2023 (9) TMI 1741 - AT - Income Tax

Reassessment proceedings under income tax: issuance of notice before supplying reasons and lack of AOs independent verification quashes reassessment

Reassessment proceedings are challenged on procedural and substantive grounds: issuance of notice under the assessment scheme before supplying reasons and ... Reassessment proceedings u/s 147 - eligibility of reasons recorded - non-application of independent mind - notice u/s 143(2) issued before supplying the reasons - report of Investigation Wing relied upon - whether AO has initiated reassessment proceedings by recording reasons based on incorrect facts and without application of mind? - HELD THAT:- Issuance of notice u/s 143(2) of the Act before supplying the reasons for initiation of reassessment proceedings and considering the petition of objection and passing reasoned order thereon does not meet requirement of law and such legal infirmity leads to inevitable invalidation of all proceedings including impugned reassessment order passed in pursuance to the notice u/s 148 of the Act. See MASTECH TECHNOLOGIES PVT. LTD [2017 (7) TMI 576 - DELHI HIGH COURT] Logical analysis of the contents of reasons recorded by the AO clearly reveals that before drawing conclusion and reason to believe that income has escaped assessment the AO has not made any factual verification of the information received from the Investigation Wing, therefore, the initiation of reassessment proceedings and all constant proceedings and orders including reassessment proceedings and order has to be quashed. In view of proposition rendered by coordinate bench of ITAT Delhi in the case of M/s R N Khemka Enterprises P. Ltd. [2021 (8) TMI 1365 - ITAT DELHI] Copy of the reasons recorded available clearly reveals that the AO initiated reassessment proceedings by recording reasons based on incorrect facts and without application of mind to the factually incorrect report of Investigation Wing, therefore, the initiation of reassessment proceedings also fails in view of various judgments particularly judgment of Hon'ble Jurisdictional High Court of Delhi in the case of M/s Synfonia Tradelinks P. Ltd. (supra). AO initiated reassessment proceedings without assuming valid jurisdiction and without complying with the mandatory requirements envisaged in section 147 and 148 of the Act. Decided in favour of assessee. Issues: (i) Whether initiation of reassessment proceedings under section 147 and issuance of notice under section 148 of the Income-tax Act, 1961 was valid where reasons recorded were based on incorrect facts and without application of mind; (ii) Whether initiation of reassessment was invalid for lack of independent verification of information received from the Investigation Wing; (iii) Whether issuance of notice u/s 143(2) before supplying reasons recorded for reopening and considering the objections vitiates the reassessment proceedings.Issue (i): Whether reassessment initiation under sections 147/148 is invalid because reasons were based on incorrect facts and without application of mind.Analysis: The reasons recorded showed a tabulation of entries where multiple entries were attributed to the assessee, but the reasons as framed contained an incorrect identification of entries (AO later reframed the table), indicating reliance on factually incorrect material. The reasons proceeded to a conclusion of escaped income without demonstration of application of mind to verify or correct factual errors in the information relied upon.Conclusion: The initiation of reassessment under sections 147/148 based on reasons containing incorrect facts and showing non-application of mind is invalid and quashed in favour of the assessee.Issue (ii): Whether reassessment initiation is invalid for failure to independently verify information supplied by the Investigation Wing.Analysis: The reasons reproduced the information received from the Investigation Wing and recorded a conclusion of escaped income without indicating any independent verification (such as bank verification or enquiry from the assessee) of the seized documents or the entries relied upon. Coordinate authorities and precedents applying identical facts were followed to assess the need for independent verification before reopening.Conclusion: Failure to make independent enquiry or verification of the investigation inputs renders the initiation of reassessment proceedings invalid; the reassessment proceedings and consequent order are quashed in favour of the assessee.Issue (iii): Whether issuance of notice u/s 143(2) prior to supplying the reasons recorded and considering objections vitiates the reassessment proceedings.Analysis: The notice u/s 143(2) was issued before the assessee was supplied with reasons for reopening and before disposal of the assessee's objections, thereby depriving the assessee of the mandated opportunity to object prior to assumption of jurisdiction. Jurisdictional High Court authority under identical circumstances was applied to determine that such procedural infirmity invalidates subsequent proceedings.Conclusion: Issuance of notice u/s 143(2) before supply of reasons and consideration of objections vitiates the reassessment process; the reassessment proceedings and order are quashed in favour of the assessee.Final Conclusion: The cumulative effect of incorrect facts in the recorded reasons, lack of independent verification of investigation inputs, and issuance of procedural notices before supplying reasons results in the initiation of reassessment proceedings and the impugned reassessment order being quashed; the assessee's appeal is allowed.Ratio Decidendi: Reassessment proceedings under sections 147/148 are invalid where the reasons to reopen are based on factually incorrect material or are recorded without application of mind, where the assessing officer fails to independently verify information received from investigative sources, or where statutory procedure (supply of reasons and disposal of objections) is not complied with prior to issuing consequential notices such as under section 143(2).