2025 (10) TMI 936 - AT - Income Tax

Reopening assessments for 2014-15 to 2018-19 quashed: s.149(1)(b) conditions unmet; fresh u/s 148 notices invalid

ITAT (Hyderabad) held reopening of assessments for A.Y. 2014-15 to 2018-19 invalid: sanction was mechanical and mandatory conditions of s.149(1)(b) were ... Validity of reopening of assessment - ground of limitation, invalid sanction by superior authority and non-satisfaction of the conditions as laid down u/s 149(1)(b) - unaccounted cash transactions - HELD THAT:- Notice issued u/s 148 of the Act in respect of A.Ys 2014-15 to 2018-19 after the expiry of 3 years from the end of the A.Y, the approval of the specified authority granted in a mechanical way renders the reopening of the assessment itself bad in law. Accordingly, in view of the facts and circumstances as cited above and various decisions as stated above, we hold that the reopening of the assessment is not valid and liable to be set aside. Apart from the invalid approval/sanction u/s 151 of the Act, the Assessing Officer has also failed to bring the case in the category where mandatory conditions u/s 149(1)(b) of the Act are satisfied for initiation of proceedings u/s 147/148 of the Act after the expiry of 3 years from the end of the relevant A.Ys and therefore, the reopening of the assessment for want of the satisfaction of mandatory condition u/s 149(1)(b) of the Act is also invalid and liable to be quashed. We order accordingly. Initiation of fresh proceedings on same issue - HELD THAT:- Since this notice u/s 148 of the Act, dated 14/11/2024 was issued after dropping the proceedings initiated by the Assessing Officer vide notice u/s 148 dated 18/03/2023, therefore, in our considered opinion, the Assessing Officer cannot initiate the fresh proceedings u/s 147/148 of the Act on the basis of the same material and facts after the proceedings initiated earlier vide notice u/s 148A of the Act dated 18/03/2003 were dropped by the Assessing Officer. The reasons for dropping of the proceedings were not beyond the control of the AO. AO has given the reasons that notice u/s 143(2) was issued, however, non-issuance of notice u/s 143(2) leads to the inference and conclusion that the Assessing Officer did not choose to scrutinize the return of income filed by the assessee in response to the notice issued by the Assessing Officer u/s 148 dated 18/11/2023 and thus, proceedings stands dropped/closed by accepting the return of income. In the absence of fresh material or change in the facts, the Assessing Officer cannot be allowed to reinitiate the proceedings already dropped by issuing a second notice u/s 148 of the Act and that too when the reasons for dropping of the earlier proceedings was not beyond the control of the Assessing Officer. ISSUES PRESENTED AND CONSIDERED 1. Whether notices issued under section 148/147 are barred by limitation because conditions of section 149(1)(b) were not satisfied (income represented as asset, expenditure or entry in books and amount = Rs.50 lakhs). 2. Whether material seized from the residential premises of a third person (senior accounts manager) during a separate search can be treated as books/documents/evidence 'in the possession of the Assessing Officer' in relation to the assessee for purposes of sections 148/149/148A. 3. Whether the seized electronic data (FOCUS 5.5 prints / Excel sheets) constitute 'entries in the books of account' or otherwise disclose an 'asset' or 'expenditure' as required under section 149(1)(b). 4. Whether the sanction/approval under section 151 (specified authority) was valid where it was recorded mechanically/routinely without application of mind. 5. Whether a second notice under section 148 issued after an earlier notice was dropped may be validly issued on the same material without fresh compliances under section 148A. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Limitation under section 149(1)(b) for notices issued after three years Legal framework: Section 149(1) distinguishes ordinary three-year limitation and extended 10-year period where the AO is in possession of books/documents/evidence revealing escaped income represented as (i) an asset, (ii) expenditure, or (iii) an entry/entries in books, and such escaped income is likely to amount to Rs.50 lakhs or more. Precedent Treatment: Tribunal and High Court authorities referred to in the judgment hold that the AO must satisfy these jurisdictional facts prima facie before issuing notice beyond three years; the exercise is not to be deferred to reassessment stage. Interpretation and reasoning: The seized data comprised receipts and payments in cash consolidated for the entire group; no assets or cash equivalents representing the alleged undisclosed income were found; the seized electronic records were not shown to be books of account; allocation to individual companies was not carried out before reopening. The AO relied on ADIT's quantification and turnover-based apportionment rather than detailed verification of seized material. Thus the reasons recorded did not identify assets/expenditure/entries qualifying under section 149(1)(b) or demonstrate that the escaped income per year per entity was = Rs.50 lakhs in the requisite manner. Ratio vs. Obiter: Ratio - where the AO's reasons do not prima facie show that material in his possession reveals escaped income as asset/expenditure/entries (and quantify it), notice beyond three years is unsustainable. Obiter - comments on methodology of apportionment and possibility of later detailed inquiry (not relied upon). Conclusion: Notices for AYs 2014-15 to 2018-19 (and similarly 2019-20 on common facts) issued after three years are invalid for failure to satisfy clause (b) of section 149(1). Issue 2 - Seizure from third person: attribution and applicability of provisos to section 148A Legal framework: Section 148A requires enquiry with prior approval and other steps before issuing a notice; provisos carve out exceptions where search or requisition in respect of the assessee is carried out on/after 1-4-2021 or where seized material from another person is shown to belong/pertain to the assessee with prior approval. Precedent Treatment: Judgment notes authorities recognizing constructive possession/attribution in some circumstances, but emphasises that separate authorisations for separate searches are relevant and that proviso exceptions are confined to cases where search pertains to the assessee or prior approval satisfies stated conditions. Interpretation and reasoning: Two distinct search operations existed - one at the assessee/group premises and a separate authorization for the accounts manager's residence. The incriminating material relied upon was seized under the latter separate warrant. The proviso relieving the AO from conducting enquiry under section 148A applies only where the search/requisition relates to the assessee; it does not automatically apply where material is seized from a third person under a separate search unless the statutory conditions (prior satisfaction/approval that material pertains to the assessee) are met. The authorities (AO/Pr. CIT/DGIT) proceeded as if the seized material directly pertained to the assessee without showing such nexus or obtaining the specific prior satisfaction contemplated by the proviso clauses. Ratio vs. Obiter: Ratio - a separate search of a third person does not automatically bring the case within the first proviso to section 148A; the proviso's exceptions require the statutory nexus or prior satisfaction/approval which must be recorded. Conclusion: The reliance on material seized from a third person without recording the requisite satisfaction/approval renders the AO's invocation of proviso to section 148A and consequent issuance of notices infirm. Issue 3 - Whether seized electronic records constitute books of account/entries or assets under section 149(1)(b) Legal framework: Clause (b)(iii) of section 149(1) requires entries in books of account; Explanation defines 'asset' to include certain movable/immovable properties and financial items. Precedent Treatment: Authorities cited establish that prints or unaudited electronic lists may not qualify as books of account/entries absent that characterisation and that the AO must identify prima facie how the seized material fits the statutory categories. Interpretation and reasoning: The FOCUS 5.5 software data and Excel printouts were consolidated records of receipts and payments across the group and not shown to be books of account of the assessee. No assets (as defined) were traced or evidenced as representing the alleged undisclosed income. Transactions included receipts and payments (some potentially loans/advances), and only considering receipts without offsetting payments was arbitrary. The AO did not demonstrate that the seized data amounted to entries in assessee's books or that they evidenced acquisition of assets. Thus the material did not satisfy sub-clauses (i) or (iii) of section 149(1)(b). Ratio vs. Obiter: Ratio - mere electronic records or consolidated lists seized from a third person are not automatically entries in assessee's books or evidence of assets; AO must show prima facie fit with statutory categories before reopening. Conclusion: Seized electronic records did not qualify as entries in assessee's books or show income represented by assets; therefore conditions of section 149(1)(b) were not satisfied. Issue 4 - Validity of sanction/approval under section 151: requirement of application of mind Legal framework: Section 151 requires specified authority to be satisfied on reasons recorded by AO before permitting issuance of notices; sanction is a safeguard and must reflect application of mind and objective satisfaction. Precedent Treatment: Authorities repeatedly held that mechanical endorsements such as 'Yes' or rubber-stamp approvals without recorded reasons indicate lack of application of mind and render sanction invalid. Interpretation and reasoning: The sanction/approval (DGIT/Pr. CIT) concurred with the AO's proposal without addressing the key defects: material seized from a separate search, absence of asset/entries demonstration, and failure to allocate receipts/payments to entities. The approval form and DGIT concurrence did not exhibit meaningful reasons or objective satisfaction, indicating mechanical acceptance of the proposal and non-application of mind. Judicial precedents cited in the judgment uniformly treat such mechanical approvals as vitiating the reopening. Ratio vs. Obiter: Ratio - sanction under section 151 granted mechanically or without discernible application of mind is invalid and vitiates jurisdiction to issue notice under section 148. Conclusion: The sanction/approval was recorded mechanically and without requisite application of mind; therefore it is invalid and the consequent notices/reopenings are void. Issue 5 - Validity of second notice after dropping earlier proceedings Legal framework: Re-initiation after dropping requires compliance with section 148A where the proviso does not apply; fresh jurisdictional satisfaction is necessary before issuing another notice. Precedent Treatment: The Tribunal applied principles that an Assessing Officer cannot reinitiate proceedings on the same material after voluntarily dropping earlier proceedings unless fresh material or circumstances justify reopening and statutory procedure is followed. Interpretation and reasoning: The AO had issued an initial notice, received a return, and subsequently dropped those proceedings for technical reasons (failure to issue a section 143(2) notice within limitation). No new material or change of facts was produced to justify a fresh notice; the second notice was issued on the same material without fresh enquiry under section 148A. The record shows the AO effectively accepted the return earlier; re-initiation on same facts without fresh statutory compliance is impermissible. Ratio vs. Obiter: Ratio - where proceedings initiated under section 148 are dropped and there is no fresh material or change in facts beyond AO's control, a second notice issued on same material without following section 148A is invalid. Conclusion: The second notice issued after dropping the earlier proceedings (AY 2019-20) is invalid and liable to be quashed for lack of fresh material and failure to follow section 148A procedures. Final disposition (from reasoning addressed above) The Court concluded that (i) the notices under section 148 for AYs 2014-15 to 2019-20 are invalid for failure to satisfy section 149(1)(b); (ii) material seized from a third person under a separate authorization did not satisfy proviso conditions to dispense with section 148A safeguards; (iii) the seized electronic records did not qualify as books/entries or assets as required; (iv) the sanction under section 151 was recorded mechanically without application of mind and is invalid; and (v) the second notice issued after dropping earlier proceedings was invalid for want of fresh material and non-compliance with section 148A. Consequently the reassessments were set aside.