E. Ashwath Narayan Vs ITO (ITAT Bangalore)
Bengaluru: In a ruling underscoring the strict procedural requirements introduced for initiating reassessment proceedings, the Income Tax Appellate Tribunal (ITAT), Bangalore bench, has quashed an assessment order against an individual, E. Ashwath Narayan. The tribunal found that the tax authorities had failed to adhere to the mandatory steps outlined in the new Section 148A of the Income Tax Act, 1961, rendering the entire reassessment process invalid.
The case involved the assessment year 2015-16. The assessee had not filed a return of income for that year, either voluntarily or in response to any notice. Subsequently, reassessment proceedings were initiated. Due to the assessee’s alleged lack of cooperation and failure to respond to notices during the assessment process, the Assessing Officer (AO) completed the assessment under Section 147 read with Section 144 (best judgment assessment) on March 4, 2023.
The assessment order resulted in substantial additions to the assessee’s income, totalling Rs. 2,24,25,743/-. These additions included Rs. 70,581/- treated as undisclosed salary/pension, Rs. 1,33,55,162/- deemed as unexplained money under Section 69A based on bank credits and cash deposits, and Rs. 90,00,000/- as undisclosed long-term capital gains (LTCG) from the sale of an immovable property, with the cost of acquisition treated as NIL.
The assessee appealed the assessment order to the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC). The CIT(A), in an order dated March 4, 2024, upheld the additions, noting that the assessee had failed to file any documents, explanations, or evidence and had not cooperated during the first appellate stage.
Before the ITAT, the assessee raised grounds challenging the additions on merits, particularly concerning the LTCG. However, the assessee also raised crucial legal grounds for the first time, arguing that the entire reassessment proceeding was void-ab-initio due to fundamental procedural violations during its initiation under the new Section 148A framework, effective from April 1, 2021. The ITAT deemed it appropriate to address these legal grounds first, as they went to the root of the validity of the assessment itself.
The first legal ground raised by the assessee concerned the notice issued under Section 148A(b) of the Act. This section requires the AO, before issuing a notice under Section 148 (for income escaping assessment), to provide the assessee with an opportunity of being heard by issuing a show cause notice. Section 148A(b) explicitly mandates that the time specified in this notice for the assessee to respond shall be “not less than seven days and but not exceeding thirty days from the date on which such notice is issued.”
In the assessee’s case, the Section 148A(b) notice was dated March 23, 2022, requiring a response on or before March 29, 2022. The assessee argued that this provided only 6 days for a response, which is less than the mandatory minimum of seven days stipulated by the law. The assessee contended that this constituted a clear violation of the principles of natural justice and vitiated the entire reassessment process.
The ITAT examined the Section 148A(b) provision and noted its clear mandate for providing not less than seven days for a response. The tribunal also referenced the CBDT guidelines dated August 1, 2022, for the issuance of Section 148 notices, which also specify a timeframe of seven to thirty days for submitting a reply to the show cause notice under Section 148A(b). The ITAT agreed with the assessee that providing only 6 days was not in conformity with the law and amounted to providing an inadequate opportunity of being heard, thus violating natural justice.
Crucially, the ITAT held that the minimum statutory requirement of seven days is mandatory, not merely a procedural formality. Failure to comply with this requirement would render the Section 148A(b) notice itself invalid.
In support of this conclusion, the ITAT placed strong reliance on the judgment of the Karnataka High Court in Panjos Builders (P) Ltd. V. Income Tax Officer. In that case, the Karnataka High Court, following a judgment of the Bombay High Court in Mukesh J. Ruparel v. ITO, had held that if a notice under Section 148A(b) prescribes a period lesser than seven days, it would vitiate the notice and all subsequent proceedings, including assessment orders and penalty orders. The ITAT quoted extensively from the Bombay High Court’s judgment in Mukesh J. Ruparel, which had also dealt with similar procedural flaws in the Section 148A process, including insufficient notice time and issues with the subsequent order.
The second legal ground raised by the assessee challenged the order passed by the AO under Section 148A(d) of the Act. This sub-section requires the AO to decide, based on the material on record and the assessee’s reply (if any), whether it is a fit case to issue a notice under Section 148. This decision is to be made by passing an order. The assessee contended that the order passed under Section 148A(d) in their case, dated March 31, 2022, was “completely blank and devoid of any contents,” meaning the AO had failed to make any actual decision as required by law, thereby violating a basic ingredient for assuming jurisdiction for reassessment.
The ITAT concurred with the assessee’s submission. The tribunal noted that the term “Decide” in Section 148A(d) implies making a formal judgment or determination. The tribunal held that an order under Section 148A(d) must essentially be a speaking order, containing the reasons for the decision, addressing the objections raised by the assessee, and concluding whether or not it is a fit case to issue a Section 148 notice.
The ITAT referred to the Delhi High Court judgment in Divya Capital One (P) Ltd v. Asstt. CIT, which had discussed the new reassessment scheme introduced by the Finance Act, 2021. The Delhi High Court had highlighted that Section 148A brought in safeguards, requiring a speaking order under Section 148A(d) before the issuance of a Section 148 notice, in line with the Supreme Court’s earlier pronouncement in GKN Driveshafts (India) Ltd. V. ITO. The ITAT concluded that a blank order under Section 148A(d), lacking any decision or reasoning, was illegal and void-ab-initio as it failed to meet the statutory requirement of passing a speaking order.
The ITAT found that the AO had acted in “great haste” by providing only 6 days for response and uploading a blank order under Section 148A(d), effectively reducing the procedural safeguards of the amended provisions to a “nullity” and defeating the very purpose of the new reassessment scheme.
Based on the findings regarding both legal grounds – the insufficient time provided in the Section 148A(b) notice and the blank order under Section 148A(d) – the ITAT concluded that the entire reassessment proceeding was vitiated due to fundamental procedural non-compliance by the tax authorities.
Accordingly, the ITAT allowed the appeal filed by the assessee. The tribunal quashed and set aside the Section 148A(b) notice dated March 23, 2022, the Section 148A(d) order dated March 31, 2022, and the consequent assessment order dated March 4, 2023, passed under Section 147 read with Section 144. The ITAT clarified that since the case was decided on these legal issues, the grounds raised on the merits of the additions were kept open, meaning they could be contested if fresh proceedings were initiated in compliance with the law.
The judgment reinforces the mandatory nature of the procedural steps introduced by Section 148A as safeguards for taxpayers before reassessment, establishing that failures such as providing inadequate time for response or not passing a reasoned order can invalidate the entire reassessment process.
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