Reassessment notice quashed for lack of independent satisfaction despite GST investigation findings under Section 147

The HC quashed a reassessment notice issued beyond four years after assessment completion under Section 143(3). The AO reopened assessment based on DG GST investigation findings that two entities lacked assets/inventories and engaged in fraudulent transactions. However, the assessee had disclosed the loan transaction with one entity in Form 3CD and balance sheet. The court held the AO acted on borrowed satisfaction without independent examination, showing non-application of mind. Since material facts were fully disclosed originally, reopening was barred under Section 147 proviso. The notice was invalid due to lack of AO's independent satisfaction and failure to examine disclosed information.

---

---

Issues Involved:
1. Validity of the reopening of assessment u/s 147 of the Income Tax Act, 1961.
2. Non-application of mind by the Assessing Officer (AO) and approval authorities.
3. Examination of alternative remedy under Article 226 of the Constitution of India.

Summary:

Validity of the Reopening of Assessment u/s 147:
The petitioner, engaged in real estate and trading of steel items, filed its return of income (ROI) for AY 2015-16 on 30th September 2015. A scrutiny assessment was completed with an order dated 29th December 2017 u/s 143(3) of the Income Tax Act, 1961. Subsequently, a notice dated 31st March 2021 u/s 148 was issued, indicating that income chargeable to tax for AY 2015-16 had escaped assessment. The petitioner filed its ROI again and was provided reasons for reopening and the approval u/s 151. The court found that both the reasons and the approval indicated total non-application of mind by the AO, the Range Head, and the Principal Commissioner of Income Tax (PCIT). The court noted that the reasons incorrectly stated that no regular assessment u/s 143(3) was made, despite an assessment order being passed on 28th December 2017. This error was not identified by the approving authorities, leading to the conclusion that the approval granted suffered from non-application of mind.

Non-application of Mind by the AO and Approval Authorities:
The court observed that the AO formed a belief that income chargeable to tax had escaped assessment based on an investigation by the Directorate General of Goods and Services Tax (DG GST), Mumbai, which found that M/s. Meher and M/s. Nyles Sales Agencies Pvt. Ltd. were shell companies. The petitioner had financial transactions amounting to Rs. 3,39,00,000/- with Nyles, but these were loans, not payments or supplies. The AO failed to examine the records, which clearly indicated the nature of the transactions. The court emphasized that the AO acted on the satisfaction of the DG GST without verifying the facts, leading to a flawed reopening process. The court cited past judgments, including South Yarra Holdings and Crompton Greaves Ltd., to highlight the necessity of the AO's independent satisfaction and the requirement to disclose material facts fully and truly.

Examination of Alternative Remedy under Article 226:
The court rejected the preliminary objection raised by the respondents that the petitioner should exhaust the alternative remedy available before approaching the court under Article 226 of the Constitution of India. The court noted that the case reflected a gross instance of non-application of mind, justifying the exercise of its jurisdiction under Article 226. The court also noted the respondents' failure to file a reply despite multiple extensions, further supporting the decision to intervene.

Conclusion:
The court concluded that the impugned notice dated 31st March 2021, the order disposing of objections dated 24th February 2022, the reassessment order dated 23rd March 2022, the notice of demand dated 23rd March 2022, and the show-cause notice for levy of penalty dated 23rd March 2022 were all unsustainable and liable to be quashed and set aside. The petition was allowed in terms of prayer clause (a), effectively nullifying the reopening of the assessment.

---