2025 (11) TMI 40 - AT - Income Tax

Reopening under s.147 void ab initio where AO relied on erroneous investigation reasons then substituted new reasons

DCIT, Circle 10 (1), New Delhi. Versus M/s. Interlink Foods Private Ltd. And (Vice-Versa)

ITAT DELHI - AT held that reopening was void ab initio because the AO relied on erroneous reasons supplied by the Investigation Wing and obtained approval ... Reopening of assessment - reasons as supplied by the Investigation Wing with the observation that the assessee has taken accommodation entry - HELD THAT:- After objections raised by the assessee, the AO in the assessment order agrees with the fact that the reasons recorded were a typographical mistake and he proceeded to complete the assessment with the new reasons which were not the reasons recorded for reopening of the case. After considering the facts on record, we observe that the reasons cannot be substituted or improvised during the assessment proceedings. AO gets the jurisdiction to reopen the assessment mainly on the basis of reasons recorded and subsequent approval of the competent authority to initiate the proceedings. We observe that the AO has taken the approval from Pr.CIT with the information received from the Investigation Wing which was wrong. AO has not verified the reason forwarded by the Investigation Wing and proceeded to initiate the proceedings with the wrong reasons. AO completed the assessment with the new issue and with the new reasons that assessee has taken loans. Since the initiation of proceedings is void ab initio, the assessment completed u/s 147 is also bad in law - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether a reopening under section 148 (and consequential assessment under section 147) is valid where the reasons recorded for reopening are factually incorrect and were effectively substituted or modified by the Assessing Officer during assessment proceedings. 2. Whether reassessment proceedings initiated for the relevant assessment year by issue of notices on or after 1 April 2021 are barred by limitation having regard to the interplay between the Taxation and other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and the post-2021 reassessment regime (including the concession recorded by the highest court that certain notices issued on/after 1 April 2021 must be dropped for the assessment year in question). 3. Whether a notice under section 148 issued after more than three years from the end of the relevant assessment year is valid where prior approval/satisfaction required under the statutory provision prescribing a 'specified authority' was not obtained from the correctly designated senior authority (i.e., approval obtained from an authority other than that mandated by the statutory scheme). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening when reasons recorded are factually incorrect and substituted during assessment Legal framework: Jurisdiction to reopen an assessment under sections 147/148 is founded on reasons recorded by the Assessing Officer and the subsequent statutory process; those reasons constitute jurisdictional facts and cannot be changed, supplemented or corrected post hoc in a manner that alters the basis for reopening. Precedent treatment: The Tribunal considered well-established administrative law principles that recorded reasons for initiating adverse proceedings are not amenable to post-reopening substitution; prior authorities emphasize that reasons recorded are immutable and that substitution of the subject or facts at assessment stage amounts to impermissible post-facto rationalisation. Interpretation and reasoning: The AO issued the reopening notice based on information identifying a particular source and transaction. During assessment the AO admitted that the recorded reasons were a 'typographical mistake' and completed assessment by making additions on the basis of different parties and transactions than those mentioned in the reasons for reopening. The Tribunal held that the AO had not verified the information before obtaining approval to reopen; the initial information was wrong and the AO proceeded to change the subject of inquiry at the assessment stage. Since the jurisdiction to reopen rested on the original recorded reasons and the approval was obtained on that (wrong) basis, the subsequent change constituted a material alteration of the basis of jurisdiction and amounted to a jurisdictional defect rendering the reopening void ab initio. Ratio vs. Obiter: Ratio - reasons recorded for reopening are jurisdictional facts; they cannot be modified at the assessment stage to change the party/transaction that formed the basis of reopening. Obiter - factual observations about the nature of the transactions (business advances, confirmations, bank statements) were noted but not determinative once the jurisdictional defect was found. Conclusion: Reopening and the assessment founded on substituted reasons are invalid; assessment set aside and cross objection allowed on this ground. Issue 2 - Limitation and effect of statutory relaxation (TOLA) and subsequent judicial concession on notices issued on/after 1 April 2021 for the assessment year Legal framework: Limitation for issuance and completion of reassessment notices is governed by the statutory time limits in the Income-tax Act; the temporary modifications effected by the Taxation and other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) interact with the reformed reassessment provisions introduced by the Finance Act, 2021. Where the revenue concedes before the highest court that certain notices issued between specific dates will not fall for completion within the TOLA period, those notices are to be treated as barred. Precedent treatment: The Tribunal relied on the highest court's concession and on subsequent High Court and Tribunal orders applying that concession to quash notices issued beyond the permissible limitation period under the statutory scheme and read in light of TOLA. Interpretation and reasoning: In the instant facts, notices relevant to the assessment year were issued on/after dates that, in light of the statutory relief and the highest court's concession, cannot be completed within the TOLA prescribed period for that assessment year. The Tribunal accepted the assessee's submission that in view of the judicial concession and consistent court orders, the reassessment initiatives for that assessment year must be dropped as barred by limitation. Ratio vs. Obiter: Ratio - where a binding concession of the highest court establishes that notices issued on/after certain dates cannot be completed within the TOLA period for the relevant assessment year, reassessment notices falling in that category are liable to be set aside. Obiter - references to various subsequent orders applying the concession reinforce the view but do not expand the legal principle beyond the concession. Conclusion: Reassessment notices falling within the conceded period are time-barred; cross objection allowed and departmental appeal dismissed as infructuous on this ground. Issue 3 - Requirement of prior approval from correctly designated 'specified authority' for notices issued after three years Legal framework: The statutory scheme requires that no notice under section 148 shall be issued where more than three years have elapsed from the end of the relevant assessment year unless prior approval is obtained from the specified authority as defined in the statute. The identification of the appropriate specified authority depends on whether more than three years have elapsed; the provision is mandatory and designed to ensure supervisory application of mind before disturbing a settled assessment. Precedent treatment: The Tribunal referred to recent judicial pronouncements holding that failure to obtain prior sanction from the particular authority prescribed by the statute (where more than three years have elapsed, the Principal Chief Commissioner/Principal Director General or equivalent senior officer) vitiates the notice and the ensuing proceedings. Prior case law emphasises that the sanctioning function is not mechanical and must reflect the superior officer's independent application of mind to the recorded reasons. Interpretation and reasoning: Here the notice was issued beyond three years and the approval recorded was from an authority that did not qualify as the 'specified authority' under the statutory clause for the >3-year scenario. The Tribunal observed that statutory procedure is mandatory; an approval from an incorrect authority cannot substitute for the mandated prior sanction. Because the approval was not from the correctly prescribed senior authority, the notice lacked jurisdictional validity. The Tribunal further stressed that the sanction must demonstrate the superior officer's independent satisfaction and cannot be treated as a mere formality. Ratio vs. Obiter: Ratio - where a reopening notice is issued after the three-year threshold, lack of prior approval from the specified senior authority prescribed by statute renders the notice invalid and void; the sanction requirement is mandatory and requires application of mind. Obiter - discussion referencing comparative rulings and statutory policy context illustrates the rationale but the operative holding is the invalidity of proceedings for lack of correct prior approval. Conclusion: Notice issued without valid approval of the prescribed specified authority is illegal, without jurisdiction and liable to be quashed; cross objection allowed and departmental appeal dismissed as infructuous on this ground.