ITAT warns awarding cost for not following SC guidelines in GKN Driveshafts

ITAT warns of awarding cost for AO not following guidelines of Supreme Court in GKN Driveshaft  where assessee objects to reassessment

ABCAUS Case Law Citation:
ABCAUS 3032 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)
ITO v. Purshottam Dass Bangur [1997] 224 ITR 362 (SC)
Rattan Gupta v. Union of India [1998] 234 ITR 220 (Del)
Rakesh Gupta v. CIT [2018] 405 ITR 213 (P&H)
Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC)
GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC)
Raymond Woollen Mills v. ITO [1999] 236 ITR 34 (SC)

The instant appeal by the Assessee was directed against the Order of the Commissioner of Income Tax (Appeals) in dismissing the assessee’s appeal contesting his assessment under section 143(3) read with section 147 of the Income Tax Act, 1961 (‘the Act’).

The principal challenge by the assessee was to the validity of the reassessment proceedings on the ground that the reasons recorded u/s 148(2) were vague and do not indicate independent application of mind by the Assessing Officer (AO). In-as-much as the specific details had not been supplied to the assessee, there was no material with the AO which could the said to form the basis of his reason/s to believe as to the income chargeable to tax having escaped assessment.

Further, other objections raised by the assessee were that the reasons recorded, which were to be prior to the notice u/s 148(1), were not dated, and the notice itself was invalid as it stated the assessee’s, an individual, as a ‘company’.

The Tribunal opined that the wrong mention of the assessee’ status (in the caption section of the reasons recorded u/s 148(2)) was clearly a mistake, curable u/s. 292BB. The reasons recorded; the proposal; the sanction, and the notice u/s. 148(1), all recorded the assessee’s PAN correctly. The word ‘company’ in the status column in the reasons recorded was, thus, clearly a typing mistake.

The Tribunal noted that as per reasons recorded u/s 148 the same clearly stated that there was material in the possession of the AO indicating/suggesting that there had been a client code modification in the instant case resulting in the reduction of the assessee’s income for the relevant year. It was further stated that the material was the survey report prepared by the Investigation Directorate upon carrying out a survey u/s. 133A of the Act and, further, on the basis of the data received from the National Stock Exchange (NSE).

The Tribunal opined that such information could not be regarded as vague or indefinite.The information was relevant; from a reliable source, and specific, qualifying thus the reasons recorded on that basis as valid, as explained in several decisions by the Apex court.

The Tribunal observed that Client Code Modification (CCM) is used as a tool for tax-evasion, as also observed by the Hon’ble jurisdictional High Court. Therefore, the assessee’s challenge to the reassessment proceedings on the ground of the reasons recorded being vague and indefinite was rejected.

However, the Tribunal opined that the AO committed a serious mistake by not providing, at any stage, the specific details of the escapement of income, for which the assessee was charged, and for which the Revenue entertained a reason to believe.

According to the Tribunal, merely stating that there had been a CCM, which without doubt there may have been, is not sufficient. In fact, it is only on the basis of these details that the fact/inference of a reduction of income chargeable to tax was arrived at or, as the case may be, drawn.

In fact, the assessee had specifically clarified vide his letter that it was not within his competence as a sub-broker of NSE to effect CCM, which can only be by the broker of NSE. It was, therefore, incumbent on the AO to have, after initiating reassessment proceedings and, rather, on his own, confronted this material to the assessee, requiring him to show cause as to why, in the face of the specific details, his income be not assessed at a higher sum (by the amount of income ostensibly escaping assessment, while the AO did not do so despite the assessee seeking the relevant details.

The Tribunal expressed displeasure that in such case, how was the assessee expected to state his case and stated that tax proceedings, it needs to be appreciated, are not adversarial in nature, and entire process of assessment is to determine the correct income of an assessee chargeable to tax for a particular year.

The Tribunal noted that in the context of reassessment proceedings, the Hon’ble Supreme Court had in GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC) laid down a procedure whereby the assessee can raise objection/s to the assessment/assessment proceedings, which would require being specifically met by the AO per a speaking order before proceeding further in the matter.

The Tribunal opined that the non-furnishing of the specific transaction details wherein there had been a client code modification, despite being specifically sought by the assessee, constituted a breach of the principle of natural justice, as well as the guideline prescribed by the Hon’ble Supreme Court.

The Revenue on being questioned during hearing, could offer no satisfactory explanation in this regard. The Tribunal though refrained from imposing any cost on the AO for this serious breach, as he ought to be heard before doing so,  nevertheless dilated upon to eschew awarding cost by the Tribunal in future.

The Tribunal set aside the re-assessment to file of the assessing authority to adjudicate after confronting the assessee with the relevant details.

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