2024 (10) TMI 1684 - AT - Income Tax

Reopening of assessment u/s 147 - addition made towards deemed dividend u/s 2(22)(e) - HELD THAT - As from perusal of the reasons recorded for reopening the assessment reproduced supra which is common to all the years under consideration except change in figures we find that the ld. AO in para 1 and in initial part of para 2 states that PCPL had advanced loans to PRPL. But in later part of para 2 the ld AO says that PRPL had advanced loans to PCPL. This clearly shows complete misunderstanding of actual facts by the ld. AO reflecting his non-application of mind. Further the reasons recorded by the AO were not even signed by the AO digitally as required by the Act though it was sent along with notice u/s 142(1). The approval u/s 151 has been obtained by the ld AO from the competent authority before issuing notice u/s 148 of the Act dated 30.3.2021 for all the years under consideration. The said approval is being sought by the ld AO from the competent authority by mentioning section 147(b) of the Act in the reasons recorded. The same is evident from the reasons reproduced supra. It is pertinent to note that section 147(b) of the Act has been omitted from the statute long back and still the ld. AO had mentioned the said section in the reasons recorded which reflects complete non-application of mind of the ld. AO and also application of incorrect provisions of the Act for the purpose of reopening the assessment. The reasons recorded by the ld. AO does not even contain any date thereon. We have no hesitation to conclude that various deficiencies as emphasized supra in the reasons recorded by the ld AO clearly depict non-application of mind by the AO thereby becoming fatal to the formation of belief per se on his mind that income had escaped assessment and these deficiencies not being corrected or rectified by the competent authority while according approval u/s 151 depicts non-application of mind and grant of mechanical approval u/s 151 of the Act by the competent authority and consequentially the reopening of assessment deserves to be quashed and is accordingly quashed.

Summary

ISSUES:

• Whether the deletion of addition towards deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 was justified.
• Whether the notice issued under section 148 read with section 144 of the Income Tax Act, 1961 for reopening assessment was valid.
• Whether a legal ground challenging the validity of reassessment under section 147 can be raised in a petition under Rule 27 of the ITAT Rules when not decided by the first appellate authority.
• Whether the reasons recorded by the Assessing Officer for reopening the assessment and the sanction granted under section 151 of the Income Tax Act, 1961 were valid and reflected application of mind.
• Whether mechanical or non-application of mind in sanctioning reopening under section 151 vitiates the reopening proceedings.

RULINGS / HOLDINGS:

• The deletion of addition towards deemed dividend under section 2(22)(e) was upheld due to deficiencies in the reopening proceedings and non-application of mind by the Assessing Officer.
• The notice issued under section 148 was held invalid as the reasons recorded by the Assessing Officer suffered from various defects, including incorrect statutory references and absence of signature, and the sanction under section 151 was granted mechanically without due application of mind.
• A legal ground challenging the validity of reassessment under section 147 can be raised in a Rule 27 petition as a "weapon of defence" against the Revenue's appeal, even if not decided by the first appellate authority, relying on authoritative precedent.
• The reasons recorded by the Assessing Officer showed a "complete misunderstanding of actual facts" and were not signed digitally as required, reflecting non-application of mind.
• The sanction granted under section 151 was mechanical, consisting merely of a cryptic note "Yes, I am satisfied," which does not amount to valid satisfaction and vitiates the reopening.
• Mechanical approval without application of mind by the competent authority renders the reopening void ab initio.
• Given the invalid reopening, the merits of the additions raised by the Revenue were left open as academic.

RATIONALE:

• The Court applied the statutory framework under sections 147, 148, 151, and 2(22)(e) of the Income Tax Act, 1961, and the procedural requirements under Rule 27 of the ITAT Rules.
• The Court relied on binding precedents including the decisions of the Hon'ble Bombay High Court in B R Bamasi vs CIT and CIT vs Gilbert & Barker, which recognize the right of the assessee to raise legal grounds as a defense in appeals filed by the Revenue.
• The Court followed the principle that reopening of assessment is an extraordinary power requiring strict compliance with procedural safeguards, including valid reasons recorded by the Assessing Officer and independent, reasoned satisfaction by the sanctioning authority under section 151.
• The Court cited the decision of the Co-ordinate Bench of Mumbai Tribunal in ACIT vs Bharti Axa Life Insurance Co. Ltd, emphasizing that mechanical or cryptic sanction without application of mind vitiates the reopening.
• The Court also followed the authoritative judgments of the Hon'ble Madhya Pradesh High Court in CIT vs S Goyanka Lime & Chemicals Ltd and the Hon'ble Delhi High Court in PCIT vs Pioneer Town Planners (P) Ltd, which hold that mechanical sanction renders reopening invalid.
• The Court noted the omission of section 147(b) from the statute and the Assessing Officer's incorrect reference thereto as indicative of non-application of mind.
• The Court emphasized that non-compliance with the requirement of digitally signed reasons recorded and the absence of date on the reasons further invalidated the reopening.
• In view of the invalid reopening, the Court refrained from adjudicating the substantive merits of the addition under section 2(22)(e), leaving those issues open.