Court quashes tax reopening order, directs fresh hearing for assessee.

Case Name:

Studio Virtues vs. Income Tax Officer Ward 5(3)(1) or His Successor

Key Takeaways: - The court emphasized the importance of following due process and providing a proper opportunity of hearing to the assessee before reopening an assessment. - The Authority must consider the evidence and documents submitted by the assessee and pass a reasoned order. - The court did not examine the merits of the case but focused on the procedural aspect of the matter. **Issue:** Whether the Income Tax Authority had correctly followed the procedure prescribed under Section 148A of the Income Tax Act, 1961, before passing the order to reopen the assessment of the petitioner for the Assessment Year 2018-19. **Facts:** - The petitioner was a former partner in a partnership firm called "Studio Virtues," which was dissolved on 31.03.2013. - The firm did not have any taxable income during the Assessment Year 2018-19 and did not file a return of income. - The Income Tax Authority issued a show-cause notice under Section 148A(b) of the Act on 15.03.2022, asking the petitioner to explain why a notice under Section 148 should not be issued. - The petitioner submitted a reply on 20.03.2022, furnishing details and documents related to the dissolution of the partnership firm and the bank account. - Despite the petitioner's reply, the Authority passed an order under Section 148A(d) on 31.03.2022, holding that it was a case for reopening the assessment for the Assessment Year 2018-19. **Arguments:** - The petitioner argued that the Authority should not have passed the impugned order without providing a proper opportunity of hearing and considering the evidence and documents submitted by the petitioner. - The petitioner contended that the impugned order was vague and reflected that the Authority had mechanically passed the order without examining the details provided by the petitioner. - The respondent (Income Tax Authority) opposed the petition and supported the impugned order. **Key Legal Precedents:** The court relied on the provisions of Section 148A of the Income Tax Act, 1961, which prescribes the procedure for conducting an inquiry and providing an opportunity of hearing before issuing a notice under Section 148 for reopening an assessment. **Judgement:** - The court quashed the impugned order dated 31.03.2022 passed by the Income Tax Authority under Section 148A(d) of the Act. - The court found that the reasoning provided in the impugned order, particularly in paragraph 5, was not satisfactory, as the Authority had not adequately considered the details and documents submitted by the petitioner. - The matter was remitted back to the Income Tax Authority for fresh consideration. - The Authority was directed to proceed further under Sections 148A(b) and 148A(c) of the Act, provide a proper opportunity of hearing to the petitioner, and pass a detailed order in accordance with law under Section 148A(d) of the Act. **FAQs:** **Q1: What was the main issue in this case?** A1: The main issue was whether the Income Tax Authority had correctly followed the procedure prescribed under Section 148A of the Income Tax Act, 1961, before passing the order to reopen the assessment of the petitioner for the Assessment Year 2018-19. **Q2: Why did the court quash the impugned order?** A2: The court quashed the impugned order because the Income Tax Authority had not provided a proper opportunity of hearing to the petitioner and had not adequately considered the evidence and documents submitted by the petitioner before passing the order under Section 148A(d) of the Act. **Q3: What was the court's direction to the Income Tax Authority?** A3: The court directed the Income Tax Authority to proceed further with the case under Sections 148A(b) and 148A(c) of the Act, provide a proper opportunity of hearing to the petitioner, and pass a detailed order in accordance with law under Section 148A(d) of the Act. **Q4: Did the court examine the merits of the case?** A4: No, the court clarified that it had not examined the case on merits and had decided only on the procedural aspect of providing a proper opportunity of hearing and passing a reasoned order. **Q5: What is the significance of this case?** A5: This case highlights the importance of following due process and providing a proper opportunity of hearing to the assessee before reopening an assessment under the Income Tax Act. It also emphasizes the need for the Income Tax Authority to consider the evidence and documents submitted by the assessee and pass a reasoned order.

1. Learned advocate Mr.S.N. Divatia for the petitioner has tendered a draft amendment dated 16.04.2022. The same is hereby allowed. To be carried out forthwith.

2. Rule. Learned advocate Mr.Karan Sanghani for waives service of notice of rule for the respondent.

3. By way of present petition under Article 226 of the Constitution of India, the petitioner has prayed for the following reliefs :

“(a) to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, orders or directions quashing and setting aside the impugned order u/s.148A(d) dated 31.03.2022 for A.Y.2018-19 passed by the Respondent [Annexure-A].

(b) to issue a writ of certiorari or in the nature of certiorari or any other appropriate writ, orders or directions of restraining the Respondent from issuance of notice u/s.148 of the Act for A.Y.2018-19.

(c) to call for the records of the proceedings and look into them and be pleased to issue a writ of certiorari or any other appropriate writ, order or direction quashing the impugned notice and order.

(d) Pending the hearing and final disposal of this petition to maintain status quo in the matter and ask the Respondent and its subordinates not to take any action or to do anything in furtherance and pursuance of this impugned order.

(e) To allow this Petition with cost.

(f) To pass any further or other orders as the Hon'ble Court may deem proper in the interest of justice and in the circumstances of the case.”

4. By an order dated 12.04.2022, notice came to be issued by the Co-ordinate Bench. In response to the notice, Mr.M.R.Bhatt, learned Senior Counsel has appeared on behalf of the respondent and accordingly, we have heard learned advocate Mr. S.N. Divatia for the petitioner and learned Senior Counsel Mr.M.R. Bhatt assisted by learned advocate Mr.Karan Sanghani for the respondent.

5. The brief facts of the case are as under :

5.1. The petitioner is a ex-partner of a partnership firm consisted of two individuals namely Ashish Suresh Parikh and Viral Ashish Parikh and had entered into a deed of partnership which came to be executed on 01.09.2012 to carry on the business in the name and style of “Studio Virtues”. The firm was allotted PAN Number being ACGFS96667P which was having a Bank Account No.43551010086979 with Union Bank of India, C.G.Road, Ahmedabad. The said firm was dissolved on 31.03.2013 and the entire business lock, stock and barrel was taken over by one of its partner namely Ashish Sureshbhai Parikh having a different PAN Number being ABCPP5324R.

5.2. Since the firm was dissolved and was not carrying the business, there was no taxable income during the Assessment Year 2018-2019 and had not filed its return of income for Assessment Year 2018-2019.

5.3. A show-cause notice under Section 148A(b) of the Income Tax Act, 1961 (for short ‘the Act’) came to be issued on 15.03.2022 by the respondent asking the petitioner to show cause as to why a notice under Section 148 should not be issued.

5.4. The petitioner submitted his reply on 20th March, 2022 and furnished details referred therein.

5.5. The respondent thereafter, passed impugned order under Section 148A(d) of the Act dated 31.03.2022 and held that it is the case of reopening of the assessment of the petitioner for the year 2018-2019. Hence, this petition.

6.1. Learned advocate Mr. Divatia for the petitioner submitted that the respondent-Authority should not have passed the impugned order without giving opportunity of having been heard as well as considering the case on merits after scrutinizing the evidence and the documents produced by the petitioner on record.

6.2. By taking us to the impugned order and particularly, paragraph No.5 of the same, learned advocate Mr. Divatia submitted that it is a vague order and it reflects that the respondent-Authority have mechanically passed the order and have not examined the details supplied by the petitioner about the Bank Account, dissolution of the partnership firm etc.

6.3.Learned advocate Mr. Divatia therefore submitted that the order be quashed and set aside and the matter be remitted.

7. On the other hand, learned Senior Counsel Mr.M.R. Bhatt for the respondent has opposed the petition and supported the impugned order passed by the respondent-Authority.

8. We have heard learned advocates for the respective parties and perused the impugned order as well as other documents. A notice dated 15.03.2022 issued by the respondent under Sub-section (b) of Section 148A of the Act was answered by the present petitioner on 20th March, 2022 and has disclosed about the dissolution of the partnership firm clarifying that the PAN Number which was allotted to the partnership firm continued in the bank account till 2021.

Necessary documents were attached including the Statement of the Bank Account of Union Bank which was of the petitioner as a proprietor and other documents.

9. By Finance Act, 2021, with effect from 1st April, 2021, the procedure with regard to reopening of assessment has been substituted by substituting Sections 147 and 148 of the Act. Section 148A is inserted for conducting inquiry providing opportunity before issuance of notice under Section 148. It would therefore be germane to refer to Section 148A, as it is inserted by Finance Act, 2021 with effect from 01.04.2021 relevant for the year 2021-2022, which reads as under :

“Section 148A. The Assessing Officer shall, before issuing any notice under section 148,-

(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

(b) provide an opportunity of being heard to the assessee, with the prior approval of specified authority, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

(c) consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);

(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

Provided that the provisions of this section shall not apply in a case where,-

(a) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of the assessee on or after the 1st day of April, 2021; or

(b) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under section 132 or requisitioned under section 132A, in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(c) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 or requisitioned under section 132A, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee.”

10. On perusal of the above provisions, the Assessing Officer before issuing the notice under Section 148 is required to conduct an inquiry with respect to the information which suggests that income chargeable to tax has escaped assessment and thereafter provide an opportunity of being heard to the assessee by serving upon him a show-cause notice to show cause as to why the notice under Section 148 should not be issued on the basis of the information with the Assessing Officer as per clause A(a). The Assessing Officer has to consider the reply furnished by the assessee, if any, in response to the show-cause notice and thereafter decide on the basis of the material available on record including the reply of the assessee, whether or not it is a fit case to issue a notice under Section 148 by passing an order under clause (d) of Section 148A within one month from the end of the month in which the reply referred to in clause (c) is received by him or otherwise.

11. Therefore, we are of the opinion that that the petitioner ought to have been given an opportunity of hearing and the respondent-Authority thereafter ought to have considered the material produced on record by the petitioner. Paragraph No.5 of the impugned order reads as under :

“5. After the notice issued under section 148A(b) of the Income-tax Act, in compliance of the notices, the assessee has submitted a reply dated 21.03.2022 along with some documentary evidence showing that there is no escapement of income, the reply of the assessee was duly considered but not found acceptable.”

12. In view of the above observation, we are not satisfied by the reasoning part of the impugned order, more particularly, when the details were supplied by the petitioner. Hence, we are of the opinion that the matter requires consideration and the same is allowed. The impugned order dated 31.03.2022 is hereby quashed and set aside. The matter is remitted back to the respondent-Authority. The respondent-Authority shall proceed further with the case under the provisions of Sub-sections (b) and (c) of Section 148A of the Act and shall afford an opportunity of hearing to the petitioner and thereafter pass a detailed order in accordance with law under Section 148A(d) of the Act.

13. Rule is made absolute to the aforesaid extent. It is made clear that we have not examined the case on merits and have decided only on the aforesaid aspect.

(A.J.DESAI, J)

(BHARGAV D. KARIA, J)