income in the return filed in response to notice u/s 148 of the Act was not relevant since the escapement of income is to be examined in the original return filed u/s 139(1) of the Act. Since there was no escapement of income, notice issued u/s.148 of the Act was uncalled for.

Accordingly, the Tribunal quashed the reassessment order.

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