2025 (6) TMI 1521 - AT - Income Tax

Validity of reopening of assessment u/s 147 - allegation of non-application of mind by the AO in taking approval from the appropriate authority u/s 151 - HELD THAT - Perusal of Form for recording the reasons for initiating proceedings u/s 148 and for obtaining approval of the Pr. CIT Delhi-8 New Delhi which is placed at Paper Book page 20 suggests that the AO mentioned the provisions under which the assessment was reopened as 147(b) of the Act. It is observed that the provisions of section 147(a)/147(b) have seized to be in the statute book from 1.4.1989. Therefore mentioning all these incorrect and non-existent sections for obtaining approval for recording the reasons for initiating proceedings u/s 148 is a clear case of non-application of mind by the AO and also by the authorities providing satisfaction u/s 151 of the Act. See Shyam Products P. Ltd 2023 (1) TMI 1437 - ITAT DELHI as held there is non-application of mind by the AO while filling up the proforma for obtaining the approval from Commissioner u/s 151 of the Act and the ld. CIT also has granted approval in a mechanical manner. Reassessment order passed u/s 147/143(3) of the Act for the AY 2009-10 is quashed - Decided in favour of assessee.

Summary

The core legal questions considered in this appeal pertain primarily to the validity of reassessment proceedings initiated under section 147 of the Income Tax Act, 1961, specifically:

1. Whether the Assessing Officer (AO) applied mind in recording reasons and obtaining approval under section 151 for reopening the assessment, given the invocation of a non-existent provision (section 147(b)) in the statutory framework;

2. Whether the reassessment proceedings initiated under section 147/148 were valid when the material leading to reassessment was seized from a third party and whether the proper procedure under section 153C was followed;

3. Whether the initiation of reassessment proceedings was done at the behest of a superior authority, thereby vitiating the AO's independent satisfaction required under section 147;

4. Whether the AO assumed jurisdiction prematurely by issuing notice under section 143(2) simultaneously with supply of reasons for reopening, thereby denying the assessee an opportunity to object to the assumption of jurisdiction;

5. Whether the approval granted by the Principal Commissioner of Income Tax (Pr. CIT) under section 151 was mechanical and devoid of application of mind, thus invalidating the reassessment proceedings;

6. Whether the notice under section 148 was properly issued in accordance with law, specifically regarding the addressee of the notice;

7. Ancillary issues concerning the merits of additions made under sections 68 and 69C on account of accommodation entries and alleged commission payments.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings: Non-application of Mind and Invocation of Non-Existent Provision

The legal framework mandates that for reopening an assessment under section 147, the AO must record reasons to believe that income has escaped assessment and obtain prior approval from the Pr. CIT under section 151. The approval must be based on application of mind and formation of satisfaction by the Pr. CIT.

In the present case, the AO recorded the provision under which reassessment was sought as section 147(b) of the Act, a provision that ceased to exist since 1.4.1989. This clerical error was accepted by the Revenue as curable under section 292B, but the Tribunal relied on binding precedents to hold that such invocation of a non-existent provision indicates non-application of mind.

Precedents such as the decisions in Smt. Kalpana Shantilal Haria vs. ACIT, Best Cybercity India P. Ltd. vs. ITO, Omkam Developers Ltd. vs. ITO, and Madhu Apartments P. Ltd. vs. ITO were relied upon. These decisions emphasize that mechanical or ritualistic approval without meaningful application of mind by the AO and the Pr. CIT invalidates reassessment proceedings.

The Tribunal noted that the Pr. CIT's approval was limited to a mere "yes" in the proforma without any recorded satisfaction or examination of the material, rendering the approval mechanical and invalid.

Application of law to facts: The AO's use of a non-existent provision and the Pr. CIT's mechanical approval demonstrated non-application of mind, rendering the reassessment proceedings void ab initio.

2. Jurisdictional Validity in Light of Section 153C

The reassessment was initiated based on incriminating material seized during a search on third parties (Sh S.K. Jain and others). The legal framework under section 153C mandates that if material is seized from a third party relating to another person, reassessment can only be initiated under section 153C and not under section 147/148.

The AO's initiation of proceedings under section 147/148 ignoring section 153C was challenged as illegal. Reliance was placed on relevant case law including M/s City Life Projects P Ltd, M/s Saurashtra Color Tones Pvt. Ltd., and Shri Adarsh Agrawal v. ITO, which held that reassessment under section 147/148 in such circumstances is bad in law.

The Tribunal found that the AO had no independent material against the assessee except that seized from the third parties, and thus the initiation under section 147/148 was improper and violative of section 153C.

3. Initiation of Reassessment at the Behest of Superior Authority

Section 147 requires that the AO himself must form satisfaction for reopening. The assessee contended that the reassessment was initiated following directives from the Directorate of Investigation and the CIT, which amounted to the AO acting at the behest of superior authorities.

Precedents such as Green World Corporation (SC), CIT v. SPL's Siddhartha Ltd., and Munjal Showa Ltd. (Delhi HC) were cited to establish that such direction vitiates the AO's independent satisfaction and renders the proceedings invalid.

The Tribunal concurred with the assessee's contention, holding that the AO's satisfaction was not independent but mechanical and influenced by superior authorities, invalidating the reassessment.

4. Premature Assumption of Jurisdiction by Issuing Notice under Section 143(2)

The assessee argued that the AO issued notice under section 143(2) on the same date as supplying reasons for reopening, denying the assessee the statutory opportunity to file objections to the assumption of jurisdiction.

The legal framework, as clarified by the Gujarat High Court in Sahkari Khand Udyog Mandal Ltd. (approved by the Supreme Court), mandates that the AO must provide reasons within 30 days of filing the return, allow 60 days for objections, and then dispose of objections within 4 months before issuing notice for reassessment.

The Tribunal relied on the Delhi High Court decision in Mastech Technologies Pvt. Ltd. vs. DCIT and the coordinate bench's decision in M/s R.N. Khemka Enterprises P. Ltd. vs. ITO, which held that issuance of notice under section 143(2) before considering objections to jurisdiction is illegal and vitiates the proceedings.

The Tribunal held that the AO's premature issuance of notice amounted to denial of natural justice and non-application of mind.

5. Mechanical Approval by Pr. CIT under Section 151

The approval by the Pr. CIT is a safeguard against arbitrary reopening. The Tribunal observed that the Pr. CIT's approval was given in a mechanical manner, without any recorded satisfaction or independent examination of the reasons recorded by the AO.

Reliance was placed on the Delhi High Court decision in NC Cable Ltd. and the Tribunal decision in Madhu Apartments P. Ltd. vs. ITO, which held that mere formal approval without application of mind is invalid.

The Tribunal concluded that such mechanical approval vitiated the reassessment proceedings.

6. Validity of Notice under Section 148

The assessee challenged the notice under section 148 on the ground that it was issued in the name of the company as an artificial juridical entity rather than in the name of the principal officer, which is required for validity.

The Tribunal referred to Calcutta High Court and Allahabad High Court decisions holding that notices issued to the company without addressing the principal officer are invalid.

The Tribunal found the notice defective and bad in law.

7. Merits of Additions under Sections 68 and 69C

The assessee challenged the additions made on account of share capital treated as accommodation entries and alleged commission payments. However, since the reassessment proceedings were quashed on procedural and jurisdictional grounds, the Tribunal did not adjudicate these grounds as they became academic.

Significant Holdings:

"Mentioning all these incorrect and non-existent sections for obtaining approval for recording the reasons for initiating proceedings u/s 148 is a clear case of non-application of mind by the AO and also by the authorities providing satisfaction u/s 151 of the Act."

"The mere appending of the expression 'approved' says nothing. It is not as if the CIT has to record elaborate reasons for agreeing with the noting put up but at the same time, satisfaction has to be recorded of the given case, which can be reflected in the briefest possible manner."

"Where the Assessing Officer does not himself exercise his jurisdiction under Section 147 but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non- satisfaction of the condition precedent."

"Issuance of notice u/s 142(1)/143(2) before supplying the reasons and considering petitioner objection and passing reasoned order thereon does not meet requirement of law. Such legal infirmity leads to inevitable invalidation of all the proceedings that took place pursuant to notice u/s. 148."

"Reopening of the assessment was quashed as the approval accorded by the Pr. CIT was mechanical and without application of mind, and the reasons recorded by the AO were based on a non-existent provision."

The Tribunal's final determination was to quash the reassessment proceedings and the impugned order dated 03.12.2019 for AY 2010-11 on the grounds of non-application of mind by the AO and Pr. CIT, invalid initiation of reassessment under section 147/148 ignoring section 153C, issuance of defective notice, and denial of opportunity to the assessee to object to the assumption of jurisdiction. Consequently, all additions made under sections 68 and 69C stood deleted as the reassessment itself was invalidated.