2025 (9) TMI 42 - HC - Income Tax

Reopening under s.148A(d)/s.148 quashed for lack of jurisdiction and no prima facie income escapement; temporal mismatch of credits

Ajay Cotspin Industries Versus Income Tax Officer, Ward 1 Mehsana

HC quashed the reopening and notice under s.148A(d)/s.148, holding the AO lacked jurisdiction and no prima facie escapement of income was shown. Credits ... Reopening of assessment u/s 147 - amount of credit in the account of Mehsana Urban Cooperative Bank Ltd. during demonitisation period - HELD THAT:- It appears that the respondent AO while arriving at prima facie conclusion that it is a fit case to reopen the assessment has failed to consider that the amount of credit in the account of Mehsana Urban Cooperative Bank Ltd. during demonitisation period could not have been considered for Assessment Year 2018-2019 as the same pertains to the Assessment Year 2017-2018. AO has only considered the transaction with M/s. Mittal Enterprise and arrived at a prima facie conclusion that such transaction represents the escaped income of the assesse only on the ground that the petitioner failed to furnish sales/purchase register. We are of the opinion that the above reasons assigned by the AO cannot lead to a prima facie conclusion that income has escaped assessment for the year under consideration. Proposed reopening in respect of credit in Mehsana Urban Cooperative Bank Ltd. is concerned, the period relied upon is from 9.11.2016 to 30.12.2016 which is relevant for the Assessment Year 2017-2018 whereas the impugned order is passed for Assessment Year 2018-2019 and so far as the transaction with M/s. Mittal Enterprise is concerned, the petitioner has already submitted ledger account along with the reply to the notice issued u/s 148A(b) of the Act in addition to the tax audit report already filed along with the return of income. We are of the opinion that the AO has failed to assume jurisdiction to hold that it is a fit case for reopening as it cannot be said that the respondent AO was having information which suggest that there is escapement of income. In the result, the impugned order passed u/s 148A(d) of the Act is hereby quashed and set aside. The impugned notice u/s 148 of the Act of even date is also quashed and set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether the order under section 148A(d) of the Income Tax Act and the consequential notice under section 148 could be sustained where the Assessing Officer relied on bank credits during the demonetisation period that pertained to a prior assessment year. 2. Whether the Assessing Officer could form a prima facie satisfaction of escapement of income for the assessment year in question based solely on the assessee's failure to produce a sales/purchase register when the ledger entries relied upon were part of audited books of account and tax audit report already filed with the return. 3. Whether mandatory procedural requirements under section 148A (including issuance of notice under section 148A(b) and consideration of the assessee's reply) and principles of natural justice were complied with by the Assessing Officer in making the order under section 148A(d). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening based on bank credits during demonetisation period applicable to prior assessment year Legal framework: Section 148A(d) permits issuance of a notice under section 148 where the Assessing Officer, after following the procedure in section 148A, forms a prima facie opinion that income chargeable to tax has escaped assessment. Reopening must relate to escapement in the assessment year for which notice is proposed. Precedent Treatment: The judgment does not cite or apply any external precedents; analysis is based on statutory interpretation and fact-application. Interpretation and reasoning: The Assessing Officer treated cash credits in the bank account during 9.11.2016-30.12.2016 as unexplained deposits representing escaped income and included them in the quantum said to have escaped for the assessment year under challenge. The Court observed that those credits fall squarely within the period relevant to the earlier assessment year (2017-18) and therefore cannot legitimately be the basis for reopening the later year (2018-19). The AO's reliance on such period-specific transactions to form a prima facie satisfaction for a different assessment year was unsound. Ratio vs. Obiter: Ratio - An Assessing Officer cannot found a prima facie conclusion of escapement for a particular assessment year by relying on transactions (bank credits) that are attributable to a prior assessment year; such reliance defeats jurisdiction to reopen that later year. Conclusion: The part of the order and notice premised on Mehsana Urban Cooperative Bank credits was invalid because those transactions related to a prior assessment year and did not furnish jurisdictional basis to reopen the assessment year in question. Issue 2 - Validity of reopening based on alleged failure to furnish sales/purchase register when ledger entries were part of audited books and tax audit report Legal framework: Section 148A requires the AO to consider material available and the assessee's explanation before forming a prima facie opinion. Book-keeping and audited accounts are relevant disclosures; the AO must be satisfied that the material indicates escapement for the year in question. Precedent Treatment: No precedents were cited; the Court applied statutory requirements and fact-assessment to determine sufficiency of disclosed material. Interpretation and reasoning: The AO treated transactions amounting to Rs. 2,17,33,683/- with a trading counterparty as unexplained because the assessee furnished only the ledger and not a sales/purchase register. The Court noted that the ledger formed part of the audited books of account and the tax audit report was filed with the return; these constituted primary disclosures of material facts. Mere absence of a separately produced sales/purchase register, where the relevant transactions are recorded in audited books, did not permit the AO to conclude prima facie escapement. The AO failed to show that the material on record suggested income chargeable to tax had escaped for the assessment year concerned. Ratio vs. Obiter: Ratio - Where the assessee has disclosed transactions in audited books of account and filed the tax audit report with the return, the Assessing Officer cannot, without more, form a prima facie satisfaction of escapement merely because a separate sales/purchase register was not produced. Conclusion: The Assessing Officer's conclusion that transactions with the counterparty represented escaped income was unjustified on the material before him; accordingly, that part of the reopening lacked jurisdictional foundation. Issue 3 - Compliance with section 148A procedural requirements and natural justice Legal framework: Section 148A prescribes a pre-reopening procedure including issuance of notice under section 148A(b), an opportunity to reply, consideration of the reply, and recording of reasons under section 148A(d) before issuing a section 148 notice. Precedent Treatment: The Court did not rely on external authority; it examined the record for compliance with statutorily mandated steps and consideration of the assessee's replies. Interpretation and reasoning: The respondent asserted that notice under section 148A(b) was issued, the assessee was granted sufficient time and did submit a reply dated 04.03.2024 which was considered and partly accepted. The Court accepted that procedural steps on notice and opportunity were followed. However, compliance with procedure does not cure the substantive absence of jurisdiction where the reasons recorded do not relate to the assessment year or are unsupported by material suggesting escapement. The Court's scrutiny focused on whether the reasons as recorded could legitimately support a prima facie satisfaction; where they could not (see Issues 1 and 2), the reopening was impermissible notwithstanding procedural steps. Ratio vs. Obiter: Ratio - Procedural compliance with section 148A is necessary but not sufficient; the Assessing Officer must have material which legitimately supports a prima facie conclusion of escapement specific to the assessment year. Procedural steps cannot validate a reopening founded on reasons that are factually or legally misplaced. Conclusion: Although the procedural requirements under section 148A were followed, the substantive reasons recorded did not furnish a valid basis to reopen the assessment year in question; therefore procedural compliance did not save the order. Overall Conclusion and Relief The Court concluded that the Assessing Officer failed to assume jurisdiction to reopen the assessment for the year under challenge because (a) part of the alleged escapement related to a prior assessment year, and (b) the remainder of the asserted escapement was based on transactions already disclosed in audited books and the tax audit report so as not to sustain a prima facie satisfaction. Accordingly, the order under section 148A(d) and the notice under section 148 were quashed and set aside. No costs were awarded.