Income Tax notice quashed for reopening assessment under Section 148 without proper verification of electronic information

The Bombay HC quashed a notice issued under Section 148 of the Income Tax Act for reopening assessment. The court held that the Assessing Officer failed to apply mind before issuing the notice based on electronically generated information under Section 135A. The petitioner had correctly disclosed interest income from Canara Bank in her return, but the AO proceeded with the notice without verifying the assessee's explanation pointing out defects in the electronic information. The court emphasized that faceless collection of information cannot create arbitrary consequences and requires proper verification before issuing reopening notices.

---

---

Issues Involved:
1. Challenge to the notice issued under Section 148 of the Income Tax Act, 1961.
2. Non-compliance with Section 148A of the Act.
3. Constitutional validity of clause (d) of the proviso to Section 148A.
4. Application of faceless collection of information under Section 135A.
5. Verification of electronic data and its accuracy.

Issue-wise Detailed Analysis:

1. Challenge to the Notice Issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 26th March 2024 issued under Section 148 of the Income Tax Act, 1961, claiming it was issued without following the due process under Section 148A. The notice was based on information received under the faceless collection of information scheme notified under Section 135A. The court observed that the notice was issued without verifying the accuracy of the information, which was later found to be incorrect. The court held that the notice was arbitrary and vitiated by non-application of mind, thus quashing and setting it aside.

2. Non-compliance with Section 148A of the Act:
The petitioner contended that the mandatory requirements of Section 148A were not complied with, as the notice was issued without conducting an inquiry or providing an opportunity to be heard. The court noted that the Assessing Officer should have verified the information against the materials furnished by the assessee before issuing the notice. The court emphasized the necessity of applying mind to the information and ensuring its accuracy before taking action under Section 148, especially when dispensing with Section 148A.

3. Constitutional Validity of Clause (d) of the Proviso to Section 148A:
The petitioner also challenged the constitutional validity of clause (d) of the proviso to Section 148A, arguing that it conferred unfettered powers on the authorities to dispense with the procedure under Section 148A. The court, however, did not delve into this issue, stating that it was disposing of the petition on the limited issue of the validity of the notice under Section 148. The court kept open the contentions regarding the constitutional validity to be agitated in appropriate proceedings at the appropriate time.

4. Application of Faceless Collection of Information under Section 135A:
The court examined the application of the faceless collection of information under Section 135A, which was the basis for issuing the impugned notice. It was observed that the information received under this scheme was found to be incorrect, leading to the issuance of an erroneous notice. The court highlighted the importance of verifying electronic information against other available materials before taking action, to prevent arbitrary consequences and undue prejudice to the assessee.

5. Verification of Electronic Data and Its Accuracy:
The court stressed the necessity of verifying the accuracy of electronic data before issuing notices under Section 148. It was noted that the information available in the electronic system might not always be free from errors, and the Assessing Officer must ensure its correctness by cross-checking with the materials provided by the assessee. The court found that the failure to verify the information led to an arbitrary action against the petitioner, emphasizing the duty of the Assessing Officer to prevent such situations.

Conclusion:
The court quashed and set aside the impugned notice dated 26th March 2024 issued under Section 148 of the Income Tax Act, 1961, due to non-application of mind and reliance on incorrect information. The court emphasized the necessity of verifying electronic information and applying mind before taking action under Section 148, especially when dispensing with the procedure under Section 148A. The constitutional validity of clause (d) of the proviso to Section 148A was not examined, keeping the contentions open for future proceedings.

---