2024 (3) TMI 1493 - HC - Income Tax

Reopening under u/s 148 quashed where Addl. CIT failed to record satisfaction and AO ignored mandatory SC procedural requirements

Principal Commissioner of Income Tax-15 Delhi Versus Kamal Kapoor

HC held the reopening under u/s 148 invalid and quashed reassessment proceedings because the Addl. CIT did not record satisfaction on the reasons provided ... Validity of reopening of assessment - valid approval accorded u/s 151 or not? - HELD THAT:- Since the Addl. CIT has not recorded his satisfaction on the reasons recorded by AO for reopening of reassessment and secondly, AO has not followed the mandatory procedure as laid down by Hon'ble Supreme Court in the case of GKN Driveshaft (India) Ltd. [2002 (11) TMI 7 - SUPREME COURT] the issuance of notice u/s 148 of the Act and consequent reassessment proceedings in the case of appellant are invalid and liable to be quashed. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under Section 147 can validly be initiated on information received from the Investigation wing (ADIT/Directorate) and whether such information amounts to material constituting a reason to believe that income has escaped assessment. 2. Whether approval under Section 151(1) of the Income Tax Act by a Joint/Additional Commissioner is valid when the authority merely stamps or records the word 'approved' without recording satisfaction in writing after applying mind to the material relied upon by the Assessing Officer. 3. Whether the Assessing Officer's failure to furnish reasons and to dispose of objections by a separate, speaking order (as held in GKN Driveshaft) renders the notice under Section 148 and consequent reassessment proceedings invalid. 4. Whether disposal of objections within the assessment order (rather than by a separate speaking order) can be treated as compliance with the mandate in GKN Driveshaft and related authorities, or whether non-separate disposal is merely an irregularity. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Reopening based on information from Investigation wing Legal framework: Section 147 permits reopening where the Assessing Officer has reason to believe that income has escaped assessment; reasons must be recorded. Information from investigation agencies may constitute such material. Precedent Treatment: Followed decisions of the jurisdictional High Court and ITAT (cited: AGR Investment Ltd., Rajat Export Import India Pvt. Ltd., Contel Medicare Systems P. Ltd.) which hold that information from the Directorate/Investigation Wing can form valid ground for reopening and that the AO need only form a prima-facie opinion, not a fool-proof case, at the reasons-recording stage. Interpretation and reasoning: The Court accepts that information supplied by ADIT indicating accommodation entries or unexplained investments provides relevant material. The AO's role at the reasons-recording stage is to form a prima-facie belief; relevance and sufficiency of material for final additions are assessed later. The facts (specific amounts invested from unexplained sources into a property) fall within the class of information recognized by the precedents as a valid basis. Ratio vs. Obiter: Ratio - information from the Investigation wing can be a valid basis for reasons to reopen; AO need only form prima-facie satisfaction at the reasons-recording stage. Conclusion: Reopening under Section 147 on the basis of the information from the Investigation wing was valid in principle and sustained by authority; this ground of challenge fails. Issue 2 - Validity of approval under Section 151(1) where approving authority merely records 'approved' Legal framework: Section 151(1) mandates that an AO below the rank of ACIT/DCIT shall not issue a notice under Section 148 unless the Joint Commissioner is satisfied on the reasons recorded by the AO; such satisfaction must be recorded in writing. Precedent Treatment: Followed and applied decisions of the jurisdictional High Court and ITAT (cited: United Electrical Co. (P) Ltd. v. CIT; N.C. Cables Ltd.; M.B. Jewelers (P) Ltd.) which hold that the power to grant approval is coupled with a duty to apply mind and that a mere stamp of 'approved' without recording satisfaction is insufficient. Interpretation and reasoning: The Court treats the word 'approved' affixed mechanically as not amounting to the requisite recorded satisfaction. The approving authority must examine the material relied upon by the AO and record in clear terms that he is satisfied; mere routine or mechanical approval defeats the statutory requirement and judicially recognized standards of application of mind. Ratio vs. Obiter: Ratio - approval under Section 151 requires recorded satisfaction after application of mind; mechanical stamping 'approved' is inadequate and invalidates the sanction. Conclusion: Where the Additional/Joint Commissioner merely endorsed 'approved' without recording satisfaction in writing and applying mind to the AO's material, the Section 151 sanction is invalid; on the facts, such invalidity was found and sustained. Issue 3 - Requirement to furnish reasons and dispose of objections by separate order (GKN Driveshaft principle) Legal framework: Post-issue of notice under Section 148, the assessee may seek reasons; upon request, the AO must supply reasons within reasonable time; the assessee is entitled to file preliminary objections and the AO must dispose of such objections by a speaking order before proceeding with reassessment. Precedent Treatment: Followed the Supreme Court's directive in GKN Driveshaft (India) Ltd. and subsequent High Court decisions (examples cited include Pr. CIT v. Tupperware India Pvt. Ltd. and Pr. CIT v. India Business Network Ltd.) which require separate disposal of objections by a speaking order and treat non-compliance as vitiating reassessment. Interpretation and reasoning: The Court (via ITAT) found that although reasons were supplied and objections were filed 18 months later, the assessment record did not contain a separate order disposing of objections; instead, objections appeared to have been addressed within the assessment order. The GKN line of authority requires a distinct disposal of objections by separate, speaking order; mere treatment of objections within the assessment order does not satisfy the mandatory procedural requirement. Ratio vs. Obiter: Ratio - failure to dispose of objections by a separate, speaking order as mandated by GKN Driveshaft renders the reassessment proceedings vitiated; the reassessment must be quashed. Conclusion: On the facts, the AO did not pass a separate order disposing of the objections as required; the reassessment proceedings were therefore invalid and liable to be annulled. Issue 4 - Whether disposal of objections in assessment order suffices or is a mere irregularity Legal framework and precedent treatment: The GKN principle and subsequent High Court rulings treat non-separate disposal as a jurisdictional defect (not merely procedural irregularity) when the AO fails to pass a distinct speaking order on objections to reopening. Interpretation and reasoning: The Court adopts the view that the requirement to dispose of objections separately is mandatory. Disposal within the assessment order does not meet the statutory/constitutional imperative identified in GKN and related decisions; the absence of a separate order signifies failure to follow mandated procedure and affects the jurisdictional validity of reassessment. Ratio vs. Obiter: Ratio - non-separate disposal is not a mere irregularity but a substantive failure to comply with mandatory procedure that can vitiate the reassessment. Conclusion: Where objections are not dealt with by a separate speaking order, the reassessment is constitutionally and legally defective; the defect is not cured by later disposal within the assessment order. Cross-reference and Combined Conclusion Interplay of issues: The validity of reopening under Section 147 was viewed holistically - while information from Investigation wing can suffice as grounds (Issue 1), the statutory sanction under Section 151 must be validly recorded (Issue 2), and the mandatory procedural steps post-notice (supply of reasons and separate disposal of objections per GKN) must be complied with (Issues 3-4). Failure on either of the procedural/sanction fronts vitiates the reopening even if the underlying information is prima facie material. Final conclusion: The Tribunal's conclusion that reassessment proceedings were invalid was upheld: (a) the Section 151 approval by the Additional Commissioner was not in the required form of recorded satisfaction, and (b) the Assessing Officer failed to pass a separate, speaking order disposing of objections as mandated by GKN Driveshaft and subsequent authorities; these defects rendered the Section 148 notice and consequent reassessment void and the appeal raised no substantial question of law.