2025 (3) TMI 1498 - HC - Income Tax

Validity of reopening of assessment - applicability of procedure u/s 148A - reason to believe - information received from another department - distinction made between a transaction of sale and purchase HELD THAT - The non-application of mind by the AO while issuing notice u/s 148A(b) is writ large. There was no distinction made between a transaction of sale and purchase. It is a classic case where on the basis of an information received from another department the proceedings were initiated without considering the relevance of the information qua the Act. Inspite of the precise language used in Section 148A of the Act and the issuance of guidelines by the CBDT the AO failed to supply the material relied upon to the petitioner or to give relevant portion of the report received from the GST authorities or details of enquiry conducted if any and this is inspite of a specific request made by the petitioner. Non supply of the information relied upon and outcome of enquiry if held denies the petitioner reasonable opportunity to object that no case is made out for reopening the assessment. The Supreme Court in the case of Chhugamal Rajpal Vs. S.P. Chaliha and Ors. 1971 (1) TMI 9 - SUPREME COURT held that the AO must have a prima-facie ground for taking action u/s 148 of the Act and a need for further enquiry in itself shall not confer jurisdiction upon AO for reopening the assessment. The only conclusion of use of phrase information which suggest that income chargeable to tax has escaped assessment and power to conduct enquiry if required is that at least prima facie AO has to be satisfied that information suggest escaped assessment. There has to be basis suggesting escaped assessment for proceeding under Section 148 fishing and roving enquiry to find income escaped from tax cannot be made. The changed instance of the AO during the pendency of notice under Section 148A(b) of the Act in fact was issued for testing the relevance of the material received from GST authority vis-a-vis escapement of tax under the Act which is not permitted. Petitioner filed another reply explaining the sales figure which are equivalent to the figure mentioned by the AO in the notice. The stand of the petitioner was substantiated by annexing transportation documents invoices showing GST having been charged separately testing reports and evidence that the consideration passed through banking channels. Instead of dealing with the documents produced by the petitioner and verifying the transaction the material produced was brushed under the carpet by the AO stating that the movement of the goods from premises of petitioner to the company was not proved. The stand taken by the AO has two fold fallacy. The distinction of nature of investigation to be made by the GST authorities and the income tax authorities has been given a go- bye. Secondly the bilties attached with the reply was an evidence of transportation of the goods from the premises of the petitioner to premises of the company. AO without doubting the payments made through banking transaction charging deposit of GST and other documents produced to substantiate the sale transactions decided that it is a fit case to proceed under Section 148. Non-compliance of the procedure as given in section 148A of the Act vitiates the proceeding being an unreasonable exercise of power. There cannot be a dispute that the procedure stipulated u/s 148A is mandatory. The intent of laying down the steps to be followed before issuance of notice u/s 148 is loud clear inspite of this not only in this case but in number of cases before this Court it has been observed that rather than implementing the procedure in its spirit it is mechanically gone through to complete the formality and this needs to looked into by authorities at appropriate level.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the order passed under Section 148A(d) of the Income Tax Act, 1961, initiating reassessment proceedings, is valid in light of the procedural safeguards mandated by the amended provisions of the Act and accompanying CBDT guidelines.

- Whether the Assessing Officer (AO) had valid "information" suggesting escapement of income chargeable to tax justifying issuance of notice under Section 148A(b) and subsequently under Section 148.

- Whether the AO complied with the mandatory procedural requirements under Section 148A of the Act, including conducting enquiry with prior approval of specified authority, providing opportunity of hearing to the assessee, furnishing the material relied upon, and passing a speaking order with prior approval.

- Whether the reopening was based on surmises, conjectures, or non-application of mind, particularly when the petitioner had explained the transactions with supporting documents.

- Whether the AO erred in treating sales transactions as purchases and in failing to distinguish between the nature of investigations by GST authorities and Income Tax authorities.

- Whether the non-supply of material relied upon by the AO to the petitioner violated principles of natural justice.

- Whether the evidence produced by the petitioner (invoices, transport documents, GST payment, banking transactions) sufficiently explained the transactions and negated the claim of bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the order under Section 148A(d) and compliance with procedural safeguards

Relevant legal framework and precedents:

The Finance Act, 2021, inserted Section 148A in the Income Tax Act, 1961, prescribing a mandatory procedure before issuance of notice under Section 148. The Supreme Court in Union of India Vs. Ashish Agarwal (2022) emphasized that reassessment proceedings post-amendment are subject to stringent safeguards including enquiry with prior approval, opportunity of hearing, consideration of assessee's reply, and passing of speaking order with prior approval.

The CBDT guidelines dated 01.08.2022 further elaborate these procedural steps, requiring the AO to provide the assessee with the information relied upon and to obtain prior approval before issuing notices.

Court's interpretation and reasoning:

The Court held that the procedure under Section 148A is mandatory and not a mere formality. The AO must apply independent mind to the information suggesting escapement of income and cannot proceed on mere surmises or conjectures. The AO's failure to distinguish between sales and purchases in the notice, and the failure to supply the material relied upon to the petitioner despite requests, amounted to non-compliance with the procedure.

Key evidence and findings:

The AO issued the initial notice under Section 148A(b) alleging bogus purchases from a company, which was factually incorrect since the petitioner had made sales to that company. The AO did not supply the information or enquiry report relied upon. The petitioner submitted detailed replies with supporting documents, but the AO disregarded these without proper verification.

Application of law to facts:

The Court found that the AO's issuance of notice without proper enquiry, prior approval, or furnishing of material violated Section 148A. The AO's change of stand during proceedings and failure to consider the petitioner's explanation negated the requirement of independent application of mind.

Treatment of competing arguments:

The Revenue argued that the company was involved in bogus invoices and deeper investigation was warranted. However, the Court emphasized that such suspicion alone cannot justify reopening without compliance with procedural safeguards.

Conclusion:

The order under Section 148A(d) was invalid due to non-compliance with mandatory procedural requirements and non-application of mind.

Issue 2: Existence of valid "information" suggesting escapement of income

Relevant legal framework and precedents:

Section 148A(a) requires AO to have "information which suggests that the income chargeable to tax has escaped assessment" before issuing notice under Section 148. The Supreme Court in Chhugamal Rajpal Vs. S.P. Chaliha held that AO must have prima facie grounds for reopening; mere need for enquiry does not confer jurisdiction.

Court's interpretation and reasoning:

The Court observed that the AO acted on information from GST authorities without verifying its relevance to income tax escapement. The AO failed to differentiate between sales and purchase transactions, indicating lack of application of mind. The AO's failure to conduct any enquiry or obtain prior approval before initiating proceedings further undermined the validity of the information.

Key evidence and findings:

The petitioner's detailed reply with documentary evidence showed sales transactions with GST charged and payments through banking channels, negating the claim of bogus purchases. The AO's assertion that movement of goods was not proved was contradicted by transport bilties and delivery challans submitted.

Application of law to facts:

The Court held that information must prima facie suggest escapement of income and must be supported by material. The AO's reliance on unverified information and failure to conduct enquiry or provide material to the petitioner violated this principle.

Treatment of competing arguments:

The Revenue's reliance on GST information was insufficient without corroboration or enquiry. The Court rejected the argument that suspicion alone justified reopening.

Conclusion:

No valid information suggesting escapement of income existed to justify reopening; the AO's action was arbitrary.

Issue 3: Adequacy of explanation and evidence produced by the petitioner

Relevant legal framework and precedents:

The principle that reopening cannot be sustained if the assessee satisfactorily explains the transactions with supporting evidence is well established.

Court's interpretation and reasoning:

The Court emphasized that the petitioner's submission of purchase orders, invoices with GST, mill test certificates, transport documents, and evidence of banking transactions constituted a sufficient explanation. The AO's failure to verify or consider these documents amounted to ignoring relevant material.

Key evidence and findings:

Documents attached by the petitioner demonstrated actual sales to the company and legitimate payment flows. The transport bilties evidenced movement of goods, directly countering the AO's claim of bogus entries.

Application of law to facts:

The Court held that the AO's refusal to accept the petitioner's evidence without proper enquiry or verification was unjustified. The AO's approach conflated the roles of GST and Income Tax investigations and overlooked the petitioner's documentary proof.

Treatment of competing arguments:

The Revenue's contention that movement of goods was not proved was rejected on the basis of transport documents submitted by the petitioner.

Conclusion:

The petitioner's explanation and evidence were adequate to negate the claim of bogus purchases and escapement of income.

Issue 4: Natural justice and supply of material relied upon

Relevant legal framework and precedents:

Principles of natural justice require that the assessee be furnished with the material on which the AO relies to enable meaningful response.

Court's interpretation and reasoning:

The Court found that despite specific requests, the AO did not supply the information or enquiry reports relied upon, depriving the petitioner of reasonable opportunity to contest the case. This was held to be a violation of natural justice and a fatal procedural lapse.

Key evidence and findings:

The petitioner's requests for material were documented but remained unfulfilled.

Application of law to facts:

Non-supply of material vitiates the proceedings and renders the reopening invalid.

Treatment of competing arguments:

The Revenue did not demonstrate compliance with furnishing material.

Conclusion:

Failure to supply material relied upon amounted to denial of reasonable opportunity and invalidated the proceedings.

Issue 5: Distinction between investigations by GST authorities and Income Tax authorities

Relevant legal framework and precedents:

Investigations by different authorities have distinct scopes and purposes; findings in one do not automatically translate into escapement of income under another.

Court's interpretation and reasoning:

The Court criticized the AO for equating GST department's suspicion of bogus invoices with escaped income under the Income Tax Act without independent verification. The AO's failure to appreciate this distinction reflected non-application of mind.

Key evidence and findings:

The AO relied on GST information but did not conduct enquiry or seek corroborative evidence relevant to income tax assessment.

Application of law to facts:

The Court held that such conflation is impermissible and cannot justify reopening.

Treatment of competing arguments:

The Revenue's reliance on GST findings was rejected as insufficient without independent enquiry.

Conclusion:

The AO's failure to distinguish between investigations constituted a procedural and substantive error.

3. SIGNIFICANT HOLDINGS

- "The procedure stipulated u/s 148A is mandatory. The intent of laying down the steps to be followed before issuance of notice u/s 148 is loud & clear... it is mechanically gone through to complete the formality and this needs to looked into by authorities at appropriate level."

- "The non-application of mind by the AO while issuing notice under Section 148A(b) is writ large. There was no distinction made between a transaction of sale and purchase. It is a classic case where on the basis of an information received from another department the proceedings were initiated without considering the relevance of the information qua the Act."

- "Non supply of the information relied upon and outcome of enquiry if held, denies the petitioner reasonable opportunity to object that no case is made out for reopening the assessment."

- "The only conclusion of use of phrase 'information which suggest that income chargeable to tax has escaped assessment' and power to conduct enquiry if required, is that at least prima facie AO has to be satisfied that information suggest escaped assessment. In other words, there has to be basis suggesting escaped assessment for proceeding under Section 148, fishing and roving enquiry to find income escaped from tax cannot be made."

- "The stand taken by the AO has two fold fallacy. The distinction of nature of investigation to be made by the GST authorities and the income tax authorities has been given a go- bye."

- "The writ petition is allowed. The impugned order and the proceedings consequent thereto are quashed."