2024 (7) TMI 1441 - HC - Income Tax

Reopening of reassessment u/s 147 - reference to the reasons as recorded in the Section 148 (2) notice - submission of the petitioner that a perusal and comparative reading of the Section 148A (b) notice and Section 148A(d) order would establish that the respondents have clearly changed their stance and now seek to base the proposed reassessment on reasoning which was neither constructed nor alluded to in the original notice. HELD THAT - The validity of the proceedings initiated upon a notice under Section 148 of the Act would have to be adjudged from the stand point of the reasons which formed the basis for the formation of opinion with respect to escapement of income. That opinion cannot be one of changing hues or sought to be shored upon fresh reasoning or a felt need to make further enquiries or undertake an exercise of verification. Ultimately, the Court would be primarily concerned with whether the reasons which formed the bedrock for formation of the requisite opinion are tenable and sufficient to warrant invocation of Section 148 of the Act. Import of Explanation 3 as well as the language in which Section 147 of the Act stands couched, we find no justification to differ from the legal position which had been enunciated in Ranbaxy Laboratories Ltd. 2011 (6) TMI 4 - DELHI HIGH COURT We also bear in consideration the said decision having been affirmed and approved subsequently in Commissioner of Income-tax (Exemption) vs. Monarch Educational Society 2016 (2) TMI 971 - DELHI HIGH COURT and Commissioner of Income-tax vs. Software Consultants 2012 (2) TMI 18 - DELHI HIGH COURT We thus, come to the conclusion that the enunciation with respect to the indelible connection between Section 148A (b) and Section 148 A(d) of the Act are clearly not impacted by Explanation 3. As we read Sections 147 and 148 of the Act, we come to the firm conclusion that the subject of validity of initiation of reassessment would have to be independently evaluated and cannot be confused with the power that could ultimately be available in the hands of the AO and which could be invoked once an assessment has been validly reopened. Explanation 3, or for that matter, the Explanation which presently forms part of Section 147, would come into play only once it is found that the power to reassess had been validly invoked and the formation of opinion entitled to be upheld in light of principles which are well settled. The Explanations would be applicable to issues which may come to the notice of the AO in the course of proceedings of reassessment subject to the supervening requirement of the reassessment action itself having been validly initiated. Explanation 3, cannot consequently be read as enabling the AO to attempt to either deviate from the reasons originally recorded for initiating action under Section 147/148 of the Act nor can those Explanations be read as empowering the AO to improve upon, supplement or supplant the reasons which formed the bedrock for initiation of action under the aforenoted provisions. The writ petitions are accordingly allowed and the impugned notices and orders in each of the above-captioned writ petitions are quashed. The impugned orders under Section 148A(d) as well as the notices under Section 148 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the initiation of reassessment proceedings under Section 148 of the Income Tax Act, 1961.
2. Whether the Assessing Officer (AO) can change the basis for reassessment after issuing the notice under Section 148A(b).
3. The scope and applicability of Explanation 3 to Section 147 of the Income Tax Act.
4. The legal implications of additional reasons provided by the AO after issuing the notice under Section 148.

Issue-Wise Detailed Analysis:

1. Validity of the initiation of reassessment proceedings under Section 148 of the Income Tax Act, 1961:
The court examined the validity of the reassessment proceedings initiated under Section 148 for the Assessment Years (AY) 2014-15, 2015-16, and 2016-17. The principal challenge was whether the reassessment was based on valid reasons. The court noted that the original notice under Section 148A(b) alleged that the petitioner had received a loan from its subsidiary, which was later clarified by the petitioner as a repayment of the loan. Despite this clarification, the AO proceeded with the reassessment on a different basis, questioning the source of funds used for the repayment.

2. Whether the Assessing Officer (AO) can change the basis for reassessment after issuing the notice under Section 148A(b):
The court emphasized that the AO cannot change the basis for reassessment after issuing the notice under Section 148A(b). It was noted that the AO initially based the reassessment on the alleged receipt of a loan, but later shifted the focus to the unexplained source of funds for the repayment. The court cited the case of Commissioner of Income Tax-II Vs. Living Media India Ltd., which held that additional reasons cannot be recorded by the AO subsequent to the issuance of a notice under Section 148. The court reiterated that the validity of the reassessment proceedings must be judged based on the reasons recorded at the time of issuing the notice under Section 148.

3. The scope and applicability of Explanation 3 to Section 147 of the Income Tax Act:
The court discussed Explanation 3 to Section 147, which allows the AO to assess or reassess income in respect of any issue that comes to his notice during the reassessment proceedings, even if it was not included in the reasons recorded under Section 148(2). However, the court clarified that this explanation does not permit the AO to deviate from or supplement the original reasons for initiating reassessment. The court referred to the case of Ranbaxy Laboratories Ltd. vs. Commissioner of Income-tax, which held that the AO must assess the income that formed the basis for the reassessment notice and only then can he assess any other income that comes to his notice during the reassessment proceedings.

4. The legal implications of additional reasons provided by the AO after issuing the notice under Section 148:
The court held that the AO cannot provide additional reasons or change the basis for reassessment after issuing the notice under Section 148. The validity of the reassessment must be evaluated based on the original reasons recorded. The court cited several precedents, including Northern Exim Pvt. Ltd. Vs. Deputy Commissioner of Income-tax and Catchy Prop-Build Pvt. Ltd. Vs. Assistant Commissioner of Income-tax, which supported this view. The court concluded that the reassessment proceedings in the present case were invalid as the AO had changed the basis for reassessment from the original notice.

Conclusion:
The court quashed the impugned reassessment orders and notices for the AYs 2014-15, 2015-16, and 2016-17, holding that the reassessment proceedings were invalid due to the AO's change in the basis for reassessment after issuing the original notice under Section 148. The court left it open for the respondents to take any steps permissible under the law.