2024 (6) TMI 208 - AT - Income Tax

Assessment invalid when reopening objections not disposed before completion under reassessment proceedings

Champalal Omprakash Versus ITO, Ward-43 (2), Kolkata

The ITAT Kolkata held that an assessment framed without disposing of the assessee's objections against reopening is invalid. The tribunal emphasized that ... Validity of reopening of assessment - Non disposal of objections of the assessee - assessee was reported to have received the accommodation entries - HELD THAT:- The power of reopening of assessment is specifically vested with the AO only. It is the AO who has to form the belief that the income of the assessee has escaped assessment. The reopening of the assessment has to be bona fide. It cannot be a mere pretence of the AO. If the assessee files objections against the reopening of the assessment order, the AO is supposed to decide the objections. If the same are decided against the assessee, the Assessing Officer is supposed not to pass the final assessment order for a period of four weeks from the date of disposal of objections. Though the ld. CIT(A) has been given the power of enhancement and can look into the other issues by giving notice to the assessee during appellate proceedings, however, the power to reopen the assessment exclusively vests with the AO only. It is the AO who has to form the belief of escapement of income of the assessee and it is the Assessing Officer who has to decide the objections against the reopening of the assessment and further to give opportunity to the assessee to seek his legal remedy, if the objections are decided against the assessee and not to pass an assessment order for a period of four weeks from the rejection of objections. Therefore, the assessment framed by the AO without disposal of objections of the assessee cannot be held to be a valid assessment. Thus as the assessment framed by the AO held to be bad in law and therefore, the consequential additions made by the AO in the reopened assessment are not sustainable. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment is valid where the Assessing Officer records reasons to believe based on an investigation report but does not decide the assessee's written objections to reopening before framing the assessment. 2. Whether the appellate authority (CIT(A)) may itself decide objections to reopening and validate a reassessment framed by the Assessing Officer who failed to dispose of objections, including the extent of CIT(A)'s powers relative to the Assessing Officer on the question of reopening. 3. Whether additions based on alleged bogus purchases can be sustained where reassessment is held invalid for procedural infirmity in reopening (i.e., effect of invalid reopening on consequential additions). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reopening where Assessing Officer fails to decide objections before framing assessment Legal framework: The power to reopen an assessment rests exclusively with the Assessing Officer who must record reasons to believe that income has escaped assessment; the assessee may file objections to the reasons recorded and, if objections are rejected, the Assessing Officer must ordinarily not pass a final assessment order for a specified period (to enable remedy), and the objections should be decided by a speaking order. Precedent treatment: Decisions require that reasons recorded must be supplied to the assessee, objections be entertained and decided by the Assessing Officer with application of independent mind (GKN Driveshafts principle) and that completion of assessment without disposal of objections renders reassessment vitiated (as followed by jurisdictional High Court decisions cited in the judgment). Interpretation and reasoning: The Assessing Officer in the instant case reproduced the investigation report as reasons and did not decide written objections filed by the assessee prior to framing the assessment. The appellate authority noted the Assessing Officer's non-compliance with apex court guidelines and treated that omission as an irregularity. However, the Court emphasized that the power to form belief and to decide objections is vested in the Assessing Officer; failure to decide objections and proceed to finalize assessment is not cured by appellate intervention except in narrow circumstances. The statutory scheme contemplates that objections must be disposed of by the AO to allow the assessee opportunity for remedy; proceeding without such disposal undermines bona fides of reopening. Ratio vs. Obiter: Ratio - Reopening is invalid where the Assessing Officer frames assessment without disposing of the assessee's objections to the recorded reasons; reproducing investigation material without independent application of mind and without deciding objections vitiates reassessment. Obiter - Observations on the nature of irregularity that might be curable in some circumstances when AO subsequently acts (not applicable here as AO did not respond to remand). Conclusion: The reassessment was held invalid because the Assessing Officer failed to decide objections to reopening before completing the assessment; therefore the reopening is bad in law and consequential proceedings are unsustainable. Issue 2: Role and limits of appellate authority in deciding objections to reopening and validating reassessment Legal framework: Appellate authority has powers co-terminus with the Assessing Officer in respect of enhancement and other appellate functions, but the statutory prerogative to form belief and to decide objections to reopening is primarily vested in the Assessing Officer. Precedent treatment: Authorities require compliance with procedural safeguards at the stage of reopening and that appellate authorities cannot ordinarily substitute for the AO's determination on reasons to reopen where AO failed to exercise jurisdiction as required. Interpretation and reasoning: The CIT(A) in the case called for a remand report, and on non-receipt of such report proceeded to decide objections himself, concluding the AO had valid reasons to believe. The Court rejected that approach: though CIT(A) can consider issues de novo to an extent on appeal, it cannot validate a reassessment by itself when the statutory process of deciding objections by the Assessing Officer and the consequent mandatory waiting period (to enable remedies) has not been observed. The court treated the CIT(A)'s exercise in this case as beyond proper appellate curative scope because the power to reopen cannot be exercised by appellate authority in substitution for the AO's primary responsibility. Ratio vs. Obiter: Ratio - Appellate authority cannot cure the fundamental jurisdictional lapse of the AO's failure to decide objections to reopening by itself deciding those objections to validate reassessment; the AO's prior exercise of jurisdiction is essential. Obiter - Co-terminus power of the CIT(A) for other appellate adjustments remains, but does not extend to validating a void reopening. Conclusion: The CIT(A)'s decision upholding reopening in place of the Assessing Officer's decision is not a valid cure for the AO's failure; the reassessment remains invalid despite the appellate authority's independent ruling on reasons. Issue 3: Consequence of invalid reopening on additions for alleged bogus purchases Legal framework: Additions arising out of a reassessment depend on validity of the reassessment; if reassessment is struck down for jurisdictional/ procedural infirmity, consequential additions cannot stand. Separate merits-based examination of purchases (genuineness, corroboration, opportunities of verification) is relevant only if reassessment is valid. Precedent treatment: Courts have held that when reassessment is invalid for lack of jurisdiction or failure to follow prescribed procedure, consequential adjustments are vitiated irrespective of substantive merits; merits become academic in that circumstance. Interpretation and reasoning: Because the court held reopening invalid, it declined to adjudicate the substantive question whether purchases were bogus or whether gross profit margin uplift and imposition of additions were justified. The Court observed that once legal issue on validity is decided in assessee's favour, other grounds on merits are rendered academic. The identical factual matrix across related appeals means the same outcome applies mutatis mutandis. Ratio vs. Obiter: Ratio - Consequential additions made pursuant to an invalid reassessment cannot be sustained; substantive merits need not be decided once reassessment is held bad in law. Obiter - Comments on absence of corroborative evidence and non-appearance of summoned parties are factual observations not forming the basis for the decision because of the primary procedural ruling. Conclusion: All consequential additions arising from the void reassessment were unsustainable and hence deleted; merits-based contentions were not adjudicated as they became academic.