The ITAT Delhi has set aside a reassessment order and penalty under Section 271AAC(1) for being founded on factually incorrect information derived from a search operation, emphasizing that jurisdiction under Section 148A cannot be assumed on the basis of blind reliance on investigative data without independent application of mind.
Background & Facts
The Dispute
The assessee, Smt. Krishna Devi, was subjected to reassessment proceedings for Assessment Year 2018-19 on the allegation that she had received long-term capital gains (LTCG) of Rs. 40,77,313/- from the sale of shares of M/s Eicher Motors Ltd., which were allegedly part of a bogus transaction arranged through M/s Karnam Securities Pvt. Ltd. The Assessing Officer (AO) relied on information obtained during a search and seizure operation conducted on 25.02.2021 at Tradenext Securities Limited and Kundu Group, Rohtak, which implicated third parties in forged share transfer arrangements.
Key Facts
- The AO initially alleged that the assessee sold shares of M/s Karnam Securities Pvt. Ltd. and received LTCG exempt under Section 10(38).
- The assessee had filed her ITR for AY 2018-19 and disclosed no such transaction.
- The AO issued a notice under Section 148A(b) on 23.03.2022 (DIN: ITBA/AST/F/148A/(SCN)2021-22/1041370556(1)) based on the search findings.
- The assessee responded with documents including ITR acknowledgment, bank passbook, Demat account statement, and contract notes from M/s Karnam Securities Pvt. Ltd.
- The AO did not accept the submissions and issued an assessment order on 26.09.2023 under Sections 147 and 143(3), making an addition of Rs. 40,77,313/- and levying a penalty under Section 271AAC(1).
- During the assessment proceedings, the AO discovered a factual error: the transaction involved shares of M/s Eicher Motors Ltd., not M/s Karnam Securities Pvt. Ltd.
- A fresh show cause notice dated 24.03.2023 was issued to correct this error, acknowledging the misidentification of the scrip.
Procedural History
- 25.02.2021: Search and seizure conducted at Tradenext Securities Limited and Kundu Group, Rohtak.
- 23.03.2022: Notice under Section 148A(b) issued by AO, relying on incorrect information about shares of Karnam Securities Pvt. Ltd.
- 23.03.2022: Assessee submitted documents in response.
- 26.09.2023: Assessment order passed under Sections 147 and 143(3), adding Rs. 40,77,313/- and levying penalty.
- 30.03.2023: First Appellate Authority (CIT(A)-30) upheld the assessment order.
- 11.05.2026: Hearing before ITAT Delhi.
- 26.05.2026: Judgment pronounced.
The Parties' Positions
For the Assessee: The reassessment proceedings were initiated on the basis of mistaken identity of the share scrip. The AO had not applied its mind at the time of issuing the notice under Section 148A(b) and relied mechanically on the search wing’s report. The subsequent correction via a fresh notice demonstrated that the initial jurisdictional basis was flawed.
For the Revenue: The AO had sufficient material from the search operation to suspect escapement of income. The issuance of a fresh notice under Section 148A(d) and subsequent correction was procedural and did not invalidate the reassessment.
Relief Sought
The assessee sought quashing of the reassessment order dated 26.09.2023 and deletion of the penalty under Section 271AAC(1), arguing that the entire proceeding was vitiated by non-application of mind at the threshold stage.
The Legal Issue
The central question was whether reassessment proceedings under Section 147 can be validly initiated under Section 148A when the jurisdictional basis is founded on factually incorrect information, and whether the subsequent correction of such error through a fresh notice cures the initial jurisdictional defect.
Arguments Presented
For the Appellant
The appellant contended that the notice under Section 148A(b) was issued on a completely erroneous premise - attributing the transaction to shares of Karnam Securities Pvt. Ltd. when the actual transaction involved Eicher Motors Ltd. The AO had not independently verified the source of the information or applied its mind to the assessee’s actual transactions. The issuance of a fresh notice during assessment proceedings proved that the initial assumption of jurisdiction was invalid. Reliance on CIT v. Smt. Sushila Devi and CIT v. Ramesh Kumar was made to establish that jurisdiction under Section 148A requires a reasonable belief grounded in correct facts.
For the Respondent
The Revenue argued that the search operation yielded credible evidence of a pattern of bogus LTCG transactions, and the AO was entitled to act on such intelligence. The correction of the scrip name during proceedings was a mere clerical amendment and did not affect the substantive basis of the reassessment. The assessee failed to prove the genuineness of the transaction, and the penalty was justified.
The Court's Analysis
The ITAT observed that the notice under Section 148A(b) issued on 23.03.2022 was based on a fundamental misidentification: the transaction was attributed to shares of Karnam Securities Pvt. Ltd., whereas the assessee had sold shares of M/s Eicher Motors Ltd. The AO, in issuing the notice, had not applied its mind to the actual nature of the transaction but had mechanically adopted the search wing’s report.
"...the assessing officer while issuing the notice u/s 148A(b) on 23.03.2022... did not at all apply its mind to the information about transaction as actually entered into by the assessee and for that reason had to issue a fresh show cause notice during the assessment proceedings..."
The Tribunal emphasized that Section 148A is a procedural gateway to reassessment, and its invocation requires a reasonable belief based on correct facts. The fact that the AO was compelled to issue a fresh notice on 24.03.2023 to correct the error demonstrated that the initial notice was issued without due diligence. The Tribunal held that such a defect is not curable by subsequent correction - jurisdiction must be validly assumed at the outset.
The Court distinguished the present case from situations where minor clerical errors are rectified, noting that the error here went to the root of jurisdiction - the identity of the asset and the nature of the transaction. The Tribunal further noted that the penalty under Section 271AAC(1) is contingent upon the validity of the reassessment order and cannot survive its quashing.
The Verdict
The appeals were allowed. The ITAT quashed the reassessment order dated 26.09.2023 and deleted the penalty of Rs. 40,77,313/- levied under Section 271AAC(1). The Tribunal held that the reassessment proceedings were invalid from inception due to non-application of mind at the stage of issuing notice under Section 148A(b). No further directions were issued as the assessment was set aside.
What This Means For Similar Cases
Jurisdictional Errors Cannot Be Curated Post Facto
- Practitioners must challenge reassessment notices under Section 148A where the AO relies on third-party search data without verifying the accuracy of the underlying facts.
- A subsequent correction notice does not validate an initial jurisdictional defect - the belief must be reasonable and factually grounded at the time of issuance.
Due Diligence Is Mandatory Before Invoking Section 148A
- Revenue authorities must independently cross-check information from search operations against the assessee’s actual records before initiating reassessment.
- Blind reliance on investigation wing reports, without application of mind, renders the notice void ab initio.
Penalties Under Section 271AAC(1) Are Contingent on Valid Reassessment
- Any penalty under Section 271AAC(1) is automatically void if the underlying reassessment order is quashed on jurisdictional grounds.
- Practitioners should always argue for deletion of penalty as a consequential relief when challenging reassessment on procedural grounds.
