s.148 notice time-barred and void; reassessment under s.147 read with s.144B quashed for lack of sanction and natural justice

ITAT JAIPUR - AT held the notice issued u/s 148 dated 28/07/2022 was time-barred as it fell beyond the surviving 28-day limit and therefore void; the consequent reassessment under s.147 read with s.144B and assessment order dated 11/05/2023 were quashed. Alternatively, the notice issued after three years lacked requisite sanction from the specified authority and was invalid. The AO also failed to furnish relied-upon material, breaching natural justice. Decision rendered in favour of the assessee; notice and reassessment quashed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether reassessment proceedings under sections 147/148 were validly initiated and completed where an initial notice under the pre-amended regime was issued within the pandemic period and subsequently processed under the new regime - specifically (a) whether the notice issued on 28.07.2022 was within the surviving time-limit computed in light of the legal fiction created by earlier Supreme Court directions and the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act (TOLA), and (b) whether prior sanction required under section 151 (new regime) was obtained from the proper specified authority.

2. Whether the reopening and reassessment proceedings were vitiated for breach of principles of natural justice by failure to furnish to the assessee the material or particulars on which the AO formed the reasons to believe (including whether a mere screenshot sufficed), and whether the AO applied independent mind or merely acted on information from another wing.

3. Whether alleged accommodation-entry receipts (unsecured loans from entities identified as paper/shell companies) constituted "income represented in the form of asset" within the meaning of section 149(1)(b) and whether amounts credited could be treated as unexplained cash credit under section 68 read with taxability under section 115BBE; alternatively, whether only peak credit was exigible.

4. Ancillary: Whether set-off of carried forward unabsorbed depreciation and/or MAT credit was permissible against income added under section 68 read with section 115BBE for the assessment year in question.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity, time-bar and sanction for reassessment notice (sections 147/148, sections 148A, 149, 151, TOLA interplay)

Legal framework: Reopening of assessment under section 147 requires issuance of notice under section 148; the amended regime prescribes procedures under sections 148A/148 and requires prior approval per section 151; TOLA extended statutory timelines falling between 20.03.2020 and 31.03.2021; earlier Supreme Court decisions created a legal fiction treating certain pre-amendment notices as show-cause notices under the new regime and directed procedural steps (supply of material and 148A processing).

Precedent treatment: The Tribunal examined and applied the Apex Court's rulings which treated pre-amendment notices as deemed show-cause notices and directed the AO to follow section 148A procedure; the Apex Court also held that surviving time available under TOLA must be used to complete further proceedings and that prior sanction per section 151 of the new regime is required where notices are issued after three years.

Interpretation and reasoning: The Tribunal computed the "surviving time" as the days between the deemed notice date and 30.06.2021 under TOLA. Noting issuance of the deemed notice on 02.06.2021, the surviving time was 28 days; the assessee's substantive reply was received on 13/16.06.2022 and, applying the legal fiction and exclusions, the AO had 28 days from receipt to complete 148A(d) and issue a fresh section 148 notice under the new regime. The fresh notice dated 28.07.2022 fell beyond the surviving time (expired 11/14.07.2022) and therefore was time-barred. Separately, because the fresh notice under the new regime was issued after three years from the end of the relevant AY, section 151(ii) required sanction from higher specified authority (Principal Chief Commissioner/Principal Director General/Chief Commissioner/Director General). The sanction obtained was from a lower authority (PCIT) and not the specified authority; in light of the Apex Court guidance, this meant the notice lacked proper sanction and was invalid.

Ratio vs. Obiter: Ratio - reassessment notice issued beyond the surviving time-limit computed under the legal fiction and TOLA is time-barred; when notice under the new regime is issued after three years, sanction must be obtained from the authority specified in section 151(ii). Obiter - observations on TOLA's purpose and illustrative calculations elaborated from precedent.

Conclusion: The fresh notice dated 28.07.2022 was time-barred under the surviving time-limit and, alternatively, was issued without proper sanction under section 151(ii); accordingly, the section 148 notice and consequent reassessment proceedings and assessment order were quashed.

Issue 2 - Breach of natural justice: non-supply of material and application of independent mind

Legal framework: Directions flowing from precedent and section 148A require the assessing officer to supply to the assessee the material relied upon for forming reasons to believe and to consider the assessee's response before taking further steps; basic principles of natural justice apply to reassessment proceedings.

Precedent treatment: The Tribunal relied on binding and co-ordinate authority precedent recognizing that non-supply of reasons/material vitiates reopening even where material may be sufficient, because supply is mandatory to afford an opportunity to the assessee to reply (citations to jurisdictional High Court decisions relied upon by parties were considered in reasoning).

Interpretation and reasoning: The record showed that the AO provided only a screenshot from an internal portal and did not furnish fuller material identifying transactions, dates, mode, nor statements or incriminating documents; assessee repeatedly requested full particulars which were not supplied. The Tribunal observed that supply of the material is mandatory and that issuing notice on borrowed/skeletal satisfaction without independent application of mind and without supplying documents to the assessee breaches natural justice. The Tribunal further noted analogous instances where departmental action on the same information was later dropped in a related case, undermining the asserted reliability of the material.

Ratio vs. Obiter: Ratio - non-supply of material relied upon for reopening and reliance on a mere screenshot/failure to apply independent mind vitiates reassessment proceedings; Obiter - comments on utility of Insight Portal as an input where properly supported were made in context of contesting submissions.

Conclusion: The reassessment proceedings were vitiated for failure to supply material and for lack of independent application of mind by the AO; this independent ground (in addition to time/sanction defects) supported quashing of reassessment.

Issue 3 - Merits of addition under section 68 and characterization as asset under section 149(1)(b); peak credit theory

Legal framework: Section 68 permits treating unexplained credits as income where the assessee fails to prove genuineness/creditworthiness; section 149(1)(b) (relevant for limitation) defines "asset" to include "loans and advances"; section 115BBE prescribes specific tax treatment for income referred in section 68 and related sections. The "peak credit" doctrine is an established accounting approach applied in limited factual matrices to determine quantum of bank-related undisclosed receipt.

Precedent treatment: Lower authorities and Revenue relied on departmental investigations identifying paper/shell companies and on precedent treating bogus loans/advances as assets for limitation purposes; Revenue argued in support of whole-amount addition in accommodation entry cases and distinguished situations where peak credit has been applied.

Interpretation and reasoning: The Tribunal observed that these substantive merits became academic after quashing the reassessment on procedural/time/sanction and natural justice grounds. The Tribunal nonetheless recited the lower authorities' findings: AO/CIT(A) concluded the lenders were paper companies, assessee failed to discharge onus under section 68, and therefore addition of the full amount was sustained; Revenue argued peak credit inapplicable to one-time accommodation entries. However, because the reassessment was quashed on jurisdictional and procedural grounds, no adjudication on the correctness of the section 68 addition was undertaken as a final operative determination.

Ratio vs. Obiter: Obiter - discussion of the merits and peak credit arguments remains non-decisive given quashing of reassessment; Ratio - none on merits because Tribunal did not uphold or reverse the substantive addition after quashing the proceedings.

Conclusion: The substantive addition under section 68/115BBE was not adjudicated on merits by the Tribunal because the reassessment proceedings were quashed on jurisdictional (time/sanction) and natural-justice grounds; accordingly, the addition did not survive.

Issue 4 - Set off of unabsorbed depreciation and MAT credit against income added under section 68/115BBE

Legal framework: Section 115BBE(2) (as amended) restricts deductions/allowances in computing income referred to in clause (a) of subsection (1); CBDT circulars and judicial decisions have addressed whether carried forward losses/unabsorbed depreciation/MAT credit can be set off against additions characterised under section 68 before and after the 2017-18 cut-off and subsequent legislative clarifications.

Precedent treatment: Authorities referred to CBDT circular guidance and judicial decisions permitting set-off in years prior to the effective cut-off and later legislative clarifications that restrict set-off; Revenue maintained that for the assessment year in question set-off was barred.

Interpretation and reasoning: The Tribunal noted that the assessee abandoned grounds seeking set-off during hearing; the lower authority dismissed set-off claims referencing section 115BBE amendments and later statutory provisions introduced by Finance Acts. Given the Tribunal's disposal on earlier procedural grounds, and the assessee's concession on some grounds, the set-off issue was not independently determined by the Tribunal.

Ratio vs. Obiter: Obiter - observations on the applicability of section 115BBE were recorded in the lower orders but were not determinative in the Tribunal's disposal; no binding ratio on set-off arose from the Tribunal's final order.

Conclusion: The Tribunal did not grant set-off of unabsorbed depreciation or MAT credit because the appeal was allowed on procedural grounds; substantive relief on set-off was not adjudicated as the assessment was quashed.

Final Disposition

On the combined grounds that the reassessment notice dated 28.07.2022 was issued beyond the surviving time-limit prescribed by the legal fiction/TOLA and/or without requisite sanction under section 151(ii), and that the AO failed to supply the material relied upon and did not demonstrate independent application of mind, the Tribunal quashed the section 148 notice, the consequent reassessment proceedings and the assessment order.

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