ITAT Rajkot Strikes Down Time-Barred Reassessment Notice Under Section 148

Background of the Dispute

The case of Shreedhar Construction Vs ITO (ITAT Rajkot) concerns the validity of a reassessment initiated under Section 147 read with Section 144 of the Income Tax Act 1961 for AY 2014-15. The assessee, a partnership concern engaged in construction activities and leasing of plant and machinery, challenged the reassessment proceedings primarily on the ground of limitation and jurisdiction.

The key controversy centered around whether the reassessment notice issued under Section 148 on 27.07.2022 was within the permissible “surviving time” as later clarified by the Supreme Court in Union of India v. Rajeev Bansal (167 taxmann.com 70), read with the earlier decision in Union of India v. Ashish Agarwal.

Chronology of Events and Statutory Framework

Original Notice Under Old Regime

  • The assessee had not filed any original return of income for AY 2014-15.
  • On the basis of information suggesting escapement of income, the Assessing Officer (AO) issued a notice under Section 148 on 24.06.2021 under the pre-Finance Act 2021 regime (old law).
  • This notice was issued taking benefit of the extended limitation under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) and CBDT Notification No. 20 dated 31.03.2021 and Notification No. 38 dated 27.04.2021, which had pushed the outer time limit for issuance of Section 148 notices to 30.06.2021.
  • The requisite approval from the competent authority was obtained prior to issuance of this old-regime notice.

Subsequently, vide judgment in Union of India and others Vs. Ashish Agarwal (Civil Appeal No. 3005/2022, dated 04.05.2022), the Supreme Court held that:

  • All notices issued under Section 148 between 01.04.2021 and 30.06.2021 under the old regime would be treated as deemed show cause notices under Section 148A(b) of the new regime introduced by the Finance Act 2021.
  • Such deemed notices were to be handled in accordance with Section 148A, including supply of information and passing of order under Section 148A(d).

Following these directions, in the present case:

  1. The AO treated the original notice dated 24.06.2021 as a deemed Section 148A(b) notice.
  2. The AO then issued a notice under Section 148A(b) on 24.05.2022, along with the underlying information said to indicate escapement of income.
  3. Thereafter, an order under Section 148A(d) was passed on 26.07.2022.
  4. On the next day, the AO issued a fresh notice under Section 148 on 27.07.2022 under the new regime.

Basis of Reopening: Alleged Unoffered Rental Income

Information with the Department

The AO had received information that the assessee had earned Rs. 2,55,05,699/- as rent from plant and machinery during the relevant financial year. Since no return had been filed originally, the AO inferred that:

  • The rental receipts had not been disclosed for tax purposes.
  • There was income chargeable to tax which had escaped assessment.

On this premise, reassessment proceedings were triggered.

Assessment Proceedings under Section 147 r.w.s. 144

  • Despite issue of notices in the reassessment proceedings, the assessee did not respond before the AO.
  • The AO concluded that the rent income had not been offered to tax and proceeded to:
    • Add the entire sum of Rs. 2,55,05,699/- to the total income.
    • Initiate penalty proceedings under Sections 271(1)(b) and 271(1)(c).
    • Charge interest under Section 234A and Section 234B.

The assessment was completed under Section 147 read with Section 144 vide order dated 27.05.2023.

Appeal Before CIT(A) and Partial Remand

Before the CIT(A), NFAC, Delhi, the assessee raised multiple technical and jurisdictional grounds, including: