2025 (6) TMI 1719 - HC - Income Tax

Reopening of assessment - reasons to believe - alleged bogus sub contract with Sadbhav Engineering Ltd as well as alleged on-money received on sale of agricultural lands by the petitioners HELD THAT - On perusal of the reasons recorded it appears that the AO has failed to disclose or provide any incriminating material allegedly found during the search/survey of residential premises of Shri Pritamkumar Rameshbhai Patel pertaining to the assessee indicating that the petitioners have understated the income or claimed excessive losses deductions etc. Instead the respondent has relied on unsubstantiated information regarding bogus contact worth either Rs. 21 crores or Rs. 42 crores with Sadbhav Engineering Ltd. with final amount remaining unclear so far as Assessment Year 2014-2015 in case of Pravinkumar Premchandbhai Patel. With regard to transaction of sale of agricultural land is concerned the respondents have accepted the reply filed in case of Gunvantbhai Premchandbhai Patel who is co-owner of such sale transaction in the assessment order. Therefore the very basis of reopening of alleged receipt of on-money by the petitioners on sale of four parcels of agricultural land is not in existence as no addition has been made in case of other co-owner which clearly shows that there is absence of any tangible material with the respondent assessing officer at the time of recording the reasons which is a mandatory requirement for assumption of jurisdiction for reopening for formation of reasonable belief for escapement of income. It is also pertinent to note that so far as Special Civil Applications the assessment orders have been passed on the same day i.e. 30.03.2022 when this Court issued the notice and granted stay of further proceedings. Therefore assessment orders are also challenged whereby additions are made in absence of any reply filed by the petitioners in view of challenge to the notice of reopening before this Court. It is also pertinent to note that the AO has made addition for alleged on-money received without any basis. Pursuant to order passed by this Court Respondent has also placed on record relevant extract from the record available online forming part of the original record of the petitions and on perusal of the same it appears that the Insight Portal only reveals that assessee has entered into bogus sub-contract with Sadbhav Engineering Ltd for Assessment Years 2013-2014 and 2014-2015 for Rs. 21 crores in case of Pravinkumar Premchandbhai Patel on the basis of seized material in case of Pritamkumar R. Patel which has no nexus with the petitioner Pravinkumar Premchandbhai Patel. Assessee appeal allowed.

Summary

The core legal questions considered by the Court in these petitions pertain to the validity and legality of notices issued under section 148 of the Income Tax Act, 1961 for reopening assessments for Assessment Years 2013-2014 and 2014-2015, along with the subsequent assessment orders passed under section 147 read with section 144B of the Act. Specifically, the issues revolve around whether the Assessing Officer had valid and tangible reasons to believe that income had escaped assessment, whether the reasons recorded for reopening were clear, unambiguous, and supported by material, and whether the procedure prescribed under the Act, including prior approval for reopening and disposal of objections, was duly followed. Additionally, the Court examined the legitimacy of the alleged bogus subcontract and on-money transactions forming the basis for reopening, and the applicability of exemption relating to agricultural land under section 2(14)(iii) of the Act.

Regarding the first issue of the validity of the reopening notices under section 148, the legal framework mandates that the Assessing Officer must have "reasons to believe" that income chargeable to tax has escaped assessment. These reasons must be recorded in writing, clear, unambiguous, and supported by tangible material. Precedents such as the Supreme Court decision in Commissioner of Income Tax v. Kelvinator of India Ltd and this Court's ruling in Sagar Enterprises v. Assistant Commissioner of Income Tax emphasize that vague or non-specific reasons, especially those not indicating the relevant assessment year or lacking nexus with the taxpayer, render the reopening notice invalid and without jurisdiction.

The Court analyzed the reasons recorded by the Assessing Officer, which relied heavily on information uploaded on the Insight Portal, allegedly derived from search and seizure operations under section 132 and survey actions. However, the Court found that the reasons lacked any tangible incriminating material directly linking the petitioners to escaped income. The information was vague, did not specify the relevant assessment year clearly, and was not supported by any direct evidence such as seized documents or statements related to the petitioners. The Court noted the absence of any addition or adverse finding against one co-owner of the agricultural land sale, despite the same transaction being the basis for reopening against the petitioners, indicating inconsistency and absence of tangible material.

On the question of procedural compliance, the respondents contended that prior approval under section 151 was obtained, and the notices were issued following search and seizure operations, with detailed reasons recorded. The Court acknowledged the procedural steps but emphasized that procedural compliance alone does not validate reopening if the reasons are insufficient or unsupported. The Court also observed that objections filed by the petitioners were either not disposed of with adequate reasoning or were rejected without proper consideration, violating principles of natural justice.

Regarding the contention about the nature of the agricultural land and capital gains exemption, the petitioners argued that the land sold was agricultural and hence exempt under section 2(14)(iii) of the Act. The Court accepted that the petitioners had consistently declared agricultural income and had claimed exemption on capital gains in revised returns. The respondents' reliance on alleged on-money transactions without any corroborative material was found to be speculative and not a valid basis for reopening.

The Court also addressed the issue of simultaneous assessment orders being passed on the same day as the Court's interim stay, which were challenged as being passed without giving the petitioners an opportunity to respond. The Court found such actions improper and quashed the assessment orders accordingly.

In balancing the competing arguments, the Court gave weight to the principle that reopening of assessments is an extraordinary power and must be exercised strictly in accordance with law. The absence of clear, specific, and tangible reasons, coupled with procedural lapses and reliance on vague information, led the Court to conclude that the reopening notices and consequent assessment orders were not sustainable.

The significant holdings of the Court include the following:

"It is settled position of law that reasons are required to be read as they were recorded by the Assessing Officer without any addition, substitution or deletion and such reasons should be clear and unambiguous and should not suffer from any vagueness."

"The very basis of reopening of alleged receipt of on-money by the petitioners on sale of four parcels of agricultural land is not in existence as no addition has been made in case of other co-owner which clearly shows that there is absence of any tangible material with the respondent assessing officer at the time of recording the reasons which is a mandatory requirement for assumption of jurisdiction for reopening for formation of reasonable belief for escapement of income."

"Procedural compliance alone does not validate reopening if the reasons are insufficient or unsupported."

"The impugned notices dated 29.03.2021 and 30.03.2021 as well as assessment orders dated 30.03.2022 are hereby quashed and set aside."

"Notices dated 30.03.2021 and orders disposing off the objections dated 11.07.2023 are also quashed and set aside."

These holdings reaffirm the core principles that reopening of assessment must be based on clear, specific, and tangible material, that the reasons recorded must be free from vagueness, and that procedural fairness must be observed in disposing of objections and passing assessment orders. The Court's final determination was to quash and set aside the impugned notices and assessment orders, thereby upholding the petitioners' challenge to the reopening proceedings and affirming the limits on the Assessing Officer's jurisdiction in the absence of valid reasons.