2024 (10) TMI 1699 - AT - Income Tax

AO's reassessment order invalid for AY 2016-17 due to non-compliance with SC directions in GKN Driveshafts case

M/s. IDFC First Bank Ltd., Versus The PCIT / ACIT, Corporate Cirlce-1 (1), Chennai.

The ITAT Chennai held that the AO's reassessment order dated 31.03.2022 for AY 2016-17 was invalid as the AO failed to comply with the binding directions ... Validity of reopening of assessment - AO failed to abide by the binding directions given in the case of M/s. GKN Driveshafts (India) Ltd.[2002 (11) TMI 7 - SUPREME COURT] as laid down the mandatory Rule to be followed by AO that after a notice u/s.148 has been issued by him, the assessee needs to file a return pursuant to such a notice; and if the assessee seek reason for issuing such notice, the AO is bound to furnish reasons for reopening the assessment, within a reasonable time and on receipt of reasons, the assessee is entitled to file objections - HELD THAT:- AO furnished a copy of the reasons recorded and the assessee objected to the re-opening by letter and it is noted that the assessee while objecting to the action of AO to re-open the assessment had prayed to the AO (i) in the light of the objections, AO may either drop the re-opening of assessment proceedings since no new tangible material was available on record to form reason to believe that income has escaped assessment and asserted that the proposed exercise of re-opening can be termed as mere ‘change of opinion’ and (ii) also pleaded that in the event, if the AO doesn’t accept the plea raised by it to drop the proceedings, the AO may pass speaking order disposing the objections as per in M/s. GKN Driveshafts (India) Ltd [2002 (11) TMI 7 - SUPREME COURT] and in accordance to Hon’ble Bombay High Court in Asian Pains [2007 (1) TMI 159 - BOMBAY HIGH COURT] We are of the view that the assessee succeeds on the legal issue that the AO failed to comply with the binding directions of M/s. GKN Driveshafts (India) Ltd., before framing the reassessment order. The AO rejecting objections of the assessee against re-opening by merely doing so while passing the re-assessment order, wouldn’t come to the rescue of the Revenue because such an action of AO is noted to be in grossdefiance to the binding order of the Hon’ble Supreme Court; and the AO couldn’t have over reached the order of the Hon’ble Supreme Court by disposing off the objections while framing the re-assessment order, which defeats the purpose of such an exercise as discussed supra. Therefore, we hold that the omission on the part of the AO to comply with the directions of the Hon’ble Supreme Court in the case of M/s. GKN Driveshafts (India) Ltd., strikes at the root of the jurisdiction of the AO to re-open the assessment and consequent passing of reassessment order dated 31.03.2022 is held to be non-est in the in the eyes of law and all other grounds are academic and not adjudicated. Therefore, on the legal issue as discussed, we quash the re-assessment order dated 31.03.2022 passed u/s.147/143(3) of the Act for AY 2016-17. Revision u/s 263 - We note that the reassessment order framed by the AO u/s.147/143(3) of the Act dated 31.03.2023 for AY 2016-17 stands quashed and held to be nonest in the eyes of law, in such an event, the foundation for exercising the impugned revisional jurisdiction doesn’t exist (in the eyes of law); and therefore, the impugned action of the Ld. PCIT is held to be non-est in the eyes of law and deserves to be quashed. For that we rely on the legal maxim “sublato Fundmento Credit opus” meaning in case a foundation is removed, the super-structure falls. In Badarinath v. Tamil Nadu [2000 (9) TMI 1044 - SUPREME COURT] the Hon’ble Supreme Court held that once the basis of proceedings is gone, all consequential orders & acts would fall on the ground automatically which is applicable to judicial and quasi judicial proceedings. 1. ISSUES PRESENTED and CONSIDERED Whether the Assessing Officer (AO) complied with the binding procedural requirements laid down by the Hon'ble Supreme Court in M/s. GKN Driveshafts (India) Ltd. regarding disposal of objections filed by the assessee against the reopening notice under Section 148 of the Income Tax Act, 1961. Whether the AO's failure to pass a separate speaking order disposing of the objections to reopening, and instead dealing with objections in the body of the reassessment order, vitiates the reassessment proceedings. Whether the reassessment order passed by the AO under Section 147/143(3) is valid in law when objections raised by the assessee were not disposed of prior to framing of reassessment. Whether the revisional order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Act interfering with the reassessment order is valid when the reassessment order itself is quashed. Whether the non-compliance with the procedural safeguards prescribed by the Supreme Court and various High Courts, including the requirement of providing a minimum four weeks' time after disposal of objections before framing reassessment, affects the jurisdiction of the AO to reopen assessment. Applicability and binding nature of conflicting High Court decisions on the issue of procedural compliance in reopening assessments, and the principle of precedence of later pronouncements by courts of co-equal strength. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Compliance with the procedural directions in M/s. GKN Driveshafts (India) Ltd. regarding disposal of objections to reopening notice Legal Framework and Precedents: The Supreme Court in M/s. GKN Driveshafts (India) Ltd. (2003) 259 ITR 19 (SC) mandated that after issuance of notice under Section 148, the AO must furnish reasons for reopening within a reasonable time. Upon receipt of reasons, the assessee is entitled to file objections, which the AO must dispose of by passing a speaking order before proceeding with reassessment. Subsequent High Court rulings, including CIT v. Pentafour Software Employees' Welfare Foundation and CIT v. Janak Shantilal Mehta (Madras High Court), reinforced that failure to comply with these procedural requirements vitiates the reopening and reassessment. Court's Interpretation and Reasoning: The Tribunal found that the AO issued notice under Section 148 on 30.03.2021, the assessee filed return on 23.04.2021 and requested reasons for reopening, which were furnished on 06.05.2021. The assessee filed detailed objections on 15.06.2021, specifically requesting disposal of objections by a speaking order and a minimum four weeks' time before reassessment. Despite this, the AO did not pass a separate speaking order disposing of objections but addressed them within the body of the reassessment order dated 31.03.2022. The Tribunal held that disposing objections within the reassessment order itself is in gross defiance of the Supreme Court's binding directions and defeats the purpose of the procedural safeguards. The AO's action amounted to non-compliance with the mandatory procedure, which goes to the root of jurisdiction to reopen assessment. Key Evidence and Findings: The assessee's letter dated 15.06.2021 contained detailed objections and a prayer for a speaking order and time gap before reassessment. The reassessment order did not contain a separate order disposing of objections but addressed them in the assessment order's body. The AO ignored the requirement of a four-week gap post disposal of objections as held in Asian Paints Ltd. and Bharat Jayantilal Patel (Bombay High Court decisions). Treatment of Competing Arguments: The Revenue contended that the AO's discussion of objections in the reassessment order satisfied the requirement in substance and that failure to pass a separate order was a procedural irregularity not vitiating the proceedings. The CIT(A) upheld this view. The Tribunal rejected this, relying on authoritative Supreme Court and High Court rulings emphasizing the mandatory nature of the procedure and the necessity of a separate speaking order disposing objections prior to reassessment. Conclusions: The Tribunal concluded that the AO's failure to pass a separate speaking order disposing of objections and failure to provide the mandatory four weeks' period before reassessment vitiated the reopening and reassessment order. The reassessment order dated 31.03.2022 was quashed as non-est in law. Issue 3: Validity of reassessment order passed without disposing objections as per binding judicial precedents Legal Framework and Precedents: The procedural safeguards in GKN Driveshafts (India) Ltd. and subsequent High Court decisions establish that the jurisdiction to reopen assessment is conditional on compliance with the procedure of disposing objections by a speaking order before reassessment. Non-compliance affects jurisdiction and renders reassessment order void. Court's Interpretation and Reasoning: The Tribunal held that the AO's omission to follow the binding procedure strikes at the root of jurisdiction and the reassessment order is invalid. The AO's attempt to dispose objections while passing reassessment order is impermissible and defeats the purpose of the procedure. Key Evidence and Findings: The assessee's objections and requests were on record and undisputed. The reassessment order did not comply with the mandatory procedure. Treatment of Competing Arguments: Revenue's contention that the reassessment order's discussion sufficed was rejected. The Tribunal relied on the binding nature of Supreme Court directions and consistent High Court rulings. Conclusions: The reassessment order is quashed for want of jurisdiction due to non-compliance with mandatory procedural safeguards. Issue 4: Validity of revisional order under Section 263 when reassessment order is quashed Legal Framework and Precedents: The legal maxim 'sublato fundmento cadit opus' applies: if the foundation (reassessment order) is removed, the superstructure (revision order) falls. The Supreme Court in Badarinath v. Tamil Nadu held that once the basis of proceedings is gone, consequential orders automatically fail. Court's Interpretation and Reasoning: Since the reassessment order dated 31.03.2022 was quashed as non-est in law, the revisional order passed by the PCIT under Section 263 lacks foundation and jurisdiction. Conclusions: The revision order dated 31.03.2024 is quashed as non-est in law. Issue 5: Effect of failure to provide four weeks' time after disposal of objections before reassessment Legal Framework and Precedents: Bombay High Court in Asian Paints Ltd. and Bharat Jayantilal Patel held that if objections to reopening are rejected, the AO shall not proceed further for at least four weeks to enable the assessee to seek judicial remedy. Court's Interpretation and Reasoning: The AO did not provide the mandatory four weeks' interval after purported disposal of objections before passing reassessment order, violating binding judicial directions. Conclusions: This procedural lapse further vitiates the reassessment order, justifying its quashing. Issue 6: Binding nature of conflicting High Court decisions and application of later pronouncement Legal Framework and Precedents: The principle that later pronouncements of courts of co-equal strength prevail over earlier conflicting views is well-established (as held by Delhi High Court in Bhika Ram & Ors. v. UOI). The Madras High Court decisions in Janak Shantilal Mehta (later) and Home Finders Housing Ltd. (earlier) represent conflicting views on consequences of non-compliance with GKN directions. Court's Interpretation and Reasoning: The Tribunal held that the later decision in Janak Shantilal Mehta, which quashes reassessment for non-compliance, is binding and applicable over the earlier Home Finders Housing Ltd. decision that treated non-compliance as irregularity only. Conclusions: The reassessment order is liable to be quashed in line with the later binding precedent.