2024 (4) TMI 1307 - HC - Income Tax

Petition dismissed; reassessment under s.149(1)(b) valid as escapement over Rs.8 crore, notice dated 6.3.2024 timely

Ravindra Pratap Shahi Versus Union of India And 2 Others

HC dismissed the petition and upheld the validity of reassessment proceedings. The court found the information before revenue prima facie relevant and ... Reopening of assessment - reason to believe - period of limitation - HELD THAT:- There is nothing to doubt the prima facie relevancy of the information received by the revenue authorities for the purpose of initiating the reassessment proceedings. Here, we take note of the fact that the petitioner was not subjected to regular assessment u/s 143(3) for the A.Y. 2017-18. Thus, there is no earlier assessment where the facts being alleged against the petitioner or his income may have been examined. As to the objection based on Section 148(1)(a) of the Act, we find no credible material to limit the period of limitation to reassess the petitioner to three years. In view of what has been noted, at present, without prejudice to the rights of the petitioners to raise such objections in the reassessment proceedings and leaving it open to the Assessing Authority to deal with the objection, if raised, on its own merits, prima facie, the quantum of escapement noted by revenue authorities exceeds Rs. 8 crores. Therefore, the period of limitation would be governed by Section 149(1)(b) of the Act. Thus, the limitation of reassessment proceedings for the A.Y. 2017-18 in the case of the petitioner would exist beyond 31.3.2021. Whether six years or ten years, the reassessment proceedings initiated against the petitioner vide notice dated 6.3.2024, would remain within time. The fact that the Assessing Authority has been drawn into the discussion to deal with the replies filed by the petitioner may not alter the status of the proceedings as a summary proceedings as may only give rise to jurisdiction to reassess. At this stage, no detailed finding is either required or permissible in law. The Assessing Authority may have done well to pass a short order to briefly deal with the objections raised to disclose his decision - that it was a 'fit case' to initiate reassessment proceedings. Accordingly, present petition stands dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether, in view of amendments by Finance Act, 2021, initiation of reassessment proceedings under Section 147 read with Section 148/148A(d) of the Income Tax Act can be quashed at writ stage for lack of a recorded 'reason to believe'. 2. Whether material retrieved from electronic records of a third party (hard-drive/storage device) can, prima facie, sustain a decision under Section 148A(d) that it is a 'fit case' to issue notice under Section 148 against the assessee. 3. Whether the integrity, authenticity and alleged coding (backdating and dividing amounts) of electronic third-party data are amenable to pre-assessment judicial scrutiny to defeat reassessment initiation. 4. Whether the period of limitation for reassessment is governed by the three-year proviso or by Section 149(1)(b) (ten-year/extended period) where alleged escapement exceeds statutory thresholds based on prima facie figures derived from third-party data. 5. Whether shortfall of one day in the minimum statutory time for filing a reply under Section 148A(b) vitiates the Assessing Authority's decision under Section 148A(d) when the assessee has in fact filed substantive replies within the time actually available. 6. Whether the writ Court, at the stage of challenge to the Section 148A(d) order, should undertake detailed examination of facts or test correctness of revenue's material. ISSUE-WISE DETAILED ANALYSIS Issue 1: Effect of Finance Act, 2021 amendments on requirement to record 'reason to believe' Legal framework: Amendments removed the pre-existing statutory requirement that the Assessing Officer record a 'reason to believe' before initiating reassessment; Section 147 must now be read with Sections 148-153 and the procedural steps under Section 148A, including a decision whether it is a 'fit case' to issue notice under Section 148. Precedent Treatment: The Court treated the legislative amendment as dispositive and controlling; no earlier requirement to insist on the 'reason to believe' test survives in its pre-amendment form for initiation decisions under Section 148A(d). Interpretation and reasoning: The legislature consciously widened reassessment jurisdiction by replacing the reason-to-believe threshold with a requirement that the AO decide, on available material and the assessee's reply to the Section 148A(b) notice, whether it is a 'fit case' to proceed. The Court read this as lowering the pre-requisite restraint and limiting the writ Court's role to examining whether the decision was a bona fide exercise of power simpliciter. Ratio vs. Obiter: Ratio - post-amendment, absence of recorded 'reason to believe' is not a ground to quash reassessment initiation at the writ stage; the AO's 'decision' under Section 148A(d) is the operative threshold to be tested for legality rather than content of reasons. Conclusion: Quashing on the ground of failure to record 'reason to believe' is not warranted under the amended scheme; the order under Section 148A(d) stands to be judged against the 'fit case' standard, not the old requirement. Issue 2: Prima facie sufficiency of third-party electronic material to constitute a 'fit case' under Section 148A(d) Legal framework: Section 148A prescribes that the AO, on material available and after considering assessee's reply to the notice under Section 148A(b), may decide whether it is a 'fit case' to issue notice under Section 148. Material from searches/seizures of third parties is admissible for initiating reassessment. Precedent Treatment: The Court declined to conduct granular verification of the third-party data at the writ stage and treated prima facie retrieval of entries against the assessee's name in third-party books as relevant material to found a decision to reassess. Interpretation and reasoning: The electronic entries retrieved from a third party's storage device recorded deposits against the assessee's name and identified two properties; these facts, together with the revenue's forensic analysis suggesting coding to conceal transaction quantum and dates, suffice prima facie to sustain a 'fit case' decision. The Court emphasized that detailed scrutiny belongs to assessment proceedings and that the AO need not be precluded from acting where the material is prima facie relevant. Ratio vs. Obiter: Ratio - third-party electronic records showing entries against the assessee, coupled with a prima facie forensic inference, can validly support the AO's decision under Section 148A(d) and are not ordinarily open to being disbelieved at writ stage. Conclusion: The material retrieved from the third party is prima facie relevant and adequate for the AO to decide it is a 'fit case' to issue notice under Section 148; the writ Court will not pre-judge its correctness. Issue 3: Challenge to integrity/authenticity and coded alterations in electronic data - scope of pre-assessment review Legal framework: Procedural fairness requires the AO to consider the assessee's reply to Section 148A(b) notice; however, the Court's power at writ stage to test factual integrity of material is limited where statutory scheme contemplates fuller inquiry during reassessment. Precedent Treatment: The Court refused to entertain detailed challenges to integrity/authenticity (including allegations of superimposition, backdating, or multiplication/division) of the recovered electronic data at the interlocutory stage, holding such issues are to be examined in reassessment proceedings. Interpretation and reasoning: Because the alleged defects pertain to factual veracity and forensic detail, and because the amended law reduces pre-reassessment judicial intervention, the writ Court should not displace the Assessing Authority's prima facie decision unless material is demonstrably extraneous or legally inadmissible. The Court noted that the revenue had a human agent verification and that the assessee had not shown conclusive proof of data tampering sufficient to oust the material from consideration. Ratio vs. Obiter: Ratio - integrity/authenticity challenges to third-party electronic material are generally to be tested during reassessment; the writ Court should not resolve such factual disputes at the Section 148A(d) stage unless clear legal disqualification of the material is shown. Conclusion: The challenge to the data's integrity is premature; the assessee may raise such objections in the reassessment proceedings where they will be tested on merits with full opportunity. Issue 4: Application of limitation provisions - whether extended period under Section 149(1)(b) applies Legal framework: Limitation for reassessment depends on alleged escapement quantum; where escapement exceeds statutory thresholds, extended limitation (ten years) under Section 149(1)(b) applies; AO's prima facie quantification informs limitation at initiation stage. Precedent Treatment: The Court accepted the revenue's prima facie computation (that certain recorded figures require multiplication by 100 and would result in alleged escapement exceeding the threshold) as sufficient to invoke extended limitation for the purpose of sustaining timeliness of the reassessment notice. Interpretation and reasoning: At this preliminary stage, absent conclusive evidence to the contrary, the Court will not restrict the limitation period to three years; the AO's prima facie conclusion that the escapement exceeds the statutory threshold places the reassessment within time under Section 149(1)(b). The Court expressly left open the right of the assessee to challenge the computation during reassessment. Ratio vs. Obiter: Ratio - where prima facie material before the AO indicates escapement exceeding statutory thresholds, the extended limitation under Section 149(1)(b) may be held to apply and sustain the validity of a notice issued within the extended period. Conclusion: Prima facie quantification by the revenue supports applicability of extended limitation; the reassessment notice dated within that extended period is not time-barred at this stage. Issue 5: Defect in time given under Section 148A(b) - effect of one-day shortfall when substantive replies were filed Legal framework: Section 148A(b) prescribes minimum time (seven days) for the assessee to reply to the proposal to reassess, subject to reasonable compliance and rules of natural justice. Precedent Treatment: The Court acknowledged a technical shortfall of one day but found substantial compliance because the assessee filed two substantive replies within the actual time available and did not demonstrate need or request for additional time. Interpretation and reasoning: A procedural defect of shortfall by one day is not automatically fatal where the assessee has substantially availed the opportunity and there is no prejudice. The Court cautioned AOs to grant reasonable time (seven to thirty days) as a practice but declined to frustrate reassessment on a mere technicality absent prejudice. Ratio vs. Obiter: Ratio - procedural shortfall in prescribed reply period does not vitiate the AO's decision when the assessee has in substance exercised the right to reply and no prejudice is shown; the defect is curable by finding substantial compliance. Conclusion: The one-day shortfall did not invalidate the Section 148A(d) decision given substantial compliance and actual filing of replies; reassessment initiation stands. Issue 6: Extent of writ Court's role in testing merits at Section 148A(d) stage Legal framework: Writ jurisdiction under Article 226 permits interference where action is mala fide, extraneous, or beyond jurisdiction; however, statutory scheme post-amendment circumscribes pre-reassessment factual inquiry. Precedent Treatment: The Court held that detailed factual findings and merits inquiries belong to reassessment proceedings; the writ Court's role is limited to examining whether the decision to reissue notice is legally sustainable on the material before the AO and whether procedural fairness was observed. Interpretation and reasoning: Given legislative intent to broaden reassessment scope and the procedural safeguards built into Section 148A, the Court should not pre-judge factual disputes or displace the AO's prima facie evaluation. The Court emphasized that objections regarding relevancy and correctness remain open to be litigated during reassessment with full natural justice. Ratio vs. Obiter: Ratio - at the Section 148A(d) stage, the writ Court will not conduct detailed merits review; it will intervene only if the material is extraneous, the decision is arbitrary or mala fide, or procedural requirements are substantially violated. Conclusion: The writ Court should ordinarily refrain from interfering with initiation of reassessment where the AO's decision to treat the matter as a 'fit case' is supported by prima facie material and procedural fairness has been substantially complied with; reassessment may proceed subject to full testing of objections in due course.