Court Slams Casual Reopening of Tax Assessments, Demands Stricter Adherence to Law

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Case Name:

The Principal Commissioner of Income Tax & Anr Vs Samcor Glass Ltd. & Anr. (High Court of Delhi)

ITA 768/2015 

Date: 12th October 2015

Key Takeaways:

1. Reopening of assessments beyond four years requires clear evidence of failure to disclose material facts.

2. Mechanical and casual reopening of assessments leads to unnecessary harassment of assessees.

3. The court directed the Revenue to issue strict instructions to Assessing Officers (AOs) for compliance with legal requirements.

4. AOs must properly address objections raised by assessees during reassessment proceedings.

Issue: 

Was the reopening of the tax assessment under Sections 147 (of Income Tax Act, 1961)/148 of the Income Tax Act, 1961 valid in these cases?

Facts:

1. The case involves two different assessees, but the issue is similar for both.

2. The Revenue appealed against an ITAT order dated February 17, 2015.

3. The reopening of assessments was done beyond four years after the original assessment year.

4. In at least one case, the assessee had already paid tax on the disputed amount (interest on fixed deposits).

Arguments:

Revenue's Argument:

- The assessment should be reopened as there was reason to believe income had escaped assessment.

Assessees' Arguments:

- The reopening didn't satisfy basic legal requirements.

- There was no failure to disclose material facts.

- In one case, tax had already been paid on the disputed amount.

Key Legal Precedents:

1. CIT v. Multiplex Trading & Industrial Co. Ltd. (ITA No. 356 of 2013, decided on September 22, 2015): Established that for reopening beyond four years, the assessee's failure to disclose material facts must be concluded with certainty.

2. GKN Driveshafts (India) Ltd v. Income Tax Officer (2003) 259 ITR 19 (SC): Set guidelines for disposing of objections raised by assessees to reopening of assessments.

Judgement:

1. The High Court dismissed the Revenue's appeals.

2. The court found that the reasons for reopening didn't satisfy basic legal requirements:

  a) They didn't clearly state the assessee's failure to disclose material facts.

  b) The AO failed to address the assessee's objection about already paying tax on the disputed amount.

3. The court directed the Principal Chief Commissioner of Income Tax to issue instructions to AOs for strict adherence to legal requirements in reopening cases.

4. AOs must ensure compliance with each legal requirement and properly dispose of assessees' objections.

FAQs:

Q1: Why did the court criticize the Revenue's approach to reopening assessments?

A: The court found that assessments were being reopened mechanically and casually, causing unnecessary harassment to assessees. This approach didn't adhere to the legal requirements established by previous Supreme Court and High Court decisions.

Q2: What instructions did the court give to the Revenue?

A: The court directed the Principal Chief Commissioner of Income Tax to instruct Assessing Officers to strictly follow the law regarding Sections 147/148 of the Income Tax Act. They must ensure that reopening orders clearly record compliance with all legal requirements and properly address assessees' objections.

Q3: What is the significance of the four-year period mentioned in the judgment?

A: For reopening assessments beyond four years from the end of the relevant assessment year, there must be clear evidence that the assessee failed to disclose material facts fully and truly. This requirement is stricter than for cases within the four-year period.

Q4: Did the court impose any penalties on the Revenue for filing these appeals?

A: While the court considered imposing heavy costs on the Revenue for filing "frivolous appeals," it ultimately decided not to do so since the appeals were dismissed ex parte (without the other party present).

CM APPL No. 22567 of 2015 (for condonation of delay) in ITA No. 768 of 2015

CM APPL No. 22568 of 2015 (for condonation of delay) in ITA No. 769 of 2015

1. For the reasons stated in the applications, the delay in refiling the appeals is condoned.

2. The applications are disposed of.

ITA No. 768 of 2015 and ITA No. 769/2015

3. These appeals by the Revenue under Section 260A (of Income Tax Act, 1961) („Act‟) are directed against a common order dated 17th February 2015 passed by the Income Tax Appellate Tribunal („ITAT‟) in ITA Nos. 4135/Del/2010 and 4134/Del/2010 for the Assessment Year („AY‟) 2002- 03.

4. Although the Assessees in both the appeals are different, the issue involved in both cases is similar, i.e., whether the reopening of the assessment under Section 147 (of Income Tax Act, 1961)/148 of the Act is valid?

5. Apart from the fact that the impugned order of the ITAT suffers from no legal infirmity, the Court is of the view that on the face of it, the reasons for reopening of the assessment in both the cases did not satisfy the basic requirement of the law, in at least in two aspects. One was that the reopening was of assessment beyond four years after the AY for which the original assessment was framed and yet the reasons for reopening did not categorically state that there was a failure by the Assessees to disclose any material particulars on the basis of which there were reasons to believe that the income has escaped assessment. This Court has recently, in a decision dated 22nd September 2015 in ITA No. 356 of 2013 (CIT v. Multiplex Trading & Industrial Co. Ltd.), clearly stated in cases where reopening of assessment is beyond four years from the end of the relevant assessment year “the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty.”

6. Secondly, the Court finds that at least in respect of one of the issues, viz.,payment of interest on fixed deposits, the Assessees drew the attention of the Assessing Officer („AO‟) to the fact that the amount has already been offered to tax and tax had been paid and yet, in the order disposing of the objections, the AO is completely silent as regards this objection.

7. The Court is of the view that notwithstanding several decisions of the Supreme Court as well as this Court clearly enunciating the legal position under Section 147 (of Income Tax Act, 1961)/148 of the Act, the reopening of assessment in cases like the one on hand give the impression that reopening of assessment is being done mechanically and casually resulting in unnecessary harassment of the Assessee.

8. The Court would have been inclined to impose heavy costs on the Revenue for filing such frivolous appeals but declines to do so since the appeals are being dismissed ex parte. However, the Court directs the Revenue through the Principal Chief Commissioner of Income Tax (Pr CIT) to issue instructions to the AOs to strictly adhere to the law explained in various decisions of the Supreme Court and the High Court in regard to Sections 147/148 of the Act and make it mandatory for them to ensure that an order for reopening of an assessment clearly records the compliance with each of the legal requirements. Secondly, the AOs must be directed to strictly comply with the law explained by the Supreme Court in GKN Driveshafts (India) Ltd v. Income Tax Officer (2003) 259 ITR 19 (SC) as regards the disposal of the objections raised by the Assessee to the reopening of the assessment.

9. The appeals are dismissed with above observations.

10. A certified copy of this order be delivered to the Pr CIT concerned for compliance.

S.MURALIDHAR, J

VIBHU BAKHRU, J

OCTOBER 12, 2015