Income tax reopening order quashed due to self-contradictory findings on crypto currency purchase assessment
Gujarat HC quashed an order under section 148A(d) for reopening assessment regarding crypto currency purchase. The petitioner had filed income return and provided bank statements showing funds borrowed from father for crypto purchase. The AO's order was self-contradictory, stating in one paragraph that return was filed while claiming in another that no return was filed. The court found the order passed without application of mind, ignoring facts on record. The assessee's appeal was allowed and the impugned order was set aside.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court are:
- Whether the Assessing Officer was justified in issuing notice under section 148 of the Income Tax Act, 1961 ("the Act") for reopening the assessment for Assessment Year 2018-2019, after the petitioner had filed the return of income and explained the source of investment in crypto currency.
- Whether the order passed under section 148A(d) of the Act, which forms the basis for issuance of the notice under section 148, was valid and based on proper application of mind, considering the factual record and submissions made by the petitioner.
- Whether the subsequent assessment order passed under section 147 read with sections 143(3) and 144B of the Act, despite an interim stay granted by the Court restraining the Assessing Officer from passing such order, is valid and sustainable.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Validity of notice issued under section 148 of the Income Tax Act, 1961
Relevant legal framework and precedents: Section 148 of the Act empowers the Assessing Officer to reopen an assessment if there is information suggesting that income chargeable to tax has escaped assessment. However, the reopening must be based on tangible material and proper application of mind. The procedure under section 148A(d) requires the Assessing Officer to record reasons for issuing the notice after considering the taxpayer's response.
Court's interpretation and reasoning: The Court examined the impugned order dated 30.03.2022 passed under section 148A(d). The order recorded contradictory findings: on one hand, it acknowledged that the petitioner had filed the return of income, while on the other, it incorrectly stated that the petitioner had not filed any return. The Assessing Officer also observed that the petitioner failed to provide the bank statement of the father from whom funds were borrowed, despite the petitioner having submitted the same, which was not disputed by the respondent's counsel.
Key evidence and findings: The petitioner had filed the return of income for AY 2018-19 declaring income and had submitted detailed replies explaining the source of funds for purchase of crypto currency, supported by bank statements of the father. The Assessing Officer issued summons under section 131(1A) twice, and the petitioner complied with the requests. The material on record thus contradicted the Assessing Officer's basis for reopening.
Application of law to facts: The Court found that the Assessing Officer failed to apply mind properly and ignored the factual record. The contradictory statements in the order under section 148A(d) evidenced a lack of coherent reasoning. The reopening notice was therefore not founded on valid material or proper consideration of the petitioner's submissions.
Treatment of competing arguments: The respondent's counsel did not controvert the factual contradictions or the petitioner's compliance with filing the return and submission of bank statements. The only argument advanced was that no addition was made in the subsequent assessment order, and the order was passed despite the interim stay, as no adverse order was intended.
Conclusion: The Court held that the notice under section 148 was issued without jurisdiction and without application of mind, rendering it invalid.
Issue 2: Validity of the order passed under section 148A(d) of the Act
Relevant legal framework and precedents: Section 148A(d) requires the Assessing Officer to record reasons for issuing a notice under section 148 after considering the taxpayer's response to the preliminary notice under section 148A(b). The order must be reasoned and consistent with the facts on record.
Court's interpretation and reasoning: The Court scrutinized the order dated 30.03.2022 and noted self-contradictions and factual inaccuracies. The order simultaneously acknowledged the filing of the return and denied it. It also incorrectly stated that the petitioner had not submitted the father's bank statements, which was disproved by the record and undisputed by the respondent's counsel.
Key evidence and findings: The petitioner's replies and documentary evidence were on record and undisputed. The Assessing Officer's order failed to address these adequately and instead recorded erroneous conclusions.
Application of law to facts: The Court concluded that the order under section 148A(d) was passed without proper application of mind and was legally unsustainable.
Treatment of competing arguments: No substantive justification was offered by the respondent for the contradictory findings or failure to consider the petitioner's evidence.
Conclusion: The order under section 148A(d) was quashed and set aside as it was contrary to the facts and law.
Issue 3: Validity of the assessment order passed under section 147 read with sections 143(3) and 144B of the Act despite interim stay
Relevant legal framework and precedents: An interim stay order restraining the Assessing Officer from passing the assessment order is binding until vacated. Passing an order in violation of such stay is generally impermissible.
Court's interpretation and reasoning: The Court noted that despite the interim order restraining the passing of the assessment order, the Assessing Officer passed the order on 20.03.2023. Although the order did not make any addition against the petitioner, the act of passing the order itself was contrary to the Court's direction.
Key evidence and findings: The assessment order and notices passed subsequent to the impugned order under section 148A(d) were challenged in Special Civil Application No. 6690/2023. The Court found that since the foundational order and notice under section 148 were quashed, the subsequent assessment order and notices could not survive.
Application of law to facts: The Court held that the assessment order passed in violation of the interim stay and based on the invalid notice under section 148 was liable to be quashed.
Treatment of competing arguments: The respondent contended that no adverse order was passed, but this did not justify contravention of the interim stay or validate the assessment order.
Conclusion: The assessment order dated 20.03.2023 and consequential notices were quashed and set aside.
3. SIGNIFICANT HOLDINGS
The Court held:
"In view of above facts and considering the material facts on record, it is evident that the impugned order dated 30.03.2022 passed under section 148A (d) of the Act is a classic example of order passed without application of mind by the respondent Assessing Officer ignoring the fact on record. Even on perusal of the order the same is self contradictory as is evident from para nos. 1 and 4 of the order."
"We are therefore, of the opinion that impugned order dated 30.03.2022 passed under section 148A (d) of the Act is liable to be quashed and set aside and is hereby quashed and set aside. Consequently notice issued under section 148 of the Act of the even date would not survive and is accordingly quashed and set aside."
"In view of setting aside of order passed under section 148A (d) of the Act and notice under section 148 of the Act, subsequent assessment order dated 20.03.2023 and consequential notices issued by respondent Assessing Officer also would not survive. Accordingly Special Civil Application No.6690 of 2023 wherein said order dated 20.03.2023 is challenged is allowed and the assessment order as well as subsequent notices are hereby quashed and set aside."
Core principles established include:
- An order under section 148A(d) must be reasoned and based on proper application of mind, considering all relevant material and taxpayer's submissions.
- Contradictory and factually incorrect findings in such an order vitiate the validity of reopening proceedings under section 148.
- Reopening of assessment requires tangible material indicating escaped income, not mere conjecture or ignoring of evidence.
- Assessment orders passed in violation of interim stay granted by the Court are invalid.
The final determinations were that the order under section 148A(d), the notice under section 148, and the subsequent assessment order were all quashed and set aside, thereby disposing of both Special Civil Applications with no order as to costs.
TaxTMI 
AI Drafter ✕
TaxTMI 
TaxTMI 
