The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has quashed reassessment proceedings for the Assessment Year 2018-19 after holding that a notice issued under Section 148 of the Income Tax Act beyond three years was invalid because the mandatory approval had been obtained from the Commissioner of Income Tax instead of the authority prescribed under Section 151(ii).
The bench of Ravish Sood (Judicial Member) and Madhusudan Sawdia (Accountant Member) set aside a penalty of ₹2,13,664 imposed under Section 270A, observing that a penalty cannot survive independently after the underlying reassessment order forming its foundation has been declared invalid.
The assessee explained that he had entrusted the filing of the appeal to his chartered accountant before travelling to Saudi Arabia for pilgrimage. He claimed that he was under the bona fide impression that the appeal would be filed within the prescribed period.
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However, owing to the pressure of audit work and return filing, the chartered accountant inadvertently lost sight of the matter and failed to file the appeal on time. The appeal was filed immediately after the assessee returned and reminded the professional about it.
The Revenue opposed the condonation request, arguing that the assessee had failed to establish sufficient cause for the delay.
After examining the affidavit, travel documents and other material, the ITAT found the explanation reasonable. It observed that the delay was neither deliberate nor attributable to any mala fide intention on the assessee’s part.
Relying upon the Supreme Court’s decision in Vidya Shankar Jaiswal v. CIT, where a justice-oriented and liberal approach was adopted while considering a delay of 166 days, the Tribunal condoned the delay and admitted the appeal for adjudication on merits.
The assessee’s assessment for Assessment Year 2018-19 had been completed under Section 147 read with Section 144B through an order dated February 28, 2024.
The Assessing Officer made an addition of ₹5,13,613 on account of capital gains and assessed the assessee’s total income at ₹9,52,723.
Penalty proceedings were subsequently initiated under Section 270A, culminating in a penalty of ₹2,13,664 through an order dated August 30, 2024.
The assessee challenged the penalty before the CIT(A), contending, among other things, that disallowance of the cost of improvement during assessment proceedings did not automatically amount to under-reporting of income resulting from misreporting.
It was also argued that the improvement expenditure had been incurred in 2003 and the assessee could not produce supporting evidence after almost 20 years.
The CIT(A), however, upheld the penalty and dismissed the appeal, prompting the assessee to approach the ITAT.
Before the Tribunal, the assessee raised additional legal grounds challenging the validity of the reassessment itself.
The assessee contended that the approval for issuing the Section 148 notice dated April 4, 2022 had been obtained from the Commissioner of Income Tax (International Taxation and Transfer Pricing), Hyderabad.
According to the assessee, since the notice was issued more than three years after the end of Assessment Year 2018-19, approval was required from the Principal Chief Commissioner or Principal Director General—or, in their absence, the Chief Commissioner or Director General—as specified under Section 151(ii).
It was therefore argued that the reassessment notice, the resulting assessment order and the consequential penalty were all legally unsustainable.
The department objected to the admission of these grounds, asserting that they concerned the validity of the underlying assessment and could not be raised in an appeal arising from penalty proceedings.
Rejecting the Revenue’s objection, the Tribunal held that the assessee could challenge the validity of the underlying assessment in proceedings against a consequential penalty.
The ITAT noted that the challenge involved a pure question of law and that all the facts necessary to decide the issue were already available on record. No fresh factual investigation was required.
It relied upon the Supreme Court’s decision in National Thermal Power Co. Ltd. v. CIT, which recognises the Tribunal’s jurisdiction to examine a legal question arising from the facts already recorded by the lower authorities and bearing upon an assessee’s tax liability, even if it was not previously raised.
The Bench also referred to the Kolkata ITAT’s decision in Shri Valley Refractories Ltd. v. DCIT, in which it was held that the legality of assessment proceedings could be questioned during penalty proceedings.
“The validity of the underlying assessment proceedings, which constitute the very foundation of the consequential penalty, can be examined in the penalty proceedings,” the ITAT observed while admitting the additional grounds.
On merits, the Tribunal found that the Section 148 notice had been issued on April 4, 2022, which was beyond three years from the end of Assessment Year 2018-19.
It was undisputed that the notice had been issued after obtaining the approval of the Commissioner of Income Tax and not the higher authority prescribed under Section 151(ii).
The ITAT referred to its earlier ruling in Kilaru Venkata Satish v. DCIT, which had considered the Telangana High Court’s decision in Deloitte Consulting India Pvt. Ltd. v. Assessment Unit, Income Tax Department and the Supreme Court proceedings in ACIT v. LinkedIn Singapore Pte. Ltd.
The Tribunal reiterated that when a Section 148 notice is issued beyond three years from the end of the relevant assessment year, approval must be obtained from the Principal Chief Commissioner or Principal Director General. Where those authorities do not exist, approval must come from the Chief Commissioner or Director General.
Approval from the Commissioner of Income Tax did not satisfy this statutory requirement.
Accordingly, the Tribunal declared the Section 148 notice invalid and quashed the reassessment order passed under Section 147 read with Section 144B.
After invalidating the reassessment, the Tribunal held that the Section 270A penalty based upon that assessment could not continue independently.
“Once the very assessment order which constitutes the foundation of the penalty proceedings is held to be invalid and quashed, the consequential penalty levied under Section 270A of the Act cannot survive independently,” the Bench held.
The ITAT accordingly quashed the penalty order dated August 30, 2024, set aside the CIT(A)’s order confirming it and allowed the assessee’s appeal.
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