2025 (7) TMI 898 - HC - Income Tax

Revenue fails to challenge assessment reopening under Section 147 due to lack of independent verification

Principal Commissioner Of Income Tax Versus Emote Wealth Private Limited

Principal Commissioner Of Income Tax Versus Emote Wealth Private Limited - TMI 1. ISSUES PRESENTED and CONSIDEREDThe Court considered the following core legal questions:I. Whether the Income Tax Appellate Tribunal (ITAT) committed substantial error in law by allowing the assessee's appeal on a legal ground-that the re-opening of the assessment was bad in law-when such legal issue was not raised by the assessee before the Commissioner of Income Tax (Appeals) [CIT(A)] either in the grounds of appeal or during appellate proceedings under the prescribed rules.II. Whether the ITAT erred in law by failing to appreciate the facts and circumstances correctly regarding the issuance of notice under Section 148 of the Income Tax Act, 1961 (the Act), as had been duly appreciated by the CIT(A) in his order.III. Whether the ITAT committed substantial error in law by quashing the initiation of reassessment proceedings on the ground that the Assessing Officer (AO) did not apply independent mind to the information received from the Deputy Director of Income Tax (Investigation) [DDIT (Inv.)], Kolkata, despite the AO having issued the notice under Section 148 after duly considering the information and material on record, forming 'reasons to believe' under Section 147, and obtaining requisite approval under Section 151 of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue I: Validity of ITAT's reliance on a legal ground not raised before CIT(A)Relevant legal framework and precedents: It is a settled principle that an appellate authority ordinarily decides only those grounds raised by the parties before it. The appellate process requires that grounds of appeal be specifically raised to enable proper adjudication and to avoid surprise or prejudice to the other party. However, courts have occasionally entertained legal points not raised at earlier stages if such points go to the root of jurisdiction or legality of the proceedings.Court's interpretation and reasoning: The Court noted that the ITAT allowed the appeal on the legal issue that the re-opening of the assessment was bad in law, even though this issue was not raised by the assessee before the CIT(A). The Court did not find this omission fatal. The Court observed that the ITAT's conclusion was based on a re-appreciation of facts and law, particularly focusing on whether the AO had applied independent mind and whether the reasons recorded for reopening were valid. The Court implied that the ITAT's intervention on this legal issue was justified given the fundamental nature of the question concerning the validity of reopening.Key evidence and findings: The ITAT found that the AO's reasons for reopening were extracted verbatim from information received from the DDIT (Inv.) without verification and that the AO had not applied independent mind. The ITAT also noted factual inaccuracies such as the absence of any unsecured loan from the alleged party and even the wrong name of the assessee recorded by the AO.Application of law to facts: The Court accepted the ITAT's approach that the validity of reopening under Section 147 is a jurisdictional and legal issue which can be examined even if not specifically pleaded before the CIT(A). The Court found no error in law in the ITAT's decision to allow the appeal on this ground.Treatment of competing arguments: The revenue argued that the ITAT erred in considering a legal ground not raised before the CIT(A), thereby violating procedural norms. The Court rejected this, emphasizing the primacy of the legality of reopening and the need for the AO to apply independent mind.Conclusions: The Court held that no substantial error of law arose from the ITAT's reliance on the legal issue not raised earlier, and that the ITAT was justified in deciding the matter on that basis.Issue II: Appreciation of facts regarding issuance of notice under Section 148Relevant legal framework and precedents: Section 148 empowers the AO to issue a notice for reassessment if he has 'reason to believe' that income has escaped assessment. The 'reason to believe' must be based on tangible material and the AO must apply independent mind. The CIT(A) and ITAT are tasked with examining whether the AO's reasons are valid and supported by facts.Court's interpretation and reasoning: The Court observed that the CIT(A) had upheld the issuance of the notice under Section 148, but the ITAT disagreed after re-examining the facts. The ITAT found that the AO had not properly verified the information from the DDIT (Inv.) and had mechanically reproduced the reasons without independent scrutiny.Key evidence and findings: The ITAT pointed out that there was no unsecured loan from the alleged party and the AO had even recorded the wrong name of the assessee, undermining the credibility of the reasons for reopening. This indicated a lack of independent application of mind by the AO.Application of law to facts: The Court concurred with the ITAT's finding that the AO did not have valid reasons to believe that income had escaped assessment, as required under Section 147, and thus the issuance of notice under Section 148 was invalid.Treatment of competing arguments: The revenue contended that the CIT(A) had rightly appreciated the facts and that the AO had complied with procedural requirements. The Court rejected this, finding the ITAT's factual re-appraisal to be justified and binding.Conclusions: The Court upheld the ITAT's conclusion that the notice under Section 148 was not validly issued due to lack of independent mind and verification by the AO.Issue III: Validity of initiation of reassessment proceedings and application of Section 133C(2)Relevant legal framework and precedents: Section 147 permits reopening of assessments if the AO has 'reason to believe' income has escaped assessment. Section 151 requires prior approval from the specified authority before issuing notice under Section 148. Section 133C(2), inserted with effect from 1.6.2016, deals with powers of income tax authorities to summon persons and records in certain cases.Court's interpretation and reasoning: The ITAT held that the AO did not apply independent mind to the information received from DDIT (Inv.) and that the reopening was therefore bad in law. The ITAT also found that Section 133C(2) was not applicable to the assessee's case as it was inserted after the relevant assessment year and did not affect the validity of the reopening.Key evidence and findings: The AO had issued the notice after obtaining approval under Section 151, but the ITAT found this procedural compliance insufficient because the underlying 'reason to believe' was not independently formed. The ITAT relied on the absence of verification and factual errors as evidence of lack of independent mind.Application of law to facts: The Court agreed with the ITAT that procedural compliance alone does not validate reopening if the AO's reasons are not bona fide or based on independent assessment. The Court also endorsed the ITAT's view that Section 133C(2) was inapplicable.