Reassessment Quashed for Non-Application of Mind Under Section 151: Bombay HC

Classic Stripes Pvt. Ltd. Vs DCIT (Bombay High Court)

Summary: The Bombay High Court, in Classic Stripes Pvt. Ltd. Vs Deputy Commissioner of Income Tax, quashed an order passed under Section 148A(d) of the Income-tax Act, 1961, and the consequential notice issued under Section 148 for Assessment Year 2019-20. The Court found that the Assessing Officer had failed to properly consider the assessee’s explanations concerning its corporate amalgamation and disclosure of financial transactions. It further held that the sanction granted under Section 151 was also vitiated by non-application of mind. The judgment reiterates that reassessment proceedings cannot be sustained where the authority introduces new allegations in the final order without giving the assessee an opportunity to respond and mechanically rejects explanations already supported by documentary evidence.

The petitioner had filed its return of income for Assessment Year 2019-20 declaring taxable income of ₹13,63,66,967, which was processed under Section 143(1). The dispute arose after the Assessing Officer issued a notice dated 23 February 2023 under Section 148A(a) using an old Permanent Account Number, alleging that no return had been filed under Section 139(1). The petitioner explained that the entity holding the old PAN had merged with Resync Auto Solutions Pvt. Ltd. pursuant to an order of the National Company Law Tribunal dated 27 April 2017, with effect from 1 May 2016. Resync held PAN AAFCR5312Q and had subsequently been renamed Classic Stripes Pvt. Ltd. Accordingly, the petitioner maintained that the allegation of non-filing was based on an incorrect understanding of the corporate restructuring and the corresponding PAN records.

Despite this clarification, another notice under Section 148A(b) was issued on 27 February 2023 using the old PAN and alleging both non-filing of the return and non-submission of any reply. The petitioner furnished a further explanation on 6 March 2023. Subsequently, the Department issued another Section 148A(b) notice on 14 March 2023, this time using the correct PAN and acknowledging the merger. The petitioner responded through letters dated 20 March, 25 March and 31 March 2023. Nevertheless, another notice dated 31 March 2023 alleged that the explanations were unsatisfactory and that the petitioner had failed to reconcile individual transactions with its income-tax return. The petitioner filed a detailed reply on 14 April 2023, but the Assessing Officer proceeded to pass the impugned order on 20 April 2023 and issued the consequential reassessment notice.

The petitioner challenged the reassessment order on the ground that its conclusions were inconsistent with the preceding notices and failed to consider the information already submitted. In particular, the final order referred to contractual receipts of ₹8,32,305 and interest on securities of ₹9,37,294, although these two items had not been raised in the earlier notices. The order also referred to rental receipts of ₹10.54 lakh and foreign remittances of ₹7,76,013, for which the petitioner had already supplied explanations and supporting documentary evidence in its reply dated 14 April 2023. The petitioner argued that if the Assessing Officer considered those explanations inadequate, the order was required to state the reasons for disagreement instead of merely asserting that the transactions had not been properly disclosed.

The Revenue contended that the petitioner could submit its objections in response to the consequential Section 148 notice and that the Assessing Officer would consider those submissions during reassessment proceedings. The Bombay High Court rejected this approach. It held that the two items concerning contractual receipts and interest on securities had been introduced for the first time in the final Section 148A(d) order. Regarding the rental receipts and foreign remittances, the Court found that the petitioner had already provided explanations and that the Assessing Officer had not identified any specific deficiency in those explanations. The Court observed that a general statement alleging failure to demonstrate disclosure could not substitute for an examination of the material furnished by the assessee.

The High Court further held that the impugned Section 148A(d) order demonstrated a failure to apply independent judicial and administrative mind to the available record. The same defect affected the approval accorded under Section 151. The Court observed that if the Range Head or Principal Commissioner had examined the file and the notices issued under Section 148A(b), they would not have recommended or approved the issuance of the notice under Section 148. The Court thus found a fundamental failure in the statutory decision-making and approval process.

Accordingly, the Bombay High Court set aside the Section 148A(d) order dated 20 April 2023 and the consequential Section 148 notice of the same date. The writ petition was allowed in terms of the prayer seeking quashing of the reassessment proceedings for Assessment Year 2019-20. The ruling highlights that approval under Section 151 must be meaningful rather than mechanical, and that an Assessing Officer cannot disregard material explanations or introduce fresh factual allegations in the final reassessment decision without addressing the procedural requirements. The case is particularly relevant to reassessment proceedings initiated against companies following amalgamation, where historical PAN information must be reconciled with the successor entity’s tax records.

FULL TEXT OF THE JUDGMENT OF BOMBAY HIGH COURT

1. Rule. Rule made returnable forthwith. By consent of the parties taken up for final hearing.

2. Petitioner is impugning an order dated 20^th April 2023 passed under Section 148A(d) and a notice also dated 20^th April 2023 under Section 148 of the Income Tax Act, 1961 (“the Act”) for Assessment Year 2019-20. Respondent No. 1 is the Jurisdictional Assessing Officer (“JAO”), Respondent No. 2 is the Principal Commissioner of Income Tax (“PCIT”), Mumbai-1 and Respondent No. 3 is the Union of India.

3. For AY 2019-20, Petitioner had filed a return of income (“ROI”) declaring taxable income of Rs.13,63,66,967/-. The return was processed under Section 143(1) of the Act. Petitioner, thereafter, received a notice dated 23^rd February 2023 under Section 148A(a) of the Act under a PAN Number, which for convenience is referred to as “old PAN”. It was alleged Petitioner had failed to file ROI under Section 139(1) of the Act. Petitioner by a letter dated 27^th February 2023 replied to the notice and informed Respondent No. 1 that the company, which was holding the old PAN number, has merged with one Resync Auto Solutions Pvt. Ltd. (“Resync”) by an order dated 27^th April 2017 passed by the National Company Law Tribunal with effect from 1^st May 2016. Resync was holding PAN No. AAFCR5312Q (a new PAN) and the name of Resync was changed to the name of Classic Stripes Pvt. Ltd. On the same day, i.e., 27^th February 2023, Respondent No. 1 issued another notice under Section 148A(b) of the Act on old PAN once again alleging that Petitioner had not filed its ROI and no reply also has been filed against notice under Section 148A(a) of the Act. Petitioner, by a letter dated 6^th March 2023 once again explained the situation.

4. Thereafter, Respondent No. 1 issued another notice under Section 148A(b) of the Act dated 14^th March 2023. In the notice, the PAN was correctly mentioned and also it was undisputed that Petitioner was merged with Resync.

5. Petitioner replied vide its letters dated 20^th March 2023, 25^th March 2023 & 31^st March 2023 to the notice dated 14^th March 2023. Notwithstanding this replies, another notice dated 31^st March 2023 was issued under Section 148A(b) of the Act stating that the submissions made were not satisfactory and Petitioner failed to reconcile each and every entry in the notice with ITR filed by it. Thereafter Petitioner filed a detailed reply to the notice on 14^th April 2023 again reiterating everything that has been stated earlier. Without considering those replies, an order dated 20^th April 2023 under Section 148A(d) of the Act which is impugned in the petition, came to be passed. A notice of even date under Section 148 of the Act also came to be issued and the approval under Section 151 of the Act was also provided.

6. Petitioner has, thereafter, approached this Court by way of this petition raising various grounds.

7. Mr. Naniwadekar submitted that in the impugned order dated 20^th April 2023, in paragraph No. 6, it is alleged as under:

“6. As the assessee failed to demonstrate that the contractual receipts of Rs.8,32,305/-, interest earned on securities of Rs. 9,37,294/-, rent receipt of Rs. 10.54 lakhs and source & Nature of foreign remittances of Rs.7,76,013/- have been fully disclosed in the merged entity, i.e., M/s. CLASSIC STRIPES PRIVATE LIMITED (PAN: AAFCR5312Q). Therefore this information suggests that income chargeable to tax has escaped assessment.”

Mr. Naniwadekar stated that the figures towards contractual receipts of Rs.8,32,305/- and interest earned on securities of Rs.9,37,294/- has never been even referred to earlier. Mr. Naniwadekar further submitted that as regards rent receipt of Rs.10.54 Lakhs and source and nature of foreign remittances of Rs.7,76,013/- have been explained in Petitioner’s reply dated 14^th April 2023 together with documentary evidence. Mr. Naniwadekar submitted that notwithstanding the explanation being given an incorrect stand is taken by Respondent No. 1 that Assessee has failed to demonstrate that these two figures have not been fully disclosed in the merged entity. Mr. Naniwadekar submitted that these have been demonstrated and yet the Assessing Officer (“AO”) was not satisfied, he should have explained why he was not satisfied than make an incorrect statement that Assessee has failed to demonstrate.

8. Mr. Suresh Kumar reiterated what is stated in the impugned order and also what is stated in the affidavit-in-reply. He also submitted that Petitioner could reply to the notice dated 20^th April 2023 issued under Section 148 of the Act and the AO will consider the submissions and, therefore, the Court should not interfere.

9. We do not agree with the approach suggested by Mr. Suresh Kumar. We also agree with Mr. Naniwadekar that the contractual receipts of Rs.8,32,305/- and interest earned on securities for Rs.9,37,294/- have been raised for the first time in the impugned order dated 20^th April 2023 passed under Section 148A(d) of the Act. Also, Petitioner, in the letter dated 14^th April 2023, has explained the rent receipt of Rs.10.54 Lakhs and source and nature of foreign remittances of Rs. 7,76,013/- and if the AO was not satisfied with the explanation, he ought to have, in the impugned order dated 20^th April 2023, made out a case as to why he does not agree with the explanation given by Petitioner than making a bald and incorrect statement that Assessee has failed to demonstrate that these items have been disclosed.

10. In the circumstance, in our view, the impugned order dated 20^th April 2023 under Section 148A(d) of the Act has been passed without application of mind. It is obvious that even the sanction that is accorded under Section 151 of the Act, has been issued without application of mind. We say this because if only the Range Head or the PCIT had bothered to read the file together with the notices issued under Section 148A(b) of the Act, they would have not recommended or approved issuance of the notice under Section 148 of the Act.

11. In the circumstances, in our view, the impugned order dated 20^th April 2023 cannot be sustained. The same is hereby quashed and set aside. Consequently, the notice issued under Section 148 of the Act also dated 20^th April 2023 is hereby quashed and set aside.

12. Rule made absolute in terms of prayer clause (a), which reads as under:

“(a) Issue a Writ of Certiorari or a Writ in the nature of Certiorari or any other appropriate Writ, order or direction under Article 226 of the Constitution of India, quashing the Impugned Order u/s 148A(d) dated 20^th April 2023 (Exhibit L), the Impugned Notice u/s 148 dated 20^th April 2023 (Exhibit M) and the impugned reassessment proceedings for AY 2019-20 as being wholly without jurisdiction, illegal and arbitrary.”