2025 (6) TMI 1132 - AT - Income Tax

Tax Reassessment Invalidated: Procedural Error in Prior Approval Derails Income Tax Reopening Beyond Three-Year Limit Under Section 147

Saif Ali Mansoor Ali Khan Pataudi Versus CIT (A), NFAC, Delhi/ACIT, Circle-16 (1), Mumbai

AT invalidated a tax reassessment notice for AY 2016-17 due to procedural non-compliance. The key issue was obtaining prior approval from the Principal ... Validity of reassessment proceedings - mandation to have prior approval of Pr. CCIT - HELD THAT:- On careful perusal of notice under section 148, we find that said notice was issued prior approval of PCIT-8. We find that notice u/s 148, which is issued with prior approval of Pr.CIT is not valid therefore, consequent action initiated thereon has become void ab initio. In the result, the assessee succeeded on primary submission of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in this appeal are:(a) Whether the reopening of assessment for AY 2016-17 by issuance of notice under section 148 of the Income Tax Act, 1961 (the Act) was valid, particularly regarding the compliance with the procedural requirements under section 151 concerning prior approval for reopening beyond three years from the end of the relevant assessment year.(b) Whether the approval for issuance of notice under section 148 was validly obtained from the appropriate sanctioning authority as mandated by amended provisions of section 151, specifically whether prior approval from the Principal Chief Commissioner of Income Tax (Pr. CCIT) was necessary and whether approval obtained from Principal Commissioner of Income Tax (Pr. CIT) sufficed.(c) Whether the reopening notice was issued within the period of limitation prescribed under the Act or was barred by limitation and thus void ab initio.(d) Whether the Assessing Officer (AO) erred in disallowing TDS credit of Rs. 50 lakhs without proper appreciation of facts.(e) Whether the reassessment proceedings initiated under section 149(1)(b) were valid in view of the definition of 'asset' and the nature of information available to the AO.(f) Whether the CIT(Appeals) failed to consider relevant legal grounds raised by the assessee and denied the assessee an opportunity of being heard by not issuing a show cause notice before enhancing the assessment, contrary to the requirements of section 251(2).2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Validity of reopening notice under section 148 and compliance with section 151 approval requirementsThe legal framework governing reopening of assessments beyond three years is set out in section 147 read with section 148 and section 151 of the Income Tax Act. Section 148 empowers the AO to issue a notice for reopening if income has escaped assessment. Section 151 mandates that where reopening is beyond three years from the end of the relevant assessment year, prior approval of the Principal Chief Commissioner of Income Tax (Pr. CCIT) or Principal Director General of Income Tax must be obtained before issuing the notice.The Finance Act, 2023 amended section 151, clarifying that prior approval for reopening beyond three years must be obtained from the Pr. CCIT and not from the Pr. CIT. This amendment is crucial in determining the validity of the approval obtained in this case.The assessee's case was reopened for AY 2016-17 by issuance of notice under section 148 dated 24.08.2022, which was beyond the three-year period. The prior approval for issuance of the notice was obtained from the Principal Commissioner of Income Tax (Pr. CIT)-8, Mumbai, and not from the Principal Chief Commissioner of Income Tax (Pr. CCIT), as required by the amended section 151.The Tribunal examined the notice under section 148, which clearly referenced approval from Pr. CIT-8, Mumbai. The Revenue's representative was unable to confirm whether the approval was from Pr. CIT or Pr. CCIT and was allowed to submit a further response but did not provide contrary evidence.On this factual matrix, the Tribunal held that the approval obtained from Pr. CIT instead of Pr. CCIT was not in compliance with the statutory mandate under the amended section 151. Consequently, the notice under section 148 was held to be invalid and the reopening of assessment was declared void ab initio.This reasoning aligns with the principle that procedural compliance in reopening assessments is mandatory and non-compliance renders the proceedings invalid. The Tribunal relied on authoritative precedents including the decisions of the Mumbai Tribunal and the jurisdictional High Court which emphasize strict adherence to approval requirements under section 151.Issue (c): Limitation period for reopening and validity of noticeSince the reopening notice was issued beyond three years from the end of the relevant assessment year, the question of limitation is governed by the provisions requiring prior approval from Pr. CCIT. The Tribunal found that the approval was not validly obtained, thereby rendering the notice beyond limitation and void.The Tribunal did not proceed to adjudicate on the merit of the limitation issue separately because the invalidity of approval itself rendered the notice non-est.Issue (d): Disallowance of TDS credit of Rs. 50 lakhsThe assessee challenged the disallowance of TDS credit of Rs. 50 lakhs made by the CIT(Appeals), contending that the facts were not properly appreciated. However, since the Tribunal quashed the reopening notice on procedural grounds, it held that adjudication on the merits, including the disallowance of TDS credit, became academic and did not require examination.Issue (e): Validity of reassessment proceedings under section 149(1)(b) and definition of 'asset'The assessee contended that reassessment under section 149(1)(b) can only be initiated if information suggests that income chargeable to tax represented in the form of an 'asset' exceeding Rs. 50 lakhs has escaped assessment. The term 'asset' includes immovable property, shares, securities, and deposits, but TDS booked in books cannot be considered an asset.Further, the assessee argued that the information on which the reopening notice was based originated from the Internal Audit Department, whereas the Finance Act, 2021 mandates that such information should originate from the Comptroller and Auditor General (CAG).The Tribunal did not delve into this issue in detail as the invalidity of the reopening notice on procedural grounds rendered further examination unnecessary.Issue (f): Failure to issue show cause notice under section 251(2)The assessee alleged that the CIT(Appeals) enhanced the assessment without issuing a show cause notice as required under section 251(2), thereby denying the assessee an opportunity of being heard.The Tribunal did not address this issue substantively due to the primary finding that the reopening itself was invalid. The issue became academic in light of the quashing of reassessment proceedings.3. SIGNIFICANT HOLDINGSThe Tribunal's key legal determination is encapsulated in the following reasoning:'Considering the aforesaid factual position, we find that notice under section 148, which is issued with prior approval of Pr.CIT is not valid; therefore, consequent action initiated thereon has become void ab initio.'This pronouncement establishes the principle that for reopening assessments beyond three years, prior approval must be obtained from the Principal Chief Commissioner of Income Tax as per the amended section 151, and failure to do so invalidates the reopening notice and all subsequent proceedings.The Tribunal further held that once the reopening notice is invalid, adjudication on the merits of the reassessment, including disallowances or additions, becomes academic and need not be examined.In conclusion, the Tribunal allowed the appeal of the assessee on the primary ground of invalid reopening notice and held that the reassessment proceedings for AY 2016-17 were void ab initio due to non-compliance with the statutory approval requirement under section 151.