2025 (10) TMI 948 - AT - Income Tax

Reopening under Section 147/148 impermissible while a valid return is pending scrutiny; escapement cannot be presumed

ITAT MUMBAI - AT held that where a valid return is available and pending disposal by the AO, reopening under s.147/148 is impermissible because escapement ... Reopening of assessment u/s 147 - Validity of belated return - HELD THAT:- When a valid return is available with the AO, the said return of income can be selected for scrutiny assessment under regular assessment and, therefore, the question of any escapement of income does not arise. In our humble opinion, unless the return of income is scrutinized by the AO or the time limit to scrutinize the return of income is over, he cannot come to a conclusion of any escapement of income. On identical facts, in the case of K.M. Pachayappan [2007 (7) TMI 229 - MADRAS HIGH COURT] quashed the reassessment proceedings as held that when a return of income has been filed and the same is pending, the proceedings are still pending. In such a situation, revenue could not have issued a notice for reopening under section 147 of the Act. The Hon'ble Court relied upon the decision of the Hon'ble Supreme Court in the case of Trustees of HEH The Nizam's Supplemental Family Trust. [2000 (2) TMI 4 - Supreme Court] wherein held that unless the return of income already filed is disposed of, a notice for reassessment u/s 148 cannot be issued. No reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of the return already filed are not terminated. We set aside the impugned notice u/s 148 of the Act and quash the resultant assessment order. Assessee appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice issued under section 148 (reopening) is valid where the assessee has filed a valid return and the Assessing Officer still has time available under section 143(2) to issue a scrutiny notice under section 143(3). 2. Whether Explanation 2(b) to section 147 permits reopening when a return has been filed but no assessment has been made, despite the Assessing Officer having the statutory period available under section 143(2) to initiate regular scrutiny proceedings. 3. Whether authorities and precedents holding that reassessment cannot be initiated while regular assessment proceedings are pending remain applicable where intimation under section 143(1)(i) has been issued but the period for section 143(2) has not expired. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of section 148 notice when time under section 143(2) is available Legal framework: Section 143(1)(i) provides for intimation and contemplates further action under section 143(2) where the Assessing Officer considers it necessary to serve a notice to complete assessment under section 143(3); time limits under section 143(2) apply. Sections 147/148 empower reopening where the Assessing Officer has reason to believe income has escaped assessment, subject to statutory limitations including explanations to section 147. Precedent treatment: The Tribunal relied on higher-court authorities holding that reassessment under section 147/148 cannot be initiated while the regular assessment proceedings based on a filed return remain pending and the time to initiate section 143(2) proceedings has not lapsed. Decisions referenced by the Court include those which quashed reopening where the return was pending and the period for scrutiny remained open. Interpretation and reasoning: The Court reasoned that where a valid return has been filed and the Assessing Officer still has the statutory period available to issue notice under section 143(2) to initiate scrutiny under section 143(3), there is no factual or legal foundation for concluding that income has 'escaped assessment.' The power to reopen under section 147/148 is not intended to abort or pre-empt the regular assessment process; it is a distinct, extraordinary power that may be exercised only after the possibility of completing regular assessment has ceased (either by completion under section 143(3) or expiry of the time for section 143(2)). Ratio vs. Obiter: Ratio - A notice under section 148 issued before expiry of the section 143(2) period (when a valid return is on record) is invalid because the Assessing Officer must first utilise the regular assessment mechanism under section 143(2)/(3); reopening cannot be used to sidestep pending regular assessment. Obiter - Observations as to the general scope of section 147/148 as an extraordinary power, though consistent with ratio, reinforce but are not independently dispositive. Conclusions: The Court set aside the section 148 notice and quashed the resultant reassessment because the Assessing Officer issued the reopening notice while the statutory window to complete regular assessment remained open, rendering the reopening invalid. Issue 2 - Scope and applicability of Explanation 2(b) to section 147 Legal framework: Explanation 2(b) to section 147 deems cases where a return has been furnished but no assessment has been made, and the assessee has understated income or claimed excessive relief, to be cases where income has escaped assessment. Precedent treatment: Courts have interpreted Explanation 2(b) as clarifying that mere absence of an assessment at the time of reopening does not preclude reopening when the AO has reason to believe understatement exists; however, prior decisions have also held that Explanation 2(b) cannot be read to nullify the statutory role and time limits of section 143(2)/(3). Interpretation and reasoning: The Court held that Explanation 2(b) is intended to cover instances where no assessment can possibly be made on the date the reopening notice is issued (for example, where limitation for regular assessment has already expired), not to permit reopening while the Assessing Officer still has the ability to initiate section 143(2) proceedings. Explanation 2(b) does not render the section 143(2) safeguard meaningless; the possibility of regular assessment defeats the premise that income has escaped assessment for purposes of reopening. Ratio vs. Obiter: Ratio - Explanation 2(b) cannot be invoked to justify reopening when the statutory period to serve a section 143(2) notice remains available; the explanation applies only where the possibility of regular assessment is absent. Obiter - General observations on the legislative purpose behind Explanation 2(b) and its limits vis-à-vis section 143 are supportive but ancillary. Conclusions: Explanation 2(b) did not validate the reopening in the facts before the Court because the Assessing Officer could still have proceeded under section 143(2); hence reliance on Explanation 2(b) was misplaced. Issue 3 - Applicability of apex/high-court precedent distinguishing failure to proceed under section 143(2) Legal framework: Judicial decisions permit reassessment under section 147 once the time for regular assessment has expired; conversely, where regular assessment remains possible, reassessment is impermissible. Precedent treatment: The Court considered and distinguished authorities relied upon by the Revenue, observing that such precedents are fact-sensitive; where those decisions permitted reopening, it was because the time to issue section 143(2) notices had already expired. The Court also relied on decisions from higher courts that directly support the proposition that reopening cannot be initiated while regular assessment remains pending. Interpretation and reasoning: The Court analyzed the cited apex-court paragraph that permits reassessment where section 147 ingredients are fulfilled, emphasizing that the cited observation was context-specific and applicable only when the period to initiate section 143(2)/(3) had expired. The Court concluded that those authorities do not assist the Revenue where the section 143(2) period remains extant. Ratio vs. Obiter: Ratio - Precedents allowing reopening are inapplicable where regular assessment may still be completed; the Tribunal's reliance on contrary apex/high-court statements was constrained by temporal facts (expiry of section 143(2) period). Obiter - Discussion of harmony among decisions is explanatory. Conclusions: Existing higher-court authority does not justify reopening under the present facts; the Court followed the decisions holding reopening invalid while section 143(2) time remained available. Cross-references 1. Issue 1 and Issue 2 are interlinked: the invalidity of the section 148 notice rests both on the continuing availability of section 143(2) (Issue 1) and on the proper limited reading of Explanation 2(b) (Issue 2). 2. Issue 3 corroborates Issues 1-2 by confirming that precedents permitting reopening post-date the expiry of section 143(2) time and are therefore distinguishable on the facts.