Petitioner loses challenge to section 148 assessment reopening after failing to file return for property sale transaction

Gujarat HC dismissed the petition challenging reopening of assessment under section 148. Petitioner sold mortgaged property for Rs. 40 lakh to satisfy debt but failed to file income tax return disclosing the transaction. Court held that since no return was filed, petitioner had no right to hearing under section 144B(6)(vii) and principles of natural justice were not violated. The sale transaction resulted in escapement of income causing revenue loss. Petitioner was directed to comply with the section 148 notice for assessment reopening.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the impugned order passed under section 148A(d) of the Income Tax Act, 1961 and the notice issued under section 148 of the Act for reopening the assessment for Assessment Year (AY) 2018-19 are valid and lawful, given the facts of the case;

(b) Whether the petitioner was denied the opportunity of hearing as mandated under section 144B(6)(vii) of the Income Tax Act, 1961, thereby violating principles of natural justice;

(c) Whether the sale transaction of immovable property by the petitioner, which was not disclosed by filing a return of income for AY 2018-19, constitutes escapement of income chargeable to tax;

(d) Whether the petitioner's contention that no sale consideration was received by it, as the sale proceeds were directly paid to the lender pursuant to a consent decree, exempts it from filing the return or paying tax on capital gains arising from the sale;

(e) Whether the reopening of assessment under section 148 of the Income Tax Act, 1961, is justified on the basis of information available with the department indicating escapement of income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity and lawfulness of the impugned order under section 148A(d) and notice under section 148

The relevant legal framework comprises sections 148, 148A, and 144B of the Income Tax Act, 1961, which govern reopening of assessments and issuance of notices where income chargeable to tax is believed to have escaped assessment. Section 148A(d) mandates that before issuing a notice under section 148, the Assessing Officer must record reasons and provide an opportunity to the assessee to respond.

The Court noted that the petitioner had not filed any return of income for AY 2018-19, despite the sale of immovable property. The Assessing Officer issued a notice under section 148A(b) seeking explanation for the alleged escapement of income. The petitioner replied, claiming it was a dormant company with no income. Subsequently, after considering the reply, the Assessing Officer passed the order under section 148A(d) and issued the notice under section 148 for reopening the assessment.

The Court observed that the reopening was based on information available with the department regarding the sale transaction amounting to Rs. 80 lakhs during FY 2017-18 relevant to AY 2018-19. The Assessing Officer found the petitioner's explanation untenable, especially since no return was filed disclosing the sale or computing capital gains.

The Court held that the reopening was lawful and valid, as it was based on credible information indicating escapement of income and was preceded by issuance of notices and consideration of the petitioner's replies.

Issue (b): Alleged denial of opportunity of hearing in violation of natural justice principles

The petitioner contended that no opportunity of hearing was granted before passing the order under section 148A(d), violating section 144B(6)(vii) and principles of natural justice.

The Court noted that the petitioner was issued a notice under section 148A(b) and was granted time to file replies and representations. The petitioner filed replies dated 04.04.2022 and 19.04.2022 addressing the sale transaction and claimed no income was received. The Assessing Officer considered these replies before passing the order under section 148A(d).

Therefore, the Court found no merit in the contention that the petitioner was denied opportunity of hearing. The procedural requirements under the Act were complied with, and the petitioner had ample opportunity to present its case before the order was passed.

Issue (c): Whether non-disclosure of sale transaction amounts to escapement of income

The petitioner admitted the sale of immovable property but submitted that the sale proceeds were directly paid to the lender pursuant to a compromise settlement and consent terms, and no amount was credited to the petitioner's account.

The respondent contended that despite the sale being made to satisfy the debt, the petitioner was obligated to file a return disclosing the transaction and compute capital gains, if any, arising from the sale. The non-filing of return and non-disclosure of the transaction constituted escapement of income.

The Court emphasized that the Income Tax Act requires disclosure of all income and transactions, including sales of capital assets, regardless of whether the sale proceeds were received by the assessee or directly paid to a third party. The petitioner's failure to file a return disclosing the sale transaction and compute capital gains led to escapement of income chargeable to tax.

Issue (d): Effect of sale proceeds being paid directly to lender on tax liability

The petitioner argued that since the sale proceeds of Rs. 40 lakhs were paid directly to the lender as per the consent decree, it did not receive any income and hence no tax liability arises.

The Court analyzed that the mode of receipt of sale proceeds does not absolve the petitioner from the obligation to disclose the transaction and compute capital gains. The sale of immovable property is a capital asset transaction, and capital gains tax liability arises on the transfer, irrespective of whether the sale consideration was received by the assessee or paid to a third party to satisfy a debt.

The Court found that the petitioner's contention that it did not receive sale proceeds in its bank account does not negate the fact of sale or the resulting capital gains. Therefore, the petitioner was required to file the return and pay tax accordingly.

Issue (e): Justification for reopening assessment under section 148

The reopening of assessment under section 148 is permissible if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The Court noted that the department had information regarding sale of immovable property by the petitioner for Rs. 80 lakhs during the relevant year, which was not disclosed in any return.

The petitioner's failure to file return and disclose the transaction justified the reopening. The Assessing Officer complied with procedural requirements under section 148A before issuing the notice under section 148. The Court held that reopening was justified in light of the undisclosed sale transaction and consequent escapement of income.

3. SIGNIFICANT HOLDINGS

The Court held:

"It is admitted that the petitioner has not filed any return of income disclosing the transaction of sale of immovable property during the year under consideration... More particularly, when the petitioner has also admitted that no return of income has been filed disclosing the sale transaction entered into between the petitioner and its lender for sale of the mortgaged property in favour of the third party to satisfy debt so as to compute the income properly on the face of the record, there is an escapement of income resulting into loss of revenue."

Further, the Court observed:

"The reopening is based on information available with the department and is lawful. The petitioner was given opportunity to respond before passing the order under section 148A(d). The petitioner's contention of non-receipt of sale proceeds does not absolve it from filing return and disclosing capital gains."

The Court concluded that the impugned order and notice under sections 148A(d) and 148 of the Income Tax Act, 1961, are valid and sustainable. The petition challenging the same was dismissed with the direction that the Assessing Officer shall pass the assessment order within twelve weeks after providing an opportunity of hearing to the petitioner in accordance with law.

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