Escapement of income u/s 147 has to be established with concrete information under amended Act– High Court
In a recent judgment Hon’ble High Court has made an extensive comparison of the amended provisions of income tax act 1961 with respect to escapement of income and held that under amended laws escapement of income u/s 147 has to be established with concrete information.
ABCAUS Case Law Citation:
ABCAUS 3875 (2024) (02) HC
Important Case Laws relied upon by parties:
CIT vs A. RAMAN & CO. [1968] 67 ITR 11 (SC)]
Larsen And Toubro Ltd Vs State Of Jharkhand 2017
CIT vs Kelvinator of India Ltd., (2010) 2 SCC 723
ACIT vs ICICI Securities Primary Dealership Ltd., (2012) 13 SCC 514
Income-Tax Officer v. Lakhmanimewal Das [1976] 103 ITR 437 (SC)
Jindal Photo Films Ltd Vs DCIT 1998 SCC Online Del 401
Travancore diagnostics p. Ltd. V. Asst. CIT, 2016 SCC online Ker 2042
Smt. Kulwanti Bhatia Charitable Trust Society vs PCIT [2023] 155 taxmann.com 653 (Allahabad)
Gandhibagsahakari Bank Ltd. vs DCIT [2023] 156 taxmann.com 221 (Bombay)
Subodh Agarwal Vs State Of UP [2023] 149 taxmann.com 448 (Allahabad)
IDFC LTD. vs DCIT [2023] 155 taxmann.com 602 (Madras)
ITO vs Lakhmanimewal Das (1976) 3 SCC 757
Divya Capital One Private Limited vs.ACIT [2022] 445 ITR 436 (Del)
GKN Driveshafts India Ltd v. ITO (2003) 259 ITR 19
Somnath Dealtrade Private Limited. vs Union Of India & Ors [2023] 455 ITR 720 (Cal)
Shrenik Sudhir Vimawala vs. ACIT, 2022 (5) TMI 528 – GUJARAT
In the instant case, the Petitioners who were octogenarian couple had filed a Writ Petition under Article 226 of the Constitution challenging the orders passed u/s 148A(d) of the Income Tax Act, 1961 (the Act) followed by notices issued u/s 148A of the Act.
The Petitioners have acquired certain shares shares in a private limited company. Subsequently his son and daughter in law gifted shares of the said company to them. Thereafter, the NCLT approved the scheme of merger of the said company with another company (second company) and by way of consideration the Petitioner couple were allotted shares in second company. Within one year, NCLT again passed an order approving demerger of the second company into third company. During the assessment year in question, the Petitioners had sold the shares in the third company.
Subsequently, notices u/s 148A(b) of the Act was issued on premises that the petitioners were allotted shares in third company as a consequence of demerger arrangements and the same were taxable in terms of Section 56(2)(x)(c) of the Act and that the petitioners having sold the shares of Third company before March ought to have offered the same to tax.
The Assessing Officer passed order u/s 148A(d), overruling the objections and issued notices u/s 148 of the Act for the impugned Assessment Year.
The contentions of the assessee were that the order passed under Section 148A(d) has gone well beyond the show cause notice and touched matters not even alleged and that the reply of the petitioners have not been considered. That the reasons recorded in the show cause notices issued under Section 148A(b) constitute the foundation for the case and it is impermissible for the Assessing Officer to travel beyond the said grounds and traverse new grounds. That the scheme that has been approved by the NCLT cannot be called into question by the Income Tax authorities, who too were parties before the NCLT.
Mere reason to believe, cannot be a ground for carrying out re-assessment under amended section 147
The Hon’ble High Court observed that under the old section 147, the opening words were “If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year”. As against that, in the amended section, the opening
words are: “If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year”. So, what is conspicuously missing from the new section is the term “reason to believe”. In other words, under the new provisions, section 147 of the Act can be invoked only if any income chargeable to tax has “escaped assessment”. Thus, the Assessing Officer has to be prima facie satisfied that there is “escapement of income”, unlike earlier law which permitted action based on mere reason to believe. Now mere reason to believe, cannot be a ground for carrying out assessment under section 147 of the Act.
The Hon’ble High Court further observed that the phrase ‘information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment’ is explained in Explanation 1 to section 148. However, the word ‘suggest’ is not defined in the 1961 Act and therefore, one has to ascertain its meaning from other sources. Further CBDT has issued Instruction dated 10.12.2021 vide F.N0. 225/135/2021/ITA-II indicating as to what is information and how it would be collected.
The Hon’ble High Court went through some of the Rulings rendered both on the amended & unamended provisions in question. In particular observed the decisions rendered under amended laws as under:
(i) The Hon’ble High Court declined to interfere with notice u/s 148 observing that the Act does not contemplate any detailed adjudication on the merits of information available with the Assessing Officer at the stage of passing order under section 148A(d). There is a specific purpose for not introducing any further enquiry or adjudication in the statute, on the correctness or otherwise of the information, at this stage.
(ii) The High Court had quashed the notice under section 148 on the basis of high value cash deposits. In that case, except for stating that such information was available on the Insight Portal it had not been indicated in the said reasons as to how there was formation of belief by the Assessing Officer that income had escaped assessment. The reasons supplied do not indicate that any exercise of independent verification thereafter was undertaken.
(iii) The reasons for issuance of notice under section 148A(b) were based on the audit objection. The High Court, after analyzing the provisions of both pre-amendment and post-amendment of section 147, held that w.e.f. 01.04.2022, clause (ii) of Explanation 1 provides the condition that information includes information in the form of audit objection. It was further held that prima facie availability of material is sufficient for reopening of the reassessment proceedings and the sufficiency and correctness of the material is not to be considered at that stage.
(iv) The High Court quashed the notices under section 148 on the ground that there exists no material to show that there was escapement of assessment as the information was already available with the department. In this case, the return filed by the assessee was already scrutinized and an order under section 143(3) was passed. Assessee had also filed an appeal before CIT (A) on such an order of assessment. The Hon’ble High Court rejected the contentions of the Revenue that the new scheme, with the omission of the phrase ‘reason to believe’ has done away with the requirement that the officer must establish ‘escapement of tax’, prima facie, at the stage of assumption of jurisdiction. The Hon’ble High Court held that such a requirement continues in light of the proviso under section 148 that casts a statutory burden upon the officer to be in possession of ‘information’ suggesting that income chargeable to tax has escaped assessment for the year concerned. If the existence of such information is not established even at the initial stage, the foundation of the proceedings stands vitiated in law.
Escapement of income u/s 147 has to be established with concrete information
The Hon’ble High Court observed that on a conjoint reading of section 147 and section 148 of the Act, it is clear that the escapement of income is a sine qua non for initiating proceedings under section 147. Therefore, availability of the ‘information which suggests that there is an escapement of income’ is a pre-requisite for issuing notice under section 148. The argument that omission of phrase ‘reason to believe’ has gotten away and has given way to “information with the assessing officer which suggests that the income chargeable to tax has escaped assessment” would mean that there should be no need for any reason seems incorrect. The phraseology of amended Section 148 makes in unmistakable terms clear that there should be a concrete information as defined in Explanation 1 to Section 148. Such information should be suggestive of income escaping assessment and such information should be objective in nature. In other words, the arguable subjectivity in the pre-amendment provision is given a go-by. For conducting assessment under section 147, there
should be not only escapement but also the reason to believe that there is such escapement, the reason being the information itself. Hence, a plausible view could be taken that post-amendment of the provision, the escapement has to be established with concrete information. Section 148A would only assist the Assessing Officer in coming to a conclusion whether such information is good enough to allow a notice to be issued under Section 148. This is how, the new provisions should be interpreted so as to make them workable in accord with the intent to achieve the purpose for which statutory change was brought about. An argument to the contrary would hijack the statutory object.
Assessing Officer can not invoke Section 147 without any reason
The Hon’ble High Court further opined that to say that the Assessing Officer can invoke Section 147 without any reason would, apart from being contrary to the aforestated rule of law, also fall foul of Article 14 as he is expected to act reasonably. The requirement to act reasonably being in-built into the amended provision, an act in variance with the same is unsustainable. The Assessing Officer should have information as defined in Explanation 1 to section 148 that suggests escapement of income and only thereafter, the provisions of Section 148 can be invoked.
Assessing Officer cannot employ jugglery of words in notices and let the assessee keep guessing why is his assessment being re-opened
In the case under question, the Hon’ble High Court noted that the reasons given in the notices, as also in the impugned orders that followed the said notices, it becomes evident that they merely mention that, information was received in line with the risk management strategy. They do not disclose what kind and content of information it was. While the notice does not state anything more, the annexure to the notice talks of Section 56 and long term capital gains versus short term capital gains. An Assessing Officer functioning under the statute cannot employ jugglery of words in notices of the kind and let the assessee keep guessing why is his assessment being re-opened.
It was observed that the first sentence in the notice states the Assessee has not disclosed the transactions in question which is falsified by the second sentence which states that the Assessee has claimed exempt income as long term capital gain from the sale of shares, which manifests the contradiction.
The Hon’ble High Court further observed that the definition of information given under Explanation I to Section 148 is a ‘means definition’ as distinguished from ‘means and includes definition’. This Explanation enumerates only two [upto 31.3.2022] and five [from 1.4.2022] categories and the information even if it be true, unless is the one relatable to any of these categories, the jurisdiction cannot be assumed by the Assessing Officer. It hardly needs to be stated that where the legislature employs ‘means definition’, it is exhaustive and therefore, nothing can be added.
Term ‘information’ in Explanation 1 to Section 148 cannot include return of income filed by the Assessee
The Hon’ble High Court opined that the term ‘information’ appearing in Explanation 1 to Section 148 cannot include the return of income filed by the Assessee as it does not fall within any of the above five categories specified therein. Even the CBDT instructions, though may not be binding on the issue of interpretation, also do not talk of the very Return which has been filed becoming information permitting the Assessing Officer to issue notice under section 148 stating that income has escaped assessment. To permit the Assessing Officer to state that income has escaped assessment and re-open the same based on the very Return filed by the Assessee who has already disclosed the transaction, would enable him to by-pass the regular assessment procedures; that would virtually render Section 147 to be an enabling provision to make second assessment where the Assessing Officer has missed the bus under Section 143.
In the given case, the Hon’ble High Court opined that the impugned orders passed by the Assessing Officer under Sec. 148A(d) of the Act were bad because, Petitioners’ Objections have not been considered. Thus, apart from being in violation of principles of natural justice, the assumption of jurisdiction under Sec. 148 was perverse and unsustainable.
The Hon’ble High Court noted that the impugned orders issued under Section 148A(d) clearly showed that contentions of the assesses had not been addressed at all. In fact, in one paragraph non-disclosure of the said transactions has been noted as one reason for re-opening. It was also found that there was a definitive finding that the entire scheme of demergers, merger and amalgamation was done with a sole intention of avoiding tax liability and that the transactions were independently verified to be nothing but ‘round trip financing lacking commercial substance and not for bonafide purposes’. This finding was clearly well beyond what is contained in the notice issued under Section 148A(b) and could not have been rendered without giving the petitioners adequate opportunity to rebut the assertion. In fact, coming to a definitive conclusion that there is avoidance of tax liability through independent verification but not disclosing the reasons or materials based on which such findings could be rendered and without giving an opportunity to the petitioners to put their case clearly. Thus, there is a gross violation of the principles of natural justice.
Order passed u/s 148A(d) cannot transcend the scope of notice u/s 148A(b)
The Hon’ble High Court stated that it hardly needs to be stated that the order to be passed under Section 148A(d) cannot transcend the scope of proposal notice under Section 148A(b) inasmuch as such a notice happens to be the foundation on the basis of which such an order can be passed, and not otherwise. That is how the statutory scheme is devised. Definitive conclusions as to grounds that are not indicated in the proposal notice cannot be said to be in line with the scheme and purpose of Section 148A. This apart, non- consideration of the reply relating to Section 56 and Section 47 would make the order also violative of the mandatory requirements of Section 148A
As a result, the Hon’ble High Court allowed the Writ Petitions and issued a Writ of Certiorari quashing the impugned orders under Section 148A and also the two impugned notices under Section 148 of the Income Tax Act, 1961.
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