Reassessment Initiated Based on Incorrect Non-Filing of ITR Alert from Insight Portal: Patna HC Quashes Demand [Read Order]

In a recent ruling, the Patna High Court quashed the income tax demand raised through reassessment proceedings which was completely based on incorrect information from the insight portal that the petitioner did not file the income tax return.

The petitioner, an Indian citizen, operates two proprietary concerns-M/s Subhlaxmi Dal Mill in Sitamarhi and M/s Agrawal Traders in Jaipur. For the assessment year 2015-16, he filed his Income Tax Return (ITR) on March 30, 2016, disclosing a total income of ₹7,99,950 and paying tax of ₹96,345.

He also claimed an exemption of ₹25,04,808 as long-term capital gain from the sale of shares. The accounts were duly audited by a Chartered Accountant under Section 44AB of the Income Tax Act, 1961, and supporting documents were annexed to his return.

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Six years after the original filing, the petitioner received an order dated April 6, 2022, under Section 148A(d) of the Act, concerning the same assessment year. The order was based on information from the Income Tax Department's Insight Portal, which categorized the petitioner as a "non-filer" and alleged substantial cash deposits and transactions totaling over ₹1 crore. The department claimed these amounts had escaped assessment due to non-filing of returns, leading to the issuance of a notice under Section 148A(b).

Upon receiving a subsequent letter from the Assessing Officer in January 2023, the petitioner promptly replied, clarifying his status as a regular taxpayer with audited accounts and requesting the proceedings be dropped. Despite this, the department continued to issue notices under Section 142(1), to which the petitioner responded by submitting all requested documents.

The petitioner contends that the reassessment was initiated on false premises and incorrect information, mainly to exploit the extended limitation period under Section 149.

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He further argued that the long-term capital gain from share sales, which was claimed as exempt, has been arbitrarily treated as bogus by the department, despite being properly accounted for in his records.

The Income Tax Department maintains that the petitioner failed to respond to the initial show cause notice, justifying the assumption of escaped income exceeding ₹1 crore.

During assessment, the department acknowledged the petitioner had filed his ITR but questioned the legitimacy of the long-term capital gains from share sales, citing lack of supporting documentation and non-cooperation from brokers. Consequently, the gain was treated as unexplained cash credit under Section 68, attracting higher tax under Section 115BBE.

The high court noted that reassessment proceedings were initiated based on incorrect information from the Insight Portal under the "Non-Filing of Return" module. The Assessing Officer wrongly assumed that the assessee had not filed the Income Tax Return (ITR) for the relevant assessment year, even though the ITR and audit report had been duly filed and uploaded.

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The Department’s explanation that the error could have occurred due to a "cut and paste" mistake was rejected by the Court as unsatisfactory. Additionally, although cash deposits and transactions were mentioned in the notice, they were not substantiated during the reassessment, and ultimately, the Assessing Officer disallowed the assessee’s claim of long-term capital gains amounting to ₹25,90,000.

The Court observed that under Section 149(1)(b) of the old Income Tax Act (prior to 01.04.2021), reassessment could be initiated within four years, or up to six years if specific conditions involving income escaping assessment exceeding ₹50 lakh were met.

In the present case, although the Department contended that the notice issued on 23.03.2022 was within the six-year limitation (set to expire on 31.03.2022), the Court found that the reassessment proceedings were flawed.

The notice under Section 148A(b) was based on incorrect information without any supporting material provided to the assessee. The Court relied on precedents, including Salik Khan and Rajeev Bansal, to emphasize that reassessment cannot proceed without valid supporting evidence.

The Bench comprising Justice Rajeev Ranjan Prasad and Justice Ashok Kumar Pandey held that no effective show-cause notice under Section 148A(b) of the Income Tax Act, 1961 was served on the petitioner.

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The Court clarified that the petitioner's failure to respond to the defective notice dated 23.03.2022 could not cure the procedural deficiency. It further emphasized that after the Finance Act, 2021, reassessment notices under Section 148 could only be issued if the conditions under Section 149(1)(b) were duly satisfied.

It viewed that “the proceeding initiated against the petitioner was based on incorrect information furnished in the notice under section 148(A) (b) which was not supported by any material, therefore, the very initiation of the proceeding by issuing section 148 notice on

06.04.2022 would stand vitiated.”

Accordingly the income tax demand was quashed by the court.

To Read the full text of the Order CLICK HERE

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