2025 (5) TMI 718 - HC - Income Tax

Validity of reopening notice - Constitutionality of provisions of Section 135A for not complying with principles of natural justice - Petitioner submits that this notice is erroneous since certain transactions have been referred to twice in the information based on which the impugned proceedings are initiated and the statement about the mismatch between the information and the returns filed by the Petitioner is also erroneous - only argument raised is that the statements in such notice are erroneous - HELD THAT - We note that the petition contains no prayer for declaring Section 135A of the IT Act as unconstitutional or ultra vires. Therefore there is no question of adjudicating this issue in this petition. In any event constitutional challenges must be supported by appropriate pleadings and prayers. They are not intended to be casually raised or invoked solely to obtain admission interim relief or to bypass the standard rule of exhausting alternative remedies. As in the case of Benaifer Vispi Patel 2024 (8) TMI 53 - BOMBAY HIGH COURT there was an admission about the errors in the impugned notice. In the affidavit-in-reply filed on behalf of Respondent-Revenue on record of the said petition such errors were acknowledged and the clear statement was made that there were no discrepancies. The impugned notice was set aside without going into the issue of constitutional validity. As noted earlier there is no challenge to the constitutional validity in the present case and the grounds raised do not disclose any ex facie error. Whether ultimately there is any error or not will have to be adjudicated during the reassessment proceedings for which the Petitioner would be offered a full opportunity. If the petitioner s case on facts is ultimately accepted during the reassessment proceedings there would be no reason to challenge the constitutional validity. In the absence of any jurisdictional infirmity we decline to entertain this petition. Nothing in this order is intended to influence the reassessment proceedings. The observations in this order if any are only in the context of entertaining the challenge to the impugned notice at the threshold. All contentions of all parties on the merits are therefore left open.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

- Whether the notice dated 28 March 2024 issued under Section 148 of the Income Tax Act, 1961 ("the IT Act") is liable to be quashed on the ground that it is based on erroneous information, specifically due to alleged duplication of certain transactions in the information on which the notice is predicated.

- Whether the issuance of the notice without considering the detailed explanations provided by the Petitioner violates principles of natural justice, thereby rendering the assumption of jurisdiction wrongful.

- Whether the provisions of Section 135A of the IT Act, which pertain to the verification scheme and dispense with the normal procedure of providing an opportunity to contest the reasons for reopening, are unconstitutional for not complying with principles of natural justice.

- Whether the Court should entertain a challenge to the constitutional validity of Section 135A in the absence of any prayer or pleadings to that effect in the petition.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of the notice under Section 148 based on alleged erroneous and duplicated information

Relevant legal framework and precedents: Section 148 of the IT Act empowers the Assessing Officer (AO) to issue a notice for reassessment if there is reason to believe that income has escaped assessment. The validity of such notice depends on the existence of credible information or reasons justifying reopening. The Court generally refrains from adjudicating disputed questions of fact at the threshold under Article 226 of the Constitution.

Court's interpretation and reasoning: The Court observed that the Petitioner's challenge to the notice is premised on the assertion that the information underlying the notice contains errors due to duplication of certain transactions and mismatch allegations. The Petitioner claims to have submitted detailed explanations addressing these points, yet the notice was issued without considering these explanations. However, the Respondent-Revenue has filed an affidavit denying any factual errors or duplication.

Key evidence and findings: The affidavit-in-reply from the Revenue denies the alleged errors and duplication. The Court noted that the determination of whether the statements in the notice are factually erroneous involves disputed questions of fact, which require an elaborate inquiry by the AO during reassessment proceedings.

Application of law to facts: The Court held that it is not the appropriate forum to resolve factual disputes at the notice stage. The Petitioner will have a full opportunity to present evidence and contest the allegations during the reassessment proceedings. Thus, the issuance of the notice cannot be quashed merely on the basis of alleged factual errors at this stage.

Treatment of competing arguments: The Petitioner argued that the notice was issued without considering explanations and hence violated natural justice. The Respondent countered that natural justice is not violated at the notice stage since the Petitioner will be given full opportunity during reassessment. The Court agreed with the Respondent's position.

Conclusions: No jurisdictional error or wrongful assumption of jurisdiction was found in issuing the notice. The petition challenging the notice on the ground of factual errors and duplication was dismissed.

Issue 2: Alleged violation of principles of natural justice in issuing the notice without considering explanations

Relevant legal framework and precedents: Principles of natural justice require that a person affected by a proceeding be given a reasonable opportunity to be heard. However, at the stage of issuance of a notice under Section 148, the law does not mandate a detailed hearing or consideration of explanations before issuing the notice. The substantive opportunity arises during reassessment proceedings.

Court's interpretation and reasoning: The Court noted that the Petitioner's contention of violation of natural justice is unfounded since the reassessment proceedings will afford full opportunity to contest the allegations and demonstrate any errors. The issuance of the notice itself does not constitute a breach of natural justice.

Key evidence and findings: The Respondent assured that the Petitioner will be given full opportunity to present his case during reassessment. The Court relied on this assurance and the procedural framework established under the IT Act.

Application of law to facts: Since the Petitioner is not deprived of the opportunity to make his defense, the issuance of the notice without prior consideration of explanations does not violate natural justice.

Treatment of competing arguments: The Petitioner's argument that the notice was issued arbitrarily was rejected as premature and not supported by the law.

Conclusions: No breach of natural justice occurred at the notice stage.

Issue 3: Constitutional validity of Section 135A of the IT Act

Relevant legal framework and precedents: Section 135A pertains to the verification scheme notified under the IT Act, which modifies the procedural requirements for reopening assessments. The Petitioner contended that this section is unconstitutional for dispensing with the normal procedure of providing an opportunity to contest reasons for reopening, thereby violating natural justice.

Court's interpretation and reasoning: The Court observed that the petition contains no prayer or pleadings challenging the constitutional validity of Section 135A. It emphasized that constitutional challenges must be expressly pleaded and supported by appropriate prayers. The Court declined to entertain the constitutional challenge raised for the first time in submissions.

Key evidence and findings: The Court referred to a precedent where a coordinate Bench left the constitutional validity of Section 135A open because the factual matrix warranted interference with the impugned notice on other grounds.

Application of law to facts: Since no formal challenge was raised and no grounds disclosed ex facie invalidity, the Court refused to adjudicate the constitutional issue in the present petition.

Treatment of competing arguments: The Respondent pointed out the absence of any prayer on constitutional validity and the impropriety of raising such issues without proper pleadings.

Conclusions: The Court declined to consider the constitutional validity of Section 135A in this petition.

Issue 4: Whether the Court should interfere with the impugned notice at the threshold

Relevant legal framework and precedents: The Court is generally reluctant to interfere with notices issued under Section 148 unless there is a clear jurisdictional error or patent illegality. The factual disputes are to be resolved during reassessment proceedings.

Court's interpretation and reasoning: The Court found no jurisdictional error or assumption of jurisdiction not vested in the authority. The Petitioner will be given full opportunity to contest the allegations during reassessment. The Court distinguished the present case from the precedent where interference was warranted due to admitted errors in the notice.

Key evidence and findings: The Court noted that in the precedent case, the Revenue had admitted errors in the notice, which is not the case here.

Application of law to facts: Since no ex facie error is disclosed and the Petitioner's grievances can be addressed during reassessment, the Court declined to interfere with the notice.

Treatment of competing arguments: The Petitioner's reliance on the precedent was found inapposite due to factual distinctions.

Conclusions: The petition was dismissed and the interim relief vacated.

3. SIGNIFICANT HOLDINGS

- "The adjudication of whether the statements or allegations in the impugned notice are erroneous in the sense that they contain factual errors or not would involve adjudication of disputed questions of fact. This would involve an elaborate process best undertaken by the AO. This Court does not normally undertake such an exercise under Article 226 of the Constitution of India."

- "This is also not a case where the Petitioner is deprived of an opportunity to make his defence good. Full opportunity is contemplated in the reassessment proceedings."

- "At the outset, we note that the petition contains no prayer for declaring Section 135A of the IT Act as unconstitutional or ultra vires. Therefore, there is no question of adjudicating this issue in this petition. In any event, constitutional challenges must be supported by appropriate pleadings and prayers."

- "Based on the arguments raised, we fail to detect any jurisdictional error or assumption of jurisdiction not vested in the authority that issued the impugned notice."

- "Nothing in this order is intended to influence the reassessment proceedings. The observations in this order, if any, are only in the context of entertaining the challenge to the impugned notice at the threshold. All contentions of all parties on the merits are therefore left open."

Core principles established include the limited scope of judicial interference at the notice stage under Section 148, the requirement of proper pleadings for constitutional challenges, and the preservation of procedural rights during reassessment proceedings rather than at the notice issuance stage.

Final determinations:

- The impugned notice under Section 148 is not liable to be quashed on the grounds raised.

- No violation of natural justice occurred at the notice stage.

- The constitutional validity of Section 135A is not decided due to lack of pleadings.

- The petition is dismissed and interim relief vacated.