Non response to unauthorised enquiry letter not constitute material forming belief of income escaped

Non response to unauthorised enquiry letter issued without approval not constitute material forming belief of escapement of income u/s 147

ABCAUS Case Law Citation:
ABCAUS 3129 (2019) (08) ITAT

Important case law relied upon by the parties:
Parsuram Pottery Works Co. Ltd. vs. ITO 106 ITR 1. (SC)  
Amrik Singh Vs ITO (2016) 70 taxmann.com 26
Chunnilal Prajapati Vs ITO’, 2011 (2) TMI 1522

The instant appeal was filed by the assessee against the order passed by the CIT(A in the matter of assessment framed under section 144/148 of the Income Tax Act, 1961 (the Act).

The Assessing Officer (AO) on the basis of information that assessee had purchased immovable properties, issued notice under section 148 which was complied with partially.

The assessment was completed by making additions to the returned income.

The CIT(A) rejected the assessee’s appeal both on legal grounds as well on merits and confirmed the assessment order as such. The CIT(A) rejected the contention of non application of mind by the AO by observing that the AO had mentioned that he had considered the reply of the appellant regarding the investment in purchase of two immovable properties and found the reply unsatisfactory.

Before the Tribunal, the assessee contended that he had by reply, explained the source of acquisition and since thereafter nothing was heard from the side of Assessing officer and this was followed by notice under section 148 of the Act.

He further submitted that the enquiry letter issued by the AO was a mere non statutory letter and as such the Assessing officer had illegally and without authority of law had issued it and based on this unauthorized enquiry letter, proceedings under section 148 could not be authorized under the law.

He further submitted that even if the proceedings of enquiry were held to be legally initiated in that eventuality too the reasons recorded are totally barren and bald do not show any application of mind and proceedings were initiated for the purpose of verification of sources of investment in property, from the stage left in earlier proceedings.

The Tribunal rejected the objection raised by the Revenue regarding the admissibly and maintainability of ground challenging the validity of notice under section 148 of the Act, on the pretext that the assessee having raised no objection with regard to the proprietary of reasons recorded cannot at this stage of proceedings raise this issue.

The Tribunal held that being purely a legal issue going to the root of the jurisdiction of the matter and in view of the Hon’ble Apex Court judgment it can be raised at this stage even for the first time.

The Revenue contended that since the assessee had not objected to the enquiry letter as unauthorized in law before the below authorities and therefore, the issue be remitted back to the file of Assessing officer.

The assessee strongly opposed to such a suggestion and stated that the assessee is under no obligation to guide the Assessing officer on law his duty is limited up to instruct the Assessing officer on facts of his case, applying the law on the peculiar facts of the case is the duty of the A.O. The assessee referred to the judgment of the Hon’ble Supreme Court wherein it was held that “It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realizing that price should familiarize themselves with the relevant provisions and become well-versed with the law on the subject. Any remission on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.”

In this view of the matter and particularly following the Hon’ble Supreme Court, the Tribunal rejected the request of the Revenue for setting aside the case.

The Tribunal observed that in compliance to the enquiry letter, the assessee had replied explaining that source of investment. Therefore, vaguely stating that such reply was unsatisfactory, without mentioning as to how the same was unsatisfactory and in which material terms the reply was lacking only leads us to believe that re-assessment proceedings were initiated for the verification of source of investment.

The Tribunal noted that the Coordinate Bench in identical circumstances had quashed the assessment. In the said case too the enquiry letter made no mention of the provision under which it had been issued. The The Coordinate Bench examined the provisions to ascertain as to under which provision it was issued. It was observed that Section 133(6) was amended in 1995 and the words ‘enquiry or’ were inserted before the word ‘proceedings’ and the second proviso was also inserted, by the Finance Act, 1995, with effect from 1-7-1995; The scope and effect of this amendment brought about in 1995 was explained by the CBDT in its Circular No. 717, dated 14- 8-1995.

The Coordinate Bench noted that pre-1995 amendment, section 133(6) could be invoked only in cases where some proceedings were pending, and not otherwise; The 1995 amendment brought in power to the revenue to gather information which, after proper inquiry, would result in initiation of proceedings under the Act. However, by virtue of the second proviso to the section, an income-tax authority below the rank of Commissioner can exercise this power in respect of an enquiry, in a case where no proceeding is pending, only with the prior approval of the Director or Commissioner; In the present case, the enquiry letter was issued by the Income-tax Officer, i.e., an officer below the rank of the income-tax authorities referred to in the second proviso to section 133(6). Thus, prior approval was required to be obtained from the competent authority before exercising power under section 133(6).

The Bench noted that there was nothing on record to suggest that any such prior approval was obtained. The letter, per se, also did not make mention of any such approval. Hence, the Tribunal held that the power exercised by the Income tax Officer, without compliance with the second proviso to section 133(6), amounted to an illegal exercise of power. The Income-tax Officer did not merely ask for information from the assessee. This took the case out of the ken of section 133(6).The letter of enquiry being illegal, it was not obligatory on the assessee to respond to the same.

In view of the above, the Tribunal held that in the instant case, non-response by the assessee to the enquiry letter could not be said to constitute material before the Assessing Officer which could lead him to form any belief of escapement of income.

The Tribunal placing reliance on several judicial opinion stated that mandate of law is clear and loud that proceedings under section 148 cannot be initiated for verification of the sources of investment. Such an action of the AO in respect of the case on hand could not be approved in law and is therefore quashed it.

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