AO Bound To Ascertain 'Correctness' Of Information Available Against Assessee, 'Decide' Whether It Is Sufficient To Reopen Assessment: Delhi HC

A division bench of Acting Chief Justice Vibhu Bakhru and Justice Swarana Kanta Sharma observed,

“As is clear from the plain language of Section 148A(d) of the Act, the AO has to decide whether it is a fit case for issuance of notice under Section 148 of the Act. This decision would require the AO to take a view in respect of the material available and form an opinion whether there are grounds to believe that the assessee's income has escaped assessment.”

The bench added that the entire purpose of establishing the procedure under Section 148 of the Act is to ensure that assessments are not reopened whimsically or arbitrarily.

“The decision to reopen the assessment must be based on cogent material that can lead to the conclusion that the assessee's income has escaped assessment. The question whether the assessee's income had in fact escaped assessment is a matter that would require to be determined in the reassessment proceedings, however, the question whether there is sufficient material that warrants reopening of the assessment is required to be examined at the stage of passing an order under Section 148A(d) of the Act,” it said.

The development comes in a case where the Petitioner-assessee contended that the AO had not supplied the necessary material to it, on the basis of which a conclusion was drawn that the petitioner's income had escaped assessment.

The Revenue on the other hand contended that the correctness of the information cannot be gone into at the stage of issuance of notice under Section 148 of the Act as the same is required to be examined during the reassessment proceedings. It was submitted that if there is, prima facie, some material which suggest that the petitioner's income had escaped assessment, the AO has the jurisdiction to issue a notice under Section 148 of the Act to reopen the assessment.

The High Court, at the outset, proceeded to explain the scheme of Section 148A. It said the provision prescribes a procedure for enabling the AO to take an “informed decision” whether to issue a reassessment notice under Section 148.

At the first stage, Court said, the AO is required to conduct an enquiry with respect to the information that suggests income of the assessee chargeable to tax has escaped assessment.

“By its very nature, the said enquiry is a preliminary enquiry and it is not necessary that the said enquiry yields any conclusive result as to whether the assessee's income has escaped assessment. The limited threshold of the enquiry is to ascertain whether there is any information suggestive of the income escaping assessment,” it clarified.

Once the AO has information which suggests that an assessee's income has escaped assessment, the Court said, it is necessary for the AO to provide an opportunity to the assessee to be heard by serving a show cause notice.

“This is an essential step to eliminate arbitrariness in initiating reassessment proceedings. The initiation of reassessment proceedings has adverse consequences for an assessee as it seeks to reopen a concluded assessment. Thus, obviously, the assessments cannot be reopened in a cavalier or casual manner. The opportunity for an assessee to respond to the information available with the AO is to enable the AO to take an informed decision whether to reopen the assessment on the basis of information available. In terms of Section 148A(c) of the Act, the AO is required to consider the response furnished by the assessee.”

Coming to Clause (d) of Section 148A, the Court said it requires the AO to take a decision on the basis of material available on record including the reply of the assessee as to whether it is a fit case for issuance of a notice under Section 148 of the Act.

“Whilst at the stage of passing an order under Section 148A(d) of the Act, the AO is not required to conclusively establish whether the income of the assessee has escaped assessment; however, the AO is required to apply his mind on the basis of the records available to ascertain whether it is a fit case for issuance of a notice under Section 148 of the Act. The use of the word “decide” in the clause (d) clearly indicates that the AO is required to examine the material as available with him as well as the assessee's response and determine whether there are grounds which indicate that the petitioner's income has escaped assessment,” Court held.

In the case at hand, the Petitioner had furnished a reply, raising a grievance that notice under Section 148A(b) of the Act merely alleged that the entity (Tulsi) had availed of accommodation entries, without providing any detailed information or material to the said effect. The petitioner had sought material on the basis of which the said allegation was made.

However, admittedly the said material was not furnished to the petitioner.

Petitioner had also claimed that no sum, as alleged in the form of accommodation entries, was received by Tulsi.

However, the AO proceeded on an assumption that the petitioner did not have any explanation as to the merits of the case.

In this factual backdrop, the High Court noted that the AO had no material which would substantiate that any amount had been remitted as accommodation entries to the bank accounts of Tulsi.

As the Revenue failed to produce any material even before the Court, to establish that Tulsi had received any amount in its bank accounts as accommodation entries, Court said,

“We are unable to accept that the reassessment can be initiated on the basis of information which is contested as palpably incorrect without examining the material giving rise to the said information. The contention that the AO does not require to take any view as to the correctness of the information available with him would render the provisions of Section 148A of the Act a dead letter and the exercise of conducting an enquiry under Section 148A of the Act an exercise in futility. The AO is required to ascertain whether the basic facts on which an assessment is sought to be reopened, are sustainable.”

It continued, “An allegation that income has escaped assessment on account of accommodation entries availed by an assessee would be insufficient to reopen a closed assessment if the AO does not have material to establish that in fact there were entries in the bank accounts that could possibly support the said allegations. The AO is not required to conclusively decide whether the entries are accommodation entries. But the AO has to be reasonably certain that the alleged entries exist that could be possibly be accommodation entries.”

Accordingly, the impugned proceedings were set aside.

Appearance: Mr. C.S. Aggarwal, Senior Advocate with Mr. Ravi Pratap Mall and Mr. Uma Shankar, Advocates for Petitioner; Mr. Sunil Agarwal, Mr. Shivansh B. Pandya, Mr. Viplav Acharya & Mr. Utkarsh Tiwari, Advocates for Respondents

Case title: Sonansh Creations Pvt Ltd. v. Assistant Commissioner Of Income Tax And Anr.

Citation: 2025 LiveLaw (Del) 27

Case no.: W.P.(C) 12316/2022