2025 (2) TMI 829 - AT - Income Tax

Reassessment notices to dissolved partnership firm invalid, section 147 proceedings quashed for procedural violations

ITAT Delhi quashed reassessment proceedings initiated under section 147 against a non-existent partnership firm, holding that notices issued to ... Reopening of assessment u/s 147 in the name of Partnership Firm as not in existence - penny stocks treated as undisclosed income u/s 68 - HELD THAT:- The law is well-settled in this regard. The re-assessment notice u/s 148 of the Act in the name of a non-existing entity despite unequivocal knowledge of its non-existence, is clearly vitiated and rendered nonest in law. The notice issued on a non-existent firm is not a mere technical glitch. The notice issued under s. 148 to the non-existent firm which was a distinct taxable entity is thus liable to be quashed at the threshold without anything more. This view is supported by the judgement rendered in the case of Maruti Suzuki India Ltd [2019 (7) TMI 1449 - SUPREME COURT], Uber India Systems (P.) Ltd. [2024 (10) TMI 1001 - BOMBAY HIGH COURT] and Alok Knit Exports Ltd [2021 (8) TMI 777 - BOMBAY HIGH COURT]. Reasons for re-opening were not provided to the assessee - Noticeably, in the instant case, reasons are neither provided at the time of initiation of proceedings nor such reasons have been spelt out in the re-assessment order. Apparently, the vested right of the assessee to file objection to any unlawful assumption of jurisdiction has been completely done away causing serious prejudice to the assessee and embroiled him in protracted litigation. For assumption of lawful jurisdiction under the Act, all jurisdictional conditions and procedural requirements need to be satisfied. In the absence of copy of reasons made available in spite of specific request, presumption would arise adverse to the Revenue on compliance of pre-requisites of s.147 & 151 of the Act. The re-assessment order framed under s. 147/143(3) is thus, liable to be quashed as rightly contended on behalf of the assessee. Addition u/s 68 - The assessee has actually incurred business losses on the transactions in Banas Finance Ltd., a stock which is otherwise duly listed on the platform of the exchanges and transactions registered have been routed through SEBI registered stock brokers. The loss claimed has actually resulted in an outgo and depletion of funds. Hence the business loss by no stretch of imagination could fall within the expression ‘unexplained cash credits’. The outgo/loss has resulted in a debit transaction rather than credit transaction. Hence, the additions made under s. 68 is impermissible in law at the threshold. We find apparent rationally in the plea of the assessee for inapplicability of s. 68 of the Act to deny a business loss claimed to have occurred to the assessee. The assessee thus succeeds on this aspect as well. Appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are: Whether the issuance of a notice under Section 148 of the Income Tax Act on a non-existent partnership firm is valid. Whether the re-assessment order under Section 147 read with Section 143(3) is sustainable when the reasons for re-opening were not provided to the assessee. Whether the Assessing Officer (AO) was required to provide the material that formed the basis for the belief of alleged income escapement. Whether the business loss from transactions in alleged penny stocks can be treated as undisclosed income under Section 68 of the Act.ISSUE-WISE DETAILED ANALYSIS1. Validity of Notice under Section 148 on a Non-Existent FirmThe legal framework requires that notices for re-assessment must be issued to an existing entity. The Tribunal noted that the partnership firm, M/s Marut Nandan & Co., was dissolved and non-existent at the time of the notice. The Court cited precedents such as Pr.CIT vs Maruti Suzuki India Ltd. and City Corporation Ltd. vs ACIT, asserting that issuing a notice to a non-existent entity is a substantive illegality. The Tribunal concluded that the notice was invalid and should be quashed.2. Re-assessment Order Without Providing ReasonsThe Tribunal emphasized the requirement for the AO to provide reasons for re-opening assessments, as established in GKN Driveshafts (India) Ltd. vs ITO. The failure to provide such reasons deprived the assessee of the opportunity to challenge the jurisdiction, rendering the re-assessment order unsustainable. The Tribunal referenced KSS Petron P.Ltd. vs ACIT, which supports quashing the order if procedural mandates are not followed.3. Requirement to Provide Material Basis for Re-assessmentThe Tribunal found that the AO did not provide the material that led to the belief of income escapement, which is essential for the assessee to understand and challenge the basis of the re-assessment. The absence of this information led to procedural unfairness, further invalidating the re-assessment.4. Applicability of Section 68 on Business Loss from Penny StocksThe Tribunal examined whether losses from transactions in Banas Finance Ltd., alleged to be a penny stock, could be treated as unexplained cash credits. The assessee argued that the transactions resulted in actual business losses and not unexplained income. The Tribunal agreed, noting that Section 68 pertains to unexplained credits, not debits or losses. The Tribunal found no basis for applying Section 68, as the transactions were genuine and resulted in a financial outflow.SIGNIFICANT HOLDINGSThe Tribunal held that: The issuance of a notice under Section 148 to a non-existent firm is invalid and must be quashed. Re-assessment orders without providing the reasons for re-opening are procedurally flawed and unsustainable. The AO's failure to provide the material basis for re-assessment further invalidates the proceedings. Section 68 is inapplicable to business losses resulting from transactions in penny stocks, as these do not constitute unexplained income.The Tribunal concluded by allowing the appeal, setting aside the first appellate order, and quashing the re-assessment order, thereby providing relief to the assessee.