Challenge to reopening u/s 147-Only reasons recorded relevant which the Court has to examine and not reasons or explanations given by the AO at a later stage – High Court
ABCAUS Case Law Citation:
ABCAUS 2066 (2017) (09) HC
The Grievance:
The assessee by the instant writ petition had challenged the notice issued by the Income Tax Officer Ward (‘AO’) under Section 148 of the Income Tax Act, 1961 (‘Act’) seeking to reopen the Petitioner’s assessment. The assessee also challenged the rejection of the objections to the reopening of the assessment.
Assessment Year : 2009-10
Important Case Laws Cited/relied upon by the parties:
AGR Investments Ltd. v. Additional CIT [2011] 333 ITR 146 (Del)
Northern Exim Pvt. Ltd. v. Deputy Commissioner of Income Tax [2013] 357 ITR 586 (Del)
India Pvt Limited Vs. ACIT
Commissioner of Income Tax v. Gupta Abhushan (P)Ltd. [2009] 312 ITR 166 (Del)
Ramkrishna Ramnath v. Income Tax Officer [1970] 77 ITR 995 (Bom)
Brief Facts of the Case:
The Petitioner was a Private Limited was engaged in the consultancy business and looking after ‘product promotion and sales services’ of products being marketed by another Limited company (Principle).
The return of the petitioner assessee was processed under Section 143 (1) of the Act. Later, the AO issued the a notice u/s 148 of the Act proposing to reopen the assessment. The reasons recorded by the AO for reopening of the assessment, as communicated to the Petitioner, were broadly as under:
(i) Allegedly bogus entities-That as per Tax Evasion Petition (‘TEP’) received by the investigation wing of the Income Tax Department, the Petitioner had collected money from its Principal (PRIL) and thereafter issued account payee cheques in the name of various sub-contractors for withdrawing cash which was subsequently used for paying bribes. It was emphasised that for two preceding years also reassessment was done for the same reasons.
(ii) Income Tax Officer (Investigation) Report-That as per the exercise u/s 131(1A) of the Act by ITO (Inv), it was inferred that the modus operandi of the assessee was the same as was in preceding two years, and
(iii) Letter of Director General of Income Tax (Vigilance)- That DGIT had also suggested that the claim of expenses made by the Petitioner would have to be examined.
The assessee filed objection to the reopening. One of the objections raised was that the entire exercise undertaken by the ITO (Inv) by invoking Section 131(1A) of the Act was without jurisdiction since that provision could not have been invoked without him being duly authorised. Rejecting the objections, the AO stated the information received from the ITO (Inv) was not the sole basis for reopening the assessment. It was stated that he had applied his mind, collected the bank statements, analysed the Financial Accounts and correlated the same with the TEP report. The case was reopened with the prior approval of the Principal CIT. Placing reliance on a decision of Delhi high Court that information received from investigation wing could be used for re-opening of the case, the AO asserted that there was live and tangible nexus between the information and belief formed which had been arrived at after independent evaluation of the information by him.
Contentions of the Respondent Revenue.
The main thrust of the Revenue was that the proceedings under Section 147 of the Act for preceding year resulted in an assessment order under which it was held that none of the entities in whose names cheques were issued are shown to be genuine entities. The Revenue placed considerable reliance on the said assessment order to urge that the re-opening the assessment for the present year was more than vindicated by the said assessment order.
Observations made by the High Court:
The High Court noted that the settled legal position is that when a challenge is laid to the reopening of an assessment under Section 147 of the Act, the Court has to examine only the reasons recorded by the AO and nothing else.
It was noted that the Court previously also had reiterated the well settled legal position that Courts had to be guided only by the reasons recorded for the assessment and not by the reasons or explanations given by the AO at a later stage in respect of notices of the assessment. AO cannot record only some of the reasons and keep the others up his sleeves to be disclosed before the Court if his action is ever challenged in a Court of law.
The High Court noted that in a recent judgment it had further elaborated on the `reasons to believe’ and concluded that the reasons have to explain what the material was that was not disclosed by the Assessee which the assessee ought to have disclosed in the first instance. Reasons must speak for themselves, a subsequent attempt to supply the omission at the stage of an order disposing of the objections raised by the Assessee or providing them in the counter-affidavit in reply to the writ petition or even worse, making good that defect in the course of arguments before the Court, will simply not suffice.
The High Court noted that in an earlier decision, it had emphasised that information relating to one AY would not automatically become relevant for re-opening the assessment for another AY. If that would be the position, then the re-opening would be only on the basis of suspicion and not ‘belief’
The High Court observed that the Revenue could not controvert that There was no TEP for the relevant Assessment Year and also for the AY 2007-08, only 7% of the ‘contractor’s expenses’ was disallowed and added back. Therefore, even for AY 2007-08, the TEP did not result in adding back the entire amount.
The High Court clarified that the decision relied by the Revenue only lays down a general proposition regarding assessments being reopened on the basis of reports of investigation. It does not obviate the need to show that there is tangible material relevant to the AY in question that warrants reopening of the assessment for that particular AY.
The High Court noted that despite being aware of the orders pertaining to AY 2007-08, the AO in his reasons for reopening the assessment for AY 2009-10 did not refer to them while recording his reasons. Clearly this was an instance of non-application of mind by the AO to the relevant material. Since the AO failed to justify his reasons to believe that income has escaped assessment for AY 2009-10 on the basis of the TEP pertaining to AY 2007-08, it was all the more important for the AO to refer to all the subsequent developments in relation to reopening of the assessment for AY 2007-08.
Regarding the exercise undertaken by the ITO (Inv.) the High Court noted that the stand taken by the Revenue was that it was not the only reason for re-opening the assessment. It was found that ITO (Inv) had not been authorised to exercise powers u/s 131 (1A) and, therefore, the reports submitted by him could not have formed the valid basis for re-opening the assessment.
Held:
The High Court held that the jurisdictional requirement for reopening of the assessment had not been fulfilled and consequently it quashed the notice u/s 148 as well as the consequent order dated of the AO rejecting the Petitioner’s objections.
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