2025 (7) TMI 997 - AT - Income Tax

COVID-19 isolation justifies remand of best judgment assessment under sections 147 and 144 for fresh proceedings

Malani Holdings Private Limited Versus Income Tax Officer, Ward-4 (1), Raipur

Malani Holdings Private Limited Versus Income Tax Officer, Ward-4 (1), Raipur - TMI The core legal questions considered in this appeal pertain to the validity and legality of the reopening notice issued under section 148 of the Income Tax Act, 1961, and the consequential assessment order passed under sections 144 and 147 of the Act. Specifically, the issues include whether the notice under section 148 dated 28/03/2021 and the assessment order dated 28/03/2022 are legally sustainable; whether the reopening was based on valid reasons or merely a change of opinion or borrowed satisfaction; the correctness of the remand order passed by the Commissioner of Income Tax (Appeals) under section 251(1)(a); and the validity of the addition of Rs. 1,20,00,000/- under section 68 of the Act on account of share application money received from a related company.The first issue concerns the legality of the notice under section 148 and the assessment order framed under sections 144 and 147. The legal framework requires that reopening of assessment under section 147 must be based on tangible material indicating escapement of income, and the notice under section 148 must comply with procedural safeguards, including the first proviso to section 147 which restricts reopening in certain circumstances. The appellant challenged the notice on grounds that it was issued on a change of opinion, was based on borrowed satisfaction without independent reasons, and was therefore illegal and bad in law.The Court noted that the appellant failed to comply with the notices during the original assessment proceedings due to extraordinary circumstances, including the director's serious health issues caused by COVID-19, bereavement, and family business insolvency, which led to non-compliance and ultimately to the best judgment assessment under section 144. The Court observed that best judgment assessment under section 144 is invoked when the assessee fails to provide necessary information or cooperate with the assessment process. The Court referred to the recent amendments introduced by the Finance Act, 2024, which empower the Commissioner (Appeals) to set aside best judgment assessments and remit the case back to the Assessing Officer for fresh adjudication, effective from 1st October 2024.Regarding the reopening notice, the Court did not find sufficient grounds to declare it illegal at this stage. The assessing officer had received information indicating that the share application money of Rs. 1,20,00,000/- was received from a company whose financial capacity and creditworthiness were questionable, resembling a paper company. The appellant failed to provide satisfactory explanations or comply with notices, justifying the reopening and best judgment assessment. The Court emphasized that the assessing officer must base the reopening on independent satisfaction and relevant material, not mere change of opinion or borrowed satisfaction, but in this case, the material on record supported the reopening.The second issue relates to the addition of Rs. 1,20,00,000/- under section 68 of the Act. Section 68 deals with unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of such credits. The assessing officer found that the share application money was received from a group company with no adequate financial capacity, constituting unexplained money. The appellant's failure to provide evidence or explanations led to the addition. The Court noted that the appellant had the opportunity to submit documents and explanations but remained non-compliant, justifying the addition under section 68.The third issue concerns the remand order passed by the Commissioner of Income Tax (Appeals) under section 251(1)(a) of the Act, which set aside the best judgment assessment and remitted the matter to the assessing officer for fresh adjudication. The appellant contended that the CIT(A) erred in not adjudicating the legal grounds raised and merely remanding the case, thus denying justice. The Court analyzed the powers of the CIT(A) under section 251, including the recent amendment empowering the CIT(A) to set aside best judgment assessments and direct fresh assessments. The Court found that the remand was appropriate in the interest of justice, especially given the bonafide reasons for non-compliance by the appellant due to health and family crises. The Court held that the appellant would have the opportunity to raise all legal contentions before the assessing officer during the fresh assessment.The Court also examined the principle of natural justice, emphasizing that the appellant was given a fair opportunity to present its case and that the remand ensured compliance with procedural fairness. The Court rejected the appellant's contention that the remand order was bad in law for not deciding legal issues, holding that such issues could be raised and adjudicated in the fresh proceedings. The Court observed that the CIT(A) had the option to seek further inquiry reports but chose remand in the interest of justice, which was a plausible and reasonable course of action.In addressing the competing arguments, the Court balanced the revenue's interest in ensuring proper assessment based on credible information and the assessee's right to fair procedure and opportunity to be heard. The Court recognized the exceptional circumstances affecting the appellant's compliance and the legislative intent behind empowering the CIT(A) to set aside best judgment assessments for fresh adjudication, thus promoting justice and accuracy in tax administration.Ultimately, the Court upheld the order of the CIT(A) remanding the case for fresh assessment and dismissed the appeal filed by the assessee. The Court found no infirmity in the remand order and confirmed that the appellant would be entitled to raise all legal and factual contentions before the assessing officer in the fresh proceedings.Significant holdings from the judgment include the following:'Considering the aforesaid amendment and discussion, and the fact that the director of the company who was responsible for replying to the notices was facing health issues and lost his father during that time and therefore could not participate during assessment proceedings and now the appellant is willing to submit the details and wishes for an opportunity to present the same, it would be appropriate to set aside the order passed under Section 144 and remand the case to the Assessing Officer (AO) for fresh adjudication. The appellant shall submit all the relevant details to the Id. AO, who will examine them on their merits.''Since the assessee had Bonafide reasons to not appear and comply before the Ld. AO, for that reason only the assessment was completed u/s 144 of the Act, Ld. CIT(A), therefore, had rightly invoked his powers available u/s 251(1) of the Act and had granted one more opportunity to the assessee to represent its case before the Ld. AO... Considering the aforesaid observations, since the assessee has been provided with further opportunity to represent its case, the principle of natural justice has been duly adhered to and there would be no prejudice to the assessee.'Core principles established include:- The reopening of assessment under section 147 must be based on independent and relevant material and not mere change of opinion or borrowed satisfaction.- Best judgment assessment under section 144 is justified when the assessee fails to comply with notices and provide necessary information, but the Commissioner (Appeals) has the power to set aside such assessment and remit for fresh adjudication, especially in light of the Finance Act, 2024 amendments.- The principle of natural justice requires that the assessee be given a fair opportunity to present its case, and extraordinary circumstances such as health issues and family bereavement may justify non-compliance, warranting remand for fresh assessment.- The Commissioner (Appeals) may remand the matter for fresh adjudication rather than decide all legal issues at the appellate stage, allowing the assessing officer to consider all contentions afresh.Final determinations on each issue are:1. The reopening notice under section 148 and the assessment order under sections 144 and 147 are not illegal or bad in law based on the material on record and circumstances.2. The addition of Rs. 1,20,00,000/- under section 68 is justified due to unexplained share application money from a company lacking financial capacity.3. The remand order by the CIT(A) is valid and appropriate, providing the assessee an opportunity to present its case in fresh proceedings, with adherence to natural justice.4. The appeal filed by the assessee is dismissed, and the order of the CIT(A) is upheld.