2025 (3) TMI 291 - AT - Income Tax

AO's mechanical recording of reasons without independent application invalidates section 147 reassessment proceedings

Shobhit Goel (HUF) Versus PCIT, Faridabad.

ITAT Delhi held that reassessment proceedings under section 147 were invalid due to mechanical recording of reasons by the AO without independent ... Revision u/s 263 - validity of the reassessment proceedings - reopening the case by directing the AD to make fresh assessment against the provisions of law and natural justice - Addition u/s 68 as long term of capital gain received in the form of accommodation entries of the companies - HELD THAT:- From the perusal of the reasons recorded it is found that the Assessing Officer has not given the details of transactions of capital gain alleged as the accommodation entry in the shape of penny stock. AO further observed that the assessee has obtained bogus accommodation entries whereas the assessee has declared long term capital gain from the sale of two companies. It appears that AO has recorded the reasons in mechanical manner without any independent application of mind and without making any enquiry nor making any other of verification the information received by him with the information available on record. Also found that from the face of the reasons, it is clear that they are incomplete and vague, therefore, in our considered opinion, the notice issued u/s 148 in the case of the assessee is bad in law and consequently order passed u/s 147 r.w. s 144B is invalid. Since the order passed u/s. 144 r.w.s.144B of the Act is an invalid order, any further proceedings originated from the said order cannot be held as valid proceedings which includes the revisionary proceedings initiated by the ld. Pr. CIT, Sambalpur u/s. 263 of the Act. Thus as relying on Westlife Development Ltd. [2016 (6) TMI 1208 - ITAT MUMBAI] we quash the revisionary order passed u/s 263 as the re-assessment order passed u/s 144/143(3) is already held as invalid. Thus, the additional grounds of appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment revolve around the validity of the order passed under Section 263 of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (PCIT). The issues include:Whether the order passed under Section 263 is without jurisdiction and barred by limitation.Whether the PCIT erred in reopening the case and directing a fresh assessment against the provisions of law and natural justice.Whether the initiation of proceedings under Section 263 based on audit objections was against the provisions of law and natural justice.Whether the order under Section 263 was passed without application of mind and merely to regularize the legality of the order passed under Section 154 by the Assessing Officer (AO).Whether the order passed under Section 263 was erroneous and prejudicial to the interest of revenue.Whether the revision order under Section 263 is null and void due to the invalidity of the underlying assessment order passed under Sections 147/144B.Whether the order passed under Section 263 is invalid as no revision can take place concerning an assessment order passed in faceless mode under Section 144B.ISSUE-WISE DETAILED ANALYSIS1. Validity of Reopening under Section 148Legal Framework and Precedents: The reopening of assessments under Section 147/148 must be based on valid 'reasons to believe' that income has escaped assessment. The process requires proper sanction under Section 151 and disposal of objections as per the ruling in GKN Driveshafts.Court's Interpretation and Reasoning: The Tribunal noted that the reasons recorded for reopening the assessment were vague and lacked specific details of the transactions. The AO did not apply independent judgment or conduct necessary inquiries.Key Evidence and Findings: The AO's reasons for reopening were based on alleged accommodation entries in the form of penny stocks, which were not clearly substantiated.Application of Law to Facts: The Tribunal found that the AO's reasons for reopening were mechanically recorded without due diligence, rendering the notice under Section 148 invalid.Conclusions: The Tribunal concluded that the reopening was invalid, making the subsequent assessment order void.2. Jurisdiction and Validity of Section 263 OrderLegal Framework and Precedents: Section 263 allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of the revenue. However, a revision cannot be based on an invalid assessment order.Court's Interpretation and Reasoning: The Tribunal considered whether an invalid assessment order under Section 147 could be the basis for a valid revision under Section 263.Key Evidence and Findings: The Tribunal referenced multiple precedents, including decisions from the Supreme Court and various High Courts, which establish that a void order cannot be the subject of revision.Application of Law to Facts: Since the reassessment order was deemed invalid, the Tribunal held that the revisionary proceedings under Section 263 lacked a valid foundation.Conclusions: The Tribunal quashed the Section 263 order as it was based on an invalid reassessment order.SIGNIFICANT HOLDINGSCore Principles Established: The Tribunal reaffirmed the principle that an invalid assessment order cannot form the basis for valid revisionary proceedings under Section 263. It emphasized the necessity of a valid legal foundation for any revisionary action.Final Determinations on Each Issue: The Tribunal allowed the appeal, quashing the Section 263 order due to the invalidity of the reassessment order. The additional grounds raised regarding the reopening under Section 148 were upheld, rendering the other grounds infructuous.Verbatim Quotes of Crucial Legal Reasoning: 'An invalid order cannot give birth to legally valid proceedings.' The Tribunal cited various judgments to support the view that jurisdictional defects in the primary assessment order invalidate subsequent revisionary orders.