2025 (10) TMI 806 - HC - Income Tax

Challenge to reopening of assessment under section 147 dismissed where no jurisdictional plea; only Wednesbury reasonableness review allowed

HC dismissed challenge to reopening of assessment under section 147, upholding the impugned order where no jurisdictional plea was raised. Relying on ... Reopening of assessment u/s 147 - reasons to believe - allegation of Proceedings Based on Suspicion, Borrowed Satisfaction and No Specific Nexus - HELD THAT:- Having noted the above factual narrative and in view of settled position of law in terms of the judgment of the Supreme Court in case of Principal Director of Income Tax (Investigation) and Others v. Laljibhai Kanjibhai Mandalia [2022 (7) TMI 639 - SUPREME COURT] we are of the view that the impugned order needs no interference, when no jurisdiction plea has been advanced. The Supreme Court has held in Laljibhai (supra) as held the sufficiency or inadequacy of the reasons to believe recorded cannot be gone into while considering the validity of an act of authorisation to conduct search and seizure. The belief recorded alone is justiciable but only while keeping in view the Wednesbury 22 Principle of Reasonableness. Such reasonableness is not a power to act as an appellate authority over the reasons to believe recorded. The formation of opinion and the reasons to believe recorded is not a judicial or quasi-judicial function but administrative in character.The information must be in possession of the authorised official on the basis of the material and that the formation of opinion must be honest and bona fide. It cannot be merely pretence. Consideration of any extraneous or irrelevant material would vitiate the belief/satisfaction. The authority must have information in its possession on the basis of which a reasonable belief can be founded that the person concerned has omitted or failed to produce books of accounts or other documents for production of which summons or notice had been issued, or such person will not produce such books of accounts or other documents even if summons or notice is issued to him. The relevance of the reasons for the formation of the belief is to be tested by the judicial restraint as in administrative action as the Court does not sit as a court of appeal but merely reviews the manner in which the decision was made. The Court shall not examine the sufficiency or adequacy thereof. In terms of the Explanation inserted by the Finance Act, 2017 with retrospective effect from 1-4-1962, such reasons to believe as recorded by the Income Tax Authorities are not required to be disclosed to any person or any authority or the Appellate Tribunal. We accordingly dismiss the petition. ISSUES PRESENTED AND CONSIDERED 1. Whether the order passed under Section 148A(3) read with Sections 147/148 of the Income Tax Act is amenable to quashing at the writ stage where the Assessing Officer has recorded reasons to believe escapement of income and issued notice after independent verification. 2. Whether the Assessing Officer's action suffers from 'borrowed satisfaction' or lack of independent application of mind, rendering the reopening invalid. 3. Whether the sanction under Section 151 was vitiated by want of application of mind such that proceedings are void. 4. Whether the material relied upon (STR/Investigation Wing report, bank statements obtained under Section 133(6), ledger entries and admissions) suffices to show prima facie escapement of income and justification for additions under Sections 68 and 69C. 5. Whether alleged procedural or substantive arbitrariness/selective action (Article 14) arises from initiating proceedings against the assessee without proceeding against the counterparty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under Sections 147/148 read with Section 148A(3): Legal framework The statutory scheme permits reopening where the Assessing Officer forms a reasoned belief that income chargeable to tax has escaped assessment; at the notice stage a prima facie belief based on material in possession suffices. Reopening must satisfy procedural pre-conditions under Sections 148/148A and, where applicable, prior approval under Section 151. Precedent Treatment The Court treated governing authorities consistently with the principle that at the stage of issuing notice the AO need only have prima facie reasons (as encapsulated in earlier authoritative rulings referred to by the order) and followed the approach of validating issuance of notice where credible material exists. Interpretation and reasoning The Court examined the impugned order which (i) reviewed the petitioner's replies and documentary record, (ii) recorded absence of requisite NBFC documentation and (iii) recorded independent verification steps (including Section 133(6) inquiry producing bank statements). The Court concluded the order is a speaking order addressing petitioner's contentions and demonstrating a prima facie case for escapement. Ratio vs. Obiter Ratio: Where the AO records specific reasons based on verifiable material and conducts independent verification, the reopening notice under Section 148 is not susceptible to quashing in writ jurisdiction merely on merits. Obiter: Remarks on broader fact patterns distinguishing mere suspicion from documentary corroboration. Conclusion The Court held the reopening under Sections 147/148 read with 148A(3) was justified and not liable to be quashed at this stage. Issue 2 - Allegation of 'borrowed satisfaction' and independent application of mind Legal framework The doctrine of 'borrowed satisfaction' invalidates actions where the AO mechanically adopts investigation findings without independent verification. Conversely, independent application of mind by the AO cures that vice; issuance of independent queries and examination of primary documents is determinative. Precedent Treatment The Court relied on and applied precedent principles distinguishing borrowed satisfaction from legitimate reliance where independent verification has been conducted; it accepted that independent verification neutralises the borrowed satisfaction objection. Interpretation and reasoning The order under challenge demonstrates independent steps: specific queries to the assessee, issuance of Section 133(6) notice to the counterparty, scrutiny of bank statements and ledger entries, and comparative analysis of conflicting statements. The Court found these steps evidence application of mind and negated the borrowed-satisfaction contention. Ratio vs. Obiter Ratio: Independent enquiries (e.g., Section 133(6) notices, documentary verification) constitute application of mind and validate reliance on investigative inputs; mere invocation of borrowed satisfaction is insufficient where AO has undertaken independent fact-finding. Obiter: Emphasis on depth of inquiry required in other factual matrices. Conclusion The Court concluded the AO applied independent mind; the objection of borrowed satisfaction fails. Issue 3 - Validity of sanction under Section 151 Legal framework Sanction under Section 151 is a pre-condition for initiation of proceedings in certain cases; it must not be a merely mechanical approval and must be based on the material placed before the sanctioning authority. Precedent Treatment The Court applied the established rule that absence of meaningful application of mind in sanctioning can vitiate proceedings, but where record shows prior independent enquiries and adequate material, sanction is sustainable. Interpretation and reasoning The impugned order expressly records that prior independent verification and material (bank statements, STRs, ledger entries, contradictory statements) existed and that sanction was obtained after such inquiry. The Court found no specific challenge of mala fides or extraneous consideration in the sanctioning process. Ratio vs. Obiter Ratio: Sanction under Section 151 is valid where it follows consideration of relevant material evidencing escapement; absence of detailed narrative by the sanctioning authority does not automatically invalidate sanction if the overarching record demonstrates application of mind. Obiter: Not all forms of brief sanctioning will suffice in materially different circumstances. Conclusion The Court found the Section 151 sanction was not vitiated and the challenge to sanction failed. Issue 4 - Sufficiency of material (STR, Section 133(6) bank statements, ledger entries) to prima facie establish escapement and justification for invoking Sections 68 and 69C Legal framework Section 68 requires the assessee to satisfactorily explain credits in books (identity, creditworthiness, genuineness). Section 69C deems unexplained expenditure to be income where the assessee fails to explain nature and source. STRs, bank records and internal ledgers may constitute material to form prima facie belief. Precedent Treatment The Court applied established principles (as represented in earlier authorities cited in the order) that where an assessee's explanation is not satisfactory and material corroborates suspicious fund flows, additions under Sections 68/69C are prima facie justifiable for assessment/reopening purposes. Interpretation and reasoning The AO relied on: (i) STR/Investigation Wing report, (ii) bank statement entries obtained under Section 133(6) showing transfers from the alleged accommodation-provider to the counterparty, (iii) ledger entries and admissions by the assessee of transactions on 'mutual understanding,' (iv) absence of NBFC-prescribed documentation, and (v) demonstrable falsehoods in counterparty's prior statements. Collectively these items were held to establish a traceable money trail and undermine the genuineness/creditworthiness of the counterparty and the genuineness of claimed expenditures. Ratio vs. Obiter Ratio: Documentary bank evidence and corroborative material can substantiate a prima facie case of unexplained credits and bogus expenditure to permit reopening and additions under Sections 68 and 69C. Obiter: The ultimate viability of specific additions remains for the Assessing Officer/Tribunal on full adjudication. Conclusion The Court found there was sufficient credible material to justify the AO's prima facie conclusion that Rs.6.75 crores had escaped assessment comprising unexplained credits and bogus expenditure. Issue 5 - Allegation of arbitrariness/selective action (Article 14) for not initiating proceedings against the counterparty Legal framework Article 14 prohibits arbitrary or discriminatory state action; selective prosecution may incur constitutional scrutiny where shown to be mala fide or discriminatory without rational basis. Precedent Treatment The Court applied the threshold that mere selective action does not vitiate proceedings in absence of material showing mala fides, discriminatory intent or extraneous considerations influencing decision-making. Interpretation and reasoning The impugned order shows specific independent inquiries directed at the counterparty (Section 133(6) notice). The AO's focus on the assessee's books and explanations was justified because the statutory burden in respect of credits rests on the recipient; the fact that proceedings against a counterparty were not initiated immediately does not demonstrate arbitrariness where the record shows targeted verification and credible suspicion against the assessee. Ratio vs. Obiter Ratio: Selective action will not invalidate proceedings unless demonstrable mala fide or extraneous considerations are shown; targeted enquiries into a particular assessee may be justified by the material on record. Obiter: Different fact patterns where counterparty is clearly exonerated might attract different outcomes. Conclusion The Court found no established arbitrariness or Article 14 violation warranting interference. Overarching Conclusion of the Court The Court dismissed the writ petition, holding that the impugned order under Section 148A(3) and consequent issuance of notice under Section 148 are supported by specific and credible material, show independent application of mind, satisfy sanction requirements under Section 151, and that statutory and jurisprudential thresholds for prima facie escapement of income under Sections 68/69C were met; therefore the Court declined to interfere at the writ stage, leaving merits to be adjudicated by the Assessing Officer/tribunal as per law.