2021 (3) TMI 1177 - HC - Income Tax

Reassessment notice under Sections 147, 148 quashed for invalid sanction under 151; limitation clarified under 149

HC held that the sanction and notice for reassessment u/s 147/148 were invalid due to lack of application of mind and improper approval u/s 151. The ... Reason to believe - reopening/re-assessment under Section 147 of the Income Tax Act - sanction under Section 151(1) of the Income Tax Act - reasons must disclose nexus between material and formation of belief - non-application of mind / rubber-stamping - jurisdictional error - limitation for issuance of notice under Section 149 of the Income Tax Act - principles of natural justiceReason to believe - reasons must disclose nexus between material and formation of belief - Validity of the reasons recorded by the Assessing Officer for issuance of notice under Section 148 (reopening for AY 2011-2012). - HELD THAT: - The Court examined the order recording reasons and found that the assessing officer failed to correlate the information received from the investigation wing with material in the assessee's returns and balance sheet. The recorded reasons contained factual errors (authorised capital, paid-up capital, share premium and year of incorporation) and inconsistent quantifications of the purported unexplained credits (different figures appearing in the reasons, endorsements and returns). The order recording reasons asserted accommodation entries as 'share capital/share premium' but the assessee's books reflected unsecured loans; the discrepancies demonstrate absence of a rational nexus between the underlying material and the formation of belief. On this basis the Court held that the formation of belief was arbitrary and irrational and amounted to non-application of mind, thereby constituting a jurisdictional error permitting judicial interference under Article 226. [Paras 9]The reasons recorded by the Assessing Officer are vitiated by non-application of mind and do not furnish a valid basis for reopening; the initiation of reassessment was unreasonable and irrational.Sanction under Section 151(1) of the Income Tax Act - non-application of mind / rubber-stamping - jurisdictional error - Validity of the sanction accorded by the Principal Commissioner (and the endorsement by the ACIT) for issuance of notice under Section 148. - HELD THAT: - The sanction-order contained only the word 'approved' and an endorsement by the ACIT stating escaped income, without any recorded reasons showing satisfaction by the sanctioning authority. The Court applied precedents holding that the sanctioning authority must indicate the exercise of mind and disclose reasons linking the material to the satisfaction reached. The impugned sanction was a mechanical rubber-stamp incapable of sustaining the reopening because it did not demonstrate that the sanctioning authority was satisfied on the basis of the recorded material or that any independent application of mind occurred; further, inconsistencies in the quantified figures should have alerted the sanctioning authority but were not addressed. [Paras 9, 10]The sanction granted by the Principal Commissioner (and the ACIT endorsement) is vitiated by mechanical approval/rubber-stamping and is quashed.Limitation for issuance of notice under Section 149 of the Income Tax Act - Whether the notice dated 31.03.2018 was time barred. - HELD THAT: - The Court observed that limitation for issuance of a notice under the relevant provision commences from the date of issuance, not service. The record showed the notice was issued on 31.03.2018, the last day of limitation; consequently, the plea that the notice was barred by limitation was rejected. [Paras 10]The limitation objection is rejected; the notice was not time barred.Non-application of mind / rubber-stamping - Whether the delay between issuance of the notice and service of the reasons established ante dating of the reasons or improper conduct justifying quashing on that ground. - HELD THAT: - The Court noted that a substantial time lag, if proved, could indicate ante dating of the reasons, but a definitive conclusion required inspection of the original file. The revenue denied ante dating and the assessee did not press the point at hearing; accordingly the Court refrained from a final determination on this aspect and indicated that a conclusive view could be taken only after examination of the original record. [Paras 10]No final finding; the Court did not decide conclusively on the allegation of ante dating/delay for lack of original record and non pursuit by the assessee.Final Conclusion: The High Court quashed the notice dated 31.03.2018 issued under Section 148 for AY 2011-2012 and the sanction accorded by the Principal Commissioner (and ACIT endorsement) on the ground that the reasons and the sanction suffered from non-application of mind and lacked the requisite nexus with the material; the limitation plea was rejected and no conclusive finding was recorded on the alleged delay/ante-dating for want of original record. Parties to bear their own costs. Issues Involved:1. Validity of notice under Section 148 of the Income Tax Act, 1961.2. Application of mind by the sanctioning authority under Section 151 of the Act.3. Correlation between the information received and the reasons recorded for reassessment.4. Alleged breach of principles of natural justice.5. Limitation period for issuance of notice under Section 148.Detailed Analysis:1. Validity of Notice under Section 148 of the Income Tax Act, 1961:The writ petition challenges the notice dated 31.03.2018 issued under Section 148 of the Income Tax Act, 1961, and the sanction accorded by the Principal Commissioner of Income Tax, Delhi-VIII. The court noted that the notice was issued on the last date of the limitation period, and the assessee argued that it was time-barred. The court found that the notice was indeed issued within the limitation period as it was dated 31.03.2018.2. Application of Mind by the Sanctioning Authority under Section 151 of the Act:The assessee contended that the sanctioning authority did not apply its mind and merely rubber-stamped the reasons recorded by the Assessing Officer (AO). The court observed that the Principal Commissioner of Income Tax simply endorsed 'approved' without providing any reasoning. The court emphasized that the satisfaction of the sanctioning authority should be discernible from the sanction order, citing the Supreme Court's judgment in *Chhugamal Rajpal vs. S.P. Chaliha*.3. Correlation between the Information Received and the Reasons Recorded for Reassessment:The court found that the AO made significant errors in correlating the information received from the investigation wing with the assessee's balance sheet. The AO incorrectly recorded figures related to the authorized capital, issued and subscribed paid-up capital, and share premium account. The court noted that the AO's formation of belief that the income had escaped assessment was unreasonable and irrational due to the lack of proper correlation.4. Alleged Breach of Principles of Natural Justice:The assessee argued that the AO relied on a statement by Mr. Pradeep Kumar Jindal without furnishing a copy of the statement to the assessee. The court noted that the revenue claimed to have provided the relied-upon documents to the assessee's authorized representative, but the proceedings sheet did not reflect this. However, the court did not base its decision on this issue as it was not pressed by the assessee during the hearing.5. Limitation Period for Issuance of Notice under Section 148:The court rejected the assessee's argument that the notice was time-barred, clarifying that the limitation period for issuance of notice under Section 148 commences from the date of issuance and not from the date of service. The notice was issued on 31.03.2018, within the prescribed limitation period.Conclusion:The court concluded that the formation of belief by the AO was unreasonable and irrational due to the lack of proper correlation between the information received and the reasons recorded. The sanctioning authority's approval was found to be mechanical and lacked proper application of mind. Consequently, the court quashed the impugned notice dated 31.03.2018 issued under Section 148 of the Act and the order granting sanction by the Principal Commissioner of Income Tax. The court ordered that parties bear their own costs and consigned the case papers to record.