Income Tax reopening order quashed for failing to follow Section 148A procedures and ignoring assessee's reply

The Rajasthan HC quashed an order under Section 148A of the Income Tax Act for failing to follow prescribed procedures. The Assessing Officer did not properly consider the assessee's reply and material on record while passing the reopening order. The court found that the AO failed to pass a speaking order addressing specific objections raised by the assessee regarding cash loan additions and interest received. The HC held that mandatory procedural requirements under Section 148A were not followed, making the order unsustainable. The court exercised writ jurisdiction despite alternative remedies being available, as the case involved jurisdictional issues and procedural violations going to the root of reassessment proceedings.

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The core legal questions considered in this judgment revolve around the validity and procedural correctness of the issuance of a notice under Section 148 of the Income Tax Act, 1961, and the associated order under Section 148A(d). Specifically, the issues include:

(1) Whether the reassessment proceedings initiated by the Assessing Officer (AO) were within the prescribed limitation period under the Act;

(2) Whether the procedure mandated under Section 148A of the Income Tax Act, 1961, was duly followed before issuing the notice under Section 148;

(3) Whether the Assessing Officer considered the objections and replies filed by the petitioner in a speaking order as required by law;

(4) Whether the information and material relied upon by the AO for reopening the assessment pertained to the petitioner and was adequately disclosed;

(5) The applicability of the proviso to Section 148A relating to exceptions where the procedure under Section 148A is not mandatory;

(6) The availability of alternative remedies and the scope of judicial interference by way of writ petition challenging the initiation of reassessment proceedings.

Issue-wise Detailed Analysis

1. Limitation for Reassessment Proceedings

The relevant legal framework is Section 149 of the Income Tax Act, which prescribes the limitation period for issuance of notice under Section 148. Post the Finance Act, 2021 amendments, the limitation is generally three years from the end of the relevant assessment year, extendable to ten years in exceptional cases with prior approval of higher authorities.

The respondent contended that the reassessment was based on information indicating escaped income of Rs. 2.8 crores, thus within limitation. The petitioner argued the proceedings were time-barred as initiated beyond three years and the material did not relate to it.

The Court observed that the survey of M/S Om Sokhal Builders and Construction Private Limited, conducted prior to 1 April 2021, revealed documents indicating the petitioner had advanced a cash loan of Rs. 2.5 crores and received interest of Rs. 30 lakhs during AY 2015-16. This formed the basis for reassessment proceedings within limitation. Hence, the limitation objection was not upheld.

2. Compliance with Section 148A Procedure

Section 148A, inserted by the Finance Act, 2021, prescribes a mandatory procedural framework before issuing a notice under Section 148. It requires the AO to:

• Conduct any necessary enquiry with prior approval of specified authority;
• Issue a show-cause notice under Section 148A(b) providing the assessee an opportunity to be heard with at least 7 days' notice;
• Disclose the information and documents relied upon;
• Consider the assessee's reply;
• Pass a speaking order under Section 148A(d) with prior approval of specified authority deciding whether to issue notice under Section 148.

The Supreme Court in Union of India Vs. Ashish Agarwal emphasized that Section 148A is a "game changer" introducing safeguards and streamlining reassessment procedure.

The CBDT guidelines dated 01/08/2022 further elaborate the process, including timelines, the necessity of speaking orders, and disclosure of material in the show-cause notice (Annexure A1).

The Court analyzed the impugned order dated 26.07.2022 passed under Section 148A(d). It noted that while the AO reproduced the petitioner's reply dated 11.06.2022, the additional reply dated 14.06.2022 containing objections was not considered. The AO concluded that the petitioner had no explanation on merits, which the Court found to be an inadequate and non-speaking order.

The Court held that the AO failed to comply with the mandatory procedure under Section 148A by not considering all replies and objections in a speaking order. This procedural lapse vitiated the reassessment initiation.

3. Disclosure of Material and Reliance on Information

The petitioner contended that the material on which the reassessment was based was not provided along with the notice, and the information did not pertain to it.

The Court observed that the information and annexure 'A-1' were supplied on 27.06.2022, which included details of loans advanced and interest received. The petitioner's demand for material was thus met, but the AO did not duly consider the petitioner's objections to this material.

The Court emphasized that proper disclosure of information and documents is crucial for compliance with principles of natural justice and the statutory scheme under Section 148A.

4. Applicability of Exceptions under Section 148A

The proviso to Section 148A exempts the procedure under Section 148A in certain cases such as where a search under Section 132 or requisition under Section 132A has been conducted on or after 1 April 2021.

The respondent argued that since the survey was conducted prior to 1 April 2021 and material seized related to the petitioner, the exception applied.

The Court found that the survey was prior to 1 April 2021, so the proviso exceptions did not apply, and the full procedure under Section 148A was mandatory.

5. Alternative Remedy and Scope of Judicial Review

The respondent argued that since the petitioner had filed an appeal against the reassessment order, the writ petition was not maintainable.

The Court referred to the Supreme Court's ruling in Whirlpool Corporation, which allows writ petitions despite alternative remedies in three contingencies: enforcement of fundamental rights, violation of natural justice, and challenge to jurisdiction or vires of proceedings.

The Court held that failure to comply with the mandatory procedure under Section 148A, including passing a speaking order and considering objections, amounts to violation of natural justice and jurisdictional error. Hence, the writ petition was maintainable despite the existence of alternative remedies.

The Court distinguished the cited Division Bench decisions where writ petitions were entertained post-passing of reassessment orders and where the petitioner participated in proceedings. Here, the challenge was to the initiation itself and was pending when the reassessment order was passed.

Significant Holdings

The Court succinctly stated:

"By Finance Act, 2021, Sections 147 to 151 of the Act were substituted. Section 148A of the Act was inserted streamlining the procedure for initiation of proceedings under Section 148 of the Act... The AO shall mandatorily pass a speaking order under Section 148A(d) in all cases with the prior approval of the specified authority, considering the reply of the assessee and material on record."

"The impugned order is not as per the procedure prescribed under Section 148A of the Act and cannot stand judicial scrutiny."

"There cannot be quibble with the proposition that if an Act mandates, a particular thing to be done in the manner, it has to be done in that way... The impugned order is not in consonance with the procedure prescribed and issue goes to the root of the jurisdiction for initiating the proceedings under Section 148 of the Act."

The Court concluded by quashing the impugned order dated 26.07.2022 passed under Section 148A(d) and the consequential proceedings initiated thereunder. It directed that the matter be remitted back to the respondent to proceed afresh in accordance with law, including issuance of notice under Section 148A(b) with proper compliance of procedural safeguards.

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