2025 (7) TMI 830 - HC - Income Tax

Validity of reopening of assessment - reasons to believe - whether the AO is possessed of information warranting reopening of the assessment? - Scope of expression information and word suggest -Time limit for notice - mandation to have prior approval of the specified authority Whether the order issued u/s 148A determining that it is a fit case to issue notice u/s 148 and the notice issued under Section 148 of the Act are amenable to challenge in writ jurisdiction? - HELD THAT - Sections 148 and 148A have been amended twice recently. Under the latest regime steps for reopening can be initiated when the assessing officer has information which suggests that income chargeable to tax has escaped assessment for the relevant assessment year. The expression reason to believe has been consciously omitted. Instead the amendment provides that the assessing officer can act on the basis of information. The expression information has been defined in Section 148(3) of the Act. The information should fall under any of the six categories set out in Section 148(3) of the Act. The information must suggest that there has been an escapement of income. The legislature has cautiously employed the expression suggest . The word suggest can only mean indicate . Suggest is not a strong word by itself. It is rather recommendatory in tone. The word suggest cannot connote anything more. Section 148A contains sufficient safeguards. Suppose there is an audit objection it is certainly an information but then on that sole ground an order cannot be passed that the case is fit for issuing notice under Section 148. The assessee s reply must be considered. In Springer Health Care Limited 2025 (6) TMI 80 - DELHI HIGH COURT held that if the assessing officer is satisfied with the reply furnished by the assessee and the material on record the assessing officer is bound to hold that it is not a fit case for issuance of notice under Section 148. We have to add a caveat here. The statute talks about taking the prior approval of the specified authority. The assessing officer cannot decide on his own. For issuing the initial notice under Section 148A(1) the assessing officer does not require any approval from the specified authority. But for passing an order under 148A(3) of the Act prior approval of the specified authority is must. In view of the material changes in the relevant statutory provisions and in view of the law laid down in Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT it may not be safe to apply the tests evolved under the old regime. First principles are one thing. Precedents rendered in particular statutory contexts are another. When the statutory position has changed it would not be safe to mechanically apply the precedents evolved in a different context. The Judges must be alert to see if the ground beneath the judicial feet has shifted. Ashish Agarwal was rendered on 04.05.2022. Dr.Mathew Cherian 2022 (10) TMI 686 - MADRAS HIGH COURT came later on 01.09.2022. However in Dr.Mathew Cherian Ashish Agarwal has not been referred to. Clause (ii) of Section 148(3) of the Act states that the information with the assessing officer which suggests that the income chargeable to tax has escaped assessment means inter alia any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of the Income Tax Act. Since this provision provides for reopening a concluded assessment it cannot be construed liberally. The audit objection must definitely opine that the assessment was not made as per the statutory provisions. Only if the audit objection contains such a clear opinion it can be taken as information for the purpose of the Section. We have already dealt with the scope of the expression suggests occurring in Section 148A(1) of the Act. While the sufficiency or the strength of the objections cannot be gone into at the initial stage of issuing notice under Section 148A(b) corresponding to Section 148A(1) the conclusion of the audit objection should be unambiguous. Unless it states that the assessment in question was not made in accordance with the provisions of the Act we have to hold that the jurisdictional fact to initiate proceedings for reassessment is absent. If the audit objection is not definite in its opinion it would not amount to information within the meaning of the provision. There is no reference to any audit objection in the above notice. In our view the notice under Section 148A(1) of the Act must be accompanied by a copy of the audit objection or at least the relevant portions. In this case before eliciting the assessee s response the audit objection was not furnished. Reassessment has to be confined to the question if processing charges and legal and professional charges have escaped assessment of income. We have already held that the audit objection must opine that the assessment was not done as per the statutory provisions. Only then it will qualify to be considered as information . The audit objection must also indicate the reasons for its conclusion. The writ court at the notice stage may not go into the sufficiency of reasons. The aforesaid test is met only in respect of the assessment pertaining to professional charges and processing charges. Therefore there can be reopening of the assessment only to this limited extent. We remit the matter to the file of the assessing officer to issue fresh notice u/s 148A(1) of the Act in respect of the above head alone. If the assessing officer issues such a fresh notice within four weeks from the date of receipt of copy of this order it will be deemed to be within time. For the foregoing reasons the order and the notice impugned in the writ petition stand quashed and the matter is remitted to the file of the assessing officer to the limited extent mentioned above.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the order passed under Section 148A(d) of the Income Tax Act, 1961 (IT Act) determining that it is a fit case to issue notice under Section 148, and the subsequent notice under Section 148, are amenable to challenge under writ jurisdiction.

(b) Whether the reopening of the assessment for the assessment year 2017-18 by issuance of notice under Section 148 is barred by limitation, having regard to the amended provisions of Section 149 of the IT Act effective from 01.04.2021.

(c) The applicability and relevance of precedents rendered under the pre-amendment regime (prior to 01.04.2021) in the context of the amended provisions governing reassessment proceedings.

(d) The interpretation and scope of the amended provisions, particularly Section 148A and Section 148(3), including the nature and sufficiency of "information" which "suggests" escapement of income warranting reopening of assessment.

(e) Whether the reopening is based on mere change of opinion or on tangible fresh information justifying reassessment.

(f) The procedural safeguards and requirements under the amended provisions, including the need for prior approval of the specified authority before passing an order under Section 148A(d).

(g) The scope and effect of audit objections as "information" for initiating reassessment proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Challengeability of the order under Section 148A(d) and notice under Section 148 in writ jurisdiction

The Court examined whether the order determining the fitness to issue notice under Section 148A(d) and the notice under Section 148 can be challenged by way of writ petition. The Revenue relied on the Supreme Court decision in Anshul Jain v. Principal Commissioner of Income-Tax, which held that post issuance of notice under Section 148A(d), grievances on merits must be agitated before the assessing officer during reassessment proceedings, not by writ. However, the Court noted that the Supreme Court and High Courts have distinguished between jurisdictional errors and errors within jurisdiction. Jurisdictional errors, such as issuing notice without jurisdictional preconditions, remain amenable to writ challenge. The Court relied on the Supreme Court decision in Red Chilli International Sales, which affirmed that writ courts can examine jurisdictional preconditions for issuance of notice under Section 148. Further, a Madras High Court decision in Avinashilingam Institute followed this approach. Thus, the Court held that writ petition challenging the order under Section 148A(d) and notice under Section 148 is maintainable if jurisdictional errors are alleged.

(b) Limitation for reopening assessment under amended Section 149

The Court considered the limitation period for issuance of notice under Section 148 for the assessment year 2017-18. The amended Section 149, effective from 01.04.2021, prescribes a three-year limitation period from the end of the relevant assessment year, extendable up to ten years if the Assessing Officer possesses books of account or other documents revealing escapement of income exceeding Rs. 50 lakh. The proviso to Section 149(1)(b) bars issuance of notice if it was time-barred as per pre-amendment provisions.

The Court referred to the Supreme Court decisions in Union of India v. Rajeev Bansal and UOI v. Ashish Agarwal, which held that the amended provisions apply retrospectively to past assessment years if notices are issued after 01.04.2021. The limitation period is to be judged as per the law in force on the date of issuance of notice.

For the assessment year 2017-18, the limitation period under the pre-amendment Section 149(1)(b) was six years from the end of the assessment year (i.e., till 31.03.2024). The notice was issued on 26.03.2024, within the six-year period. Therefore, the Court held that the reopening is not barred by limitation.

The Court clarified that if the four-year limitation period had expired before 01.04.2021 and the assessee had made full and true disclosure, the old regime would apply, barring reopening. However, since the limitation period had not expired by 01.04.2021, the amended provisions apply.

(c) Applicability of precedents under the old regime

The assessee relied on decisions such as CIT v. Kelvinator and others, which established the principle that reopening cannot be based on mere change of opinion and that the Assessing Officer lacks power to review assessments. The Court observed that these decisions were rendered under the pre-amendment regime and emphasized that the legislative amendments brought radical and reformative changes to reassessment procedure.

The Court referred extensively to the decision in Ashish Agarwal, which explained the rationale and scope of the substituted Sections 147 to 151. The new regime replaced the "reason to believe" test with a requirement of "information" that "suggests" escapement of income, and introduced procedural safeguards including prior approval of specified authority and opportunity to the assessee before issuance of notice.

The Court held that it is not safe to mechanically apply old precedents post-amendment. The statutory context has shifted, requiring fresh interpretation aligned with the amended provisions.

(d) Interpretation of "information" and scope of Section 148A and Section 148(3)

The Court analyzed the amended Section 148A, which mandates that before issuing notice under Section 148, the Assessing Officer must provide the assessee an opportunity to show cause why notice should not be issued, accompanied by the "information" suggesting escapement of income. The Assessing Officer must then pass an order with prior approval of the specified authority determining fitness to issue notice.

The Court emphasized that the word "suggests" is recommendatory and indicates a possibility or indication of escapement, not a conclusive finding. At the stage of issuance of notice under Section 148A(1), the Court will not examine sufficiency or adequacy of the information. If the Assessing Officer has relevant information implying possible escapement, the notice can be issued.

However, Section 148A provides safeguards: the Assessing Officer must consider the assessee's reply and obtain prior approval before issuing notice. If the Assessing Officer is satisfied with the reply, notice should not be issued.

(e) Reopening on mere change of opinion

The Court rejected the Revenue's contention that the amended provisions dispense with the "change of opinion" test altogether. It held that while the statutory language has changed, the Assessing Officer cannot reopen assessments on a mere change of opinion without any information suggesting escapement. The reopening must be based on relevant information, not arbitrary or capricious grounds.

(f) Procedural safeguards and prior approval requirement

The Court noted that the amended provisions mandate prior approval of the specified authority before passing order under Section 148A(d). The Assessing Officer cannot unilaterally decide to reopen without such approval. The Court underscored the procedural rigor and safeguards introduced to prevent abuse of power.

(g) Role and sufficiency of audit objections as "information"

The Court examined the audit objections relied upon by the Assessing Officer as the "information" suggesting escapement. It held that audit objections must clearly opine that the assessment was not made in accordance with the provisions of the Act to qualify as "information" under Section 148(3). Mere audit objections raising issues for further examination or proposing inquiries do not suffice.

In the instant case, the audit objections raised concerns about the nexus of expenses with business, genuineness of borrowings, and creditworthiness of lenders, but paragraphs (b) and (c) only proposed further examination without definite objection that assessment was not in accordance with law.

The Court held that reassessment can be confined only to the issue of processing charges and professional charges, where the audit objection clearly suggested escapement. Other aspects lacked definite audit objection qualifying as "information".

Application of law to facts and treatment of competing arguments

The Court found that the reopening notice was issued within the six-year limitation period under the pre-amended Section 149(1)(b). The amended provisions apply retrospectively as the notice was issued after 01.04.2021.

The Court disagreed with the learned Single Judge's reliance on pre-amendment precedents like Kelvinator, holding that the amended statutory framework requires fresh analysis.

Regarding the audit objection, the Court held that the notice under Section 148A(1) must be accompanied by the audit objection or relevant portions, which was not done here. The Assessing Officer's order under Section 148A(d) contained only a truncated extract.

The Court concluded that only the issue relating to processing and professional charges met the threshold of "information" suggesting escapement. The reassessment proceedings and notice were therefore limited to this aspect.

The Court remitted the matter to the Assessing Officer to issue a fresh notice under Section 148A(1) within four weeks in respect of the limited issue of processing and professional charges.

3. SIGNIFICANT HOLDINGS

"The High Court itself made a distinction between jurisdictional error and error of law / fact within jurisdiction. The High Court clarified that for rectification of errors, statutory remedy has been provided. The clear implication is that where there are jurisdictional errors, writ petition will lie."

"The amended provisions apply retrospectively for past assessment years as well, if notice under Section 148 is issued after 01.04.2021. The limitation period must be judged as per the law in force on the date of issuance of notice."

"The word 'suggests' can only mean 'indicate'. Suggest is not a strong word by itself. It is rather recommendatory in tone. The word 'suggest' cannot connote anything more."

"At the stage of issuance of initial notice under Section 148A(1), the Court would not go into the sufficiency or adequacy of the information. If the assessing officer can show that he has 'information' and it suggests escapement of income, the writ Court should not interfere at that stage."

"Audit objection must opine that the assessment was not made as per the statutory provisions. Only then it will qualify to be considered as 'information'."

"The reopening cannot be based on mere change of opinion. The Assessing Officer must have information which suggests escapement of income."

"The amended provisions have introduced procedural safeguards including prior approval of the specified authority before passing order under Section 148A(d)."

"The writ petition filed by the assessee is maintainable to challenge jurisdictional errors at the stage of issuance of notice under Section 148A and Section 148."

"The reopening notice issued on 26.03.2024 for the assessment year 2017-18 is within the six-year limitation period under the pre-amended Section 149(1)(b) and hence not barred by limitation."

"The reassessment proceedings are confined to the issue of processing charges and professional charges only, as only in respect of these charges the audit objection qualifies as 'information' suggesting escapement of income."