2025 (10) TMI 425 - AT - Income Tax

Notice under s.148 invalidated as reassessment barred where escaped income not shown as asset under s.149(1)(b)

ITAT DELHI - AT held the notice issued u/s 148 invalid and quashed reassessment proceedings because the AO failed the requirement that escaped income be ... Validity of assumption of jurisdiction u/s 147 - Period of limitation - as argued AO did not have any books of accounts, evidence or other documents in his possession which reveal that that income of the assessee had escaped assessment and such income is represented in the form of asset as required u/s 149(1)(b) and hence the notice issued u/s 148 is barred by limitation. HELD THAT:- The term “asset” as defined in the 4th proviso to section 153A and in Explanation to section 149(1)(b) as it stood at the relevant point of time for the year under consideration were one and the same. We find that from 1-4-2021, the provisions of section 149(1)(b) is amended wherein income escaping assessment amounting to Rs 50 lakhs or more should be represented in the form of an asset, expenditure in respect of a transaction or in relation to an event or occasion or an entry or entries in the books of account. This amendment is to be construed only prospective in nature in the light of the decision of Smart Chip Private Limited [2025 (5) TMI 216 - DELHI HIGH COURT] Accordingly, AO contemplating to disallow the purchases from Bansal traders in the sum had satisfied the first condition of section 149 of the Act that it represents income escaping assessment. But the second condition prescribed thereon that such escaped income should be represented in the form of an asset is not satisfied herein as disallowance of expenditure cannot be construed as being represented in the form of an asset. Reopening in the instant case made after 3 years cannot be made and accordingly the notice issued under section 148 of the Act dated 23-4- 2021 is barred by limitation. Consequentially, the reassessment proceedings are hereby quashed. Accordingly, the Ground No. 3 raised by the assessee in its Cross Objection is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the reopening of assessment under section 147 read with section 148 of the Act, by issuance of notice beyond three years from the end of the relevant assessment year, was valid in absence of information in possession revealing that the escaped income was represented in the form of an 'asset' as required by section 149(1)(b) (as amended with effect from 1-4-2021). 2. Whether disallowance of purchases/expenses (i.e., expenditure or entries treated as not genuine) can be construed as income 'represented in the form of an asset' for the purpose of permitting reassessment beyond three years under section 149(1)(b) and related provisos. 3. Whether decisions of higher fora construing the proviso to the amended section 149(1)(b) and the scope of section 153A are applicable to bar issuance of a notice under section 148 in circumstances where no books, documents or other evidence show escaped income represented as an asset. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reopening beyond three years under section 147/148 read with section 149(1)(b) Legal framework: Section 147 and notice under section 148 permit reassessment where income has escaped assessment. Section 149(1) (as amended effective 1-4-2021) restricts issuance of notice under section 148 after three years unless the Assessing Officer has information revealing that escaped income represented in the form of an 'asset' (as defined in the Explanation) or other specified forms amounts to or is likely to amount to Rs. 50 lakh or more. Precedent Treatment: The Court applied the principles laid down by higher fora that the amended section 149(1)(b) and its first proviso must be construed prospectively and examined whether, in the circumstances, a notice could have been issued under the prior regime or under section 153A. Interpretation and reasoning: The Tribunal examined the reasons recorded by the Assessing Officer which related to alleged nongenuineness of purchases from a third party and consequent disallowance of such purchases/expenses. The Tribunal observed that although the AO had material to suspect escaped income, the material did not show that such escaped income was represented in the form of an 'asset' as defined (immovable property, shares and securities, loans and advances, deposits in bank account). The amended section requires both (i) escaped income of Rs.50 lakh or more and (ii) representation of such income in the form of an asset (or other specified forms) to sustain reopening beyond three years. The disallowance of expenditure/purchases was not an 'asset' within the statutory Explanation. Ratio vs. Obiter: Ratio - reopening beyond three years is impermissible where the AO lacks information showing escaped income represented in the form of an asset as defined; mere information suggesting disallowance of expenditure or non-genuine purchases does not satisfy the asset requirement. Obiter - observations on prospectivity of amendments and cross-application of section 153A principles as illustrative guidance. Conclusions: The notice under section 148 issued beyond three years was barred by limitation because the second statutory condition (representation of escaped income in the form of an asset) was not met. Reassessment proceedings founded on that notice must be quashed. Issue 2: Whether disallowance of expenditure/entries constitutes 'asset' for s.149(1)(b) Legal framework: The Explanation to section 149(1)(b) (and corresponding definition in the provisos to section 153A) expressly defines 'asset' to include specific categories (land, building, shares and securities, loans and advances, deposits in bank account). The amended law adds permutations such as 'expenditure in respect of a transaction or in relation to an event or occasion' and 'an entry or entries in the books of account' for the purpose of the revised threshold; however, the amended provisions must be read with the statutory text and any temporal provisos limiting retrospective effect. Precedent Treatment: The Tribunal relied on higher court reasoning that the amended requirement of representation in the form of an asset cannot be stretched to equate disallowance of expenditure or purchases with acquisition/representation as an asset absent material showing such conversion or representation into the statutory categories of asset. Interpretation and reasoning: The AO's case was confined to disallowing purchases from a vendor on the ground of being accommodation entries. Such disallowance shows suspected bogus expenditure or entries but does not show acquisition or holding of an asset as defined. The Tribunal held that disallowance of expenditure does not of itself become an 'asset' for s.149(1)(b) purposes; therefore the statutory precondition to reopen beyond three years remains unsatisfied. Ratio vs. Obiter: Ratio - expenditure disallowed as non-genuine is not, without more, an 'asset' within the meaning of the Explanation to section 149(1)(b); thus it cannot justify reopening beyond three years. Obiter - discussion on the interplay of amendments and temporal application. Conclusions: The AO's reliance on disallowance of purchases/expenses did not meet the statutory asset requirement; reopening was therefore impermissible on that basis. Issue 3: Application of higher authority rulings on proviso/section 153A and their effect on limitation Legal framework: The first proviso to amended section 149(1)(b) and the provisions of section 153A govern retrospective effect and the permissible temporal reach of reassessment notices where earlier time limits may have lapsed under the pre-amendment law. Section 153A contemplates extended reassessment in search/requisition scenarios subject to conditions including possession of books or documents revealing escaped income represented as an asset. Precedent Treatment: The Tribunal followed higher authority reasoning that (i) the amended thresholds and definitions must be construed prospectively unless the proviso allows limited retrospective operation, and (ii) where section 153A would not have permitted issuance of notice beyond applicable earlier time limits (because the fourth proviso conditions are unsatisfied), a notice under the new section 149 regime cannot be sustained retrospectively. Interpretation and reasoning: The Tribunal analogized the facts to instances where a search/requisition regime would not have permitted extension beyond six years absent evidence of escaped income represented as an asset. By parity, issuance of a notice under section 148 after three years cannot be validated where the AO does not have material showing escaped income represented as an asset. The Tribunal therefore applied the higher authority's construction to bar the impugned notice. Ratio vs. Obiter: Ratio - where conditions of extended limitation under section 153A (or prior regime) are not met, the amended section 149 cannot be invoked retroactively to validate notices that would otherwise be time-barred. Obiter - broader comments on interplay of amendments and statutory provisos. Conclusions: The higher authority approach was followed; because the AO lacked material showing escaped income represented as an asset, the issuance of notice under section 148 after three years was barred and the reassessment could not be sustained. Relief and Consequences The Court concluded that the notice under section 148 dated beyond three years was barred by limitation; the reassessment proceedings were quashed and the revenue's appeal dismissed. Other grounds raised in the reopened proceedings were left open as the reassessment was annulled; one ground in the cross-objections was not pressed and dismissed accordingly. Cross-references See Issue 1 and Issue 2 analysis for cross-application of the definition of 'asset' and the requirement that escaped income be represented as such for reassessment beyond three years; see Issue 3 for the treatment of provisos and retrospective application principles which inform the limitation analysis.