Income Tax Reassessment Orders need Prompt Interference if Mechanically Initiated or Based on Wrong Factual Foundation: Madras HC [Read Order]

The Madras High Court has quashed Income Tax reassessment orders issued and notices observing that it needs immediate inference if it is initiated mechanically or based on wrong factual foundation, without applying the mind. The petitioner in several writ petitions has challenged an order under Section 148A(d) of the Income-tax Act, 1961, along with subsequent notices under Section 148 and a show cause notice for four assessment years spanning from AY 2014-2015 to AY 2017-2018.

The  matter revolved around transactions between the petitioner and Fives France under an Assistance Service Agreement. The petitioner sought a ruling from the Authority for Advance Ruling (Income tax) (AAR) concerning the tax liability on payments to Fives France. However, the AAR declined to answer the questions raised. Following the filing of income tax returns for the relevant AYs, the petitioner received notices alleging income escapement. These notices were successfully challenged based on a change in the legal regime for reassessment. Eventually, the Supreme Court’s ruling in Union of India v. Ashish Agarwal led to a communication from the respondents, treating the notices under Section 148 as notices under Section 148A(b). The petitioner contende that the reassessment orders were based on flawed premises, with transactions not covered under the AAR application wrongly included. Moreover, the approval for reassessment granted by the Chief Commissioner of Income Tax was challenged, as it did not align with the specified authority under Section 151 of the Income-tax Act.

In response, the learned senior standing counsel argued that the petitioner should have pursued statutory appeals after the assessment orders were issued, and that the reassessment proceedings were justified due to tangible material indicating income escapement. The Court supported the contention of the petitioner that “if re-assessment proceedings are initiated mechanically or on the wrong factual foundation, such orders may warrant interference.” A Single bench of Justice Senthilkumar Ramamoorthy stated that the principles outlined in the Delhi High Court’s judgment in Rajiv Agarwal and the Supreme Court’s decision in Chhugamal Rajpal apply here.

These cases emphasized the importance of the assessing officer considering the objections raised by the assessee and examining the material on record before issuing approvals under Section 148. Given the grossly erroneous factual basis for reopening and the petitioner’s compliance with tax remittance in transactions under scrutiny, both the impugned order under Section 148A(d) and the notice under Section 148 are invalidated, observed the bench. The bench highlighted that while the PCIT, a specified authority under clause (ii) of Section 151, granted approval for AYs 2014-2015 and 2015-2016, the Chief Commissioner of Income Tax, who lacked such specified authority, granted approval for AYs 2016-2017 and 2017-2018.

As there was a Principal Chief Commissioner, reassessment proceedings for AYs 2016-2017 and 2017-2018 are therefore invalidated. The contested order under Section 148A(d) and the notice under Section 148 of Income Tax warrant intervention. Consequently, the challenged orders and notices in the Writ Petitions were annulled. As a result, the subsequent assessment orders will be invalidated. Thus, the writ Petitions were allowed. To Read the full text of the Order CLICK HERE

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