Initiation of reopening u/s 148 by recording wrong facts not categorically rebutted by the Department illegal – ITAT

Initiation of reopening u/s 148 by recording wrong facts not categorically rebutted by the Department held to be arbitrary and bad in law – ITAT

The instant appeal was filed by the appellant assessee against the order of the CIT(A) upholding the reassessment proceedings and re-assessment order passed by the Assessing Officer (AO) u/s 147 of the Income Tax Act, 1961 (the Act) on the ground that the AO had mechanically recorded reasons for reopening of assessment and reasons were vague and based on wrong facts.

ABCAUS Case Law Citation:
ABCAUS 2329 (2018) (05) ITAT

Important Case Laws Cited/relied upon by the parties:
National Thermal Power Co. Ltd. vs. CIT, 229 ITR 383
Hindustan Lever Ltd. vs. R.B. Wadkar [2004] 137 Taxman 479
Income Tax Officer Vs Lakhmani Mewal Das 1976] 103 ITR 437 (SC)

Initiation of reopening u/s 148 by recording wrong facts illegal

The reassessment proceedings were initiated against the appellant assessee by issue of notice u/s 148 of the Act by recording reason that the assessee had sold a property for a consideration less than stamp duty valuation and thus the shortfall representing capital gain u/s 50C of the Act had escaped taxation.

The assessee filed objections for initiating proceedings u/s 147/148. The assessee categorically stated that the reasons recorded were not based on relevant material and credible information. It was further stated that assessee had not sold any property for the sale consideration recorded by the AO. On the other hand, the assessee and other co-owners had executed sale deed of a portion of the property wherein the assessee’s share was only 1/4th. The assessee claimed that it showed that “reasons recorded” were not based on ‘credible ‘and ‘relevant information’ and on this reasoning alone, the proceedings initiated should be dropped.

The AO in his order disposing off the objections stated as under:

“The assessee has stated that reasons recorded are not based on credible and relevant information. In this context, it is stated that the reasons recorded are based on credible and relevant information since the reasons recorded mentioned sale of immovable property by the assessee and this fact has also been accepted by the assessee in his letter ……. Thus this objection raised by the assessee is hereby disposed off.”

Before the Tribunal, the assessee argued that the order disposing off the objection was an arbitrary and irrational way wherein no specific finding or no materials on record had been stated wherein it could be understood that these were the materials based on which reasons are recorded. The AO simply mentioned that reasons were based on credible and relevant information but what were those credible and relevant information was absolutely nowhere to be found in his order. The assessee submitted that in view of such arbitrary and illegal action of the Department, the re- assessment proceedings initiated and order passed under section 147/148 should therefore be quashed.

The Tribunal observed that the Bombay High Court had categorically held that reasons that are recorded by the Assessing Officer for reopening of assessment are only reasons which can be considered when formation of belief is impugned, such reasons cannot be allowed to grow with age and ingenuity by devising new grounds in replies and affidavits not envisaged when reasons for reopening an assessment are recorded.

It was observed that in the instant case, the assessee had categorically objected to the reasons that the facts by which reopening are done were wrongly mentioned. While disposing of this objection of the assessee, Assessing Officer had not at all stated whether these objections were correct or not and had simply stated that the reason to believe was based on credible and relevant information. However, again the AO had failed to elaborate on those credible and reliable information. This was nothing but devising new grounds for replies and affidavits and it was something which cannot be said to be a proper reasons to form a belief for reopening an assessment.

The Tribunal observed that the co-ordinate ITAT Bench had held that in absence of basic details of property in the reasons recorded, like address, location, whether the assessee was owner or co-owner, date of sale, correct sale consideration, then it is to be inferred that the reasons were recorded mechanically without application of mind.

It was further observed  that the Hon’ble Supreme Court had held that reasons for formation of belief contemplated by section 147 for reopening of assessment must have rational connection with or relevant bearing on formation of belief, and rational connection postulates that there must be direct nexus or live link between material coming to Income Tax Officer’s notice and formation of his belief that there has been escapement of assessee’s income from assessment in particular year because of his failure to disclose fully and truly all material facts. Meaning whereby reasons must be on a stand alone basis and it should have direct link or nexus between materials coming to the knowledge of the Assessing Officer because of which he is forming belief that income has escaped assessment.

It was observed that in the instant case, the reasons recorded, objections raised by the assessee and the order of the Department disposing of those objections, there was no direct nexus which was brought on record by the Department that on these factors the AO believed or necessitated that there was an income escaping assessment. Most of the wordings in the order disposing of objections of the assessee regarding reasons recorded seemed to be arbitrarily worded without any specific finding or basis or even reader of that particular order cannot find a direct link as to why Department has reason to believe that income has escaped assessment so far as assessee was concerned.

The Tribunal found that the objections of the assessee stating that certain wrong facts were recorded that was also not categorically rebutted by the Department.

Thus the ITAT opined that the reasons recorded for initiation of proceedings under section 147/148 was arbitrary and bad in law and therefore assessment framed consequent thereto was obviously illegal and void ab initio and liable to be quashed.

Accordingly the order of the CIT(A) was set aside and re-assessment proceedings held bad in law

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