2025 (5) TMI 1339 - HC - Income Tax

Reopening of assessment u/s 147 - mandatory requirement of recording reasons - HELD THAT - In Pankaj Garg vs. Meenu Garg Anr. 2013 (2) TMI 924 - SUPREME COURT reiterated the settled position of law holding that an order which does not contained any reason is no order in the eyes of law. Since the order passed by the AO is bereft of any cogent or plausible reasons the same is set aside. The matter is remanded back to the AO to decide the same afresh in accordance with law. If the AO still comes to the conclusion that notice u/s 148 is necessary then he shall record detailed reasons for arriving at such conclusion. AO is directed to decide the case as expeditiously as possible and in no event later than 31.08.2025.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the orders passed under Section 148A(d) of the Income Tax Act, 1961, and the subsequent notice under Section 148, are legal, valid, and sustainable in law.

2. Whether the Assessing Officer complied with the mandatory requirement of recording reasons before issuing a notice under Section 148 after issuing a notice under Section 148A(d).

3. Whether the failure to record reasons amounts to denial of justice and renders the impugned orders liable to be quashed.

4. The extent and nature of the legal obligation on quasi-judicial authorities, including income tax authorities, to record reasons in support of their decisions, especially when such decisions adversely affect the assessee.

Issue-wise Detailed Analysis

Issue 1: Legality and validity of orders under Section 148A(d) and notice under Section 148

The relevant legal framework includes Sections 147, 148, and 148A of the Income Tax Act, 1961. Section 148 empowers the Assessing Officer to issue a notice for reassessment if income chargeable to tax has escaped assessment. Section 148A prescribes a preliminary inquiry procedure before issuing such notice, with subsection (d) requiring the Assessing Officer to record reasons and obtain prior approval before issuing a notice under Section 148.

The petitioner challenged the orders dated 29.02.2024 and the notice under Section 148 on grounds of illegality and arbitrariness, particularly emphasizing the absence of recorded reasons for the conclusion that income had escaped assessment exceeding Rs. 50,00,000/-.

The Court noted that while normally courts are reluctant to interfere with such notices, the peculiar facts of this case warranted judicial intervention due to the Assessing Officer's failure to provide any reasons supporting the issuance of the notice under Section 148.

The Assessing Officer's order, though detailed, did not specify the basis for concluding that escaped income exceeded Rs. 50,00,000/-. Instead, the Assessing Officer merely stated that the case was at a preliminary stage and that the petitioner's contentions required detailed examination.

The Court held that such an approach is impermissible. The Assessing Officer is obligated to decide the matter on the material available, including the assessee's reply, and record reasons before issuing a notice under Section 148. Simply deferring the decision without reasons is not acceptable.

Issue 2: Obligation to record reasons before issuing notice under Section 148

The Court extensively examined the jurisprudence on the requirement of recording reasons in administrative and quasi-judicial decisions. It emphasized that recording reasons is a fundamental principle of natural justice and an indispensable component of a sound judicial system.

The Court relied on authoritative precedents, including a landmark judgment which summarized the principles governing the recording of reasons:

• Judicial and quasi-judicial authorities must record reasons when their decisions adversely affect any party.
• Reasons ensure transparency, fairness, and prevent arbitrariness in decision-making.
• Recording reasons facilitates judicial review and appellate scrutiny.
• Reasons must be clear, cogent, and sufficient to demonstrate application of mind.
• Failure to record reasons amounts to denial of justice and renders the order unsustainable.

The Court cited multiple Supreme Court decisions reinforcing these principles, including rulings that administrative authorities exercising quasi-judicial functions must record reasons irrespective of whether the decision is subject to appeal or revision.

It was further emphasized that the requirement to record reasons is not merely a procedural formality but serves the wider principle that justice must not only be done but also appear to be done.

Issue 3: Application of law to facts and treatment of competing arguments

The petitioner had responded to the notice under Section 148A(d) with supporting documents, clarifying that the immovable property purchased was valued at Rs. 1,31,63,935/- rather than Rs. 1,21,00,000/-. Despite this, the Assessing Officer failed to address these submissions with any reasoned order and proceeded to issue the notice under Section 148 without recording reasons.

The Assessing Officer's contention that the case was at a preliminary stage and required detailed examination was rejected by the Court as an abdication of statutory responsibility. The Court clarified that the inquiry under Section 148A must culminate in a reasoned decision on whether to issue a notice under Section 148.

The Court underscored that issuing a notice under Section 148 has serious civil consequences and cannot be done lightly or without recorded reasons. The absence of such reasons effectively denies the assessee the opportunity to understand the basis of the action and to challenge it effectively.

Issue 4: Principles governing recording of reasons and natural justice

The Court undertook an extensive review of the doctrine of natural justice and the jurisprudence on the requirement of recording reasons. It highlighted that reasons are the "live links between the minds of the decision-taker and the controversy," substituting subjectivity with objectivity.

The Court quoted that "the right to reason is an indispensable part of a sound judicial system" and that "a pretence of reasons or 'rubber stamp reasons' is not to be equated with a valid decision-making process."

The Court also referred to international jurisprudence, including Strasbourg decisions, emphasizing that adequate and intelligent reasons must be given for judicial decisions as part of the right to a fair trial.

It was noted that the recording of reasons ensures judicial accountability, transparency, and fairness, and helps maintain litigants' faith in the justice delivery system.

Conclusions

The Court concluded that the order passed by the Assessing Officer under Section 148A(d) and the subsequent notice under Section 148 are illegal and unsustainable due to the failure to record reasons.

The Court set aside the impugned orders and remanded the matter to the Assessing Officer with clear directions to decide the case afresh in accordance with law and to record detailed reasons if the notice under Section 148 is to be issued.

The Court also directed that the decision be taken expeditiously, preferably by 31.08.2025.

Significant Holdings

"Failure to give reasons amounts to denial of justice. Reasons are live links between the minds of the decision-taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity."

"The Assessing Officer cannot shirk away from his responsibility of deciding the case on the material available on record by simply observing that 'at the preliminary stage, the contention of the assessee is not acceptable and the same requires a detailed examination'.

"Notice under Section 148 does have serious civil or evil consequences and cannot be passed so lightly and reasons for the same have to be recorded in the order itself."

"The right to reason is an indispensable part of a sound judicial system."

"Recording of reasons is the principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected."

"An order which does not contain any reason is no order in the eyes of law."

"The requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review."

These principles collectively establish that the issuance of a notice under Section 148 must be preceded by a reasoned order under Section 148A(d), failing which the notice is liable to be quashed. The decision underscores the fundamental requirement of reasoned decision-making as an essential safeguard against arbitrariness and for upholding the rule of law.