Tax department's reassessment proceedings fail due to improper notice service under section 148 to unauthorized consultant

ITAT Mumbai quashed reassessment proceedings initiated under section 147 due to invalid service of notice under section 148. The AO served notice on a tax consultant without establishing their authorization to receive notices on behalf of the assessee. Despite conducting survey at assessee's PE premises (Aptivaa India), revenue failed to serve notice at correct address or demonstrate the served address belonged to assessee. The tribunal held that improper notice service invalidated the entire reassessment, as valid notice under section 148 forms the foundation of reassessment proceedings under the old regime.

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The core legal questions considered by the Tribunal in this appeal concern the validity and legality of reassessment proceedings initiated under the Income Tax Act, 1961, specifically focusing on the issuance and service of notice under section 148 and related procedural requirements. The principal issues are:

1. Whether the reassessment notice issued under section 148 was validly issued and served on the assessee within the prescribed time limits, including consideration of the applicability of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA").

2. Whether the notice under section 148 could be issued in the absence of evidence of escaped income represented by an asset, as required under section 149(1)(b).

3. Whether the subsequent notice under section 143(2) was valid, considering the return of income filed in response to the section 148 notice.

4. Whether the reassessment proceedings were initiated based on independent application of mind by the Assessing Officer (AO) or merely on borrowed satisfaction from another department.

5. Whether the addition of income on account of the assessee being held as a resident of India and having a Permanent Establishment (PE) in India was justified under the provisions of the Act and the India-UAE tax treaty.

6. Whether the AO and Dispute Resolution Panel (DRP) erred in relying on statements recorded during a survey conducted on the assessee's parent entity, which were later retracted.

7. Whether penalty proceedings initiated under sections 274, 271F, and 271(1)(e) were valid.

Issue-wise Detailed Analysis

Validity and Service of Notice under Section 148 and Time Limitation

The reassessment proceedings were initiated by the AO through a notice dated 31.03.2021 under section 148 of the Income Tax Act. The Revenue contended that this notice was served on the assessee on 15.04.2021, thereby treating it as a notice under section 148A as per the Supreme Court's directions in the Ashish Agarwal case, which applies to notices issued between 01.04.2021 and 30.06.2021.

The assessee challenged the validity of the notice on the ground that it was sent to an incorrect address that did not belong to the assessee, and hence, the notice was never validly served. The assessee only became aware of the reassessment proceedings upon receipt of an email dated 23.03.2022 from the AO. The assessee argued that the time limit for issuing the notice should be computed from the date of valid service, i.e., 23.03.2022, and not from the date of issuance, 31.03.2021.

The AO submitted a report stating that the notice was served at the address of a tax consultant, JSP Finman Consultants, without clarifying whether they were authorized agents of the assessee. The Tribunal noted that mere service on a tax consultant without proof of authorization does not satisfy the jurisdictional requirement of valid service on the assessee.

The Tribunal relied on authoritative judicial precedents, including the Delhi High Court's decision in PCIT v. Atlanta Capital (P.) Ltd and the Supreme Court's rulings in CIT v. Chetan Gupta and R.K. Upadhyaya v. Shanabhai P. Patel. These precedents establish that:

• Issuance and valid service of notice under section 148 are mandatory jurisdictional conditions for reopening assessment.
• Service must be effected on the assessee or an authorized agent; mere participation in proceedings without valid service does not amount to waiver.
• Failure to serve notice properly renders reassessment proceedings invalid and liable to be quashed.
• Section 292BB, which relates to deemed service, is prospective and does not apply where the assessee objects to non-service.

Applying these principles, the Tribunal found that the Revenue failed to prove valid service of the section 148 notice on the assessee. The notice was sent to an incorrect address, and no evidence was furnished to establish authorization of the tax consultant to receive notices. Consequently, the reassessment proceedings based on this notice were held to be invalid and barred by limitation, as the draft and final assessment orders were issued beyond the permissible period calculated from the date of valid service.

Issuance of Notice under Section 148 in Absence of Escaped Income Represented by Asset

The assessee contended that the notice under section 148 could not be issued under section 149(1)(b) because there was no escaped income represented by an asset. However, since the Tribunal quashed the reassessment on grounds of invalid notice and lack of proper service, this issue was rendered academic and left open.

Validity of Notice under Section 143(2) and Filing of Return in Response to Section 148 Notice

The assessee challenged the validity of the notice under section 143(2) issued on 17.03.2023, arguing that it was invalid as the AO did not consider the return filed in response to the section 148 notice. This issue was also not adjudicated upon in detail due to the primary finding of invalid reassessment proceedings.

Independence of AO's Satisfaction and Reliance on Statements Recorded During Survey

The assessee argued that the AO initiated reassessment based on borrowed satisfaction from another department and relied on statements recorded during a survey of the parent entity, which were later retracted. The Tribunal did not delve into this issue in detail, as the invalidity of the reassessment notice rendered these contentions academic.

Determination of Residential Status and Permanent Establishment

The AO and DRP held that the assessee was a resident of India under section 6(3)(ii) of the Act and had a fixed place PE in India under Article 5(1) of the India-UAE tax treaty. Accordingly, 75% of the assessee's profits were attributed to the PE in India.

The assessee disputed these findings, contending that the additions were based on conjectures and surmises, and that the PE status was wrongly attributed. However, as the reassessment was quashed on procedural grounds, the Tribunal did not examine the merits of these findings.

Allegation of Bogus Expenses and Repatriation of Cash

The AO alleged that the assessee claimed bogus expenses amounting to AED 30,91,240.90, with cash generated being repatriated to India, relying on survey statements that were later retracted. This issue was not addressed substantively due to the procedural dismissal of the reassessment.

Validity of Penalty Proceedings

The assessee challenged penalty proceedings initiated under sections 274 read with 271F and section 271(1)(e) of the Act. This contention was not decided upon as the reassessment itself was quashed.

Significant Holdings

The Tribunal held unequivocally that:

"The notice issued under Section 148 of the Act was dispatched to an incorrect address. Consequently, the Revenue's assertion that the said notice was duly served upon the Appellant on April 15, 2021, is factually untenable."

"The entire assessment based on the notice under section 148 which was not served on the assessee is liable to be quashed."

"Issuance and service of notice under section 148 are jurisdictional requirements that must be mandatorily complied with and are not mere procedural requirements."

"The onus is on the Revenue to show that proper service of notice has been effected under section 148 of the Act on the Assessee or an agent duly empowered by him to accept notices on his behalf."

"Reassessment proceedings finalized without effecting proper service of notice on the Assessee under section 148(1) of the Act are invalid and liable to be quashed."

The Tribunal preserved the core principle that valid service of notice under section 148 is a mandatory jurisdictional precondition for reassessment proceedings and that failure to comply with this requirement invalidates the reassessment irrespective of the merits of the case.

Due to this fundamental procedural defect, the Tribunal did not consider the merits of the additions or other contentions raised by the assessee. The appeal was allowed, and the reassessment order was quashed. Consequently, the stay application became infructuous.

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