2025 (7) TMI 828 - HC - Income Tax

Ex-parte assessment order under Section 147 quashed due to lack of opportunity to respond to Section 148A(b) notice

M/s. Natural Spirits Versus Income Tax Officer Ward 4 (3) (3), Bangalore, The Principal Commissioner Of Income Tax -2 Bangalore.

The Karnataka HC quashed an ex-parte assessment order passed under Section 147. The petitioner argued they couldn't reply to the Section 148A(b) notice as ... Ex-parte order passed u/s 147 - as argued petitioner did not have an opportunity to reply to the notice u/s 148A(b) on account of the petitioner having stopped the business - HELD THAT:- Though the reason for the submission made by petitioner, cannot be accepted, that the petitioner did not commence the business and therefore did not activate its PAN number. In the interest of justice, considering that there is an ex-parte order passed and the petitioner is interested in furnishing certain documents for consideration by the respondents- Authority, indulgence is extended by quashing the assessment order which had been passed and remanding the matter to the first respondent for fresh consideration from the Section 148A(b) stage by permitting the petitioner to reply to the notice under Section 148A(b). 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this matter are:Whether the ex-parte order passed under Section 147 read with Section 144B of the Income Tax Act for the assessment year 2017-18 is liable to be quashed on the ground that the petitioner was denied an opportunity to reply to the notice issued under Section 148A(b) of the Act.Whether the penalty notices issued under Sections 270A, 271AAC(1), 271F, and 272A(1)(d) of the Income Tax Act for the assessment year 2017-18 are liable to be quashed in light of the alleged procedural irregularities.Whether the petitioner, having allegedly not commenced business and not activated the PAN number, is entitled to relief from the impugned assessment and penalty orders.The scope and applicability of Section 148A(b) notice and the procedural fairness owed to the petitioner before passing assessment and penalty orders.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of the ex-parte order under Section 147 read with Section 144BRelevant legal framework and precedents: Section 147 of the Income Tax Act empowers the Assessing Officer to reopen an assessment if there is reason to believe that income has escaped assessment. Section 144B mandates that before passing an order under Section 147, the Assessing Officer must issue a notice under Section 148A(b) affording the assessee an opportunity to be heard and file a reply. The principle of natural justice requires that no order should be passed without giving the affected party an opportunity to present their case.Court's interpretation and reasoning: The Court noted that the impugned order was passed ex-parte, meaning without the petitioner having been given an adequate opportunity to respond to the Section 148A(b) notice. The petitioner contended that the business was never commenced and the PAN was not activated, hence no reply was furnished. The Court, however, did not accept the submission that the petitioner had no obligation to respond on this basis.Key evidence and findings: The petitioner's own admission that the partnership firm was formed and capital received indicated that the entity existed in law, and thus procedural fairness was mandated. The failure to respond to the notice under Section 148A(b) led to the ex-parte order.Application of law to facts: The Court emphasized that even if the petitioner had ceased business or not commenced it, the statutory procedure under Section 148A(b) must be complied with before passing an assessment order. The petitioner should have been given an opportunity to reply before the order was passed.Treatment of competing arguments: The petitioner's argument that the PAN was not activated and hence no reply was possible was rejected. The Court balanced the principle of natural justice against the procedural requirements and found in favor of the petitioner's right to be heard.Conclusion: The ex-parte order passed under Section 147 read with Section 144B was quashed for non-compliance with the mandatory procedural requirement of hearing the petitioner under Section 148A(b).Issue 2: Validity of penalty notices under Sections 270A, 271AAC(1), 271F, and 272A(1)(d)Relevant legal framework and precedents: Penalty provisions under the Income Tax Act require that the underlying assessment or reassessment proceedings are valid and that the assessee has been given an opportunity to contest the charges before penalties are imposed. The principles of natural justice and fair procedure extend to penalty proceedings as well.Court's interpretation and reasoning: Since the penalty notices were consequent to the impugned ex-parte assessment order, the Court held that the penalty notices could not survive independently. The penalty notices dated 22.03.2025 and 29.03.2025 were quashed along with the assessment order.Key evidence and findings: The penalty notices were issued without the petitioner having been afforded a proper opportunity to respond to the assessment proceedings, which formed the basis for the penalties.Application of law to facts: The Court reasoned that quashing the assessment order necessarily entailed quashing the penalty notices that flowed from it, as the penalties were predicated on the validity of the assessment.Treatment of competing arguments: No substantial argument was made by the respondents to uphold the penalty notices independently of the assessment order. The Court did not find any justification to maintain the penalties in the absence of a valid assessment.Conclusion: The penalty notices under Sections 270A, 271AAC(1), 271F, and 272A(1)(d) were quashed as they were consequent to the impugned assessment order which was set aside.Issue 3: Petitioner's claim of non-commencement of business and non-activation of PANRelevant legal framework and precedents: The existence of a legal entity and receipt of capital contributions are sufficient to attract the provisions of the Income Tax Act. Activation of PAN is a procedural requirement but does not negate the legal existence or obligations of the entity.Court's interpretation and reasoning: The Court did not accept the contention that the petitioner's failure to activate the PAN or commence business absolved it from responding to the statutory notices. The Court held that the petitioner had a legal status and was bound by the statutory process.Key evidence and findings: The formation of the partnership firm and receipt of capital were admitted facts, which indicated that the petitioner was a taxable entity under the Act.Application of law to facts: The Court applied the principle that procedural fairness and statutory compliance cannot be circumvented by technical or factual claims such as non-activation of PAN or non-commencement of business.Treatment of competing arguments: The petitioner's argument was considered but ultimately rejected on the ground that it did not justify denial of opportunity to be heard.Conclusion: The petitioner was required to respond to the notices irrespective of the status of business commencement or PAN activation.Issue 4: Scope of Section 148A(b) notice and procedural fairnessRelevant legal framework and precedents: Section 148A(b) mandates that before reopening an assessment, the Assessing Officer must issue a notice and provide an opportunity to the assessee to respond. This provision was introduced to ensure transparency and fairness in reassessment proceedings.Court's interpretation and reasoning: The Court emphasized the mandatory nature of