2022 (4) TMI 346 - HC - Income Tax

Court Invalidates Income Tax Act Section 148 Notices for Lack of Jurisdiction

Shri Dinar Tarcar, Mrs. Manisha Tarcar, Versus Assistant Commissioner of Income Tax, Central Circle, Panaji-Goa., Joint Commissioner of Income Tax, Central Range, Panaji-Goa., Commissioner of Income Tax, Karnataka, Union of India

The court set aside the notices issued under Section 148 of the Income Tax Act, ruling them as lacking jurisdiction, breaching natural justice principles, ... Reopening of assessment u/s 147 - Order disposing of the objections relies upon the directions of the CIT (Appeals) to make Section 150 of the Income Tax Act applicable to reject the objections - deemed dividend addition u/s 2(22)(e) - whether AO has incorrectly invoked the provisions of Section 150 of the IT Act because in this case there was neither any direction nor any finding to reassess the returns filed by the petitioners? - HELD THAT:- It is quite clear that CIT (Appeals) in his order cannot be said to have issued any direction as contemplated by Section 150 read with Explanation 3 of Section 153 of the IT Act. This is because the CIT (Appeals) after deleting the addition of deemed dividends in the hands of DTRPL, only made the following observations that decision leaves it open for the Assessing Officer to make an assessment of such deemed dividend in the hands of the shareholders as held by Hon’ble Bombay High Court in the case of CIT vs Universal Medicare (P) Ltd [2010 (3) TMI 323 - BOMBAY HIGH COURT] Following the law laid down in Murlidhar Bhagwan Das [1964 (1) TMI 5 - SUPREME COURT] and Rajinder Nath [1979 (8) TMI 3 - SUPREME COURT] the aforesaid observations cannot be called a direction based upon which the impugned notices can be sustained. Whether there is any finding in the order dated 16.01.2013 made by CIT (Appeals) based upon which issuance of the impugned notices could be sustained? - It is apparent that the respondent has invoked the provisions of Section 150 of the IT Act for issuing the impugned notices. This invocation was in turn based on an order dated 16.01.2013 made by CIT (Appeals). This order dated 16.01.2013 contains no direction as contemplated by Section 150 of the IT Act. Even assuming that this order dated 16.01.2013 contains a finding affecting the petitioners, it is apparent that such a finding came to be recorded without granting the petitioners any opportunity of being heard. Such finding, therefore, was not only in breach of principles of natural justice and fair play, but also contrary to Explanation 3 to Section 153 of the IT Act and could not have formed the basis for invoking the provisions of Section 150 of the IT Act. The impugned notices are liable to be set aside and are hereby set aside. Issues Involved:1. Validity of notices issued under Section 148 of the Income Tax Act, 1961.2. Applicability of Section 150 of the Income Tax Act.3. Compliance with principles of natural justice and fair play.4. Independent application of mind by the Assessing Officer (AO).5. Jurisdictional authority and procedural correctness.Analysis:1. Validity of Notices Issued Under Section 148 of the Income Tax Act, 1961The petitioners challenged the notices issued under Section 148 of the Income Tax Act dated 25.03.2014 and 10.03.2014, which sought to reopen the completed assessment for the assessment year 2010-2011. The court noted that the reasons supporting the impugned notices did not indicate any directions from CIT (Appeals) to issue the reopening notice. The court observed that the AO had relied on the directions of the CIT (Appeals) to make Section 150 applicable, which prima facie could not support the impugned notice. Therefore, the interim relief in terms of prayer clause 'd' was granted.2. Applicability of Section 150 of the Income Tax ActThe court examined whether the impugned notices could sustain under Section 150 of the IT Act. Section 150 allows for the issuance of a notice under Section 148 for reassessment in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference, or revision. The court noted that the CIT (Appeals) in its order dated 16.01.2013 did not issue any direction as contemplated by Section 150. Even if the order contained findings affecting the petitioners, such findings were recorded without granting the petitioners an opportunity of being heard, thereby contravening Explanation 3 to Section 153 of the IT Act.3. Compliance with Principles of Natural Justice and Fair PlayThe court emphasized that the petitioners were not notified nor granted any opportunity of hearing in the appeal before the CIT (Appeals). The court held that any reliance upon such findings would contravene the principles of natural justice and fair play, and would amount to an express breach of Explanation 3 of Section 153 of the IT Act. The court also rejected the contention that the opportunity of hearing granted to DTRPL (the company) should be deemed to include the opportunity of hearing to the petitioners (individuals).4. Independent Application of Mind by the Assessing Officer (AO)The petitioners argued that the impugned notices were issued at the dictates of the Deputy Commissioner of Income Tax without independent application of mind by the AO. The court noted that the AO had forwarded proposals to the Commissioner for the exercise of revisional powers, which were refused by the Deputy Commissioner, who pointed out that the AO had a remedy under Section 148 read with Section 150. The court found that the AO's reliance on the Deputy Commissioner's refusal indicated a lack of independent application of mind.5. Jurisdictional Authority and Procedural CorrectnessThe court highlighted that the CIT (Appeals) had only made observations leaving it open for the AO to make an assessment of deemed dividends in the hands of the shareholders, which could not be construed as a direction. The court referred to precedents such as Murlidhar Bhagwan Das and Rajinder Nath to explain the scope of the expressions 'finding' and 'direction' under Section 150. The court concluded that the CIT (Appeals)'s observations did not meet the criteria for a direction under Section 150, nor were the petitioners given an opportunity of being heard, thus failing procedural correctness.Conclusion:The court set aside the impugned notices issued under Section 148 of the Income Tax Act, holding that they were without jurisdiction, violated principles of natural justice, and were based on an incorrect application of Section 150. The rule was made absolute in terms of prayer clauses (A) and (B) of the petitions, with no order for costs.