Quashed earlier notices; revenue must proceed afresh under section 148A(b), allow assessee reply before reassessment under section 148

HC set aside and quashed the impugned show-cause notice, assessment order and demand, holding that because earlier notices under section 148 were quashed, revenue must proceed under section 148A(b) afresh (the SC's dispensation of inquiry being applicable). The assessee was entitled to reply to the show-cause and consideration thereof, which might have led to an order under section 148A(d) before any notice under section 148 and reassessment. The court reiterated that earlier quashed notices cannot be treated as deemed notices under section 148A and directed revenue to move forward in accordance with law.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the impugned show-cause notice dated 3rd May, 2023, assessment order and demand dated 12th May, 2023 are sustainable where they were issued/processed without following the procedure under Section 148-A of the Income Tax Act as amended by the Finance Act, 2021, after earlier notices under Section 148 had been quashed.

2. Whether the dispensation of the prior inquiry/approval requirement under the Supreme Court direction (treating existing Section 148 notices as deemed Section 148-A show-cause notices and dispensing with prior approval) applies to notices which were quashed by the High Court, thereby permitting the revenue to rely on that dispensation to proceed without issuing fresh Section 148-A show-cause notice.

3. What is the proper procedural sequence and consequences for reassessment where earlier Section 148 notices have been quashed by the Court: specifically, whether revenue must commence afresh from Section 148-A(b) (give material and permit reply) prior to issuance of a fresh Section 148 notice.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the impugned show-cause notice, assessment order and demand issued without following Section 148-A procedure after earlier Section 148 notices were quashed

Legal framework: The post-2021 statutory regime requires compliance with Section 148-A for reopening assessments, including issuance of a show-cause notice under Section 148-A(b), consideration of the assessee's reply, and an order under Section 148-A(d) before a fresh notice under Section 148 can be issued; Section 151 (pre-amendment) and the amended procedure govern temporal and procedural validity.

Precedent treatment: Coordinate Bench quashed earlier Section 148 notices on the ground that the mandatory prior inquiry under Section 148-A had not been followed; that Bench left liberty to the Department to proceed afresh in accordance with law.

Interpretation and reasoning: The Court reasoned that once earlier notices under Section 148 were quashed, the revenue could not bypass the Section 148-A procedure and proceed directly to assess and demand on the basis of a purported show-cause notice that was not in conformity with Section 148-A. The impugned show-cause notice of 3rd May, 2023 was not a Section 148-A notice and its consequences (finalization without providing the assessee the statutory reply/consideration regime under Section 148-A) do not match the statutory scheme. As the procedural steps under Section 148-A were not observed, the subsequent assessment and demand were vitiated.

Ratio vs. Obiter: Ratio - Where earlier Section 148 notices are quashed, any fresh action to reopen must comply with the amended Section 148-A procedure; a document styled as a show-cause notice but not conforming to Section 148-A cannot validly lead to assessment and demand. Obiter - Observations reiterating the general sequence of compliance are ancillary to the decision but consistent with the operative ratio.

Conclusions: The impugned show-cause notice dated 3rd May, 2023, assessment order dated 12th May, 2023 and demand dated 12th May, 2023 are set aside and quashed for failure to comply with Section 148-A requirements after prior notices were quashed; revenue may proceed afresh but only in accordance with the Section 148-A process.

Issue 2: Applicability of the higher court dispensation (treating pre-amendment Section 148 notices as deemed Section 148-A notices and dispensing with prior approval) to notices quashed by the High Court

Legal framework: The Supreme Court direction (referred to by the revenue) treated certain Section 148 notices issued after 1-4-2021 as deemed Section 148-A show-cause notices and dispensed with the requirement of prior approval for a one-time measure in relation to notices issued under Section 148 of the unamended Act.

Precedent treatment: The revenue relied on that Supreme Court dispensation; the coordinate Bench had quashed the earlier notices, and left revenue liberty to proceed in accordance with law.

Interpretation and reasoning: The Court distinguished the Supreme Court dispensation on the ground that the direction to treat extant Section 148 notices as deemed Section 148-A show-cause notices presupposes that such Section 148 notices remain extant. Where a Section 148 notice has been quashed by the High Court, it ceases to have legal existence and therefore cannot be treated as a deemed Section 148-A notice under the dispensation. Consequently, the mechanism of paragraph 25.1 (providing material relied upon in the original notice so that the assessee may reply) cannot be invoked in relation to notices that were struck down. The Court held that the dispensation does not entitle the revenue to avoid issuing a fresh Section 148-A(b) show-cause notice when earlier notices have been quashed.

Ratio vs. Obiter: Ratio - The Supreme Court's dispensation cannot be applied to notices that have been quashed; a quashed notice cannot be deemed to subsist as a Section 148-A notice for procedural purposes. Obiter - The description of the limited scope of the Supreme Court dispensation as a one-time measure is explanatory but supports the ratio.

Conclusions: The Supreme Court dispensation does not validate revenue action based on quashed Section 148 notices; where notices have been quashed, revenue must issue a fresh Section 148-A(b) show-cause notice (subject to the one-time dispensation only insofar as extant, unquashed notices are concerned).

Issue 3: Proper procedural sequence for reassessment after quashing of earlier Section 148 notices and related consequences

Legal framework: The amended scheme contemplates (i) issuance of show-cause notice under Section 148-A(b) with disclosure of material relied upon, (ii) receipt and consideration of the assessee's reply, (iii) passing of an order under Section 148-A(d) if the officer is satisfied, and (iv) issuance of a Section 148 notice thereafter; the pre-amendment Section 151 and the coordinate Bench's directions permitting the Department to proceed afresh subject to compliance.

Precedent treatment: Coordinate Bench gave leave to the revenue to proceed afresh after compliance; the present Court reiterated that mandate and clarified the procedural starting-point.

Interpretation and reasoning: The Court held that where prior Section 148 notices have been quashed, the correct procedural step is to start from Section 148-A(b), taking into account the Supreme Court's dispensation only insofar as it operates on extant notices. Procedural fairness requires that the assessee be provided with the material and an opportunity to reply, and that the assessing officer consider such reply before making a Section 148-A(d) order - failing which any subsequent Section 148 notice and assessment will be irregular. The Court emphasized that the coordinate Bench's liberty to proceed connotes compliance with these statutory requirements.

Ratio vs. Obiter: Ratio - Reassessment after quashing must commence with a valid Section 148-A(b) process (material disclosure and opportunity to reply), followed by a considered order under Section 148-A(d) before issuing a fresh Section 148 notice; non-compliance vitiates subsequent assessment. Obiter - Observations on the mechanics of how material should be furnished (timelines) are illustrative rather than foundational.

Conclusions: Revenue may proceed with reassessment only by issuing a fresh Section 148-A(b) show-cause notice (unless an extant unquashed Section 148 notice exists to which the Supreme Court dispensation applies), allowing the assessee to reply, and then passing a Section 148-A(d) order before issuing any fresh Section 148 notice; failure to follow this sequence renders the assessment and demand liable to be quashed.

Cumulative conclusion and cross-reference

For purposes of moving forward, and consistent with the coordinate Bench's earlier reservation, revenue must issue a fresh Section 148-A(b) show-cause notice and comply with the Section 148-A procedure (material disclosure, opportunity to reply, consideration and Section 148-A(d) order) because the earlier notices which were the subject of the Supreme Court dispensation stood quashed (see Issue 2). Consequently, the impugned show-cause notice, assessment and demand are quashed (see Issue 1), and revenue's lawful path is to proceed afresh in strict conformity with Section 148-A as interpreted above (see Issue 3).

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