2024 (3) TMI 1419 - HC - Income Tax

Reopening of assessment u/s 147 - giving time of less than 7 days to respond - HELD THAT - When the notice u/s 148A (b) has admittedly issued giving time of less than 7 days to file reply to the assessee contrary to the provision of the Act such notice is to be held invalid. When the impugned notice under section 148A(b) of the Act is invalid order under section 148A(d) and any notice under section 148 would not survive. Accordingly impugned order u/s 148A(d) and notice u/s 148 of the Act are hereby quashed and set aside.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether the notice under section 148A(b) of the Income Tax Act, 1961, issued to the petitioner, is valid given the time provided for response was less than the statutory requirement.
• Whether the audit objection raised by the Comptroller and Auditor General of India constitutes valid information for reopening the assessment under section 148 of the Act.
• Whether the income from the sale of shares should be treated as capital gains or business income.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Notice under Section 148A(b)

• Relevant Legal Framework and Precedents: Section 148A(b) of the Income Tax Act mandates that a notice to show cause must provide a minimum of seven days for the assessee to respond. The Court referenced the decision in CIT vs. Amit K. Jain, which emphasized the requirement of clear statutory time limits.
• Court's Interpretation and Reasoning: The Court determined that the notice issued on 21.03.2022 provided less than seven days for the petitioner to respond, which is contrary to the statutory requirement. This non-compliance renders the notice invalid.
• Application of Law to Facts: The notice was issued on 21.03.2022, requiring a response by 28.03.2022, offering only six days for compliance, thereby violating the statutory requirement.
• Conclusions: The Court concluded that the notice under section 148A(b) was invalid due to insufficient response time, rendering subsequent proceedings void.

2. Audit Objection as a Basis for Reassessment

• Relevant Legal Framework and Precedents: Explanation-1(ii) to section 148 of the Income Tax Act discusses the use of audit objections as information for reopening assessments. However, it requires such objections to be finalized through parliamentary procedures.
• Court's Interpretation and Reasoning: The Court noted that the audit objection by the Comptroller and Auditor General of India had not been placed before the Parliament and the Public Accounts Committee, thus it could not be considered finalized or valid for reassessment.
• Conclusions: The Court found that relying on an unfinalized audit objection does not satisfy the statutory requirements for reopening an assessment.

3. Classification of Income from Sale of Shares

• Relevant Legal Framework and Precedents: Section 10(38) of the Income Tax Act provides exemptions for long-term capital gains on equity shares subject to certain conditions, including the payment of Securities Transaction Tax (STT).
• Court's Interpretation and Reasoning: The petitioner argued that the shares were held as investments, not as stock-in-trade, and thus the income should be classified as capital gains. The respondent contended that the shares were part of a trading business.
• Key Evidence and Findings: The petitioner maintained records in Tally Software, showing investments as inventories for tracking purposes, but claimed these were long-term investments.
• Conclusions: The Court did not delve into the merits of this argument due to the procedural invalidity of the notice.

SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "When the notice under section 148A(b) has admittedly issued giving time of less than 7 days to file reply to the assessee contrary to the provision of the Act such notice is to be held invalid."
• Core Principles Established: Compliance with statutory time limits for notices is mandatory, and failure to adhere to these requirements invalidates the proceedings initiated by such notices.
• Final Determinations on Each Issue: The notice under section 148A(b) was declared invalid, and consequently, the order under section 148A(d) and any notice under section 148 were quashed. The Court clarified that the respondent could issue a fresh notice in compliance with statutory provisions.