2025 (4) TMI 156 - AT - Income Tax

Validity of Reopening of assessment u/s 147 r.w.s. 148 of the Act without any application of mind and without there being a proper approval of the competent authority - HELD THAT - Perusal of the reasons recorded states that there is no application of mind by the ld. AO to the information received and even the amounts stated in the reasons recorded are different and conflicting. At one place the ld. AO stated that the assessee has entered into fictious profit in equity / derivative trading whereas in the very next line it was stated that the assessee had claimed an amount as exempted Long Term Capital Gain on which STT was paid. Finally the ld. AO noted that the income of Rs.95, 62, 800/- was required to brought to tax as the same has escaped assessment. Moreover the ld. AO has not given any details of transactions entered into by the assessee such as the date of transactions with whom the transactions were entered into and therefore reasons recorded are devoid of any detailed information about the transactions for which the assessee has escaped income. We observe that the reasons recorded by the ld. AO is scanty vague and ambiguous. The ld. AO has just reopened the case of the assessee based on the information received without any independent application of mind. We note that there is no mention of details of transactions mode of payment amount received by the assessee and also the details from whom the money was received by the assessee. In our opinion the reopening of assessment cannot be allowed on the basis of such vague reasons where the ld. AO has not done anything as there was gross non-application of mind by the ld. Assessing Officer. Under these circumstances we are not in a position to sustain the reopening of assessment. Similarly the approval has been granted in a mechanical manner wherein it was only mentioned in the approval status as approved. In our opinion in the case of the assessee such an approval is mechanical approval and cannot be considered as valid approval. In our opinion the PCIT has to record the reasons and the satisfaction for having granted such approval. In our opinion the reopening of assessment on the basis of said approval is bad in law. Thus we aside the notice issued u/s 147 of the Act and quash the reopening of assessment u/s 147 read with section 144 of the Act on the ground of non application of mind by the AO to the information received and also invalid approval granted by PCIT. Assessee appeal allowed.

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment was the validity of the reopening of the assessment under Section 147 read with Section 148 of the Income Tax Act. Specifically, the issues were whether the reopening was conducted with proper application of mind by the Assessing Officer (AO) and whether the approval for reopening by the Principal Commissioner of Income Tax (PCIT) was valid.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reopening of Assessment under Section 147/148

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act allows the AO to reopen an assessment if there is reason to believe that income has escaped assessment. Section 148 requires that a notice be issued to the taxpayer before such reopening. The reopening must be based on tangible material and not on mere suspicion. The approval for reopening must be obtained from the competent authority as per Section 151.

Court's Interpretation and Reasoning: The Tribunal scrutinized whether the AO applied his mind independently to the information that led to the reopening. It was observed that the reasons recorded by the AO were vague and inconsistent, indicating a lack of application of mind. The amounts mentioned in the reasons were conflicting, and there was no detailed information about the transactions that allegedly led to the income escaping assessment.

Key Evidence and Findings: The reasons recorded by the AO included conflicting amounts regarding fictitious profits and exempted Long Term Capital Gains. The Tribunal noted that the AO failed to provide details such as transaction dates, parties involved, and modes of payment, rendering the reasons insufficient and vague.

Application of Law to Facts: The Tribunal applied the legal principles from the case of CIT vs. Insecticides (India) Ltd., where it was held that reopening of assessment cannot be based on vague reasons. The Tribunal found that the AO's reasons lacked specificity and independent application of mind.

Treatment of Competing Arguments: The assessee argued that the reopening was invalid due to the lack of application of mind and vague reasons. The Revenue contended that the administrative process involved detailed notings and explanations, and the approval was granted after due consideration. However, the Tribunal sided with the assessee, emphasizing the need for specific and detailed reasons.

Conclusions: The Tribunal concluded that the reopening of the assessment was invalid due to the lack of application of mind by the AO and insufficient reasons for reopening.

2. Validity of Approval by PCIT

Relevant Legal Framework and Precedents: Section 151 of the Income Tax Act mandates that the PCIT must be satisfied with the reasons recorded by the AO for reopening an assessment. The approval must not be mechanical but should reflect an independent application of mind.

Court's Interpretation and Reasoning: The Tribunal examined the approval process and found that the PCIT's approval was mechanical. The mere use of the word "approved" without any recorded satisfaction or reasoning did not meet the legal requirements.

Key Evidence and Findings: The approval by the PCIT was found to be a mere formality, with no indication of independent examination of the reasons recorded by the AO. The Tribunal referenced the decision in Capital Broadways Pvt. Ltd. Vs. ITO, where a similar mechanical approval was deemed invalid.

Application of Law to Facts: The Tribunal applied the legal principles from the case of Capital Broadways Pvt. Ltd. and other precedents, emphasizing that the approval must involve a meaningful examination of the reasons for reopening.

Treatment of Competing Arguments: The assessee argued that the approval was mechanical and invalid, while the Revenue maintained that the approval process involved due consideration. The Tribunal rejected the Revenue's argument, finding the approval process lacking in independent application of mind.

Conclusions: The Tribunal concluded that the approval by the PCIT was invalid, as it was mechanical and did not reflect an independent satisfaction of the reasons for reopening.

SIGNIFICANT HOLDINGS

The Tribunal held that the reopening of the assessment was invalid due to the lack of application of mind by the AO and the mechanical approval by the PCIT. The significant legal reasoning included:

"The reopening of assessment cannot be allowed on the basis of vague reasons, where the AO has not done anything as there was gross non-application of mind by the AO."

"The approval granted by the PCIT for issuance of notice under Section 148 of the Act is not valid and therefore the impugned notice under Section 148 cannot be sustained."

The core principles established include the necessity for specific and detailed reasons for reopening an assessment and the requirement for a meaningful and independent approval process by the competent authority.

The final determination was that the appeal of the assessee was allowed, setting aside the notice issued under Section 147 and quashing the reopening of the assessment.

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