Reassessment under section 147 based solely on internal audit objection held invalid and void

ITAT Mumbai held that reassessment proceedings initiated under section 147 based solely on internal audit objection were invalid. The tribunal determined that internal audit memo dated 06.02.2018 did not qualify as "information" under Explanation 1 to section 148 on the date of show cause notice issuance (29.06.2021). Following Bombay HC precedent in Hashmukh Estates case, ITAT ruled that reassessment notice based on internal audit objection was impermissible in law. The tribunal rejected Revenue's argument regarding amended provisions effective 01.04.2022, confirming CIT(A)'s decision to quash proceedings. Notice under section 148 was declared void ab initio. Assessee's appeal was allowed.

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Issues Involved:

1. Validity of reassessment proceedings initiated under section 147 of the Income Tax Act.
2. Justification for deletion of the addition of Rs. 6,50,00,000/- under section 68 of the Income Tax Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:

The primary issue in this case revolves around the validity of the reassessment proceedings initiated under section 147 of the Income Tax Act. The Revenue's appeal and the assessee's cross-objection both address this issue. The Revenue contended that the reassessment was valid based on an internal audit objection, which, post-amendment of Explanation 1(ii) of section 148 effective from 01.04.2022, includes any audit objection as valid "information" for reassessment. The assessee, however, argued that the reassessment was invalid as the notice under section 148 was issued on 29.06.2021, prior to the amendment, and based solely on an internal audit memo, which does not qualify as "information" under the pre-amended provisions of the Act.

The Tribunal analyzed the provisions of section 148 and section 148A, emphasizing that the "information" required to initiate reassessment must be valid at the time of issuing the show cause notice under section 148A(b). The Tribunal noted that the internal audit memo dated 06.02.2018 was the sole basis for the reassessment and did not qualify as "information" under the pre-amended Explanation 1 to section 148. Consequently, the reassessment proceedings were deemed invalid as they were based on a change of opinion, which is impermissible in law. The Tribunal relied on the precedent set by the Hon'ble Bombay High Court in Hashmukh Estates Pvt. Ltd. vs. ACIT, which held that internal audit objections do not constitute valid information for reassessment.

2. Justification for Deletion of Addition under Section 68:

The second issue pertains to the addition of Rs. 6,50,00,000/- under section 68 of the Income Tax Act, which was deleted by the CIT(A). The Revenue challenged this deletion, arguing that the creditworthiness of the lender and the genuineness of the loan transaction were unverified. However, since the reassessment proceedings themselves were quashed on jurisdictional grounds, the Tribunal found this issue to be infructuous.

The CIT(A) had previously held that the assessee provided a reasonable explanation for the loan transaction, and the identity of the lender was established through responses to notices issued under section 133(6). As the reassessment proceedings were invalidated, the Tribunal did not delve further into the merits of the addition under section 68, rendering the Revenue's challenge moot.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. It upheld the CIT(A)'s decision to quash the reassessment proceedings as void ab initio and bad in law, due to the reliance on an internal audit memo that did not qualify as valid "information" under the pre-amended provisions of the Act. Consequently, the deletion of the addition under section 68 was left unaddressed as the reassessment itself was invalidated.

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