2025 (4) TMI 1217 - AT - Income Tax

Reopening of assessment u/s 147 - assessee is a non-filer and had sold immovable property but the capital gain derived on the same is not offered to tax - HELD THAT - From the reasons recorded by the AO for reopening of the assessment and the facts brought on record by the AO we find that the very basis for reopening of the assessment is that the assessee has not filed any return of income disclosing the capital gains arising from sale of immovable property whereas the assessee has submitted before the AO that he has fired his return of income on 22.12.2015 disclosing capital gains arising from sale of property. Therefore is undisputedly clear that the very foundation for which the reopening is based in the reasons recorded by the AO for the reopening of the assessment collapses therefore in our considered view the AO has reopened the assessment on an incorrect assumption of facts even though the assessee has filed his return of income for the impugned assessment year. AO went on to record reasons on the fact that the assessee has not filed his return of income disclosing relevant capital gains. Since the very foundation of reopening of the assessment is collapsed in our considered view the subsequent issue of notice u/s 148 and consequent final assessment order passed by the AO u/s 144 rws 144C(13) cannot survive under Law. This legal principle is supported by the decision in the case of Vijay Harishchandra Patel 2017 (12) TMI 865 - GUJARAT HIGH COURT . AO based his reopening on the sole premise that assessee has not filed his return of income and disclosed relevant capital gain arising out of transfer of immovable property whereas the fact remains that the assessee had already filed his return of income and disclosed the relevant capital gains arising out of transfer of property. Therefore there is no application of mind by the AO to the relevant material before arriving at a conclusion that there is escapement of income as per the provisions of section 147. Therefore reopening of the assessment in light of an invalid reasons recorded by the AO cannot be sustained in law and thus we quash the notice issued by the AO u/s 148 - Decided in favour of assessee.

The core legal questions considered in this appeal are:

1. Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 (the Act) by issuing notice under section 148 was valid and justified, given that the assessee had already filed the original return of income disclosing the relevant capital gains.

2. Whether the objections filed by the assessee before the Disputes Resolution Panel (DRP) were maintainable despite being filed beyond the prescribed due date under section 144C(2) of the Act.

3. Whether the additions made by the Assessing Officer (AO) towards computation of long-term capital gains were sustainable, considering the quashing of the reopening notice and assessment order.

Issue 1: Validity of Reopening Assessment under Section 147/148 of the Act

Legal Framework and Precedents: The reopening of assessment under section 147 is permissible only when the AO has recorded valid reasons to believe that income has escaped assessment. The reasons recorded must be based on relevant and correct facts. The reopening notice under section 148 must be issued within the prescribed time limits and on a valid foundation. The Supreme Court's decision in National Thermal Power Co. Ltd. vs. CIT [1998] establishes that legal grounds can be raised at any stage, including before the Tribunal. The Gujarat High Court's ruling in Vijay Harishchandra Patel vs. ITO [2018] and the ITAT Hyderabad decision in Mrs. Tahera Abida Ghori vs. DCIT confirm that reopening based on incorrect factual assumptions is illegal and void ab initio.

Court's Interpretation and Reasoning: The Court observed that the AO initiated reopening on the premise that the assessee, a non-resident individual, had not filed any return disclosing capital gains from the sale of immovable property. However, the assessee had indeed filed the original return on 22.12.2015, declaring the relevant capital gains. The AO's reasons for reopening were thus founded on an incorrect assumption of fact. The Court emphasized that the foundation for reopening must be valid and cannot be substituted by other grounds after the fact.

Key Evidence and Findings: The assessee produced the original return, computation of income, purchase and sale deeds, and valuation reports to prove disclosure of capital gains. The AO's reliance on the absence of PAN and non-mention of PAN in the sale deed was not sufficient to negate the fact of filing the return. The Court found no evidence that the assessee had concealed income or failed to disclose capital gains.

Application of Law to Facts: Since the reopening was based on a factually incorrect premise, the AO lacked a valid reason to believe that income had escaped assessment. Therefore, the notice under section 148 and consequent assessment order could not stand. The Court applied the principle that reopening must be based on valid reasons recorded at the time of initiation, and subsequent grounds cannot validate an otherwise invalid reopening.

Treatment of Competing Arguments: The Revenue argued that the absence of PAN and its non-availability in the database justified reopening. The Court rejected this argument, holding that the mere absence of PAN in records cannot override the fact that the return was filed disclosing capital gains. The Court found the AO's assumption erroneous and not supported by the record.

Conclusion: The reopening notice dated 28.03.2021 and the final assessment order dated 26.12.2023 are illegal and void ab initio. The reopening was based on invalid reasons, and the assessment order was quashed accordingly.

Issue 2: Maintainability of Assessee's Objections before DRP

Legal Framework: Section 144C(2) of the Act prescribes the due date for filing objections before the DRP. Objections filed beyond the due date are generally not maintainable.

Court's Interpretation and Reasoning: The DRP rejected the assessee's objections filed on 06.04.2023 as beyond the due date of 05.04.2023. However, the Tribunal admitted the additional grounds of appeal filed by the assessee challenging the reopening itself, relying on the Supreme Court's decision that legal grounds can be raised at any stage.

Key Evidence and Findings: The objections on the reopening validity were legal in nature and did not require further fact-finding. The Tribunal found merit in admitting these grounds despite procedural lapses.

Application of Law to Facts: The Tribunal exercised discretion to admit additional grounds challenging the reopening, as they were purely legal and critical to the validity of the entire assessment process.

Treatment of Competing Arguments: The Revenue opposed admission of additional grounds, citing procedural defaults. The Tribunal rejected this, emphasizing the importance of addressing legal validity over procedural technicalities.

Conclusion: The additional grounds challenging reopening were admitted for adjudication.

Issue 3: Additions towards Computation of Capital Gains

Legal Framework: Additions to income must be justified on valid grounds and after due consideration of evidence. If the reopening is invalid, the assessment order and additions based thereon cannot be sustained.

Court's Interpretation and Reasoning: Since the reopening notice and assessment order were quashed, the additions made by the AO towards capital gains computation became academic and unsustainable.

Key Evidence and Findings: The assessee had submitted comprehensive evidence including sale deeds, valuation reports, and computations supporting the declared capital gains.

Application of Law to Facts: The Court held that without a valid reopening, the additions lack legal foundation.

Treatment of Competing Arguments: The Revenue did not contest the academic nature of these grounds once the reopening was quashed.

Conclusion: Other grounds challenging additions were dismissed as infructuous.

Significant Holdings:

"The very basis for reopening the assessment is that the petitioner had not filed any return of income disclosing such sale of the immovable property... Considering the fact that a return of income had been filed disclosing sale of such immovable property, the very foundation on which the reopening is based in the reasons recorded by the Assessing Officer for reopening the assessment, collapses."

"It is settled legal position, that the reopening of the assessment has to be maintainable on the reasons recorded for reopening the same, and that such reasons cannot be substituted."

"Once the foundation on which the reopening was based, is not based on relevant facts or contrary to facts available on record, then, subsequent issue of notice under section 148 of the Act and consequent assessment order passed by the Assessing Officer is illegal and void ab initio and liable to be quashed."

"There is no application of mind by the Assessing Officer to the relevant material before arriving at a conclusion that, there is escapement of income as per the provisions of section 147 of the Act."

The Tribunal conclusively held that the reopening notice and consequent assessment order were illegal and void due to being founded on incorrect assumptions. The additional grounds challenging reopening were admitted and adjudicated. The appeal was allowed, quashing the reopening notice and assessment order, and dismissing other grounds as academic.

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