2022 (8) TMI 1584 - HC - Income Tax

Validity of reopening of assessment - opportunity of being heard to the assessee with the prior approval of the specified authority - scope of expression shall has been used in the said provision - HELD THAT - Opportunity provided under clause (b) of Section 148A should be a meaningful opportunity whereby the assessee is made known of the allegation he has to meet and on what basis the assessing officer is of the opinion that the income chargeable to tax has escaped assessment. If the assessee submits a reply to the show-cause notice the assessing officer is required to consider the reply furnished by the assessee in response to the show- cause notice. It is only thereafter he can exercise his power under clause (d) of the Section 148A and decide the case based on material available on record including the reply of the assessee. The option being a statutory mandate we are required to see as to whether assessing officer had complied with the same. On going through the order passed under clause (d) of Section 148A we have no hesitation to hold that the assessing officer did not follow the mandatory procedure under the Act. In response to the notice issued under Section 148A(b) the assessee had submitted a reply dated 25th March 2022. We find the reply to be a detailed reply containing several annexures. The assessing officer does not dispute the fact that the assessee has submitted his reply. However in a single line the AO held the reply of the assessee is not satisfactory as per law provides. Thus the order is in gross violation of the procedure stipulated u/s 148A of the Act. Assessee placed reliance on the decision of FIRST SOLAR POWER INDIA PRIVATE LIMITED 2022 (6) TMI 33 - DELHI HIGH COURT and the decision of JASMINE BONNY AGITOK SANGMA 2022 (5) TMI 1106 - MEGHALAYA HIGH COURT - In both the decisions the Hon ble Division Bench has interfered with the order passed under clause (d) of Section 148A by noting that in terms of clause (C) of Section 148A there is a duty cast on the assessing officer to consider the reply as the expression shall has been used in the said provision. We are of the considered view that the order passed under clause (d) of Section 148A of the Act is unsustainable in law. Appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the procedural compliance of the assessing officer under Section 148A of the Income Tax Act, 1961, specifically:

• Whether the assessing officer complied with the mandatory procedure under Section 148A, particularly the requirement to consider the assessee's reply to the show-cause notice issued under clause (b) of Section 148A before passing an order under clause (d).
• Whether the order passed by the assessing officer under clause (d) of Section 148A without adequately considering the assessee's detailed reply is sustainable in law.
• The scope and nature of the opportunity of hearing that must be afforded to the assessee under Section 148A before issuing a notice under Section 148.
• The applicability and binding nature of judicial precedents interpreting the mandatory duty of the assessing officer to consider the assessee's reply under Section 148A.

Issue-wise Detailed Analysis

1. Compliance with the procedural mandate under Section 148A of the Income Tax Act

Relevant legal framework and precedents: Section 148A was introduced to regulate the issuance of notices under Section 148 when income is believed to have escaped assessment. The section mandates a two-step inquiry process: (a) conducting an inquiry with prior approval if required, and (b) issuing a show-cause notice to the assessee with an opportunity to respond. Clause (c) requires the assessing officer to consider the assessee's reply, and clause (d) mandates passing an order based on available materials, including the reply, with prior approval.

Precedents relied upon include decisions from the High Courts of Delhi and Meghalaya, which emphasized the mandatory nature of considering the assessee's reply, noting the use of the word "shall" in clause (c) of Section 148A, thereby imposing a non-discretionary duty on the assessing officer.

Court's interpretation and reasoning: The Court underscored that the opportunity of hearing under clause (b) must be meaningful, entailing that the assessee must be informed of the basis of the allegation and given a chance to respond. The assessing officer is then statutorily bound to consider the reply before deciding under clause (d).

The Court found that the assessing officer failed to comply with this mandatory procedure. Although the assessee submitted a detailed reply dated 25th March 2022 with annexures in response to the show-cause notice dated 21st March 2022, the assessing officer's order dated 5th April 2022 merely stated in a single line that the reply was unsatisfactory, without any detailed consideration or reasoning.

Key evidence and findings: The undisputed fact was that the assessee had submitted a detailed reply. The assessing officer did not dispute receipt but failed to engage with the substance of the reply. This lack of consideration violated the statutory mandate.

Application of law to facts: The Court applied the statutory provisions and judicial precedents to hold that the procedure under Section 148A was not followed. The assessing officer's order was thus unsustainable.

Treatment of competing arguments: The respondent authority did not deny the submission of the reply but justified the order by stating the reply was unsatisfactory. The Court rejected this as insufficient, emphasizing the requirement for a reasoned order considering the reply.

Conclusion: The order passed under clause (d) of Section 148A without proper consideration of the reply is in gross violation of the procedure and hence unsustainable.

2. Scope of the opportunity of hearing and requirement of a speaking order

Relevant legal framework: Section 148A(b) requires the assessing officer to serve a show-cause notice and provide a minimum period of seven days (up to 30 days) for the assessee to respond. Clause (d) requires a decision on whether to issue a notice under Section 148, based on materials including the reply.

Court's interpretation and reasoning: The Court emphasized that the opportunity to be heard is substantive and not a mere formality. The assessing officer must make the assessee aware of the basis of the allegation and consider the reply fully. Further, the Court directed that after considering the reply, the assessing officer must afford an opportunity of personal hearing before passing any order.

Key evidence and findings: The assessee's detailed reply and annexures were not considered, and no personal hearing was granted before passing the order.

Application of law to facts: The Court held that the absence of a personal hearing and failure to pass a speaking order based on the reply violated the principles of natural justice and statutory requirements.

Treatment of competing arguments: The respondent did not dispute the absence of personal hearing but relied on the order passed. The Court found this insufficient and remanded the matter for compliance.

Conclusion: The assessing officer is directed to consider the reply, grant a personal hearing, and pass a speaking order on merits and in accordance with law.

3. Binding effect of judicial precedents on the mandatory consideration of the assessee's reply

Relevant legal framework and precedents: The Court referred to two recent High Court decisions that held the duty to consider the assessee's reply under Section 148A is mandatory and non-negotiable.

Court's interpretation and reasoning: The Court relied on these precedents to reinforce the interpretation that the assessing officer's power under clause (d) cannot be exercised without considering the reply under clause (c).

Key evidence and findings: The precedents were directly applicable and consistent with the statutory language.

Application of law to facts: The Court applied these precedents to invalidate the impugned order.

Treatment of competing arguments: The respondent did not challenge the applicability of these precedents.

Conclusion: The precedents mandate strict compliance with the procedure, which was not followed here.

Significant holdings:

"The opportunity provided under clause (b) of Section 148A should be a meaningful opportunity whereby the assessee is made known of the allegation he has to meet and on what basis, the assessing officer is of the opinion that the income chargeable to tax has escaped assessment."

"If the assessee submits a reply to the show-cause notice, the assessing officer is required to consider the reply furnished by the assessee in response to the show-cause notice. It is only thereafter he can exercise his power under clause (d) of the Section 148A and decide the case based on material available on record including the reply of the assessee."

"The order dated 5th April, 2022 passed under clause (d) of Section 148A of the Act is unsustainable in law."

"The matter is remanded to the assessing officer with a direction to consider the reply submitted by the assessee dated 25th March, 2022 along with annexures, afford an opportunity of personal hearing to the assessee or his authorized representative and thereafter pass a speaking order on merits and in accordance with law."

Core principles established include the mandatory nature of the procedural safeguards under Section 148A, the requirement for meaningful opportunity of hearing, the necessity for reasoned consideration of the assessee's reply, and adherence to principles of natural justice before issuing notices under Section 148.

Final determinations on each issue conclude that the impugned order was passed without compliance with mandatory procedural requirements and is therefore quashed, with directions for fresh consideration in accordance with law.