2024 (9) TMI 1792 - AT - Income Tax

Reassessment Notice Under Section 148 Without Proper Approval Is Invalid and Quashed

The ITAT CUTTACK held that the reassessment notice issued under section 148 after four years lacked valid approval, as it was sanctioned by an incompetent ... Validity of assessment order passed u/s. 147 r.w.s. 144B - as argued approval as mandated u/s. 151(1) was obtained after the expiry of 4 years and not taken from the competent authorities as prescribed under the Act - HELD THAT:- As from bare perusal of the notice u/s. 148 of the Act, it is evident that the satisfaction was recorded by the AO and necessary approval was obtained from the JCIT, Range Rourkela for the impugned year. As per Section 151(1) of the Act, any notice issued after four years from the end of the relevant assessment year should contain an approval from the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner wherein satisfaction has to be reached on the sufficiency of reasons recorded by the AO being a fit case for issue of notice u/s. 148 of the Act. In the instant case, as is clear from the notice u/s. 148 of the Act itself that the approval was obtained/granted by the JCIT Rourkela, who is not competent for making such approval as in this case four years have elapsed from the end of the relevant year, therefore, notice issued u/s. 148 is without proper sanction and is liable to be quashed. Issue of notice on 01.04.2021 where the law as amended vide Finance Act, 2021 has come into force - As per the certified copy supplied by the AO vide dated 09.07.2024 it is clear that the notice u/s. 148 of the Act dated 31.03.2021 was sent and delivered to the assessee on 01.04.2021 at 5.29 AM through email and not on 31.03.2021, therefore, if the notice u/s. 148 of the Act is issued on or after 01.04.2021, the amended provision of Section 148A of the Act by the Finance Act, 2021 are applicable. In the instant case, the assessment has been completed on the basis of the proceedings initiated by a notice issued u/s. 148 of the Act dated 31.03.2021. Proceedings were also initiated under the amended Act u/s. 148A of the Act which were dropped by the authorities by observing that it is a mere change of opinion since the reassessment has already been done as a consequence of proceedings initiated u/s. 148 of the Act vie notice dated 31.03.2021. When the notice u/s. 148 of the Act dated 31.03.2021 was not issued nor served upon the assessee within the closing hours of 31.03.2021 and the proceedings under amended Act vide Finance Act, 2021 stood dropped by the department, the consequential order passed is liable to be quashed. Notice u/s. 148 of the Act as violated the Instruction No. 1/2011 issued by the CBDT - We find that similar issue came before us in the case of Shree Deosharwali Oil Industries [2024 (7) TMI 1674 - ITAT CUTTACK] wherein by following the decision of Shree Shoppers Ltd. [2023 (3) TMI 1432 - CALCUTTA HIGH COURT] the proceedings initiated u/s. 148 of the Act were quashed as held CBDT vide its instruction No. 1/2011 (supra) has issued specific instruction in regard to pecuniary jurisdiction. If the Sub-ordinate Officer was not competent to issue notice u/s. 148 of the Act, it has to be issued by a higher authority, then there was no reason for CBDT to issue such instruction. It is possible that a Senior Officer assumed the jurisdiction of a Sub-ordinate Officer but the reverse is not possible and should that argument is accepted, nothing could stop the Income Tax officer for assuming the duty from a Senior Officer also. Now coming to the issue of Section 292BB, a perusal of the same would clearly show that, that was a case where a valid notice has been issued and the assessee has cooperated in such proceedings. That is a provision to protect the issuance of notice more so service on the AO, it does not protect invalid issuance of notice on account of jurisdiction. Thus, we are of the view that the notice issued u/s. 148 of the Act by the ITO, Ward-1, Jharsuguda is without jurisdiction, therefore, consequential reassessment proceedings should be quashed. Assessee succeeded on this cross objection also. Application of the provisions of Section 40A(2)(b) of the Act in respect to the cooperative societies - payments made to the related parties which were identified by the auditor in the tax audit report filed in Form 3CD - The assessee being cooperative society and the payments are made to its members, the same is not covered under the provisions of Section 40A(2)(b) of the Act as a cooperative society forms on the principle of mutuality where the income distributed between the members is exempted in the hands of the members. Similar issue has been decided in the case of CIT Vs. Manjara Shetkari Sahakari Sakhar Karkhana Ltd [2007 (8) TMI 260 - BOMBAY HIGH COURT] wherein the Hon’ble High Court has held that provision u/s. 40A(2)(b) of the Act are not applicable to the cooperative societies. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the learned CIT(A) was justified in estimating income @6% without adequately appreciating the explanations and records relating to payments to related party subcontractors and without substantiating whether the expenditure was excessive or unreasonable under section 40A(2)(b) of the Income Tax Act. 2. Whether the comparison of net profit percentage to disallowance by the CIT(A) is supported by any provision of the Income Tax Act or is based on conjectures and surmises. 3. Whether the assessee furnished cogent documentary evidence before the Assessing Officer to prove that the expenditure claimed was actually incurred and allowable under section 40A(2)(b) of the Act. 4. Whether the assessee's own return of income reporting no allowance under section 40A(2)(b) affects the validity of income estimation by the CIT(A). 5. Jurisdictional validity of reassessment proceedings initiated under section 147 read with section 148, including: Validity of prior approval obtained from JCIT instead of PCIT/PCCIT as mandated under section 151(1) for reopening beyond four years; Fulfillment of twin conditions under the proviso to section 147 (failure to make return or failure to disclose fully and truly all material facts); Validity of notice issued under section 148 on 31.03.2021 but served on 01.04.2021, post amendment by Finance Act, 2021; Jurisdictional competence of AO issuing notice contrary to CBDT Instruction No. 1/2011 on pecuniary limits. 6. Whether the order passed under section 147 based on the old law becomes infructuous after initiation of proceedings under the amended law (section 148A) following the Supreme Court judgment in Ashish Agarwal. 7. Applicability of section 40A(2)(b) to cooperative societies and whether disallowance under this section is permissible against such entities. 8. Distinction between reporting requirements under Form 3CD by the tax auditor and disallowance by the Assessing Officer under section 40A(2)(b). 9. Whether the Assessing Officer must demonstrate excessiveness or unreasonableness of expenditure to justify disallowance under section 40A(2)(b). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1-4: Validity of Income Estimation and Disallowance under Section 40A(2)(b) Legal Framework and Precedents: Section 40A(2)(b) disallows expenditure paid to related parties if such expenditure is excessive or unreasonable compared to fair market value, legitimate business needs, or benefit derived. The onus lies on the Revenue to establish excessiveness. The tax auditor's report (Form 3CD) requires only reporting payments to related parties, not an opinion on excessiveness. The Supreme Court and various High Courts have held that disallowance cannot be made merely on reporting without demonstration of excessiveness or unreasonableness. Court's Interpretation and Reasoning: The CIT(A) deleted the entire disallowance of Rs. 5,44,88,752/- made by the AO, holding that the AO failed to establish beyond doubt that payments were excessive or unreasonable, thus the condition under section 40A(2)(a) was not fulfilled. However, the CIT(A) proceeded to estimate net income at Rs. 46,64,000/- on an adhoc basis invoking section 251(1)(a) powers. Key Evidence and Findings: The assessee submitted explanations and records relating to major subcontractors who were related parties. The tax audit report disclosed payments to related parties but the assessee's return reported nil disallowance under section 40A(2)(b). No cogent documentary evidence was found on record by the AO to prove excessiveness. Application of Law to Facts: The AO's disallowance lacked material to prove excessiveness or unreasonableness. The CIT(A)'s adhoc income estimation was beyond the scope of appeal as the issue of disallowance was the subject matter. The estimation was not based on any statutory provision or concrete evidence. Treatment of Competing Arguments: The Revenue contended that the disallowance was justified and the CIT(A)'s adhoc estimation was improper. The assessee argued that no disallowance was warranted without proof of excessiveness and that the cooperative society status exempts it from section 40A(2)(b). Conclusions: The disallowance under section 40A(2)(b) was not sustainable due to lack of demonstration of excessiveness. The adhoc income estimation by CIT(A) was beyond jurisdiction and not supported by law or facts. Issue 5: Jurisdictional Validity of Reassessment Proceedings Relevant Legal Framework and Precedents: Section 147 read with section 148 governs reassessment. Section 151(1) mandates prior approval from PCIT/PCCIT/Pr.CCIT for reopening beyond four years. The proviso to section 147 requires failure on part of assessee to disclose fully and truly all material facts. CBDT Instruction No. 1/2011 specifies pecuniary jurisdiction of AO. The Finance Act, 2021 amended reassessment provisions effective 01.04.2021 introducing section 148A. Court's Interpretation and Reasoning: The AO obtained prior approval from JCIT instead of the competent PCIT/PCCIT, violating section 151(1). The notice under section 148 dated 31.03.2021 was digitally signed but served on 01.04.2021, post amendment, requiring compliance with new provisions. The AO lacked pecuniary jurisdiction as per CBDT Instruction No. 1/2011 since the returned income exceeded Rs. 15 lakhs but reassessment was initiated by ITO instead of ACIT/DCIT. The proviso to section 147 was not satisfied as the assessee had disclosed all material facts in the original assessment. Key Evidence and Findings: The notice itself showed approval from JCIT. Certified email copy established service on 01.04.2021. The original return declared income above pecuniary limit for ITO jurisdiction. No material indicated failure to disclose fully and truly all material facts. Application of Law to Facts: The notice issued without proper sanction is invalid. The reassessment initiated post amendment without following new procedure is void. Jurisdictional limits under CBDT Instruction were breached. Absence of failure to disclose material facts negates jurisdiction to reopen beyond four years. Treatment of Competing Arguments: The Revenue urged validity of notice and reassessment. The assessee relied on binding High Court precedents and Supreme Court rulings to challenge jurisdiction and validity of notice. Conclusions: Reassessment proceedings were without jurisdiction, invalid, and liable to be quashed. Issue 6: Effect of Supreme Court Judgment in Ashish Agarwal on Proceedings under Old and New Law Legal Framework and Precedents: The Supreme Court held that reassessment notices issued under old section 148 after 01.04.2021 but up to 30.06.2021 are deemed to have been issued under new section 148A. Defenses and rights under new law remain available. Court's Interpretation and Reasoning: The AO issued notice under section 148 on 31.03.2021 but served on 01.04.2021. Proceedings under section 148A were initiated but dropped as not a fit case. The order under section 147 based on old law became infructuous after initiation of section 148A proceedings. Key Evidence and Findings: The AO's order under section 147 dated 31.03.2022 was followed by notice under 148A(b) and order under 148A(d) dropping proceedings. No fresh notice under section 148 was issued. Application of Law to Facts: The old law order loses effect once new law procedure is followed and proceedings are dropped. Keeping old order alive is impermissible. Conclusions: The reassessment order under old law is infructuous and void. Issue 7: Applicability of Section 40A(2)(b) to Cooperative Societies Legal Framework and Precedents: Section 40A(2)(b) does not mention cooperative societies. Bombay High Court held that cooperative societies are distinct from Association of Persons (AOP) and section 40A(2) does not apply to them. Cooperative societies enjoy mutuality doctrine and specific deductions under section 80P. Court's Interpretation and Reasoning: The assessee is a cooperative society formed under law, engaged in transportation business. Payments made to members are not covered under section 40A(2)(b). The disallowance invoking section 40A(2)(b) is contrary to law. Key Evidence and Findings: Registration documents and nature of business confirm cooperative status. Payments were to members. Application of Law to Facts: Section 40A(2)(b) is not applicable to cooperative societies; hence disallowance under this section is impermissible. Conclusions: Disallowance under section 40A(2)(b) is not sustainable against cooperative societies. Issue 8: Distinction Between Reporting in Form 3CD and Disallowance by AO Legal Framework and Precedents: Clause 23 of Form 3CD requires reporting payments to related parties but does not mandate opinion on excessiveness or fair market value. Courts have held that reporting is not evidence for disallowance. Court's Interpretation and Reasoning: The tax auditor's report only discloses payments made, not that payments are excessive or unreasonable. The AO cannot disallow expenditure solely on the basis of tax audit report. Key Evidence and Findings: Tax audit report disclosed payments but did not opine on reasonableness. Application of Law to Facts: Reporting in Form 3CD is distinct from disallowance which requires independent assessment and evidence. Conclusions: Disallowance cannot be based solely on tax auditor's report. Issue 9: Requirement of Demonstrating Excessiveness or Unreasonableness for Disallowance under Section 40A(2)(b) Legal Framework and Precedents: Section 40A(2)(a) empowers AO to disallow expenditure only to the extent it is excessive or unreasonable considering fair market value, legitimate business needs, or benefit derived. The Supreme Court and various High Courts have emphasized the need for AO to demonstrate such excessiveness. Mere payments to related parties are insufficient. Court's Interpretation and Reasoning: The AO failed to conduct any exercise or produce material to establish excessiveness or unreasonableness. Judicial precedents require a clear demonstration of such excessiveness before disallowance. Key Evidence and Findings: No material or market comparison was placed on record by AO. The CIT(A) rightly deleted disallowance for lack of proof. Application of Law to Facts: Without demonstration of excessiveness, disallowance under section 40A(2)(b) cannot be sustained. Conclusions: Disallowance under section 40A(2)(b) without proof of excessiveness is invalid.