2025 (6) TMI 907 - HC - Income Tax

Validity of reassessment proceedings - effect of non disposal of objections - as argued by assessee Respondents have not disposed of the objections raised as clearly in violation of the judgment of GKN Driveshafts (India) Ltd. 2002 (11) TMI 7 - SUPREME COURT - HELD THAT - We find considerable force in the arguments canvassed on behalf of the Petitioner that not only has there been a breach of principles of natural justice but the entire proceedings are vitiated by not first disposing of the objections of the Petitioner before passing the Assessment Order under Section 147 r/w 144B of the IT Act. Respondent sought to contend that no formal objections have been filed by the Petitioner - We find this argument of respondent to be factually incorrect. The objections can be found at page 57 of the paper-book where the Petitioner has clearly stated that he has not entered into any bogus transactions and that the Petitioner does not have any acquaintance with the said person nor has he entered into any financial transactions with the said person during the A.Y. 2014-15. This aspect has been completely ignored by the Income Tax authorities. We therefore find that this argument is factually incorrect and misplaced. Even in the Assessment Order the 4th Respondent has categorically stated in paragraph 7 that the re-assessment proceedings are getting time barred by 31st March 2022 and at the fag end of the year when the case is getting barred by limitation the Assessee has filed details and therefore it is not possible to thoroughly examine the issues. We fail to see how such a finding could have been given when in fact the objections were filed as far back as on 30th July 2021 and as per the Notice issued under Section 144 time was granted to the Petitioner to furnish the requisite details by 7th March 2022 and which was duly done by the Petitioner. We find that this is a fit case where the matter needs to be remanded back to the 4th Respondent who will first deal with the objections filed by the Petitioner.

Summary

The primary legal questions considered in this judgment are:

1. Whether the reopening of the assessment under Section 148 of the Income Tax Act, 1961 (IT Act) was valid, particularly in light of the jurisdictional requirements established by precedent.

2. Whether the objections raised by the Petitioner against the reopening notice and the reasons recorded were properly disposed of by the Income Tax authorities, as mandated by law and judicial precedent.

3. Whether the Income Tax authorities conducted an independent and diligent inquiry before issuing the reopening notice and passing the reassessment order, or whether the proceedings were mechanical and based solely on information from the Insight Portal without further verification.

4. Whether principles of natural justice were violated in the course of the reassessment proceedings, including the issuance and service of notices and the opportunity to respond.

Issue 1: Validity of Reopening Assessment under Section 148 of the IT Act

The legal framework governing reopening of assessments under Section 148 requires that the Assessing Officer must have "reasons to believe" that income has escaped assessment. The Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer established that the reasons recorded must be clear, relevant, and disclosed to the assessee, and the objections raised by the assessee must be disposed of before proceeding.

The Court observed that the reopening notice dated 30th March 2021 was issued mechanically and based solely on information received from the Insight Portal without any independent application of mind or verification of records. The reasons recorded were mere extracts and ambiguous, not specifically related to the Petitioner. This failure to independently verify the information and the absence of proper reasons violated the jurisdictional requirement under Section 148.

The Court found that the reopening was therefore not validly initiated, as the Assessing Officer did not meet the threshold of "reasons to believe" with proper disclosure and consideration of objections.

Issue 2: Disposal of Objections Raised by the Petitioner

The Petitioner filed detailed objections on 30th July 2021, denying any transactions with the alleged individual named in the reopening notice and asserting no acquaintance or financial dealings with such person during the relevant assessment year. The Supreme Court precedent in GKN Driveshafts mandates that such objections must be disposed of before proceeding with reassessment.

The Court found that the Income Tax authorities failed to dispose of these objections or seek further clarification. Instead, they issued subsequent notices under Section 142(1) which were not received by the Petitioner, and proceeded to issue a show-cause notice under Section 144 without addressing the objections. This was held to be a clear breach of the procedural requirements and principles established by the Supreme Court.

The Respondents' contention that no formal objections were filed was rejected as factually incorrect, as the objections were on record and explicitly denied the alleged transactions.

Issue 3: Independent Inquiry and Application of Mind by the Assessing Officer

The Court scrutinized whether the Assessing Officer conducted any independent inquiry beyond the information from the Insight Portal. It was found that the reopening and reassessment were based solely on portal information without any further verification or inquiry into the Petitioner's records.

This mechanical approach was criticized as it failed to meet the statutory and judicial standards requiring the Assessing Officer to apply independent mind and verify the information before reopening assessments. The Court emphasized that reliance on raw data without corroboration or inquiry is insufficient to justify reopening.

Issue 4: Violation of Principles of Natural Justice

The Court examined the procedural irregularities, including non-service of notices dated 15th December 2021 and 25th February 2022, and the issuance of a show-cause notice on 25th March 2022 at 9:35 p.m. with a response deadline two days later on a Sunday, which effectively denied the Petitioner a reasonable opportunity to respond.

The Petitioner had already filed a return under protest and responded to earlier notices, but the authorities proceeded to pass the reassessment order on 28th March 2022 without disposing of objections or providing adequate opportunity to be heard. This was held to be a breach of natural justice principles.

Conclusions and Application of Law to Facts

The Court concluded that the reopening notice and reassessment order were vitiated by procedural and jurisdictional infirmities. The failure to dispose of objections, mechanical issuance of notices, lack of independent inquiry, and breach of natural justice rendered the entire reassessment proceeding bad in law.

The Court remanded the matter to the Assessing Officer (4th Respondent) with directions to first dispose of the objections filed by the Petitioner. The Assessing Officer was instructed not to proceed further for four weeks after communicating the disposal order, and to complete the reassessment strictly in accordance with the provisions of the IT Act.

Significant Holdings

The Court reiterated the binding principles from GKN Driveshafts (India) Ltd. that "the objections raised by the assessee must be disposed of before reopening the assessment," and that reopening cannot be based on mechanical reliance on information without independent application of mind.

It was held that "the entire proceedings are vitiated by not first disposing of the objections of the Petitioner before passing the Assessment Order under Section 147 r/w 144B of the IT Act."

The Court emphasized that "the reopening was not validly initiated as the Assessing Officer did not meet the threshold of 'reasons to believe' with proper disclosure and consideration of objections," and that "there has been a breach of principles of natural justice" due to failure in service and unreasonable timeframes for response.

Accordingly, the Writ Petition was allowed with directions for remand and reconsideration, but without any order as to costs.