Section 148A(d) order quashed after AO accepted assessee's explanation; PCIT approval mechanical; fresh 148A(b) notice possible

HC set aside the order under Section 148A(d) quashing the reassessment action where the AO had accepted the assessee's explanation that contested transactions were accounted for and income was offered to tax. The court held the AO could not proceed to recommend escaped income after accepting the explanation and found the PCIT's approval of the draft order was mechanical and without application of mind. The HC allowed the petition in favour of the assessee but observed the AO may, if legally permissible, issue a fresh notice under Section 148A(b); no opinion was expressed on that.

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Issues Involved:
1. Validity of the impugned order dated 21st April 2023 passed u/s 148A(d) of the Income Tax Act, 1961.
2. Validity of the notice dated 21st April 2023 issued u/s 148 of the Income Tax Act, 1961.
3. Application of mind by the Principal Commissioner of Income Tax (PCIT) in granting approval.

Summary:

1. Validity of the impugned order dated 21st April 2023 passed u/s 148A(d):
The Petitioner, a partnership firm engaged in government contracts, filed a return of income (ROI) for AY 2019-20 disclosing an income of Rs. 1,45,78,825/-. The Petitioner received a notice dated 23rd March 2023 u/s 148A(b) of the Income Tax Act, 1961, alleging that income chargeable to tax had escaped assessment. The Petitioner responded, providing details of the transactions and confirming that the income from these transactions was duly offered for taxation. Despite this, the impugned order dated 21st April 2023 was issued, stating that the genuineness of subcontracting work with M/s Prathmesh Constructions needed verification. The High Court held that the Assessing Officer (AO) cannot indulge in a fishing enquiry and that the reasons mentioned in the impugned order were based on suspicion, not relevant material.

2. Validity of the notice dated 21st April 2023 issued u/s 148:
The High Court noted that the AO had accepted in the impugned order that the information reported by the Insight portal was accounted for by the Petitioner and the income arising from those transactions was offered for taxation. The Court referenced the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Private Limited, stating that at the stage of issuing a notice, there must be relevant material for forming a belief of income escapement. The Court also cited Commissioner of Income Tax v. Jet Airways, emphasizing that if the AO accepts the assessee's contention that no income has escaped assessment, it is not open to independently assess other income without issuing a fresh notice. Therefore, the impugned order and notice dated 21st April 2023 were deemed unsustainable.

3. Application of mind by the Principal Commissioner of Income Tax (PCIT) in granting approval:
The High Court criticized the PCIT for granting approval without applying his mind. The approval merely stated that the case was fit for issuing a notice u/s 148, without addressing the specifics of the case. The Court concluded that the PCIT had mechanically signed the approval, indicating a lack of due diligence.

Conclusion:
The High Court allowed the Petition, quashing the impugned order dated 21st April 2023 passed u/s 148A(d) and the notice dated 21st April 2023 issued u/s 148 of the Income Tax Act, 1961. The Court made the rule absolute and disposed of the Petition accordingly.

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