Reopening for cash deposits for non response to notice u/s 133(6) is illegal where assessment was completed u/s 143(3)/147 and 4 years have lapsed.
Soon after the demonetization, the Income Tax Department (‘Department’) had launched a scheme called “operation Clean money” for online verification of cash deposits in bank by various assessees.
Under the scheme, the assessee were required to submit an online response to the cash deposits in its bank account as appearing in his e-filing window after logging to PAN holder’s account at income tax e-filing website. A detailed SOP/user guide and help desk was also created to assist taxpayers in this regard.
Initially, the tax payers were required to submit their e-response within 10 days expiring on 10th February, 2017. However the deadline was later extended by 5 days to 15th February, 2017.
Apart from the above, the Department for the verification of AIR/CIB information, have issued numerous notices u/s 133(6) of the Income tax Act, 1961 (‘the Act’) calling for information related to the source of the cash deposits made in the bank account of the assessee. CBDT had also issued Instruction No. 4/2017 on the subject of issue of notice u/s 133(6) for verification of cash deposits under operation Clean money.
In several cases, where the assessee had failed to submit an online response under operation Clean money or in response to the notice u/s 133(6), reassessment proceedings u/s 147 for re-opening of the case has been initiated by issue of notice u/s 148 of the Act.
Though, even in cases where no assessment was completed except summary assessment u/s 143(1), the Assessing Officer is required to form a bona fide belief that income has escaped assessment, in particular, in cases where an assessment u/s 143(3) or 147 has been previously completed, non response under operation Clean money or non response to notice issued u/s 133(6) can not be resorted to as a basis for initiation of re-assessment/reopening u/s 147 after the expiry of four years from the end of the relevant assessment year.
In other words, as provided in the first proviso to section 147, if the following dual conditions are fulfilled, no reopening can be done on the basis of non-response to operation Clean money or notice u/s 133(6).
- Where an assessment has already been made u/s 143(3) or 147 for the relevant assessment year; and
- Four years have elapsed since the expiry of the relevant assessment year.
The reason why in the cases covered by the above conditions, no reopening can be done on the basis of non-response to operation Clean money or notice u/s 133(6) is that as per the said first proviso in such cases, no action can be taken under section 147 unless the alleged escapement of the income is by reason of the failure on the part of the assessee to disclose fully and truly, during the assessment proceedings already completed, all the material facts necessary for its assessment for that assessment year.
Thus what follows is that in such cases, the primary and jurisdictional requirement being the mandate of the said proviso to section 147.
Therefore, the deciding question would be whether the assessee, during the course of the previous assessment proceedings completed u/s 143(3)/147 for the relevant AY had made a full and complete disclosure of its financial affairs and in particular with regard to its bank accounts (including the one in which the cash was deposited), which were further supported by the financial statements and corroborated by its return of income. And if the answer to the above question is in the affirmative, unless, the reasons recorded gives any finding to the contrary with reference to any cogent material to suggest that any facts or information previously disclosed by the assessee during the assessment proceedings u/s 143(3)/147 has been subsequently found to be false or untrue, no reopening can be initiated on the basis of notice u/s 133(6) or non-response to operation Clean money.
Therefore, if the reasons recorded for the initiation of the reassessment proceedings are entirely based on non response to the notice u/s 133(6)/operation Clean money, then the belief of the Assessing Officer for the initiation of the reassessment proceedings would be wrongly founded on the failure of the assessee to respond to the notice u/s 133(6)/Operation Clean money instead of the any material that is available to the Assessing Officer in the form of return of income, audit report, audited financial statements and the records of the assessment proceedings u/s 143(3)
Therefore, the initiation of the re-assessment proceedings by issuance of notice u/s 148, without recording a clear finding that the escapement of income is due to the failure of the assessee to disclose fully and truly all material facts necessary for its assessment during the assessment proceedings completed u/s 143(3)/147 for the relevant assessment year would be illegal and void ab initio
Apart from the above ground, the notice u/s 147 which is solely based on non-response to the notice u/s 133(6)/ Operation Clean money and does make out a case with materials that such cash deposits or bank accounts are not forming part of the return of income, financial statements etc. then the reassessment proceeding can be challenged as mere change of mind and arising out of suspicion and initiated merely for verification of certain documents or facts, which is not contemplated in the Act. It is interesting to note that in many notices issued u/s 133(6) the subject line itself mentions that the information has been called for for the “verification of AIR/CIB information” as under;
As said earlier, CBDT had also issued Instruction No. 4/2017 on the subject of issue of notice u/s 133(6) for verification of cash deposits under operation Clean money. Therefore reassessment proceedings initiated on the basis of mere non response to such notices meant for verification would be without jurisdiction. It has been judicially held in numerous cases that mere cash deposits in bank account do not suggest escapement of income.
There is one more aspect that should be carefully looked into. As per the second proviso to section 133, the power to call for information or to make inquiry, in a case where no proceeding is pending, shall not be exercised except by or with the approval of income tax authorities of the rank of Principal Director or Director or Principal Commissioner of Commissioner. The section has been mellowed down but with effect from AY 2017-18
However, it has been observed that in many cases the notice u/s 133(6) has been issued by an Assessing Officer/Income tax Authority of a rank lower than the prescribed one. Moreover, such notices also do not specify that they have been issued with prior approval of the Income Tax authorities with the rank as prescribed in second proviso to section 133.
Therefore depending on the facts of the case, the notice issued u/s 133(6) itself can be challenged as without jurisdiction and thus void ab initio.
Procedure to be adopted on receipt of such notice u/s 148 on the basis of non response to notice u/s 133(6)/Operation Clean Money
The proper course of action under these circumstances is to first lodge a Preliminary objection with the Assessing officer requesting him/her to dispose them before embarking into the reassessment proceedings.
The procedure to be adopted in such cases has been laid down by Hon’ble the Supreme Court in the case of GKN DRIVESHAFTS (INDIA) LTD. where while dealing with the preliminary objection raised with respect to notices issued under Sections 148 and 143(2) of the Act, their Lordships had laid out the procedure requiring that the assessee should first lodge preliminary objections before the Assessing Officer who is bound to decide the preliminary objections by passing a SPEAKING ORDER
The Hon’ble Gujarat High Court in the case of Garden Finance Limited vs ACIT and later in the case of Arvind Mills Ltd. vs. ACW while following the decision of the Hon’ble Supreme Court in of GKN DRIVESHAFTS (INDIA) LTD. concluded that once the Apex Court stated that the AO was bound to dispose of the objections by passing a speaking order, it was not open to the authorities to contend that in the absence of any provision in the Act, the authorities could not have passed a speaking order.
Like-wise, Hon’ble the Delhi High Court in the case of Delhi Tourism & Transport Development Corporation Ltd. vs. ACIT [2004] 141 Taxman 361 (Delhi) and in the case of M/S Keshav Shares & Stocks Limited vs ITO (2008), while relying upon the aforesaid decision in GKN Drivesharfts (India) Ltd. has also opined that the procedure laid down by the Hon’ble Apex Court must be observed by passing a speaking order before passing the assessment order.
In a recent judgment ITAT Delhi has held that the jurisdictional issue could not be said to be a general ground requiring no adjudication and whenever the jurisdiction of an authority to pass the order is questioned then the foundational fact questioned is to be first decided as per law on facts applicable to it.
In a yet recent judgment the ITAT Delhi has held that when service of notice is challenged by a party then the onus to demonstrate that notice was issued in accordance with law is on the authority whose jurisdiction in the absence of notice is under challenge.
Remedy avaiable to the assessee if AO do not dispose off Preliminary Objections by a Speaking Order or the order so passed is against the assessee:
As clarified by the Hon’ble Gujarat High Court in the case of Garden Finance Limited vs ACIT the rigour of availing of the alternative remedy before the Assessing Officer for objecting to the re-assessment notice under Section 148 has been considerably softened by the Apex Court in the GKN Driveshaft case. by requiring the assessee first to lodge preliminary objections before the Assessing Officer who is bound to decide the preliminary objections to issuance of the re-assessment notice by passing a SPEAKING ORDER and, therefore, if such AO does not firt dispose off such objections or the order passed on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the re-assessment proceedings which would have entailed the liability to pay tax and interest on re-assessment and also to go through the gamut of appeal, second appeal before Income-tax Appellate Tribunal and then reference/tax appeal to the High Court.
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