AO Ought To Verify Details Before Initiating Reassessment Based On Faceless Information: Bombay High Court

The Bombay High Court has held that the Assessing Officer (AO) ought to verify details before initiating reassessment based on faceless information.

The bench of Justice G. S. Kulkarni and Justice Somasekhar Sundaresan has held that the Assessing Officers need to bear in mind that when the Assessing Officer intends to resort to an action under Section 148 on the basis of information, which is derived under Section 135A of the Act, that is in the electronic form, unless the Assessing Officer has verified such other relevant materials gathered either from the assessee or otherwise available. The AO ought not to proceed to issue a notice under Section 148 without undertaking an exercise of appropriate verification of materials so as to form an opinion that it would be permissible in a given case to dispense with the procedure under Section 148A to be followed for issuance of a notice under Section 148.

The petitioner/assessee filed a return of income for the assessment year on 22nd December, 2020. On January 16, 2021, an intimation was issued to the petitioner without any addition, accepting the total income disclosed by the petitioner in her return of income.

On 2nd April, 2021, “information” was received on the Insight Portal, informing the petitioner of discrepancies in regard to the “interest income” set out in the return filed for the assessment year. The information indicated that the income of the petitioner from other sources was Rs. 26,41,234.65. The petitioner replied to the information on 3rd April, 2021, stating that an amount of Rs. 8,88,577/- as disclosed in the return was the correct income from interest as earned by the petitioner, and the balance amount of Rs. 17,52,657.65 alleged to be received by the petitioner was incorrect information received by the respondent department from the portal.

Almost after a period of more than one year, the assessee was issued the reassessment notice under Section 148 along with the approval of the respondent and the preliminary verification report (PVR). The approval under Section 151 recorded that a notice under Section 148 be issued, without the requirement to follow the pre-issuance procedure under Section 148A of the Act.

The assessee contended that the reassessment notice, issued under Section 148 of the Income Tax Act, is issued without application of mind, hence it is arbitrary. The department has proceeded purely on an erroneous basis merely on information derived from the e-portal and under the mechanism operating under the provisions of Section 135A and as incorporated under Section 148A of the Income Tax Act, in issuance of the notice, so as to form a prima facie opinion that income has escaped assessment.

The assessee argued that incorrect information was received under the electronic portal, being a system as set into motion, as a consequence of Section 135A. Once the basis of such information itself was incorrect, it was the duty of the assessing officer to examine the responses as received from the petitioner, and only after an appropriate satisfaction was reached after examining the comparative material could a notice under Section 148 by following the necessary procedure be issued.

The department contended that the information that was supplied by the petitioner in the return of income is revealed to be the correct information, as the interest income as disclosed in the return of the petitioner is now correctly reflected in the system, namely the interest income of Rs. 8,72,799.65.

Section 135A states that the Central Government is empowered to make a scheme by a notification in the Official Gazette for the purposes of calling for information, collecting information, or calling for information, or exercising power to inspect the register of companies or exercising the powers of the Assessing Officer to empower transparency and accountability by eliminating the interface between the income tax authority and the assessee, or any other person to the extent technologically feasible. Optimizing utilization of the resources through economies of scale and functional specialization and by introducing a team-based exercise of powers so as to call for, collect, process, or utilize the information with dynamic jurisdiction. The provisions of Section 135A become relevant when the Assessing Authority has relied on information gathered or collected under the faceless mechanism for the purpose of issuing to the petitioner a notice under Section 148.

The court stated that it is of utmost necessity that before any action prejudicial to the assessee, like in the nature of issuance of a show-cause notice under Section 148 of the Act, is resorted, it would be the duty and obligation of the respondents to verify or to have a basic scrutiny whether such information, when cross-checked with the materials furnished by the assessee in the returns or otherwise, would lead to a prima facie conclusion that income has escaped assessment for further action to be taken under Section 148. It is hence the duty of the Assessing Officer to ensure that the assessee is not confronted with such undesirable situations on account of defective data being applied to initiate proceedings under Section 148, failing which the first proviso of Section 148 would be rendered negatory.

The court, while allowing the petition, held that the notice issued under Section 148 is arbitrary and vitiated by non-application of mind, and consequently it is required to be quashed and set aside.

Counsel For Petitioner: Dharen V. Gandhi

Counsel For Respondent: Akhileshwar Sharma

Case Title: Benaifer Vispi Patel Versus ITO

Case No.: Writ Petition No.8594 Of 2024

Click Here To Read The Order