2025 (10) TMI 97 - HC - Income Tax

Income tax department warned against blind reliance on software data; wrongful assessments quashed, token costs imposed

HC held that the income tax department had been blindly acting on software-generated data without proper verification, causing wrongful assessments ... Levy of exemplary cost of Rs. 1 Crore on Income Tax Officers (AO) vide earlier order [2025 (4) TMI 1133 - GUJARAT HIGH COURT] for being assessment order resulting into high-pitch assessment - non-application of mind and negligence - Initiation or proceedings on dead person/amalgamated companies or business and inactive or multiple PANs in the software system of the department - HELD THAT:- Respondent income tax department is taking corrective proactive steps for resolution of the issues which are raised in this petition pertaining to initiation or proceedings on dead person/amalgamated companies or business and inactive or multiple PANs in the software system of the department. On perusal of the affidavit in reply filed on behalf of respondent nos.2 and 3, it transpires that instead of action being taken on the basis of information available and exercise of discretion, the respondent department is taking action as per the information made available by the software system. Thus we are of the opinion that instead of department taking help of the software system, is being directed by the software system as if the software system is the master of the respondent department and the respondent department is blindly following the information made available by the software system and taking action without verifying the veracity of the same. It may therefore, happen that if someone enters false or wrong information in the software system, Jurisdictional Assessing Officer would take action on the basis of such information without verifying the correctness of the same resulting into multiple and protracted litigation. Time and again, we have come across major litigations on account of action being taken by the respondent department due to either mis-information, non-information or false information made available by the Insight Portal without having any nexus to the documents or material available on record. The Jurisdictional Assessing Officers are acting as a tool of the software system to initiate the proceedings rather than taking information as only the basis, without conducting any inquiry or application of mind. Thus the software system has become the master, rather than a helpful tool for the department for implementing the provisions of the Income Tax Act. The present petition is a classic example where little verification or application of mind by the Jurisdictional Assessing Officer would not have resulted into this litigation and it could have been avoided by not taking any action more particularly, when there was a merger of one National Bank with the petitioner bank. We are also apprised by the learned advocate Mr. Patel that action is taken by the department against the Jurisdictional Assessing Officer on administrative side. Therefore, we do not want to further prejudice such departmental action by observing in any manner. The petition is therefore, disposed off with a cost of Rs. 10,000/- (Rupees Ten Thousand only) to be paid by the respondent nos.1 and 2 with the Gujarat State Legal Service Authority as a token cost instead of Rs. 1 crore for such negligence which was deemed fit at the time of passing the judgment on 17.03.2025. ISSUES PRESENTED AND CONSIDERED 1. Whether an assessment order can be sustained when it is framed against a non-existent/ceased entity (including merged/amalgamated entities) in circumstances where departmental records and available communications indicated cessation or merger. 2. Whether Assessing Officers may rely conclusively on outputs of departmental software systems (ITBA/Insight/CPC/e-filing) without independent application of mind, verification of data, or event-marking where statutory mechanisms (including event marking under relevant provisions) exist to record corporate events. 3. Whether the departmental software ecosystem has a presently enforceable duty or functionality to synchronize data across portals (e-filing, ITBA, PAN, Insight, CPC) and to proactively identify and alert officers about duplicate/inactive PANs; and what legal consequences follow from deficiencies in such synchronization. 4. Whether exemplary costs are appropriate against the Departmental respondents for issuance of a high-value assessment and demand pursuant to the foregoing defects, and if so, the quantum and conditions for imposition or reduction of such costs. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of Assessment Against Non-Existent/Merged Entity Legal framework: Statutory provisions enabling event marking and giving effect to mergers/amalgamations and striking off (referenced in the judgment are the provisions dealing with recording of corporate events and their effect under the Income-tax Act). The fundamental requirement is that an assessment must be grounded on accurate identification of the assessee and material facts. Precedent Treatment: No prior judicial authorities were cited or applied in the judgment to modify or overrule existing precedent; the Court decided the matter on factual and statutory record before it. Interpretation and reasoning: The Court found that the impugned assessment was passed against a PAN mapped to a non-existing entity which, on the material before the Tribunal, had been subject to merger/ cancellation requests earlier. The assessing machinery proceeded without adequate verification of the corporate status despite communications (including a communication dated 02.02.2022 about merger) being available to the Department. The Court characterized the assessment as high-pitched and resulting from total non-application of mind and negligence of the Assessing Officer. Ratio vs. Obiter: Ratio - An assessment framed against a non-existent/ceased entity, where evidence of cessation/merger exists and was not verified by the Assessing Officer, is not sustainable; such an order can be quashed as vitiated by non-application of mind. Obiter - Observations on systemic causes and software roles illustrating recurring patterns of similar litigation. Conclusions: The Court quashed and set aside the impugned assessment order as unsustainable on the facts; it endorsed that minimal verification by the Assessing Officer would have averted the litigation. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Reliance on Departmental Software Outputs Without Application of Mind Legal framework: Administrative law principles requiring public authorities to exercise discretion, make independent enquiries where necessary, and to apply mind to the material before reaching adjudicatory action; statutory processes for event marking within the Department's IT frameworks. Precedent Treatment: The Court relied on principle rather than specific precedent and expressed repeated judicial concern over departmental officers acting mechanically on software-generated flags. Interpretation and reasoning: On review of the DGIT(Systems) affidavit, the Court noted that Assessing Officers are able to view certain events on specific portals but that many event-markings are not synchronized across systems. The Court recorded that, in practice, officers were treating software outputs as conclusive and initiating or reopening proceedings without independent inquiry into veracity. The Court held that software is a tool, not a substitute for discretionary application of mind, and that blind reliance risks initiation of incorrect or multiplicative litigation. Ratio vs. Obiter: Ratio - Assessing Officers must exercise independent judgment and verify software-provided data before initiating proceedings; mechanical reliance on IT outputs without verification is improper and can invalidate departmental action. Obiter - Broader systemic criticisms and policy suggestions about software governance and training. Conclusions: The Court mandated that departmental action must not be directed solely by software outputs; officers must verify information and apply discretion before initiating assessments or reopening proceedings. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Synchronisation of Portals and Identification of Duplicate/Inactive PANs Legal framework: Statutory prohibition against multiple PANs under section 139A and statutory/event marking mechanisms; administrative responsibility to maintain accurate taxpayer records for lawful assessment. Precedent Treatment: No judicial authority was applied to change the legal obligations as to data management; the Court examined the DGIT(Systems) affidavit and the current technical architecture and plans. Interpretation and reasoning: DGIT(Systems) explained that (a) certain events (e.g., legal-heir registration) are visible on some portals but not auto-synchronized into the PAN module of ITBA or Insight; (b) there is presently no system function to proactively alert JAOs of duplicate PANs due to risk of false positives; and (c) planned projects (ITBA 2.0, PAN 2.0, Insight 2.0) aim to introduce synchronization and enhanced de-duplication. The Court accepted that technological development is underway but emphasized that present deficiencies led to the impugned wrongful action. The Court noted procedural pathways available presently for de-duplication (taxpayer-initiated surrender, JAO-initiated deletion upon reliable information) but criticised lack of proactive reconciliation and systemic alerts. Ratio vs. Obiter: Ratio - In the current state, absence of synchronization and proactive system alerts does not absolve Assessing Officers from verifying the identity/status of an assessee before action; systemic improvements are necessary but interim officer diligence is required. Obiter - Technical explanations by DGIT(Systems) and future IT projects are informative but not determinative of present legal standards. Conclusions: The Court acknowledged planned systemic remedies but held that in the interim Assessing Officers must verify facts; it urged development and deployment of synchronizing functionalities and proactive de-duplication measures (as described by DGIT(Systems)) to prevent recurrence. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Imposition and Quantum of Costs for Negligent Departmental Action Legal framework: Judicial power to impose costs as a corrective and deterrent measure where litigation arises from departmental negligence, non-application of mind or manifestly unreasonable action. Precedent Treatment: The Court exercised its discretion in light of facts, apology tendered by respondents, and DGIT(Systems) affidavit; no precedents were cited to fix a tarif for exemplary costs. Interpretation and reasoning: Initially the Court had considered imposing an exemplary cost of Rs. 1 Crore given the scale of the high-pitched assessment and demand; however, after receiving the departmental affidavit explaining technical shortcomings and an unconditional apology, and mindful that administrative action against officers is separately available, the Court moderated its view. The Court observed that while software defects contributed, the decisive fault lay in failure of the Assessing Officer to verify and apply mind. Balancing deterrence, corrective purpose, and departmental remedial steps, the Court reduced the cost to a token amount to be paid to a legal services authority. Ratio vs. Obiter: Ratio - Costs can be imposed for gross negligence and non-application of mind; the quantum is discretionary and may be moderated by remediation efforts and apology. Obiter - Comments about administrative proceedings against officers and the larger need for systemic reform are advisory. Conclusions: The Court imposed a token cost of Rs. 10,000 to be paid by the Department to the State Legal Services Authority (instead of the earlier considered Rs. 1 Crore), while recording concerns about negligence and directing that systemic improvements be pursued as per the DGIT(Systems) responses. REMEDIAL AND ADMINISTRATIVE DIRECTIONS (Ratio/Operational Mandates) 1. The impugned assessment order is quashed for failure of verification and non-application of mind where the assessee was non-existent/merged. 2. Assessing Officers must not act mechanically on software-generated flags; they are obligated to verify the correctness of data and apply discretion before initiating or reopening assessments. 3. The Court noted the DGIT(Systems) assurance that ITBA 2.0, PAN 2.0 and Insight 2.0 projects will aim to synchronize event markings, integrate third-party orders/databases, and explore proactive de-duplication; until such functionalities are in place, existing manual/verification procedures remain obligatory. 4. A token cost is imposed to reflect negligence and to serve as a reminder of duty to verify departmental records; administrative action against officers remains open and the Court refrains from commenting further to avoid prejudice to such processes.