2025 (6) TMI 1394 - AT - Income Tax

Validity of reopening of assessment - period if limitation - Time limit for notices u/s 148 and 148A - reasons to believe - HELD THAT - We observe that assessing officer has not followed the procedure mentioned in section 148A of the Act properly. While following the procedure we find that there are lot of launches which is not curable. It was submitted that the allegation in the entire Annexure (Reason) is that of unaccounted receipts by assessee from booking / sale of units in the project Silver Heights . However while justifying the reopening of case under the prescribed time-limit u/s 149 of the Act it was alleged that income chargeable to tax in assessee s case is not represented in the form of assets / expenditure that is nowhere it is mentioned that income chargeable to tax which has escaped assessment amounts to Rs. 50, 00, 000/- or more. Therefore there is clear contradiction between the allegation raised on the basis of so-called documents/data seized from the premises of third party and averment made in justification of compliance with the provision of Section 149(1)(b) of the Act. In the show cause notice dated 13.03.2023 it is mentioned that the reopening proceedings are made as per clause (iv) of Explanation 2 to Section 148 of the Act this is in stark contradiction to the reasons mentioned in the very notice issued u/s. 148 of the Act dated 23.02.2023. In the said notice issued u/s 148 of the Act on 23.02.2023 it is mentioned that assessment is reopened on account of search initiated u/s 132 of the Act in your case or in the case of the person in respect of which you are assessable under the Act . This means that while reopening the proceedings assessing officer had formed an opinion and a belief that either search has been carried out in assessee s case or that assessee s representative of any other search person (In this case of R K Group). Thus the very initiation of the reassessment proceedings is on a completely incorrect factual premises or belief and it was strongly objected by the assessee during the assessment proceedings. Therefore on this ground also initiation of proceeding u/s. 147 of the Act is incurably and defective. We find that in para-3 of SCN it is stated that the provision of Section 149(1)(b) has been followed by taking approval from the specified authority. However as stated above there is no mention of asset or expenditure represented by the alleged-escaped income and hence the notice issued u/s.148 of the Act is barred by the limitation period of time prescribed u/s.149 of the Act. Proceedings initiated u/s147 of the Act are wholly and ipso facto invalid and hence reassessment proceedings are hereby quashed. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this consolidated appeal arising from reassessment proceedings under sections 147 read with 143(3) of the Income Tax Act, 1961, pertain to the validity and legality of the reopening of assessments under section 148, the correctness of additions made on account of alleged unaccounted 'on-money' receipts, the applicability of section 145(3) for rejection of books of account, the procedural fairness in terms of opportunity for cross-examination, and the quantum of estimated profit to be added on such unaccounted receipts. Specifically, the issues are:

1. Whether the reassessment proceedings initiated under section 148 and culminating in orders under section 147 of the Act were valid and legally sustainable, particularly in light of procedural requirements under sections 148, 148A, and 149 of the Act, including the correctness of the satisfaction note, approval for reopening, and the notice under section 148.

2. Whether the Assessing Officer was justified in rejecting the books of account under section 145(3) and estimating unaccounted profits based on seized data from a third party, and the correctness of treating Rs. 9.80 crores as 'on-money' in the assessee's hands.

3. Whether the addition of unaccounted profit at the rate of 18% on the alleged 'on-money' receipts was justified, including the reliance on data found from an accountant of the searched party.

4. Whether the assessee was denied a fair opportunity of cross-examination of persons belonging to the searched party, whose statements or data formed the basis of the addition.

5. Whether the disallowance of claim of set-off of brought forward unabsorbed depreciation was justified.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Sections 148/147:

Legal Framework and Precedents: The reopening of assessment under section 148 requires the Assessing Officer to record reasons for belief that income chargeable to tax has escaped assessment. Post amendments effective 1.4.2021, sections 148, 148A, and 149 prescribe detailed procedural safeguards, including clear reasons specifying the assessment year, and conditions for issuance of notice within prescribed time limits, especially when reopening beyond three years but within ten years is sought on the basis of assets, expenditure, or entries indicating escaped income exceeding Rs. 50 lakhs.

Court's Interpretation and Reasoning: The Tribunal scrutinized the satisfaction note and approval for reopening and found that these documents did not mention the relevant assessment year, which is fundamental to the validity of reassessment proceedings. The absence of the assessment year in these primary documents indicated a non-application of mind and mechanical approval. The notice under section 148 incorrectly stated that a search was initiated in the assessee's case on 22.10.2021, whereas the actual search was conducted on 24.08.2021 in the case of other entities (R.K. Group and associates). This factual inaccuracy demonstrated a lack of proper application of mind and rendered the notice defective.

The Tribunal emphasized settled principles of law that statutory actions must be taken strictly in accordance with prescribed procedures ('Expressiouniusest exclusion alteris'). Failure to comply with mandatory requirements, such as specifying the assessment year and correct facts in the notice, vitiates the proceedings.

Key Evidence and Findings: The approval letter and satisfaction note lacked mention of the assessment year; the notice under section 148 contained incorrect facts about the date and subject of the search; the reasons recorded for reopening did not clearly identify whether the alleged escaped income was represented by an asset or expenditure, nor did they quantify the amount exceeding Rs. 50 lakhs as required under section 149(1)(b).

Application of Law to Facts: Since the foundational documents for reopening were defective and the procedural requirements under sections 148A and 149 were not complied with, the reopening was held invalid. The Tribunal held that the Assessing Officer's jurisdiction to reopen was absent, and consequently, all subsequent proceedings based on such reopening were void.

Treatment of Competing Arguments: The Revenue argued that minor defects in the documents do not invalidate the proceedings and relied on the approval letter which mentioned the assessment year. The Tribunal rejected this, observing that the primary documents lacked the assessment year and that the approval was mechanical. The Revenue's contention that the notice under section 148 was valid despite factual errors was also rejected.

Conclusion: The reassessment proceedings under sections 147/148 were quashed for non-compliance with statutory procedural requirements, absence of clear reasons, and defective notices.

2. Addition of Unaccounted 'On-Money' and Rejection of Books under Section 145(3):

Legal Framework and Precedents: Section 145(3) allows the Assessing Officer to reject books of account if they do not reflect the true income. Additions can be made based on seized material, including data from third parties, provided there is a clear nexus to the assessee's income.

Court's Interpretation and Reasoning: The Assessing Officer relied on digital data seized from the premises of an accountant of the R.K. Group, which included 'Miracle' software files showing transactions involving the assessee. The Assessing Officer observed that the books of the assessee were incomplete and did not reflect these unaccounted transactions. The Tribunal noted the Assessing Officer's finding that the seized data was accurate and reliable, and that the assessee's books could not be relied upon.

Key Evidence and Findings: Seized digital data showing entries such as 'SH MM' and 'Silver Heights' linked to the assessee, statements of key persons admitting accounting under instructions, and the absence of corresponding entries in the assessee's books.

Application of Law to Facts: The Assessing Officer invoked section 145(3) to reject the books and estimated unaccounted profits based on the seized data. The Tribunal, however, did not reach the merits of this issue due to quashing of the reassessment proceedings on procedural grounds. The assessee's contention that the seized data was not authentic or relevant was noted but not adjudicated.

Treatment of Competing Arguments: The assessee argued that the seized data was incomplete, not in its possession, and had no direct nexus, while the Revenue relied on the incriminating material found in the digital data and statements of associates. The Tribunal did not decide on this issue due to quashing of reassessment.

Conclusion: The issue is rendered academic and not adjudicated due to quashing of reassessment proceedings.

3. Quantum of Estimated Profit on 'On-Money' Receipts:

Legal Framework and Precedents: Only the profit element embedded in unaccounted receipts is taxable, not the entire amount. Estimation of profit must be reasonable and based on relevant data.

Court's Interpretation and Reasoning: The Assessing Officer initially estimated profit at 50% of on-money receipts. The CIT(A) reduced this to 18%, observing that the 50% rate was arbitrary and not based on scientific data. The CIT(A) also directed that such income be taxed in the year of actual sale when risk and reward transfer.

Key Evidence and Findings: Seized data indicating varying net surplus funds from -237% to 51% in different projects; the assessee's declared sales consideration exceeding stamp duty valuations; and the assessee's gross profit shown at 15.38%.

Application of Law to Facts: The CIT(A)'s reduction to 18% was considered a balanced approach covering irregularities and incomplete transactions. The Tribunal did not decide on this issue following quashing of reassessment.

Treatment of Competing Arguments: The assessee contended for deletion or reduction of addition; the Revenue sought to uphold 50% addition. The Tribunal did not adjudicate due to quashing.

Conclusion: Not adjudicated due to quashing of reassessment proceedings.

4. Opportunity for Cross-Examination:

Legal Framework and Precedents: Principles of natural justice require that an assessee be given a reasonable opportunity to cross-examine witnesses whose statements are used against it. However, reliance solely on seized material without statements may not necessitate cross-examination.

Court's Interpretation and Reasoning: The assessee requested cross-examination of the accountant whose data was seized. The Assessing Officer and CIT(A) held that the addition was based on seized data, not on statements, and cross-examination was not necessary. The Tribunal did not decide on this issue due to quashing.

Key Evidence and Findings: Letter requesting cross-examination; reliance on seized digital data rather than statements.

Conclusion: Not adjudicated due to quashing of reassessment proceedings.

5. Disallowance of Set-Off of Brought Forward Unabsorbed Depreciation:

This ground was raised but not specifically adjudicated due to the quashing of reassessment proceedings.

Significant Holdings:

"It is a settled principle of law that correct income is to be assessed in the correct assessment year. However, in the above satisfaction note, there is no 'assessment year' mentioned at all. It means the department does not know for which 'assessment year' they are going to assess the assessee. Therefore, the primary document for initiation of reassessment proceeding does not contain the 'assessment year', which is foundation to assess the income of the assessee, and therefore, we find that since there is no foundation, the superstructure cannot be built on that. Once the foundation fails, the superstructure also fails."

"Law is well settled that when the statute requires to do certain thing in certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and necessarily forbidden."

"The show cause notice having used both the phrases (asset and expenditure) at a time, it suffers from vagueness and demonstrates absence of initial judgment itself, as to whether the information represents assessee's asset or expenditure. As a result, the notice becomes bad in law and assessment order deserves to be quashed."

"The reassessment proceedings initiated under section 147 of the Act are wholly and ipso facto invalid and hence, reassessment proceedings are hereby quashed."

Core Principles Established:

- The validity of reassessment proceedings hinges critically on strict compliance with procedural requirements, including clear recording of reasons, correct identification of assessment year, and adherence to time limits under sections 148, 148A, and 149 of the Act.

- Defective satisfaction notes and notices under section 148 that fail to specify the assessment year or contain factual inaccuracies render the reassessment proceedings invalid.

- The Assessing Officer's jurisdiction to reopen an assessment is contingent upon possession of clear and explicit information indicating escaped income represented by asset or expenditure exceeding the prescribed threshold.

- The principle of natural justice requires opportunity for cross-examination only where statements form the basis of additions; reliance solely on seized material may not necessitate it.

- Estimation of unaccounted income must be reasonable and based on reliable data; arbitrary estimation is unsustainable.

Final Determinations:

The Tribunal quashed the reassessment proceedings initiated under section 148/147 of the Act for all the relevant assessment years on the grounds of non-compliance with mandatory procedural requirements, defective satisfaction notes and notices, and failure to establish jurisdiction under section 149(1)(b). Consequently, all additions and other issues raised in the appeals and cross-appeals were rendered academic and were not adjudicated. The assessee's appeals were allowed, and the Revenue's cross-appeals were dismissed.