2025 (10) TMI 1096 - AT - Income Tax

Notice under Section 148 held invalid; reassessment quashed where reopening relied on loose third-party papers without satisfaction

ITAT DEHRADUN - AT set aside the reassessment, holding the notice issued u/s 148 invalid and the consequent reassessment order quashed. The AO reopened ... Reopening of assessment - mandation to record valid sanction - AO by alleging that assessee received cash loan of INR 50 Lakhs and paid interest as confirmed in the statement of Shri J.P. Sharma recorded u/s 132(4) - AR submits that despite of repeated requests, reasons recorded before re-opening of assessment were never provided to the assessee and that copy of the Approval memo u/s 151 of the Act by the Competent Authority was not provided HELD THAT:- It is found that a search was carried out in case of third person and during the course of search, certain loose papers containing entries of Rs. 50.00 Lakhs given to the assessee were found noted. According to the reasons recorded AO recorded the satisfaction that assessee has violated the provision of section 269SS & 269T of the Act however, no penal proceedings were advised to be initiated in the order passed u/s 147 r.w.s 143(3) - AO has not recorded any satisfaction with respect to escapement of income of Rs. 50.00 lacs for which addition was made. Admittedly as per the reasons recorded, assessee received cash loan from Shri J.P. Sharma in whose case, search was carried out, and it is settled law that receipt of loan cannot be held as income in the hands of the recipient when the identity of loaner is known and his creditworthiness is not doubted. This clearly suggests that case of the assessee is re-opened on vague reasons which were recorded without application of mind solely based on the information received from Investigation Wing that too with respect to the cash loan and not related to any undisclosed/ unaccounted for income. Re-assessment proceedings initiated in the case of the assessee, suffers serious defects and accordingly, notice issued u/s 148 is hereby, held as invalid and consequent re- assessment order passed is hereby quashed. Accordingly, Grounds raised by the assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under section 148/147 is valid when the assessee was not supplied the reasons to believe and the material relied upon prior to re-opening. 2. Whether reassessment proceedings are invalid in absence of production of the sanction/approval required under section 151 (or the equivalent prior approval specified by law) along with the reasons to believe. 3. Whether compliance with the procedural safeguards of section 148A (in its applicable form), including supply of material and consideration of the assessee's reply and any enquiry results, is mandatory before issuance of notice under section 148. 4. Whether reliance on statements of third parties (obtained in search or otherwise) without supplying those statements to the assessee and without affording opportunity for cross-examination violates principles of natural justice and invalidates the reassessment. 5. Whether receipt of a cash loan from an identified and creditworthy lender can be treated as income escaping assessment for the purposes of reopening under section 147. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of notice under section 148 in absence of supply of reasons/material Legal framework: The statutory scheme requires the Assessing Officer to have 'reasons to believe' that income chargeable to tax has escaped assessment before issuing a notice under section 148; principles of fair hearing and administrative reason-giving apply to quasi-judicial acts. Precedent treatment: The Court followed and applied the reasoning of the High Court decision (Kishore Kumar Singh) which held that reasons supporting a section 148 notice must be supplied so as to permit effective response; it also relied on Supreme Court direction in cases requiring supply of material relied upon (e.g., Ashish Agarwal) and general principles in Oryx/ECIL authorities about providing reasons for quasi-judicial actions. Interpretation and reasoning: The Tribunal held that a bald, vague notice unsupported by reasons/material denies the assessee an effective opportunity to reply and offends Article 14 and principles of natural justice. The AO's failure to supply the material on which reopening was based rendered the notice inadequate and the consequent proceedings unsustainable. Ratio vs. Obiter: Ratio - Non-supply of reasons/material relied on for reopening is fatal to the validity of the section 148 notice. Obiter - Observations on Article 14 reasoning and comparison with other authorities are supportive but ancillary. Conclusion: The section 148 notice issued without supplying reasons and material was held invalid; reassessment based thereon is quashed on this ground (applied to the facts). Issue 2 - Requirement and supply of sanction/approval under section 151 (or equivalent prior approval) Legal framework: The statutory scheme contemplates prior approval/sanction by the specified authority for initiation of reassessment in certain circumstances; that approval and the reasons must be available/supplied as part of the procedural record. Precedent treatment: The Tribunal followed the High Court authority (Tia Enterprises) and coordinate tribunal decisions holding that absence of production/supply of the sanction memo vitiates the assumption of jurisdiction under section 147. Interpretation and reasoning: The Court emphasised that the approval granted by the specified/statutory authority is an integral part of the reassessment record and must be furnished to the assessee along with the reasons to believe; lack of such production undermines the legal foundation for reassessment. Ratio vs. Obiter: Ratio - Failure to furnish the sanction/approval renders reassessment jurisdictionally flawed. Obiter - Comments on timing and administrative practice for furnishing approvals. Conclusion: In absence of production/supply of valid sanction/approval, the reopening was held faulty and contributed to quashing the reassessment. Issue 3 - Mandatory compliance with section 148A procedural safeguards (supply of material, consideration of reply, order under 148A(d)) Legal framework: Section 148A (as applicable) requires enquiry (if required), supply of the results of enquiry and the information relied upon, an opportunity to be heard by serving a show-cause notice, consideration of the assessee's reply, and a reasoned decision whether to issue notice under section 148. Precedent treatment: The Tribunal relied on Supreme Court direction (Ashish Agarwal) that the AO must supply material relied upon for initiation and coordinate tribunal judgments applying the mandatory nature of section 148A steps; also cited decisions that non-consideration of the assessee's reply and failure to provide enquiry results invalidate reopening. Interpretation and reasoning: The AO failed to supply enquiry results and the relied-upon material, did not consider the reply filed by the assessee, and recorded only vague information from an 'insight portal' without independent application of mind. Such omissions meant the AO did not comply with statutory safeguards and effectively denied the assessee a fair opportunity to rebut the basis for reopening. Ratio vs. Obiter: Ratio - Compliance with section 148A procedural requisites (supply of material, consideration of reply, reasoned order) is mandatory; non-compliance renders the notice/ proceedings invalid. Obiter - Detailed criticism of reliance on risk-management portal without verification. Conclusion: The Court held the mandatory procedural safeguards under section 148A were not complied with and therefore the issuance of notice under section 148 was invalid; reassessment was quashed for this reason. Issue 4 - Use of third-party statements without supply and without opportunity for cross-examination Legal framework: Principles of natural justice and settled authorities require that where the Revenue relies upon statements of third parties and those statements form the basis for adverse findings, the assessee should be afforded opportunity to confront/cross-examine or at least be supplied with those statements to enable effective rebuttal. Precedent treatment: The Tribunal applied the Supreme Court ruling in Adman Timber and coordinate High Court/tribunal precedents (Best City Infrastructure and others) holding that denial of opportunity to cross-examine third-party witnesses whose statements are relied upon makes the order a nullity. Interpretation and reasoning: The AO relied upon statements obtained in search and enquiries but did not supply such statements nor provide any opportunity for cross-examination; further, the AO ignored the assessee's request to cross-examine. This constituted a gross violation of natural justice and undermined the reliability of the material used to reopen and assess. Ratio vs. Obiter: Ratio - Reliance on third-party statements without supplying them and without affording opportunity for cross-examination vitiates the reassessment. Obiter - Reinforcement from multiple High Court decisions cited. Conclusion: Because third-party statements were relied upon but not supplied or subjected to cross-examination, the reassessment proceedings were invalidated on natural justice grounds. Issue 5 - Whether receipt of cash loan from identified lender can constitute escaped income Legal framework: Tax law distinguishes receipt of bona fide loans from income; receipt of loan is not income where lender identity and creditworthiness are established and there is no evidence that the loan represents disguised income. Precedent treatment: The Tribunal applied settled law that mere receipt of loan from a known lender cannot be treated as income unless further material demonstrates it is not a genuine loan. Interpretation and reasoning: The reasons recorded for reopening relied on loose papers found during a search indicating a cash loan of Rs.50 lakhs; the AO recorded contraventions of sections 269SS/269T but did not initiate penal proceedings or record satisfaction that income had escaped. No independent application of mind was shown to treat the loan as income, and the lender's identity/creditworthiness were not doubted. Thus the reopening on that basis was vague and unsustainable as a basis for treating the sum as escaped income. Ratio vs. Obiter: Ratio - Receipt of loan from an identifiable, creditworthy lender is not income and cannot, without supporting material, justify reopening under section 147. Obiter - Observations on failure to initiate penal proceedings under 269SS/269T where alleged. Conclusion: The AO's reliance on an alleged cash loan to infer escapement of income was unsupported and contributed to the quashing of reassessment; reopening on that ground was held invalid. Final Disposition (as derived from the Court's conclusions) The Tribunal held that the reassessment proceedings suffered multiple fatal defects - non-supply of reasons/material, non-production of sanction/approval, non-compliance with section 148A safeguards, reliance on third-party statements without supply or cross-examination, and absence of any recorded satisfaction that income had escaped where the transaction was the receipt of an identifiable loan - and accordingly quashed the notice under section 148 and the consequent reassessment order. Remaining grounds were treated as academic and not adjudicated.