2024 (5) TMI 642 - AT - Income Tax

Reassessment proceedings quashed for failure to record belief that escaped income exceeded Rs. 1,00,000 under section 149(1)(b)

Maya Milind Sirsath Versus ITO 33 (2) (3), Mumbai

The ITAT Mumbai quashed reassessment proceedings initiated beyond four years where the AO failed to record belief that escaped income exceeded Rs. ... Reopening of assessment - notice u/s 148 issued beyond the period of four years - As per assessee AO has not recorded a belief that income escaped was more than Rs. 1,00,000/-, which was required u/s 149(1)(b) - HELD THAT:- Assessing officer was required to record that income escaped was more than Rs. one lakh but in copy of the reasons recorded provided to the assessee, the Assessing Officer has not complied with the mandatory condition of tax effect involved being more than Rs. 1,00,000/-. As in the case of Hindustan Unilever ltd in [2021 (10) TMI 466 - BOMBAY HIGH COURT] held the assessing officer has to specifically point out the failure on the part of the assessee in disclosing all the material facts and in absence therefore , reassessment proceedings is invalid in law. In instant case also in absence of any such satisfaction in the reasons recorded, the assessment proceedings are void ab-initio, therefore, same are quashed. The appeal of the assessee is accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an additional legal ground raising validity of reassessment (including compliance with statutory / circular formalities) can be admitted at the appellate stage when it involves no fresh factual investigation. 2. Whether the Assessing Officer complied with section 149(1)(b) (requirement to form satisfaction that escaped income is Rs. 1,00,000 or more) when issuing notice under section 148 beyond four years from the end of the relevant assessment year. 3. Whether two different sets of recorded reasons-one provided to the assessee and another alleged to be on the departmental file but not served-affect the validity of the reopening notice and consequent reassessment proceedings. 4. Whether non-compliance with mandatory content requirements for reasons for reopening (including failure to state tax effect exceeding the statutory threshold) renders reassessment proceedings void ab initio. 5. Whether, having quashed reassessment on statutory-compliance grounds, other substantive grounds of appeal (relating to additions under section 69A and computation of capital gain) require adjudication. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of Additional Legal Ground Legal framework: Appellate practice permits admission of additional grounds that are purely legal in nature and do not require fresh factual investigation. Precedent treatment: The Tribunal followed the principle in the controlling precedent allowing admission of purely legal grounds at appellate stage where no fresh fact-finding is required. Interpretation and reasoning: The additional ground challenged the validity of the reassessment on legal and procedural grounds (including alleged failure to comply with circular requirements and statutory thresholds). The Tribunal found the ground to be purely legal and not necessitating new fact-finding; consequently the ground was admitted for adjudication. Ratio vs. Obiter: Ratio - admission of purely legal additional grounds where no fresh factual inquiry is required is permissible. Conclusion: The additional ground was admitted for adjudication. Issue 2 - Requirement under section 149(1)(b) when reopening beyond four years Legal framework: Section 149(1)(b) prohibits issuance of notice under section 148 after four years from the end of the relevant assessment year unless the escaped income is, or is likely to be, Rs. 1,00,000 or more; Explanation to section 149 directs that Explanation 2 to section 147 applies for determining escaped income. Precedent treatment: The Tribunal relied on the jurisdictional High Court authority requiring that reasons for reopening must specifically point out the omission or failure to disclose material facts and must reflect the requisite satisfaction regarding tax effect to sustain reassessment beyond four years. Interpretation and reasoning: The reasons for reopening provided to the assessee (and on record with the assessee) described receipt of information from the Investigation Directorate about trading in a penny-script and stated that the assessee had traded in that scrip with total sales of Rs. 5,69,501. That served reason did not, however, record an explicit satisfaction that income chargeable to tax which had escaped assessment amounted to or was likely to amount to Rs. 1,00,000 or more as mandated by section 149(1)(b). The Tribunal examined a second, diverging set of departmental reasons which did state an assessment impact of Rs. 5,69,501 and an explicit reason-to-believe, but found that second set was not served on the assessee and its authenticity was doubtful. The Tribunal held that non-provision of the served reasons containing the statutory satisfaction meant the Assessing Officer failed to comply with the mandatory requirement in section 149(1)(b) when issuing the notice beyond four years. Ratio vs. Obiter: Ratio - when a notice under section 148 is issued after four years, the reasons recorded and provided to the assessee must reflect the statutory satisfaction that escaped income is Rs. 1,00,000 or more; absence of such recorded satisfaction in the served reasons invalidates the reassessment. Obiter - reliance on departmental file reasons that were not served cannot cure non-service and cannot be used to validate reopening. Conclusion: The Assessing Officer did not comply with the condition in section 149(1)(b) in the reasons served to the assessee; reopening beyond four years was therefore invalid. Issue 3 - Effect of divergent sets of recorded reasons and non-service Legal framework: Principles of natural justice and statutory mandates require that reasons recorded for reopening, when relied upon to issue a notice, must be communicated to the assessee; court/tribunal may scrutinize the served reasons for statutory compliance. Precedent treatment: The Tribunal relied on authority holding that failure to disclose material facts or to record requisite satisfaction in reasons for reopening renders reassessment invalid. Interpretation and reasoning: Two distinct sets of reasons were produced before the Tribunal: one served to the assessee (lacking the requisite statutory tax-effect satisfaction) and another purportedly on the departmental folder (stating a tax effect and reason-to-believe). The Tribunal found the latter was not shown to have been served and its authenticity was doubtful; it cannot be relied upon to validate the notice. Where the served reasons fail to satisfy statutory requirements, undisclosed departmental material cannot cure the defect. Ratio vs. Obiter: Ratio - only reasons actually recorded and served on the assessee (or otherwise proven to have been validly communicated) can operate to validate a reopening; unserved departmental reasons cannot be used to cure defects in the served reasons. Obiter - authenticity concerns about departmental documents deepen the defect of reliance on unsupplied material. Conclusion: Divergent unserved reasons on the departmental file do not validate the otherwise defective and served reasons; reassessment cannot stand on unserved, unauthenticated reasons. Issue 4 - Consequence of non-compliance: Reassessment void ab initio Legal framework: If the statutory preconditions for issuance of a notice under section 148 (as qualified by section 149) are not met and the reasons recorded do not disclose the requisite satisfaction, the notice and consequent assessment proceedings are void. Precedent treatment: The Tribunal applied established rulings that require specificity in reasons and that absence of required satisfaction renders reassessment invalid. Interpretation and reasoning: Given that (a) the reasons served on the assessee lacked the mandatory satisfaction that escaped income exceeded Rs. 1,00,000, and (b) the purported departmental reasons containing that satisfaction were not served and were of doubtful authenticity, the Tribunal concluded that the conditions of section 149(1)(b) were not met. The reassessment proceedings initiated on the basis of the defective notice were therefore void ab initio. Ratio vs. Obiter: Ratio - non-compliance with the statutory requirement to record and communicate the threshold satisfaction (where applicable) invalidates the reassessment proceedings; such invalidity leads to quashing of reassessment. Obiter - where reassessment is quashed on statutory grounds, substantive issues raised in the appeal become academic unless specific directions are called for. Conclusion: Reassessment proceedings were quashed as void ab initio for failure to comply with section 149(1)(b). Issue 5 - Necessity to adjudicate other substantive grounds after quashing reassessment Legal framework: Where reassessment is held invalid on threshold statutory grounds, subsequent substantive additions based on that reassessment typically become academic unless the appellate forum directs otherwise. Precedent treatment: The Tribunal applied the practice of not adjudicating substantive disputes rendered academic by quashing of foundational proceedings. Interpretation and reasoning: Having quashed the reassessment on mandatory-compliance grounds, the Tribunal held that other grounds (including additions under section 69A and computation arguments) were rendered academic and declined to adjudicate them. Ratio vs. Obiter: Ratio - quashing of reassessment on procedural/statutory grounds obviates the need to decide on consequential substantive issues in the same appeal. Obiter - none. Conclusion: Other grounds of appeal were not adjudicated as they were rendered academic by quashing of reassessment; the appeal was allowed on the statutory-compliance ground.