2023 (8) TMI 519 - HC - Income Tax

Reopening of assessment under section 147 and approval under section 151 invalidated for lack of application of mind; notice quashed

Validity of reopening under section 147 was examined on whether the approval under the reassessment scheme (section 151) constituted a valid sanction. The ... Validity of Reopening of assessment u/s 147 - Valid approval u/s 151 or not? - as argued notice issued u/s 148 was wholly without jurisdiction as it does not meet the pre-requisite conditions stipulated under the amended scheme of reassessment - also approval granted u/s 151 by the specified authority reflects non application of mind - HELD THAT:- Having considered the approval u/s 151 we are satisfied that there is no valid sanction. There is no evidence that PCIT has even granted any valid sanction. If respondents say there was a sanction by respondent No. 2, then it is an obvious case of utter non-application of mind because he would otherwise have not granted sanction if he had only read and applied his mind to what is stated in box 9, i.e., the time limit for current proceedings covered under is stated to be u/s 149(1)(b), or he would have sent it back to respondent no. 1 refusing to grant approval. It also goes to say that even respondent no. 1, who has sought approval, has not applied his mind. We are of the opinion that if only respondent No. 2 had read the report carefully, he would have never come to the conclusion that there is any material before him to treat it as a fit case to issue notice under Section 148 of the Act or pass order u/s 148A(d) - The safeguards provided in Sections 148 and 151 were lightly treated by respondent nos. 1 and respondent No. 2. Both of them appear to have taken the duty imposed on them under these provisions as of little importance. On this ground alone, the order passed u/s 148A(d) and notice issued u/s 148 of the Act have to be quashed and set aside. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the notice issued under Section 148 and the order under Section 148A(d) of the Income Tax Act are valid where the pre-requisites for reassessment under the amended scheme (including proper sanction under Section 151) have not been complied with or where there is alleged non-application of mind by the Assessing Officer and the sanctioning authority. 2. Whether the approval granted under Section 151 of the Act is vitiated by mechanical/ministerial action or internal inconsistencies in the approval form (specifically inconsistency in the box indicating applicability of Section 149(1)(a) vs. Section 149(1)(b)) and consequent effect on validity of the reopening notice and order. 3. Whether absence of a digital signature on the sanction/approval under Section 151, or issuance of a system-generated sanction lacking individual digital authentication, renders the sanction (and the consequential notice under Section 148) invalid - and to what extent this ground needs determination where non-application of mind is found on other grounds. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Section 148 notice and Section 148A(d) order where pre-requisites and application of mind are challenged Legal framework: Sections 147-151 (including procedural safeguards in Section 148A) of the Income Tax Act set out the conditions and supervisory check for reopening assessments; Section 148 authorises issue of notice for reassessment where income has escaped assessment; Section 148A prescribes show-cause and reasoned order requirements; Section 151 requires prior approval of a specified higher authority for reopening in certain circumstances. Precedent treatment: The Court treated established principles that reopening and sanction require bona fide application of mind by both the Assessing Officer and sanctioning authority as binding guidance (referenced generally to well-settled supervisory purpose of Section 151). No contrary precedent was followed or overruled in the judgment. Interpretation and reasoning: The Court analyzed the record (including the approval form and the order under Section 148A(d)) and found that both the issuing authority and the sanctioning authority did not apply their minds. The Court stressed Section 151's supervisory function - to correct material errors by the Assessing Officer and to ensure reasoned concurrence - and held that concurrence given without addressing apparent errors or internal inconsistencies is mechanical. The Court noted specific indications of non-application of mind: (a) the sanctioning authority's apparent failure to reconcile information in the approval form (box entries on time limit), (b) absence of any independent reasons or speaking approval by the sanctioning authority, and (c) the approving authority not having considered the taxpayer's objections under Section 148A(c) before concurrence. Ratio vs. Obiter: Ratio - where the sanctioning authority or the Assessing Officer fails to apply mind or gives mechanistic concurrence (including approval lacking independent reasons and unexplained internal inconsistencies), the sanction under Section 151 and consequent notice under Section 148 and order under Section 148A(d) are invalid and must be quashed. Obiter - general observations on the purpose of Section 151 as supervisory (though used to support ratio, these are established principles). Conclusions: The Court concluded there was no valid sanction and that both respondent officers appeared to have acted mechanically; accordingly, the order under Section 148A(d) and notice under Section 148 were quashed and set aside on this ground alone. Issue 2 - Effect of internal inconsistency in approval (box 9 indicating Section 149(1)(b) while the reopening is within three years) on validity of sanction Legal framework: Section 149 differentiates sanctioning authorities and time limits for reopening beyond three years (Section 149(1)(b)) and within three years (Section 149(1)(a)); Section 151 requires sanction by the appropriate specified authority consistent with the applicable time limit provision. Precedent treatment: The Court applied the statutory allocation of sanctioning authorities by reference to Section 149 and Section 151. No cited case law was adopted to alter statutory interpretation; the Court relied on the statutory scheme to assess the correctness of the sanction. Interpretation and reasoning: The approval form contained an inconsistent entry: box 9 recorded the time limit as 'u/s 149(1)(b) - for more than 3 years but not more than 10 years' notwithstanding that the reopening related to an assessment year within three years. The Court reasoned that such an inconsistency, if read by a diligent sanctioning authority, would have precluded granting the sanction or would have prompted return of the file for correction. The fact that the sanctioning authority nonetheless signed the approval indicated non-application of mind and therefore vitiated the sanction. Ratio vs. Obiter: Ratio - an approval/sanction containing material internal inconsistencies on the face of the sanction (affecting identification of applicable statutory provision and competent sanctioning authority) that are ignored by the sanctioning officer indicates non-application of mind and invalidates the sanction. Obiter - none significant; the point is integral to the decision. Conclusions: The inconsistency in the approval form (misstating the applicable time limit provision) demonstrated that the sanctioning authority did not apply mind, rendering the sanction invalid and thereby invalidating the consequent notice and order. Issue 3 - Validity of sanction where digital signature / system-generated nature of approval is in dispute Legal framework: Section 282A permits electronic communication and prescribes signing/issuance requirements for notices/documents by income tax authorities; departmental policies on digital signature (Miscellaneous - DSC Policy - 2018) require digital signing of communications to ensure authentication, integrity and non-repudiation. Precedent treatment: The petitioner relied on a High Court judgment holding absence of digital signature could invalidate sanction; the Court acknowledged that digital authentication is material to validity in some contexts but did not decide the point here. Interpretation and reasoning: The Court observed that the petitioner had raised the lack of digital signature as a ground. However, having found a fundamental defect (non-application of mind / invalid sanction) it chose not to decide the digital signature issue in the present case, leaving it open for determination in an appropriate case. The Court thus treated the digital signature question as potentially significant but not necessary to the adjudication where a dispositive ground already exists. Ratio vs. Obiter: Obiter - the observation that the digital signature/DSC issue was not adjudicated and may be considered in an appropriate case is expressly obiter. The Court's refusal to decide the digital signature ground does not create binding precedent on that discrete legal point. Conclusions: The Court did not decide whether absence of a digital signature renders the sanction invalid in all cases; the point was left open because the Court quashed the notice and order on the ground of non-application of mind and invalid sanction for other reasons. Cross-reference and dispositive conclusion All issues converge on the core finding that statutory safeguards relating to reopening (Sections 148, 148A, 149 and 151) require genuine application of mind by both the issuing officer and the sanctioning authority; mechanical concurrence, unexplained approvals, and internal inconsistencies in sanction documentation vitiate sanction and thereby invalidate subsequent notice and orders. On that ground alone the Court quashed the order under Section 148A(d) and the notice under Section 148, leaving ancillary questions (such as the digital signature issue) undecided for future cases.