Reassessment Notice issued Without Prior Verification by AO was Invalid: Bombay HC

Narendra Kumar Shah Vs ACIT (Bombay High Court)

Bombay High Court quashed the reassessment proceedings initiated against Narendra Kumar Shah for the Assessment Year 2019-20, citing procedural lapses by the Income Tax Department. Shah had filed his return of income on November 29, 2019, which was duly processed under Section 143(1) of the Income Tax Act. However, on March 31, 2023, he received a notice under Section 148A(b), alleging that he had not filed his return despite having a salary income of ₹58,18,452 and securities purchases worth ₹5,22,000. Shah responded by submitting proof of his filed return, including tax payments totaling ₹18,36,575 and a claimed refund of ₹1,27,100. Despite this, the Assessing Officer (AO) proceeded to reject his objections, concluding that Shah failed to provide justification for the transactions.

The High Court ruled that the reassessment notice was unjustified as the AO did not conduct the necessary verification before issuing it. The court emphasized that tax authorities must verify available data, as mandated by CBDT guidelines, before initiating reassessment proceedings. Had the AO checked Shah’s tax records using his PAN, it would have been evident that he had already filed his return and paid taxes. The court criticized the mechanical issuance of notices without due diligence and set aside both the notice under Section 148A(b) and the order under Section 148A(d). The judgment reaffirmed that tax reassessment proceedings must be based on substantive verification rather than automated risk management triggers, ensuring fairness in tax administration.

1. Petitioner is an individual assessed to income from salary, house property and other Petitioner filed on 29^th November 2019 return of income for Assessment Year 2019-2020. The return was processed and an order dated 26^th February 2020 was passed under Section 143(1) of the Income Tax Act, 1961 (“the Act”). Subsequently, Petitioner received a notice dated 31^st March 2023 under Section 148A(b) of the Act alleging that there was information which suggests that income chargeable to tax for Assessment Year 2019-2020 has escaped assessment within the meaning of Section 147 of the Act. The details of information/enquiry was also enclosed. Petitioner was directed to submit reply to the notice along with supporting documents on or before 20^th April 2023.

2. The information, based on which the notice was issued, reads as under :

“Information, in accordance with the Risk Management Strategy formulated by the Central Board of Direct Taxes (CBDT) has been received in your case for the Financial Year 2018-19 relevant to A.Y. 2019-20 through Insight Portal. The details of the aforesaid information is/are as given below (includes) : 

2. It is seen from the records that you are a non filer for the assessment year 2019-20 as you have failed to file a return of income. Therefore, the income arising from the above transactions during the year has not been declared / offered by you for taxation.”

 3. Therefore, the only information Respondent 1 had was that Petitioner despite having a salary of Rs. 58,18,452/- per annum and having purchased securities worth Rs. 5,22,000/-, was a non-filer for Assessment Year 2019-2020 having failed to file a return of income. In short, the basis for re-opening is despite having a salaried income, Petitioner has not filed return of income.

4. Petitioner, as per the E-Proceedings Response Acknowledgement responded to the notice dated 26^th April 2023 issued under Section 148A(b) of the Act. In that Petitioner has explained as under :

“Dear Sir, as per your notice Your Honour has stated that I had not filed the Income Tax Return for the Assessment Year 2019-2020. But as per the records on Income Tax Portal it is clearly reflecting that the Return of Income has been filed. We are enclosing the return for your reference. With Regards, Narendra Shah.”

The Income Tax Returns were also attached.

5. On 26^th April 2023, the impugned order under Section 148A(d) of the Act came to be passed rejecting the objections. According to Respondent No. 1, “assessee in his reply only stated that he had filed Income Tax Returns for the year under consideration. However, assessee did not provide his justification on the transactions in question. Thus it is logical to conclude that assessee has no explanation to offer with respect to the above mentioned information suggesting escapement of income in the case for Assessment Year 2019-2020.” This was following by impugned notice dated 26^th April 2023 issued under Section 148 of the Act.

This Petition was therefore filed and interim relief was granted on 21^st August 2023, restraining Respondents from taking any steps pursuant to the impugned order and notice.

6. On 21^st  August  2023,  time  to  file  reply  was Respondents were directed to file reply and serve a copy thereof within two weeks. No reply has been filed. Mr. Singh states that the Petition itself was served in June 2023. Therefore, considering facts of the case, we see no reason to give any further time to file any reply and we shall proceed to hear Petitioner.

7. In our view, the order dated 26^th April 2023 passed under Section 148A(d) of the Act is unsustainable. This is because the notice under Section 148A(b) of the Act does not call upon Petitioner to provide any justification on any transaction in question. The entire basis for issuing the notice under Section 148A(b) of the Act was that Petitioner was a non-filer for Assessment Year 2019-2020 as he has failed to file the Return of Income and therefore, the income from salary and purchase of securities have not been declared/offered for taxation. But the fact is Petitioner has filed his Return of Income and has also paid total tax of Rs. 18,36,575/- and had also claimed refund of Rs. 1,27,100/-. Therefore, the order under Section 148A(d) of the Act, passed on 26^th April 2023, has to be quashed and set aside. Consequentially the notice issued under Section 148A(b) of the Act, that is also dated 26^th April 2023, has to be quashed and set aside.

8. We would go a step further and say that even the notice under Section 148A(b) of the Act was unjustified. This is because the Assessing Officer (“AO”) before issuing the notice, was bound to atleast verify or enquire following the information that was received in accordance with the Risk Management Strategy. In fact the guidelines for issuance of notice under Section 148 of the Act bearing 299/10/2022-Dir(Inv.III)/611 dated 1^st  August 2022  at paragraph 2.1 (vi) and (vii) read as under :

(vi) The AO shall, if required, undertake enquiries on any “information” received/available with him which suggests that the income chargeable to tax has escaped assessment in a previous year only with the prior approval of “specified authority”.

(vii) If the result of enquiry/information available suggests that the income chargeable to tax has escaped assessment, the AO shall provide an opportunity of being heard to the assessee by issuing a show cause notice u/s 148A(b) of the Act. The said notice shall provide between 7 to 30 days’ time to the assessee for submitting the A template of show cause notice is enclosed at Annexure-A1.

 The instruction regarding uploading of data on functionalities/portal of the Income Tax Department bearing F. No. 299/10/2022-Dir(Inv.III)/647 dated 22^nd August 2022 at paragraphs 3 and 4 read as under :

3. Further, it in re-emphasized that –

(i) Before initiating proceedings under Section 148/147 of the Act, any information available data- base/portal of the Income Tax on Department shall be verified before drawing any adverse inference against the taxpayers. It is not out of place to mention here that the information made available/data uploaded by the reporting entities may not be fully accurate due to inter alia, error of human nature technical nature, etc. Therefore, due verification may be carried out and opportunity of being heard be given to the taxpayer before initiating proceedings under Section 148/147 of the Act.

(ii) The supervisory authorities are hereby advised to keep an effective supervision as to ensure that all extant Instructions/ Guidelines/Circulars/SOPs are duly followed by the Assessing Officers in their

 4. In addition to above, it is also advised that all the information/reports which are being uploaded on any of the functionalities/portal of Directorate of Systems should be verified by the Officer uploading the said information/reports. Supervisory authorities are to ensure that all extant  Instructions/ Guidelines/Circulars/SOPs in this regard are duly followed by Officer uploading the said information/reports.

 If the AO had only verified in the portal of assessee before initiating proceedings, particularly when he had the PAN number with him, AO would have realized that not only Petitioner has filed the Return of Income, but also the return has been processed and an order dated 26^th February 2020 under Section 143(1) of the Act had been passed. Therefore, the notice that was issued under Section 148A(b) of the Act also has to be quashed and set aside.

9. In the circumstances, Petition disposed in terms of prayer clause (a), which reads as under :

(a) That this Hon’ble Court be pleased to 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, calling for the records of the Petitioner’s case and after examining the legality and validity thereof quash, cancel and set aside the impugned show- cause notice dated 31^st March 2023 (Exh-‘A’), the impugned order under Section 148A(d) of the Act dated 26^th April (Exh-‘B’) and the impugned notice under Section 148 of the Act dated 26^th April 2023 issued by Respondent 1 (Exh-‘C’) and the impugned sanction order dated 25^th April 2023 issued by Respondent No. 2.