Reassessment proceedings under section 147 invalid due to procedural violations and defective section 151 sanction

The ITAT Bangalore held that reassessment proceedings under section 147 were invalid due to procedural violations. The AO improperly disposed of assessee's objections on 07.11.2016 regarding reasons supplied on 04.11.2016, while objections were filed on 03.11.2016 before receiving the reasons. Additionally, the PCIT's sanction under section 151 was defective as the approval letter dated 24.03.2016 lacked proper signature and application of mind by the approving authority. The reasons were recorded after approval, making the entire reassessment proceedings bad in law.

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Issues Involved:
1. Validity of initiation of reassessment proceedings.
2. Validity of reassessment proceedings based on non-culmination and pendency of earlier notice.
3. Validity of reassessment proceedings due to lack of mention of earlier notice in the reasons recorded.
4. Validity of reassessment proceedings due to lack of valid approval under section 151 of the Act.
5. Validity of reassessment proceedings due to non-disposal of objections by a speaking order.
6. Validity of reassessment proceedings based on incriminating material found during a search.
7. Justification of addition of Rs. 1,37,30,000 as unexplained credit under section 68 of the Act.
8. Violation of principles of natural justice due to lack of opportunity for cross-examination and non-provision of seized material.

Summary:

1. Validity of initiation of reassessment proceedings:
The Tribunal found that the reassessment proceedings were invalid due to the AO's failure to follow the mandatory procedure laid down in GKN Driveshaft v. ITO (2003) 259 ITR 19 (SC). The AO did not dispose of the objections raised by the assessee before proceeding with the assessment, which was a violation of the principles of natural justice as established by the Hon'ble jurisdictional High Court in Deepak Extrusions (P.) Ltd. v. DCIT (2017) 80 taxmann.com 77 (Karnataka).

2. Validity of reassessment proceedings based on non-culmination and pendency of earlier notice:
The Tribunal noted that the second notice issued on 29.03.2016 was invalid since the first notice dated 26.03.2013 had not culminated in an assessment. This indicated non-application of mind by the AO.

3. Validity of reassessment proceedings due to lack of mention of earlier notice in the reasons recorded:
The Tribunal observed that the reasons recorded for the second notice did not mention the earlier notice dated 26.03.2013, leading to the conclusion that the reassessment proceedings were based on non-application of mind.

4. Validity of reassessment proceedings due to lack of valid approval under section 151 of the Act:
The Tribunal held that the reassessment proceedings were invalid due to the absence of a valid approval under section 151 of the Act. The sanction letter dated 24.03.2016 did not bear the signature of the PCIT, and the reasons recorded were not properly dated. This was in violation of the mandatory provisions of section 151, as established by the Hon'ble Delhi High Court in Synfonia Tradelinks (P) Ltd. v. ITO (2021) 435 ITR 642 (Delhi) and the Hon'ble jurisdictional High Court in CIT v. H.M. Constructions (2014) 43 taxmann.com 105 (Karnataka).

5. Validity of reassessment proceedings due to non-disposal of objections by a speaking order:
The Tribunal found that the AO's order dated 07.11.2016 did not dispose of the objections raised by the assessee on 07.11.2016 but referred to objections dated 31.10.2016 (filed on 03.11.2016). This indicated a non-judicious attempt by the AO to dispose of the proceedings in a manner not known in law.

6. Validity of reassessment proceedings based on incriminating material found during a search:
The Tribunal noted that the assessment should have been completed under sections 153C/153A of the Act instead of section 148, as the reassessment was based on incriminating material found during a search conducted on 14.09.2010.

7. Justification of addition of Rs. 1,37,30,000 as unexplained credit under section 68 of the Act:
The Tribunal did not adjudicate the issue on merits due to the quashing of the reassessment on legal grounds. However, it was noted that the AO had concluded that the addition represented fictitious share allotment and share premium, chargeable to tax as unexplained credit under section 68 of the Act.

8. Violation of principles of natural justice due to lack of opportunity for cross-examination and non-provision of seized material:
The Tribunal observed that the assessee was not provided with the material relied on by the AO for rebutting the same and was not given the opportunity to cross-examine the persons from whom statements were recorded, which was a violation of the principles of natural justice.

Conclusion:
The Tribunal quashed the reassessment proceedings on legal grounds and allowed the appeal filed by the assessee. The reassessment was found to be invalid due to procedural lapses and lack of proper approval under section 151 of the Act. The Tribunal refrained from adjudicating the issue on merits due to the quashing of the reassessment.

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