2021 (7) TMI 348 - HC - Income Tax

Court quashes reassessment notices under Section 148 for lack of new material

The court allowed the writ petitions and quashed the notices issued under Section 148, the reasons for reassessment, and the orders disposing of ... Reopening of assessment u/s 147 - whether the respondent can continue with the impugned proceedings based on the same material which was examined and qua which opinion was rendered by the AO while passing the draft assessment orders? - Is the respondent be permitted to assess the petitioners’ income chargeable to tax, which, according to the respondent, had escaped assessment in the facts and circumstances obtaining in the instant cases? - HELD THAT:- AO has no power to carry out an assessment based on a mere change of opinion on the same set of facts and materials which was available on record. The AO’s power under Section 147 of the Act does not extend to carry out the review of the material that was always available on record, and by this route conclude that the assessee’s income chargeable to tax has escaped assessment. [See Commissioner of Income-tax, Delhi vs. Kelvinator of India Ltd.,[2010 (1) TMI 11 - SUPREME COURT] Grant of approval under Section 151 for issuance of notice under Section 148 - Given this backdrop, the ACIT while giving approval under Section 148 of the Act, ought to have applied his mind, to the crucial question as to whether any new or fresh facts had come to the notice of the AO for triggering the provisions of Section 147/148 of the Act. The ACIT, on the other hand, mechanically replicated the language of the provision [i.e., Section 151 of the Act] by making the aforesaid endorsement in both cases - Given this backdrop, the ACIT while giving approval under Section 148 of the Act, ought to have applied his mind, to the crucial question as to whether any new or fresh facts had come to the notice of the AO for triggering the provisions of Section 147/148 of the Act. The ACIT, on the other hand, mechanically replicated the language of the provision [i.e., Section 151 of the Act] by making the aforesaid endorsement in both cases - See SYNFONIA TRADELINKS PVT. LTD. VERSUS INCOME TAX OFFICER, WARD-22 (4) [2021 (3) TMI 1177 - DELHI HIGH COURT] The argument advanced on behalf of the respondent, that the petitioners should be relegated to an alternate remedy cannot be sustained as the errors committed in the instant cases go to the root of the respondent's jurisdiction. As noticed above, the stand taken that Explanation 2(b) appended to Section 147 of the Act would come to the aid of the respondent is completely misconceived given the fact that, in instant cases, the proceedings under the said provision have been undertaken based on a review of the material which was already available on record. Undoubtedly, the respondent was attempting to regurgitate old facts by taking recourse to the provisions of Section 147/148 of the Act, which, according to us, is not permissible. The failure to arrive at a logical conclusion in a Section 144C proceeding cannot become the ruse for initiating the proceedings under Section 147/148 of the Act in the absence of new material emerging before the AO which gives the AO reason to believe that assessee's income chargeable to tax had escaped assessment. - Decided in favour of assessee. Issues Involved:1. Legality of the reassessment proceedings initiated under Section 147/148 of the Income Tax Act, 1961.2. Validity of the draft assessment orders passed under Section 144C/143(3) of the Income Tax Act.3. Applicability of Explanation 2 to Section 147 of the Income Tax Act.4. Adequacy of the reasons recorded for initiating reassessment proceedings.5. Validity of the approval granted under Section 151 of the Income Tax Act for issuing notices under Section 148.Detailed Analysis:1. Legality of the Reassessment Proceedings Initiated Under Section 147/148 of the Income Tax Act, 1961:The court examined whether the reassessment proceedings initiated against the petitioners were lawful. The Assessing Officer (AO) issued notices under Section 148 based on the premise that the draft assessment orders were not taken to their logical conclusion. The court noted that the AO had previously assessed the petitioners under Section 144C/143(3) for the Assessment Year (AY) 2013-2014. The court found that the AO's action was based on a mere change of opinion on the same set of facts, which is not permissible under Section 147. The court emphasized that reassessment proceedings could only be initiated based on new material and fresh facts that had not already been disclosed.2. Validity of the Draft Assessment Orders Passed Under Section 144C/143(3) of the Income Tax Act:The court observed that the draft assessment orders dated 23.12.2016 were passed under Section 144C/143(3) despite the petitioners being non-resident foreign partnership firms and not eligible assessees within the meaning of Section 144C(15)(b). The court highlighted that the AO had previously assessed the petitioners under Section 143(3) for AYs 2011-2012 and 2012-2013. The court found no justification for the AO to resort to the procedure under Section 144C for AY 2013-2014, given the unchanged status of the petitioners.3. Applicability of Explanation 2 to Section 147 of the Income Tax Act:The court addressed the respondent's reliance on Explanation 2 to Section 147, which deems certain cases as instances where income chargeable to tax has escaped assessment. The court clarified that Explanation 2(b) cannot be read in isolation and must be considered in conjunction with the main provision. The court held that even if the assessment proceedings remained 'inchoate,' reassessment under Section 147 could only be completed based on fresh facts and not on material already traversed.4. Adequacy of the Reasons Recorded for Initiating Reassessment Proceedings:The court scrutinized the reasons recorded by the AO for initiating reassessment proceedings. The AO's notes dated 20.03.2018 cited the draft assessment orders not reaching a logical conclusion as the reason for initiating reassessment. The court found that the reasons were based on the same material already available on record and did not constitute new or fresh facts. The court held that the AO's action amounted to a review of the material already considered, which is not permissible under Section 147.5. Validity of the Approval Granted Under Section 151 of the Income Tax Act for Issuing Notices Under Section 148:The court examined the approval granted by the Additional Commissioner of Income Tax (ACIT) under Section 151 for issuing notices under Section 148. The ACIT's endorsement merely stated, 'This is a fit case for issue of notice u/s 148 of the IT Act, 1961. Approved,' without providing any reasons. The court found that the ACIT had mechanically accorded permission without applying his mind to the crucial question of whether any new or fresh facts had emerged. The court held that the approval was flawed in law and could not pass muster.Conclusion:The court allowed the writ petitions and quashed the notices issued under Section 148 dated 29.03.2018, the underlying reasons contained in the notes dated 20.03.2018, and the orders disposing of the objections dated 24.09.2018. The court emphasized that the errors committed by the respondent went to the root of the jurisdiction and that the reassessment proceedings were not based on new material or fresh facts. The court also highlighted the mechanical nature of the approval granted under Section 151, which lacked proper application of mind.