2025 (3) TMI 1011 - HC - Income Tax

Reopening notice quashed after tribunal found no Association of Persons existed between two companies

The Bombay HC set aside a reopening notice issued to assess income of an alleged Association of Persons (AOP) formed between two companies. The court held ... Reopening of assessment - assess income of an alleged Association of Persons (AOP) formed between two companies - HELD THAT:- The impugned reopening notice in this case was admittedly issued to the Petitioners on the premise that together, they constitute an AOP. This premise would no longer hold good, given the ITAT’s finding that no AOP existed. Since the base of the impugned reopening notice no longer survives, the impugned reopening notice will have to be set aside and is hereby set aside. Decided in favour of assessee. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:1. Whether the notice issued under Section 148 of the Income-tax Act, 1961, to assess income of an alleged Association of Persons (AOP) formed between two companies was valid and within jurisdiction.2. Whether the reopening of assessment based on the existence of an AOP was justified given that the issue of AOP's existence was pending before the Income Tax Appellate Tribunal (ITAT).3. Whether there was an independent application of mind by the Assessing Officer when issuing the notice.ISSUE-WISE DETAILED ANALYSIS1. Validity and Jurisdiction of the Notice under Section 148The relevant legal framework involves Section 148 of the Income-tax Act, which allows for reassessment if income has escaped assessment. The Court considered whether the notice was issued based on a valid premise that the Petitioners constituted an AOP.The ITAT's findings were crucial, as it determined that the Petitioners did not form an AOP. The Court noted that the ITAT found no joint management, execution, or sharing of profits and losses between the parties, which are essential elements for constituting an AOP. Each party was responsible for separate obligations, and there was no overlap in the execution of work.The Court concluded that since the ITAT determined no AOP existed, the basis for the notice under Section 148 was invalid, rendering the notice without jurisdiction.2. Reopening of Assessment and Pending AppealThe Court considered the impact of the pending appeal before the ITAT on the reopening of the assessment. The third proviso to Section 147 of the Act suggests a bar on issuing a notice if the matter is under appeal. The Court observed that the reopening notice was issued despite the pending appeal on the same matter, which questioned the existence of an AOP.Given the ITAT's decision that no AOP existed, the Court found the reopening notice unsustainable. The Court emphasized that the reopening was based on a premise now invalidated by the ITAT's findings.3. Independent Application of Mind by the Assessing OfficerThe Court examined whether the Assessing Officer independently assessed the material before issuing the notice. The Petitioners argued that the notice was based solely on another person's opinion without independent evaluation.The Court noted that the reasons recorded for the notice indicated reliance on external opinions rather than an independent assessment. This lack of independent application of mind further undermined the validity of the notice.SIGNIFICANT HOLDINGSThe Court held that the reopening notice was invalid due to the absence of an AOP as determined by the ITAT. The Court stated, 'The impugned reopening notice in this case was admittedly issued to the Petitioners on the premise that together, they constitute an AOP. This premise would no longer hold good, given the ITAT's finding that no AOP existed.'The Court established that the absence of joint management, execution, and profit-sharing negated the existence of an AOP. The final determination was that the notice and subsequent order were set aside due to the lack of jurisdiction and valid basis.The judgment clarified that this decision does not preclude the revenue from challenging the ITAT's findings or seeking reassessment if the Court reverses the finding on the existence of an AOP in the future. The Court allowed the Petition, setting aside the notice and order based on it, while leaving open the possibility for further legal proceedings if necessary.