ITAT Mumbai has summarized relevant provisions of Income Tax Act, 1961 related to reopening and reframing of reassessment u/s 147 which require that Assessing Officer mandatorily comply in a step-wise manner for valid assumption of jurisdiction.

Case Details:
ITA No. 2910/Mum/2013, AY: 2006-07
Motilal R. Todi (Appellant) vs. ACIT (Respondent)
Date of Order: 22-09-2015

In this case, the assessee challenged the reopening as bad in law. It was submitted that the Reasons have been recorded without there being any fresh tangible material coming into the possession of the AO and that the  AO has recorded the Reasons on the basis of same set of material and records which were available at the time of framing of original assessment u/s 143(3).

Held:
The ITAT held that reopening done by AO in the absence of fresh tangible material was invalid and bad in law and accordingly re-assessment order framed in pursuance to invalid reopening was considered as illegal and quashed

The relevant excerpts from the judgment are as under:

The provisions of section 147 have been enshrined in the statute with a view to enable the AO to assess the escaped income. For this purpose, the AO has been conferred with the requisite powers under the law to reopen an already concluded assessment. On the other hand, the Constitution of our country has attached great sanctity to the concept of finality of litigation. Thus, by making suitable provisions at appropriate places in the statute itself, legislature has ensured that sword of litigation should not be kept hanging on the heads of the litigating parties, be it the Government or the Citizens. That’s why, strict provisions with regard to assumption of jurisdiction, especially in cases of already concluded assessments, have been kept on the statute.

In the Income Tax Act, the provisions of section 147 to 151 of the Act deal with the issues of reopening of the assessment and framing of the re-assessment order by the AO. In these provisions, on the one hand, requisite powers have been given to the AO to carry out the task of bringing to tax the escaped income, but simultaneously, on the other hand, certain fetters have been provided within the frame work of these provisions to ensure that these provisions are used only in deserving cases and no undue hardship is caused to the taxpayers by reopening their cases, after lapse of so many years. These provisions deal with the issues of determining the nature, scope of powers and obligations assigned by the legislature to the AO with regard to assumption of jurisdiction by the AO, for reopening of the case and for making the assessment of the reopened case. Various courts have held that since these provisions deal with the jurisdictional issues, these have to be followed strictly and applied literally, by the officers for reopening of the assessment and for framing the re-assessment orders. The compliance of the mandatory conditions has to be made by the AO at various stages, as prescribed in these provisions. The compliance of these mandatory conditions has been integrated in these provisions, in a step-wise manner. Many courts of our country have explained, in various cases, significance of these statutory requirements, time to time.

Thus, taking help from these judgments, relevant provisions of law, fixing obligations upon the AO for making mandatory compliances, in a step-wise manner, for valid assumption of jurisdiction for reopening and reframing of reassessment order, can be summarized as under:

(i) Availability of the new tangible material indicating escaped income of the assessee, which should have come into possession of the AO, after the passing of original assessment order, whether u/s 143(3) or 143(1)

(ii) Recording of the ‘Reasons’ by the AO: ‘Reasons’ recorded should not be based upon the change of opinion of the Assessing Officer. ‘Reasons’ should be such that any person of ordinary prudence should be in a position to make a belief about escapement of income on the basis of facts narrated and material referred to, in the ‘Reasons’ recorded. The ‘Reasons’ should show that, there is rational nexus and cause & effect relationship between the material sought be relied upon in the Reasons and belief sought to be formed by the AO about escapement of income.

(iii) In case; reopening is sought to be done by the AO after expiry of four years from the end of the relevant assessment year and the original assessment was framed u/s 143(3) then reasons can be recorded only if there was failure on the part of the assessee in disclosure of material of facts, as has been envisaged in first proviso to section 147.

(iv) Before issuing notice u/s 148, the AO has to obtain, on the reasons recorded by him, sanction for reopening of the case, from the competent authority as envisaged u/s 151 viz. Additional Commissioner or the Commissioner of Income Tax, as the case may be. Before granting its sanction, the sanctioning authority is required to record its satisfaction based upon its independent application of mind, making out a case that as per the facts narrated and material referred to in the ‘Reasons’ recorded by the AO, a belief can be formed about escapement of income and case sought to be reopened is a fit case for reopening u/s 147.

(v) After obtaining the sanction, the AO is required to issue and serve notice u/s 148 upon the assessee, within the time limit as prescribed u/s 149, to enable him to assume jurisdiction to reopen the assessment.

(vi) The assessee is required to file to return of income, in response to notice u/s 148 and may request for the copy of reasons.

(vii) The AO is bound, as per law, to provide a certified and verbatim copy of Reasons to the assessee.

(viii) The assessee may file its objections before the AO, to the Reasons recorded, if any.

(ix) In pursuance to judgment of Hon’ble Supreme Court in the case of GKN Driveshafts 259 ITR 19 (SC), the AO is obliged to dispose of these objections and intimate the same to the assessee, before proceeding further with the reassessment proceedings.

(x) Thereafter, the AO is obliged under the law to issue and serve notice u/s 143(2) to enable him to make assessment of the return filed by the assessee in response to notice issued under section 148.

(xi) Framing of the re-assessment order by the AO u/s 147/143(3) after providing adequate opportunity of hearing to the assessee and considering replies and evidences of the assessee, and all other applicable provisions of the Act.

The aforesaid compliances have to be made by the AO u/s 147 to 151 of Income Tax Act, 1961 read with other relevant provisions of the Act, in a step-wise and chronological manner. Therefore, validity of the reopening proceedings initiated by the AO, can be examined in this step-wise or chronological manner only.

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