2024 (12) TMI 197 - AT - Income Tax

Validity of the reassessment proceedings initiated u/s 147 - notice issued by the AO based on an internal audit objection - HELD THAT - We are of the considered view that whether the material satisfies the criteria of information as per the provisions of Explanation 1 to section 148 of the Act has to be analysed on the date of issuance of show cause notice under section 148A(b) of the Act since such information remains constant till the culmination of the entire proceedings resulting in issuance of notice under section 148 of the Act and ultimately passing of the assessment order under section 147 of the Act. Therefore if a material does not satisfy the criteria of information as provided in Explanation 1 to section 148 on the date of issuance of show cause notice under section 148A(b) of the Act we are of the considered view that no notice under section 148 of the Act can be issued since the twin conditions as noted in the foregoing paragraph in the first proviso to section 148 of the Act are not satisfied. Therefore in the instant case since the only information available with the Revenue for initiating the re-assessment proceedings was the internal audit memo dated 06.02.2018 we are of the considered view that on the date of issuance of show cause notice under section 148A(b) of the Act which in the present case is 29.06.2021 the same does not fall within the scope and ambit of the term information as provided in Explanation 1 to Section 148 of the Act. We find that the Hon ble Jurisdictional High Court while considering the similar objection against the initiation of re-assessment proceedings in Hashmukh Estates Pvt. Ltd. 2023 (11) TMI 508 - BOMBAY HIGH COURT held that the re-assessment notice issued by the AO based on an internal audit objection would not be permissible in law. we find no merits in the submission of the Revenue that the amended provisions of Explanation 1 to section 148 of the Act w.e.f. 01.04.2022 are applicable in the present case. Since the internal audit memo has been found to be outside the scope and ambit of the term information as provided in Explanation 1 to section 148 of the Act prior to its amendment by the Finance Act 2022 we are of the considered view that the learned CIT(A) has rightly quashed the re-assessment proceedings. Accordingly we find no infirmity in the impugned order passed by the learned CIT(A) on this aspect of the invocation of jurisdiction under section 147 of the Act. Accordingly we are of the considered view that the notice issued u/s 148 of the Act is void ab initio and bad in law - Assessee appeal allowed.

Summary

Issues Involved:

1. Validity of reassessment proceedings initiated under section 147 of the Income Tax Act.
2. Justification for deletion of the addition of Rs. 6,50,00,000/- under section 68 of the Income Tax Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:

The primary issue in this case revolves around the validity of the reassessment proceedings initiated under section 147 of the Income Tax Act. The Revenue's appeal and the assessee's cross-objection both address this issue. The Revenue contended that the reassessment was valid based on an internal audit objection, which, post-amendment of Explanation 1(ii) of section 148 effective from 01.04.2022, includes any audit objection as valid "information" for reassessment. The assessee, however, argued that the reassessment was invalid as the notice under section 148 was issued on 29.06.2021, prior to the amendment, and based solely on an internal audit memo, which does not qualify as "information" under the pre-amended provisions of the Act.

The Tribunal analyzed the provisions of section 148 and section 148A, emphasizing that the "information" required to initiate reassessment must be valid at the time of issuing the show cause notice under section 148A(b). The Tribunal noted that the internal audit memo dated 06.02.2018 was the sole basis for the reassessment and did not qualify as "information" under the pre-amended Explanation 1 to section 148. Consequently, the reassessment proceedings were deemed invalid as they were based on a change of opinion, which is impermissible in law. The Tribunal relied on the precedent set by the Hon'ble Bombay High Court in Hashmukh Estates Pvt. Ltd. vs. ACIT, which held that internal audit objections do not constitute valid information for reassessment.

2. Justification for Deletion of Addition under Section 68:

The second issue pertains to the addition of Rs. 6,50,00,000/- under section 68 of the Income Tax Act, which was deleted by the CIT(A). The Revenue challenged this deletion, arguing that the creditworthiness of the lender and the genuineness of the loan transaction were unverified. However, since the reassessment proceedings themselves were quashed on jurisdictional grounds, the Tribunal found this issue to be infructuous.

The CIT(A) had previously held that the assessee provided a reasonable explanation for the loan transaction, and the identity of the lender was established through responses to notices issued under section 133(6). As the reassessment proceedings were invalidated, the Tribunal did not delve further into the merits of the addition under section 68, rendering the Revenue's challenge moot.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. It upheld the CIT(A)'s decision to quash the reassessment proceedings as void ab initio and bad in law, due to the reliance on an internal audit memo that did not qualify as valid "information" under the pre-amended provisions of the Act. Consequently, the deletion of the addition under section 68 was left unaddressed as the reassessment itself was invalidated.