2025 (6) TMI 240 - HC - Income Tax

Reopening of assessment - purchase of immovable property in India by an NRI without filing an income tax return - books relating to the income earned in USA were not produced - HELD THAT - Supreme Court in the case of Chhugamal Rajpal Vs. S.P. Chaliha and Ors. 1971 (1) TMI 9 - SUPREME COURT held that the AO must have a prima-facie ground for taking action under Section 148 of the Act and a need for further enquiry cannot be equated for reason for issuing notice under Section 148. Apart from the information of petitioner having purchased an immovable property in India during the relevant year there is no information with the department to suggest that the income having been earned by petitioner in India or liable to be taxed under the Act had escaped assessment. No such averment is there either in the show cause notice or in the impugned order. It is clear that preliminary inquiry can be held by AO prior to issuance of notice under Section 148A(b). Rather the AO while acting under the Act wanted to verify the source of income in USA. Once the source of investment was duly explained and it was established that it originated in foreign country there was no basis for the AO to proceed under Section 148. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the Assessing Officer (AO) was justified in initiating reassessment proceedings under Section 148 of the Income Tax Act, 1961, on the ground that income chargeable to tax had escaped assessment, when the petitioner is a Non-Resident Indian (NRI) and had not earned income in India during the relevant assessment year;
• Whether mere purchase of immovable property in India by an NRI, without filing an income tax return for the relevant year, constitutes sufficient information or material to issue a notice under Section 148A(b) and proceed under Section 148;
• Whether the AO was entitled to reject the petitioner's explanation and documents regarding the source of funds for the property purchase, specifically the foreign income and banking transactions, in absence of any concrete evidence indicating income escaping assessment in India;
• The extent and nature of the preliminary inquiry permissible under Section 148A(b) and the requirement of prima facie satisfaction by the AO before issuing notice under Section 148;
• The applicability of the principles laid down by the Supreme Court regarding the threshold for initiating reassessment proceedings under Section 148, particularly the requirement of prima facie satisfaction and the distinction between need for further inquiry and grounds for issuing notice.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Initiating Reassessment Proceedings under Section 148

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act empowers the AO to reassess income escaping assessment, which by definition must be "income chargeable to tax" under the Act. The Supreme Court in Chhugamal Rajpal Vs. S.P. Chaliha (1971) 79 ITR 603 held that the AO must have a prima facie satisfaction that income chargeable to tax has escaped assessment before issuing notice under Section 148. Mere need for further inquiry is insufficient.

Court's Interpretation and Reasoning: The Court observed that the AO's initiation of proceedings was based solely on information that the petitioner, an NRI, had purchased immovable property in India and had not filed a return for the relevant year. There was no information or material indicating income earned in India or income liable to tax under the Act had escaped assessment. The AO's suspicion regarding the source of foreign income did not amount to prima facie satisfaction of escaped income chargeable to tax in India.

Key Evidence and Findings: The petitioner produced detailed documents including bank statements from USA and NRE account in India, sale deed, proof of TDS deduction, citizenship and passport details establishing non-resident status, and declaration of no income earned in India. These documents were not doubted but the AO rejected the explanation on the ground that account books relating to income earned in USA were not produced.

Application of Law to Facts: The Court held that the AO's dissatisfaction with the source of foreign income, without any concrete information or material indicating income escaping assessment in India, was insufficient to invoke Section 148. The petitioner's explanation and documentary evidence established that the investment was from foreign income, not taxable in India.

Treatment of Competing Arguments: The respondent argued that the AO was not satisfied with the source of foreign income and thus reassessment was justified. The Court rejected this, emphasizing that suspicion or need for further inquiry cannot substitute the requirement of prima facie satisfaction of escaped income chargeable to tax in India.

Conclusion: The AO was not justified in initiating reassessment proceedings under Section 148 in absence of any material indicating escaped income chargeable to tax in India.

Issue 2: Sufficiency of Information for Issuance of Notice under Section 148A(b)

Relevant Legal Framework and Precedents: Section 148A(b) provides for issuance of notice for preliminary inquiry before initiating reassessment. However, the Supreme Court has clarified that issuance of notice under Section 148 requires prima facie satisfaction of escaped income.

Court's Interpretation and Reasoning: The Court noted that the information leading to issuance of notice under Section 148A(b) was limited to the fact of property purchase and non-filing of return. This alone cannot constitute sufficient information to proceed under Section 148. The risk management flagging of the petitioner's case as high risk was also held insufficient to form basis for reassessment.

Key Evidence and Findings: The petitioner's reply to the notice included comprehensive documentation explaining the source of funds and non-resident status. The AO did not produce any independent material indicating escaped income.

Application of Law to Facts: The Court held that preliminary inquiry under Section 148A(b) is permissible but cannot be a substitute for the requirement of prima facie satisfaction under Section 148. Mere suspicion or risk profiling does not justify reassessment proceedings.

Treatment of Competing Arguments: The respondent contended that the AO's dissatisfaction warranted further enquiry and reassessment. The Court distinguished between need for further enquiry and satisfaction of escaped income, siding with the petitioner.

Conclusion: The information available was insufficient to issue notice under Section 148 and proceed with reassessment.

Issue 3: Rejection of Petitioner's Explanation and Documents

Relevant Legal Framework and Precedents: The burden lies on the AO to establish existence of escaped income chargeable to tax. The petitioner's explanation and supporting documents must be considered unless they are found to be false or unreliable.

Court's Interpretation and Reasoning: The Court found that the AO did not doubt the authenticity of the documents but rejected the explanation on the ground that account books relating to foreign income were not produced. The Court held that such a requirement was not justified in the circumstances, especially when the petitioner was an NRI and had produced alternate credible evidence.

Key Evidence and Findings: The petitioner produced bank statements, citizenship documents, sale deed, TDS proof, and identification numbers. The AO did not provide any contradictory evidence.

Application of Law to Facts: The Court applied the principle that absence of further documents cannot be a ground to reject credible explanations and initiate reassessment without prima facie material.

Treatment of Competing Arguments: The AO's insistence on account books was rejected as unreasonable given the petitioner's status and the documents produced.

Conclusion: The AO erred in rejecting the petitioner's explanation and documents without adequate basis.

3. SIGNIFICANT HOLDINGS

The Court held:

"The flagging of the case of the petitioner as a high risk case in the inside portal according to the risk management strategy, itself cannot