2025 (7) TMI 679 - HC - Income Tax

AO failed to provide adequate opportunity despite Tribunal directions, assessment order under Section 147 set aside

Dreamz Vanijya Private Limited Versus Union Of India And Ors.

Dreamz Vanijya Private Limited Versus Union Of India And Ors. - TMI 1. ISSUES PRESENTED and CONSIDERED- Whether the assessment order dated 31st March, 2025 passed under Section 147 read with Section 254 of the Income Tax Act, 1961, is valid when it was passed without affording adequate opportunity to the petitioner to respond to the proposed variation.- Whether the Assessing Officer properly considered the petitioner's response submitted on 31st March, 2025 before passing the final assessment order.- Whether the demand for Rs. 38,79,98,944/- raised on 28th March, 2025, prior to circulation of the draft assessment order proposing variations, is valid and whether it vitiates the assessment proceedings.- Whether the Assessing Officer complied with the directions of the Income Tax Appellate Tribunal (ITAT) dated 8th February, 2024, which mandated granting sufficient time and opportunity to the petitioner for submission of details and response.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of Assessment Order Passed Without Adequate OpportunityRelevant Legal Framework and Precedents: The Income Tax Act, 1961, specifically Sections 147, 142(1), and 254, govern reassessment proceedings and appellate procedures. The principle of natural justice mandates that an assessee must be given a reasonable opportunity to respond to any proposed variations before a final order is passed. Precedents emphasize that failure to afford such opportunity renders the order liable to be quashed.Court's Interpretation and Reasoning: The Court noted that the ITAT had explicitly directed the Assessing Officer to grant sufficient time to the petitioner for submitting requisite details and responses. Despite this, the Assessing Officer issued a draft assessment order on 29th March, 2025, calling for a response by the next day at 6:00 P.M., which was a Sunday. The petitioner contended that such a short period was inadequate to respond.Key Evidence and Findings: The petitioner submitted its response on 31st March, 2025, the following working day. However, the Assessing Officer passed the final assessment order on the same day without considering this response, recording that no response was offered.Application of Law to Facts: The Court found that the Assessing Officer's conduct violated the principles of natural justice and the specific directions of the ITAT. The short notice and failure to consider the petitioner's response demonstrated procedural impropriety.Treatment of Competing Arguments: The department argued that the short time was justified due to the limitation period ending on 31st March, 2025. The Court acknowledged the limitation but held that it did not justify denial of adequate opportunity, especially after the ITAT's clear directions.Conclusion: The assessment order was passed without affording adequate opportunity and without considering the petitioner's response, rendering it invalid.Issue 2: Validity of Demand Raised Prior to Draft Order CirculationRelevant Legal Framework and Precedents: Under the Income Tax Act, demands must be raised following due process, typically after the assessment order or in accordance with prescribed procedures. Raising a demand prior to the issuance of a draft assessment order proposing variations is irregular.Court's Interpretation and Reasoning: The Court observed that a demand of Rs. 38,79,98,944/- was generated on 28th March, 2025, before the draft order was circulated on 29th March, 2025. This indicated a closed mind and procedural irregularity.Key Evidence and Findings: The petitioner highlighted this demand as evidence of prejudgment. The department acknowledged the demand but clarified it was not raised by the Assessing Officer.Application of Law to Facts: The Court held that raising a demand prior to the draft order and without affording opportunity to the petitioner was impermissible and vitiated the proceedings.Treatment of Competing Arguments: The department's explanation did not justify the premature demand, especially in light of the ITAT's directions for fair procedure.Conclusion: The demand raised prior to the draft order was quashed as consequential to the setting aside of the assessment order.Issue 3: Compliance with ITAT Directions for Fair OpportunityRelevant Legal Framework and Precedents: The ITAT's directions are binding on the Assessing Officer, especially when they emphasize adherence to principles of natural justice and procedural fairness.Court's Interpretation and Reasoning: The Court noted that although the ITAT's order was dated 8th February, 2024, the reassessment proceedings recommenced only on 8th January, 2025, indicating delay. Despite the directions, the Assessing Officer failed to provide adequate time and proceeded to finalize the order prematurely.Key Evidence and Findings: The petitioner was given limited time to respond, and the Assessing Officer did not consider the response submitted on 31st March, 2025.Application of Law to Facts: The Court found non-compliance with the ITAT's mandate, which undermined the fairness of the assessment process.Treatment of Competing Arguments: The department cited limitation constraints but did not dispute the failure to comply fully with the ITAT's directions.Conclusion: The Assessing Officer's failure to comply with the ITAT's directions warranted setting aside the assessment order and remanding the matter.Issue 4: Remand and Fresh Disposal of AssessmentCourt's Interpretation and Reasoning: Considering the Assessing Officer has since been changed, the Court opined that justice would be served by remanding the matter to the new jurisdictional Assessing Officer for fresh consideration from the stage of circulation of the draft order proposing variation.Key Evidence and Findings: The petitioner's response dated 31st March, 2025, is to be considered afresh. The Court directed completion of reassessment by 31st July, 2025.Application of Law to Facts: The remand ensures compliance with natural justice and ITAT directions, allowing fair adjudication.Conclusion: The assessment order dated 31st March, 2025 was set aside, the demand quashed, and the matter remanded for fresh adjudication.3. SIGNIFICANT HOLDINGS'The above would demonstrate a closed mind of the Assessing Officer in deciding the issue.''I am of the view that justice would be sub-served in the event the matter is remanded back to the jurisdictional Assessing Officer from the stage of circulation of the draft order proposing variation and the consideration of the petitioner's response to the same.''The purported demand as appearing at page 117 of the writ petition dated 28th March, 2025 is consequentially quashed.'Core principles established include the necessity of affording adequate and reasonable opportunity to the assessee before passing an assessment order, strict adherence to directions of appellate authorities, and the invalidity of demands raised prematurely without due process.Final determinations:The assessment order dated 31st March, 2025 is set aside for failure to afford adequate opportunity and non-consideration of the petitioner's response.The demand raised on 28th March, 2025 is quashed as invalid.The matter is remanded to the jurisdictional Assessing Officer for fresh adjudication in accordance with law and directions, to be completed by 31st July, 2025.