2024 (7) TMI 1676 - AT - Income Tax

Reopening under Section 148 to tax hardship allowance under Section 56(2)(vii) held invalid after deletion of sole addition

Shri Sureshkumar Jethanand Rawlani, Versus Income Tax Officer – 17 (3) (4), Mumbai

ITAT MUMBAI - AT held that reopening under section 148 to assess a 'hardship' allowance under section 56(2)(vii) was unsustainable where CIT(A) deleted ... Reopening of assessment - AO had issued notice u/s 148 seeking to assess “hardship” allowance u/s. 56(2)(vii) - CIT(A) has deleted the addition hereinabove which formed the sole reason of reopening - HELD THAT:- As decided in B.P. Poddar Foundation for Education vs. BP [2022 (9) TMI 660 - CALCUTTA HIGH COURT] wherein their lordships; dealing which instance wherein the AO had initiated 148/147 proceeding for a single head of income and made various other additions followed by the CIT(A)’s lower appellate findings deleting the former head and upholding the latter ones, concludes that such a reopening itself is not sustainable in law. Thus, we conclude that the impugned reopening/reassessment is not sustainable in law any more in very terms - Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings initiated under Section 148 read with Section 147 are legally sustainable when the sole reason recorded for reopening (the primary ground) is subsequently deleted by the first appellate authority. 2. Whether Explanation 3 to Section 147 empowers the Assessing Officer to assess or reassess income on any other issues (not recorded in the reasons for reopening) even where the original reason for reopening is held to be without substance or is dropped by the appellate authority. 3. Whether an invalid notice under Section 148 vitiates the entire reassessment proceeding, including additions made on heads not mentioned in the reasons for reopening. ISSUE-WISE DETAILED ANALYSIS - I. Validity of reassessment where basis for reopening is deleted Legal framework: Section 147 requires formation of 'reason to believe' that income chargeable to tax has escaped assessment; Section 148 prescribes service of notice based on recorded reasons; Explanation 3 to Section 147 (post-2009 amendment) permits the Assessing Officer to assess 'any other income' coming to his notice during reassessment proceedings. Precedent treatment: The Court reviewed competing lines of authority - (a) decisions holding Explanation 3 permits assessment of additional issues discovered during reassessment (e.g., Jet Airways interpretation of Explanation 3 as permissive but subject to Section 147's substantive conditions); (b) decisions (including Majinder Singh Kang) reading Explanation 3 more broadly; and authorities requiring disposal of objections to reasons for reopening (GKN Driveshafts) and prohibiting reassessment where reopening amounts to change of opinion (Kelvinator/GKN line). Interpretation and reasoning: The Court held that Explanation 3 cannot override the substantive conditions of Section 147. Explanation 3 lifts the judicial embargo on assessing heads other than those recorded as reasons for reopening but does not eliminate the prerequisite that the Assessing Officer must have a valid basis to reopen the assessment. If the basis/reason for reopening is examined and the ground that formed the basis is dropped by the appellate authority (i.e., found not to have escaped assessment), the Assessing Officer cannot thereafter proceed to make fresh additions on unrelated grounds without issuing a fresh valid notice under Section 148. The Court relied on the logic that permitting otherwise would allow circumvention of the statutory safeguard (formation of reason to believe and valid notice) and enable roving inquiries that frustrate the protection against unjustified reopenings. Ratio vs. Obiter: Ratio - Explanation 3 does not validate reassessment on other issues where the foundational reason for reopening fails; a fresh valid notice under Section 148 is required to entertain independent additions when the original reason is dropped. Obiter - observations on the breadth of various High Court precedents and comparative comment on Majinder Singh Kang as being distinguishable or not followed uniformly. Conclusions: Reassessment sustained only if the original notice under Section 148 remains valid and the Assessing Officer legitimately proceeds under Section 147; where the primary reason for reopening is set aside by the appellate authority, the Assessing Officer cannot sustain additions on unrelated heads without a fresh notice - thus reassessment in such circumstances is unsustainable. ISSUE-WISE DETAILED ANALYSIS - II. Effect of Explanation 3 to Section 147 on Assessing Officer's power to consider other heads Legal framework: Explanation 3 permits assessment or reassessment of 'any other income' which comes to the Assessing Officer's notice during proceedings under Section 147; however, Explanation is subordinate to the substantive provision and cannot override statutory prerequisites. Precedent treatment: The Court considered Jet Airways and Ranbaxy which interpret Explanation 3 as enabling the AO to assess additional items discovered during reassessment but subject to the requirement that the reassessment proceedings are founded on a valid notice/reason; other decisions (Majinder Singh Kang) were noted but treated as not reflecting the prevailing view of various High Courts and later considerations. Interpretation and reasoning: The Court emphasized a conjunctive reading of Section 147 - the AO may reassess 'such income' for which reason existed and, in addition, any other escaped income that comes to notice during proceedings. Explanation 3 removes the narrow judicial restriction but does not permit the AO to continue reassessment when the foundational reason is invalidated; otherwise Explanation 3 would nullify the core condition of Section 147 and permit circumvention of the statutory safeguards against reopenings beyond permissible circumstances. Ratio vs. Obiter: Ratio - Explanation 3 is enabling but conditional; it cannot be invoked to sustain additions where the notice under Section 148 is invalid or where the foundational reason is dropped; Obiter - remarks on legislative intent and explanatory memorandum considered by higher courts. Conclusions: Explanation 3 does not grant blanket power to the AO to conduct roving enquiries; expansion of assessment to other heads during reassessment is permissible only when the reassessment proceedings are otherwise validly anchored by recorded reasons and a valid notice under Section 148. ISSUE-WISE DETAILED ANALYSIS - III. Consequence of an invalid Section 148 notice Legal framework: Validity of reassessment depends on a valid notice under Section 148 founded on lawful reasons; GKN Driveshafts establishes the right to raise objections and requires disposal of those objections in a speaking order within reasonable time. Precedent treatment: The Court treated authorities holding that an invalid notice vitiates reassessment (including Jet Airways/ Ranbaxy approach and GKN Driveshafts obligations) and aligned with decisions holding that the AO cannot proceed on other heads if the foundational notice is invalid. Interpretation and reasoning: The Court reasoned that the foundation of reassessment is the notice dated under Section 148; if that notice is legally unsustainable or the reason recorded for issuing it is set aside on appeal, the consequential reassessment and additions lack jurisdictional basis and must fall. Allowing additions to survive would render the notice requirement illusory and permit reassessment without satisfying statutory preconditions. Ratio vs. Obiter: Ratio - An invalid Section 148 notice renders the reassessment proceedings and additions made pursuant thereto unsustainable; Obiter - ancillary discussion of disposal of objections and timelines from GKN Driveshafts. Conclusions: Where the notice under Section 148 is held invalid (or the primary reason for reopening is deleted), the Assessing Officer cannot sustain additions made in the reassessment on other grounds; the reassessment collapses for want of jurisdiction. OVERALL CONCLUSION The Court concluded that the reassessment proceedings were not sustainable because the foundational reason for reopening was deleted by the appellate authority and the notice under Section 148 was therefore incapable of supporting other additions. Explanation 3 to Section 147 does not cure an invalid notice or permit the AO to independently pursue unrelated additions without a fresh valid notice. Accordingly, the appeals were allowed and the reassessment additions set aside.