2025 (5) TMI 2155 - HC - Income Tax

Reopening of assessment - reasons to believe - Addition u/s 68 - there was a report alleging that MSIPL was a bogus entity - HELD THAT - Considering the letter sent by the Principal Director of Income Tax (Inv.) Kanpur as well as the fact that the proceedings in respect of GFPL were been dropped; the information to the effect that there is a report regarding MSIPL being bogus entity could not have been accepted without any substantiation as to the allegation. In any event the material and evidence produced by the petitioner could not be rejected only on the ground that there was a report alleging that MSIPL was a bogus entity. The provisions of Section 148A must be read in a meaningful manner. It must give a fair opportunity to the assessee to respond to the information which according to the AO suggests that the assessee s income had escaped assessment. It is necessary for the AO to thereafter at the bare minimum examine the evidence and material produced by the assessee to counteract the allegations. Disregarding response furnished by the petitioner solely for the reason of the information on portal and simply reiterating the information as available would render the procedure u/s 148A of the Act meaningless. We set aside the impugned order passed u/s 148A (d) of the Act and the impugned notice issued u/s 148A (b) of the Act. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the notice issued under Section 148A(b) of the Income Tax Act, 1961, proposing reassessment proceedings on the ground of escaped income, was validly issued in the absence of any "particular information" suggesting such escape of income.

(b) Whether the Assessing Officer (AO) was justified in rejecting the petitioner's detailed explanation and documentary evidence supporting the genuineness of purchases made from M/s Madhumita Steel Industries Pvt. Ltd. (MSIPL), which were alleged to be bogus.

(c) Whether the AO's reliance on information from the GST Department and the Directorate of Income Tax (Investigation) without independently verifying or scrutinizing the petitioner's evidence was legally sustainable.

(d) Whether the reassessment proceedings could be sustained when a parallel inquiry by the Principal Director of Income Tax (Investigation), Kanpur, had recommended no action against the petitioner and a similarly situated entity, M/s Gold Feather Pvt. Ltd. (GFPL), whose proceedings were dropped.

(e) The proper interpretation and application of the procedural safeguards under Section 148A of the Act, particularly the requirement to give a fair opportunity to the assessee to respond to information suggesting escaped income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Notice under Section 148A(b) without Particular Information

Legal Framework and Precedents: Section 148A(b) mandates issuance of a notice when the AO has "information" suggesting income has escaped assessment. The Supreme Court and various High Courts have held that the AO must have "particular information" and not mere suspicion or vague information to initiate reassessment proceedings.

Court's Interpretation and Reasoning: The Court observed that the impugned notice was issued solely on information available on the insight portal, which indicated that the petitioner had made purchases from MSIPL, alleged to be a dummy entity involved in bogus billing. However, the Court noted that the AO did not have any independent material or particularized information beyond this portal data to suggest escaped income.

Application of Law to Facts: The Court held that the AO's reliance on unverified portal information without particularized material was insufficient to justify issuance of the notice under Section 148A(b). The petitioner's detailed response and documentary evidence should have been considered before initiating reassessment.

Conclusion: The notice under Section 148A(b) was invalidly issued without any particular information justifying reassessment.

Issue (b): Rejection of Petitioner's Evidence Regarding Genuineness of Transactions

Legal Framework and Precedents: The assessee is entitled to a fair opportunity to explain and furnish evidence to rebut allegations of bogus transactions. The AO must consider such evidence before proceeding further.

Court's Interpretation and Reasoning: The petitioner furnished extensive evidence including purchase and sale invoices, E-way bills, transporter receipts, GST returns, bank statements evidencing payments, and reconciliation statements. The Court noted that none of these facts were controverted by the AO or the Revenue. Despite this, the AO disregarded the evidence solely on the basis of the GST Department's assertion that MSIPL was a dummy entity.

Key Findings: The Court found that the AO failed to undertake any meaningful scrutiny or verification of the petitioner's evidence. The AO's approach amounted to a mere acceptance of the portal information without testing its veracity against the petitioner's documentary proof.

Application of Law to Facts: The Court emphasized that the purpose of Section 148A is to provide a meaningful opportunity to the assessee to explain the information on record. The AO's rejection of overwhelming evidence without examination was contrary to the statutory scheme.

Treatment of Competing Arguments: The Revenue contended that the documents submitted were not conclusive to establish genuineness, but the Court held that mere submission of invoices and bank statements cannot be disregarded without cogent reasons. The Revenue's reliance on the mere allegation of dummy status was insufficient.

Conclusion: The AO's rejection of the petitioner's evidence was unjustified and legally unsustainable.

Issue (c): Reliance on Investigation Wing's Report and Differential Treatment of Similarly Situated Entities

Legal Framework and Precedents: The principle of consistency and non-arbitrariness requires that similarly situated entities be treated alike unless material distinctions exist.

Court's Interpretation and Reasoning: The Court noted that the Principal Director of Income Tax (Investigation), Kanpur, after inquiry, recommended no action against the petitioner and GFPL, both of whom had transactions with MSIPL. Proceedings against GFPL were dropped on this basis, yet reassessment was pursued against the petitioner without any fresh material.

Key Evidence: The letter dated 28.02.2024 from the Principal Director of Income Tax (Investigation), Kanpur, explicitly recommended no action against the petitioner and GFPL.

Application of Law to Facts: The Court held that the AO could not ignore the investigation wing's findings and proceed against the petitioner when no such proceedings were sustained against GFPL, who was similarly placed.

Conclusion: The reassessment proceedings against the petitioner were unsustainable in the absence of material distinguishing it from GFPL.

Issue (d): Interpretation and Application of Section 148A Procedural Safeguards

Legal Framework and Precedents: Section 148A introduces a mandatory pre-reassessment procedure requiring the AO to issue a notice under Section 148A(b), allow the assessee to respond, and then pass an order under Section 148A(d) only if satisfied that income has escaped assessment. This procedure is designed to protect the assessee's rights and prevent arbitrary reassessment.

Court's Interpretation and Reasoning: The Court emphasized that the AO must meaningfully consider the explanation and evidence furnished by the assessee before passing the order under Section 148A(d). Simply reiterating the information from the portal without examination defeats the legislative intent.

Application of Law to Facts: The AO failed to conduct any verification or evaluation of the petitioner's response and evidence, and mechanically proceeded to reopen the assessment. This was held to be contrary to the statutory mandate.

Conclusion: The impugned order under Section 148A(d) was set aside for non-compliance with the procedural safeguards.

3. SIGNIFICANT HOLDINGS

The Court held:

"The AO has completely disregarded the explanation and the evidence furnished by the petitioner by simply accepting the information to the effect that MSIPL was a dummy entity involved in bogus billing, as correct. In our view, this approach defeats the very purpose of enabling an assessee to respond to the information, which according to the AO, may suggest that its income for the relevant assessment year has escaped assessment."

"Disregarding response furnished by the petitioner solely for the reason of the information on portal and simply reiterating the information as available, would render the procedure under Section 148A of the Act meaningless."

"Considering the letter sent by the Principal Director of Income Tax (Inv.), Kanpur as well as the fact that the proceedings in respect of GFPL were dropped; the information to the effect that there is a report regarding MSIPL being bogus entity could not have been accepted without any substantiation as to the allegation."

"We set aside the impugned order passed under Section 148A(d) of the Act and the impugned notice issued under Section 148A(b) of the Act."

"This order would not preclude the AO from initiating the proceedings if it finds that any of the material furnished by the petitioner, is incorrect or if the AO finds any other material substantiating the information, which suggests otherwise."

Core principles established include:

• The necessity of "particular information" before issuance of notice under Section 148A(b).
• The mandatory requirement for the AO to meaningfully consider the assessee's response and evidence before passing an order under Section 148A(d).
• The inadmissibility of mechanically relying on unverified portal information or third-party reports without independent verification.
• The principle of consistency in treatment of similarly situated entities in reassessment proceedings.
• The procedural safeguards under Section 148A are substantive and must be complied with to prevent arbitrary reassessment.

Final determinations were that the impugned notice and order under Sections 148A(b) and 148A(d) respectively were quashed, and the reassessment proceedings were set aside for non-compliance with the legal and procedural requirements. However, the AO was not precluded from initiating fresh proceedings if new material justified such action.