Patna High Court Quashes Reassessment Proceedings Initiated on False Premises

In a significant judgment, the Patna High Court quashed reassessment proceedings initiated by the Income Tax Department against the petitioner, Ankit Agarwal, holding that the proceedings were based on incorrect and false premises. The court ruled that the reassessment notice issued under Section 148 of the Income Tax Act, 1961, was invalid as it did not comply with the mandatory conditions laid down under the amended provisions of the Finance Act, 2021.

Background of the Case

The petitioner, Ankit Agarwal, a resident of Jaipur, Rajasthan, filed his Income Tax Return (ITR) for the Assessment Year (AY) 2015-16 on 30.03.2016, declaring a total income of ₹7,99,950/- and paying a tax of ₹96,345/-. He also claimed an exempted long-term capital gain (LTCG) of ₹25,04,808/- from the sale of shares.

Key Events Leading to the Writ Petition

1. Notice under Section 148A(b) (23.03.2022):

   • The Income Tax Department issued a show-cause notice alleging that the petitioner was a "non-filer" of ITR for AY 2015-16.

   • The notice claimed that the petitioner had deposited ₹20 lakhs in cash in State Bank of India and made transactions worth ₹26,31,400/- and ₹43,97,919/-, leading to an alleged escaped income of ₹1,04,90,899/-.

2. Order under Section 148A(d) (06.04.2022):

   • Despite the petitioner’s submission that he had indeed filed his ITR, the Assessing Officer (AO) passed an order under Section 148A(d), initiating reassessment proceedings.

3. Subsequent Notices & Final Assessment Order (18.03.2024):

   • The AO issued multiple notices under Section 142(1) seeking additional documents.

   • Ultimately, an assessment order was passed under Section 144/147, raising a demand of ₹19,45,394/-, primarily disallowing the LTCG claim of ₹25,90,000/-.

Petitioner’s Arguments

The petitioner challenged the reassessment proceedings on the following grounds:

1. False Premise of Non-Filing of Return:

   • The Department wrongly claimed that the petitioner was a non-filer, despite him having filed his ITR and audit report.

2. Jurisdictional Error & Time-Barred Proceedings:

   • The reassessment notice was issued beyond the 3-year limitation period under Section 149(1)(a).

   • The Department inflated the escaped income to ₹1.04 crore (to invoke a 10-year limitation under Section 149(1)(b)), whereas the actual dispute was only about ₹25.9 lakhs (LTCG claim).

3. Non-Compliance with Section 148A Procedure:

   • The AO did not provide supporting documents while issuing the notice under Section 148A(b).

   • The CBDT Instruction No. 01/2022 mandates that reassessment beyond 3 years requires evidence of income escaping assessment exceeding ₹50 lakhs, which was absent.

4. Violation of Natural Justice:

   • The petitioner was not given a proper opportunity to respond, and the AO relied on unverified information from the Insight Portal.

Department’s Defense

The Income Tax Department argued:

• The notice under Section 148A(b) was issued within the 6-year limitation period (as per pre-2021 law).

• The reassessment was justified due to suspicious transactions and non-verification of LTCG claim.

• The petitioner did not respond to the initial notice, leading to a best judgment assessment under Section 144.

However, the Senior Standing Counsel admitted that the "non-filer" claim was incorrect and possibly a result of a "cut-paste error" in the notice.

Court’s Observations & Judgment

The High Court made the following key observations:

1. Reassessment Notice Based on Incorrect Information

• The initial notice under Section 148A(b) was factually incorrect as it alleged non-filing of ITR, despite the petitioner having filed it.

• The cash deposit claim of ₹20 lakhs was never discussed in subsequent proceedings, indicating inflation of income to bypass the 3-year limitation.

2. Limitation Period Violation

• Post-Finance Act 2021, reassessment beyond 3 years is allowed only if escaped income exceeds ₹50 lakhs (Section 149(1)(b)).

• Since the actual dispute was only about ₹25.9 lakhs, the 10-year limitation did not apply.

3. Non-Compliance with Section 148A

• The AO failed to provide supporting documents while issuing the notice, violating the mandatory procedure under Section 148A(b).

• Reliance was placed on:

  • Union of India v. Rajeev Bansal (2024): The AO must supply all relevant material before issuing notice.

  • Ganesh Dass Khanna v. ITO (2024): Reassessment beyond 3 years is permitted only in serious tax evasion cases (₹50L+).

4. Quashing of Reassessment Proceedings

The Court held:

• The reassessment notice was issued without jurisdiction as it was time-barred.

• The entire proceeding was vitiated due to non-compliance with mandatory procedures.

• The assessment order and demand notice were quashed.

Conclusion

This judgment reinforces the strict procedural safeguards introduced by the Finance Act, 2021, ensuring that:

1. Reassessment beyond 3 years is allowed only in high-value evasion cases (₹50L+).

2. The AO must provide all relevant material while issuing a Section 148A(b) notice.

3. False or inflated claims by the Department will invalidate reassessment proceedings.

The ruling provides relief to taxpayers facing arbitrary reassessment notices and emphasizes the importance of due process in tax proceedings.

Read the full judgment here: Patna High Court CWJC No.5202 of 2024