Quashing of Notice u/s 148 for AO not applying mind to information received – SLP dismissed

Quashing of Notice u/s 148 as AO did not apply mind to information received – SC dismissed Special Leave Petition (SLP) of Income Tax Department  

In a recent judgment, Hon’ble Supreme Court has upheld the quashing of notice u/s 148 by the Bombay High Court where the AO had not independently applied its mind to the information received or conducted own inquiry to come to conclusion that indeed income assessable to tax had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction.

ABCAUS Case Law Citation:
4340 (2024) (12) abcaus.in SC

Case laws relied upon by the Parties:
ITO Vs. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)
First Source Solution Ltd Vs. Asst. CIT2 [2021] 438 ITR 139 (Bom.)

In the instant case, the assessee fled its return of income, which was processed under Section 143(1) of the Income Tax Act, 1961 (the Act) for the assessment year 2016-17. The Assessing Officer (AO) subsequently issued a notice under Section 148 of the Act seeking to reopen the assessment on the ground that income chargeable to tax for the said year had escaped assessment.

The AO rejected the objections of the assessee to the reopening. Aggrieved, the assessee filed a Writ Petition before the Hon’ble Bombay High Court challenging the validity of notice u/s 148 of the Act.

It was submitted that reassessment proceeding initiated by the assessing officer was based upon reasons being vague and general, had no direct nexus or live link with the formation of the belief that the assessee’s income had escaped assessment. It was, therefore, contended that the jurisdictional requirement of Section 147 having not been fulfilled by the assessing officer, the notice under Section 148 of the Act, was without jurisdiction.

The Hon’ble High Court noted that in the reason recorded, it was alleged that on verification of the VAT returns of a third party, it was found that the assessee had sold goods to it which was allegedly a shell entity. However, reasons did not furnish any explanation as to on what basis and material the assessing officer came to a conclusion that the said third party was indeed a shell entity. The verification of the VAT returns referred to in the reasons recorded suggestted only transaction between the assessee and the third party in regard to goods. There was, thus, no material or basis for the assessing officer to hold the transaction between the assessee and the third party as not a genuine transaction of sale or for that reason to hold that said third party was a shell entity.

The Hon’ble High Court further noted that the reasons recorded did not suggest at all whether pursuant to receipt of information, the assessing officer had independently applied its mind to the information received or conducted its own inquiry into the matter for the purpose of coming to a conclusion that indeed income assessable to tax had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction.

The Hon’ble High Court further observed that it is settled law that the issue of reopening of assessment has to be tested only on the basis of the reasons recorded, which reasons can neither be improved upon nor substituted by an affidavit or oral submissions. Therefore, the action of the assessing officer for the purpose of reopening of reassessment has to be tested on the basis of reasons recorded by the said officer and cannot, therefore, be improved upon the reply affidavit.

The Hon’ble High Court opined that the impugned notice issued under Section 148 of the Act was issued without satisfying the conditions precedent under Section 147 of the Act.  Accordingly, the Petition was allowed and the impugned notice was quashed and set aside.

Not satisfied with the order of the Hon’ble High Court, the Income Tax Department filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court.

However, the Hon’ble Supreme Court dismissed the SLP with the following observations,

“There is a delay of 354 days in filing the present special leave petition, which has not been adequately and satisfactorily explained. Even on merits, we do not see any good ground and reason to interfere with the impugned judgment.”

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