Reasons recorded must withstand test of judicial scrutiny at any stage – ITAT

Reasons recorded must withstand test of judicial scrutiny at any stage. Other materials can not be used to test application of mind. 

ABCAUS Case Law Citation:
ABCAUS 3126 (2019) (08) ITAT

Important case law relied upon by the parties:
GKN Driveshafts (India) Ltd. v. ITO (2002) 125 Taxman 963(S.C)

M/s GinniFilaments vs. CIT
Hindustan Lever Ltd. Vs. R.B. Wadkar (2004) 268 ITR 332
Bir Bahadur Singh Sijwali vs. ITO(2015) 68 SOT 197
NTPC Vs CIT(1998) 229 ITR 383 (SC)
Km. Teena Gupta Vs. CIT (2017) 4 TMI 114
Chunnilal Prajapati Vs ITO 2011 (2) TMI 1522
Ingram Micro (India) Exports (P) Limited Vs DCIT (2017) 178 taxman.com140
Jamuna Lal Kabra vs. ITO reported in (1968) 69 ITR 461
Prashant S. Joshi Vs ITO reported in (2010) 324 ITR 510
Shri Abdul MajidVsCIT(2006) 153 Taxman 131 (All)
Agarwalla Brothers reported in (1991) 189 ITR 784
CIT vs. Safetag International India Pvt. Ltd.

In the instant case, the assessee, had challenged the order passed by the CIT(A) whereby he had rejected the objections raised by the assessee regarding the validity of the reasons recorded for reopening u/s 147/148 of the Income Tax Act, 1961 (the Act).

The appellant assessee had purchased a property alongwith her son. A notice under section 148 was issued to her after recording reasons.

However, in response to the said notice, no return of income was filed and whatever evidences were filed to explain the sources of availability of funds did not favour with the view held by the Assessing Officer (AO).

Consequently, the AO framed the assessment under section 144/147 of the Act determining making additions to the total income.

The CIT(A) rejected the appeal both on legal ground as well on merits and confirmed the assessment. The CIT(A) sustained re-opening on the ground that before issuing notice under section 148 due enquiries were made from the assessee by the Additional CIT and by the ITO who issued notices to the assessee and replies furnished in response thereto were found unsatisfactory.

Before the Tribunal, the appellant submitted that the purported reasons were no reasons in the eye of Law. Neither on facts nor in law, on the basis of reasons recorded, no ‘satisfaction’ could be arrived for escapement of income. According to the appellant, the purported reasons were conclusion without any process of reasoning showing application of mind.

It was contended that the so called reasons, did not show any ‘intelligible nexus’ to show that ‘Investment’ as made by the assessee represented ‘Income’ which too was liable for Income Tax and had escaped Assessment warranting recourse to Notice under section 148 of the Act.

He submitted that alleged non-compliance, partial compliance or even unsatisfactory compliance to notices issued prior may be a ground only for ‘reasons to suspect’ for alleged escapement of income but does not give any valid foundation for reaching to ‘reasons to believe’ and thereafter arriving at the ‘satisfaction’ for escapement’ of Income warranting recourse to notice under section 148 of the Act.  

It was further submitted that while sustaining the validity of notice the CIT(A) erred in referring to the Letters which in fact did not find mention in the reasons recorded and therefore, could not be referred or relied in order to improve the reasons recorded.

Per contra, the Revenue stated that since assessee had not challenged the validity of notice under section 148 of the Act before the authorities below therefore, it cannot be allowed to raise this objection at this belated stage and thereby taking the revenue by surprise. The Revenue relied on the judgment of Hon’ble Supreme Court.

The Revenue further submitted that no return of income was filed and therefore, being a case of deemed escapement of income under clause (a) to section 147 of the Act, the Assessing officer was well within his right to issue notice under section 148 of the Act.

Reasons recorded have to withstand test of judicial scrutiny at any stage

The Tribunal rejecting to the objections of the Revenue admitted the objections raised first time as to the validity of the notice u/s 148 being purely legal objection going to the root of the jurisdiction of the matter.

In allowing the objection to the validity of the notice, the Tribunal placed reliance on the judgment of Hon’ble Supreme Court and several Hon’ble High Courts wherein the additional ground challenging the validity of the assessment order on the basis of illegal initiations of the proceedings under Section 148 of the Act were allowed. It was also held that reassessment notice is a jurisdictional notice and it is settled law that ground of lack of jurisdiction may be raised at a subsequent stage as well.

Regarding the reliance placed by the Revenue on the Hon’ble Supreme Court in the case of GKN Driveshafts for the proposition that the Hon’ble Supreme Court has required that immediately after receipt of notice under section 148 of the Act assessee has to furnish return of income and seek reasons recorded and thereafter file objectionthe Tribunal pointed out that the Hon’ble Supreme Court had only provided step wise procedure and nowhere it had been held that if objections are not filed before the Assessing officer such objection cannot be taken up at any further stage or the legal right of assessee would stands waived. No inference against the assesse is possible as far as substantive right is concerned.

Legality of Notice u/s 148 not dependent upon objection/no objection by assessee

The Tribunal reiterated that the settled position in law is that the question of Jurisdiction is not a matter of acquiescence. The proprietary of notice under section 148, based upon reasons recorded is not dependent upon the objection or no objection by the assessee at the stage of assessment. If the reasons recorded, independently can withstand the test of judicial scrutiny, only such reasons will confer jurisdiction to issue notice and frame assessment in pursuance thereto. However, if the reasons recorded, upon being challenged at any stage of proceedings fails to withstand the test of judicial scrutiny, in that eventuality, upon such recorded reason no valid notice can be issued and any assessment framed consequent thereto even taking shelter of ‘No objection’ from the assessee could save the assessment from being held to be declared void-ab-intio.

Application of mind can be seen from the recorded reasons only

The Tribunal concurred with contention of the assessee that application of mind can be seen from the recorded reasons only and for testing the validity of the reasons recorded no reference can be made to any other material even if any other material is available on assessment records except which is referred in the reasons recorded.

The Tribunal observed that the argument has judicial approval of law, in view of settled position requiring that for adjudicating the proprietary of re-assessment proceedings it is the recorded reasons of the ITO, which can only be considered and looked into. For this, the Tribunal placed reliance on several judgments of the Hon’ble High Court as under:

Hon’ble Allahabad High Court

Subsequent reference to other material cannot justify reopening of assessment as assumption of jurisdiction to reopen the assessment can be examined only on the basis of material mentioned in the reasons so recorded.

Hon’ble Patna High Court

the relevancy of the reasons recorded can be tested only by reference to the reasons recorded under section 148(2) and the ITO is not authorized to refer to any other reasons even if it can be otherwise inferred or gathered from the records

Hon’ble Bombay High Court

reasons recorded by the AO cannot be supplemented by filing affidavit or making oral submissions so as to supply the material particulars in which such notice was lacking

Hon’ble Bombay High Court

the requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and, on those reasons, alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded.

In view of the settled position of law the Tribunal concluded that CIT(A) was legally unjustified in sustaining re-opening by referring to Letters which did not find mention in the reasons recorded by the Assessing officer and thus had to be excluded for the purpose of consideration of the proprietary of reasons recorded.

The Tribunal observed that the first part of reasons recorded stated only of a fact which was not under dispute that assessee along with her son had jointly purchased a property, deed of which was furnished by the assessee before the Additional CIT.

Mere non-filing of Return is not sufficient ground for assuming escapement of income

The Tribunal further observed that the last part of reasons recorded mentioned the fact that assesse had not filed return of income, which according to Revenue was itself sufficient ground for issuing notice under section 148 of the Act as deemed escapement in view of clause (a) of section 147 of the Act.

However as pointed out by the assessee, such argument has already been rejected by the Hon’ble High Court by holding that Explanation 2(a) to apply, the income chargeable to tax which is deemed to have escaped assessment does not arise simpliciter on not filing return of income but must also be coupled with the prima-facie satisfaction of the assessing officer that the income of a person concerned is chargeable to income tax even if it exceeds the maximum amount not exigible to tax.

Accordingly, the Tribunal rejected the argument of the Revenue that mere non-filing of Return is sufficient ground for assuming escapement of income as based on incorrect understanding of law.

Thus the only part of the reasons recorded left for consideration by the Tribunal pertained to mentioning of purchase of property. The Tribunal opined that no escapement can be presumed merely referring to investment coupled with the fact on no return of income filed by the assessee.

Reopening merely on the report from Investigation wing illegal

The Tribunal considered various decisions where the action under section 148, initiated merely on the basis of Report from the Investigation wing that assessee had invested in purchase of immovable property or deposited cash in bank account, was held to be illegal.

Investment in property is akin to cash deposits in saving bank account

The Tribunal expressed agreement with the submission of the assessee that the fact of investment in property is akin to cash deposits in saving bank account as both being Investments and are assessable under section 69 of the Act, and such fact alone could not be a reason for escapement of income and to clothe the Assessing officer with jurisdiction to issue notice under section 148 of the Act.

The Tribunal noted that the text of the reasons recorded proved that virtually there had been no application of mind by the Assessing officer so as to form requisite satisfaction that any income has escaped assessment. Reasons did not reveal that the AO had done some exercise by way of any enquiry having been conducted by him before arriving at the satisfaction for escapement of income.

The Tribunal opined that the reasons recorded were his conclusions, leaving the reader to guess for the material on basis of which the belief of escapement is founded. The reasons were instead of being reasons to believe were reasons to suspect.

Investment need not necessarily come from the income

The Tribunal pointed out that the investment need not necessarily come from the income. It might be out of income exempt from tax, past savings, loans, gifts, liquidation of investment or sale of another property etc. Notice under section 148 cant be issued for verification of information, but the jurisdictional satisfaction of the essential requirement has to be shown that there has to be reason to believe that there was income chargeable to tax.

There must be direct nexus between material and belief of escapement

According to the Tribunal, the reasons recorded by the Assessing officer should speak his mind and the basis for coming to conclusion that investment had been sourced from income, which should have been disclosed and had not been shown therefore, there was escapement of income. There must be direct nexus between the material and belief of escapement. This mental exercise must be self-evident from the reasons recorded. Reasons must be self-speaking and self-defending.

The Tribunal was of the view that in the instant case, the purported reasons did not show any such exercise by the Assessing officer and hence we have no hesitation in holding that the learned Assessing officer had exceed his authority in wrongly acquiring the jurisdiction in the matter.

Accordingly, the Tribunal held that the reasons recorded by the Assessing officer, were no reasons in the eye of law for assuming jurisdiction in this case.

Thus the Tribunal allowed the appeal and quashed the assessment order being void-ab-intio.

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