High Court Quashes Income Tax Reopening Order, Directs Fresh Consideration of Objections

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Case Name

Chetan Engineers vs. Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 17702 of 2018

Date: 17th March 2021

Key Takeaways

• Proper Procedure Required: The court emphasized that when reopening an assessment under Section 148 of the Income Tax Act, the AO must provide clear reasons and meaningfully address any objections raised by the assessee.
• Speaking Order Needed: The AO’s order disposing of objections must show application of mind and cannot be a mere formality.
• Remand for Fresh Consideration: The court set aside the AO’s order and directed a fresh decision on the assessee’s objections, reinforcing the importance of procedural fairness in tax matters.
• No Opinion on Merits: The court did not comment on the merits of the tax dispute itself, focusing solely on the procedural lapse.

Issue

Did the Assessing Officer fail to properly consider and address the assessee’s objections before proceeding with the reassessment under Section 148 of the Income Tax Act, 1961?

Facts

• Parties: Chetan Engineers (the assessee) vs. Assistant Commissioner of Income Tax (the respondent).
• Assessment Year: 2012-13.
• Original Assessment: The assessee filed their return, which was scrutinized, and an order under Section 143(3) was passed.
• Reopening: Later, the AO issued a notice under Section 148, seeking to reopen the assessment, alleging that certain creditor liabilities written off by the assessee were not properly offered for taxation.
• Objections: The assessee objected to the reopening, arguing that the set-off of certain deposits (claimed to be capital in nature) against liabilities was proper.
• AO’s Response: The AO overruled the objections with a brief order.
• Writ Petition: Dissatisfied, the assessee approached the High Court, arguing that their objections were not meaningfully considered.

Arguments

Petitioner (Chetan Engineers)

• The AO did not provide a reasoned or meaningful order addressing their objections.
• The reopening was beyond four years and followed a scrutiny assessment, so higher standards of justification applied.
• The set-off of deposits against liabilities was proper and had been explained.

Respondent (Income Tax Department)

• The AO had reasons to believe that income had escaped assessment due to improper set-off of capital deposits against revenue liabilities.
• The AO followed the procedure by issuing notice and disposing of objections.

Key Legal Precedents & Provisions

• Section 148 of the Income Tax Act, 1961: Deals with the procedure for reopening assessments if income has escaped assessment.
• Section 143(3) of the Income Tax Act, 1961: Relates to scrutiny assessments.
• Section 151(1) of the Income Tax Act, 1961: Requires prior sanction for reopening assessments after a certain period.
• Article 226 of the Constitution of India: Empowers High Courts to issue writs for enforcement of rights.

Note: The judgment does not cite specific case law names but emphasizes the settled legal principle that the AO must pass a “speaking order” when disposing of objections to reopening.

Judgement

• Decision: The High Court quashed the AO’s order disposing of the assessee’s objections and remitted the matter back to the AO for fresh consideration.
• Reasoning: The AO failed to meaningfully consider the objections; the order lacked application of mind and was not a “speaking order.”
• Directions: The AO must reconsider the objections and pass a fresh, reasoned order within four weeks. If the new order is adverse to the assessee, they must be given at least four weeks to seek further legal remedy.
• No Comment on Merits: The court did not decide on the substantive tax issue, focusing only on the procedural aspect.

FAQs

Q1: What was the main reason the court intervened in this case?

A: The court intervened because the AO did not properly consider the assessee’s objections before proceeding with the reassessment. The order lacked detailed reasoning and failed to address the objections meaningfully.

Q2: Does this judgment decide whether the assessee’s tax position was correct?

A: No, the court did not decide on the merits of the tax dispute. It only addressed the procedural fairness of the AO’s order.

Q3: What happens next for the assessee?

A: The AO must reconsider the objections and issue a fresh, reasoned order. If the new order is adverse, the assessee can challenge it further, with at least four weeks to do so.

Q4: What is a “speaking order”?

A: A “speaking order” is an order that clearly explains the reasoning behind the decision, addressing all objections and showing application of mind.

Q5: Why is this case important?

A: It reinforces the requirement for tax authorities to follow due process and provide reasoned decisions, especially when reopening completed assessments.

1. By this writ­ application under Article 226 of the Constitution of

India, the writ­applicant [assessee] has prayed for the following reliefs:­

11(A) be pleased to call for the records of the proceedings, look into

them and be pleased to issue a writ of certiorari or any other

appropriate writ, order or direction quashing the impugned 148 notice

at Annexure­G and the order disposing the objections at Annexure­N.

(B) be pleased to issue a writ of mandamus or any other appropriate

writ, order or direction asking the respondent not to proceed further in

pursuance of section 148 notice at Annexure­G and the order rejecting

the objections at Annexure­N.

(C) pending the hearing and final disposal of this application, be

pleased to stay further proceedings in pursuance of section 148 notice

at Annexure­G.

(D) be pleased to grant any further or other relief as this Hon'ble

Court deems just and proper in the interest of justice, and

(E) be pleased to allow this application with cost against the

respondent.

2. This is a case of reopening for the Assessment Year 2012­13

beyond the period of 04 years and that too, in a case of scrutiny

assessment under Section­143(3) of the Income Tax Act, 1961 [for short

'The Act'].

3. The reasons assigned for reopening of the assessment under

Section­147 of the Act read as under:­

“In this case, return of income was filed by the assessee on 26.09.2012

declaring total income of Rs.46,86,470/­. Subsequently case was

selected for scrutiny and order u/s.143(3) had been passed on

24.07.2014, at assessed total income of Rs.61,04,333/­.

Thereafter, on perusal of the records, it was noticed that the assessee

has credited an amount of Rs.2,38,108/­ as balance written off during

the year in the P&L account. During the year the assessee has written

off creditors liabilities, pertaining to Patel Babaldas Virchanddas of

Rs.27,498/­, Ashok Engineering Const. Co. of Rs.7,59,883/­, Barkatali

B Pirani of Rs.2,18,472/­, Amardeep Metal Works of Rs.10,79,086/­,

Ambrish Engineering of Rs.12,59,429/­ and Ami Enterprise of

Rs.11,98,263/­ aggregating to Rs.45,42,632/­. Therefore, the assessee

was required to offer the whole amount of liabilities of Rs.45,42,632/­

for taxation. However, against these liabilities, the assessee has taken

set off, of receivable amount from Daxin Guj. Vij. Co. Deposit of

Rs.23,15,699/­. Retention for Royalty Deposit Jaipur of

Rs.18,82,343/­, Allahabad Bank Jaipur of Rs.70,116/­ and Uno

Motor Car of Rs.36,365/­ aggregating to Rs.43,04,523/­. Thus, net

income of Rs.2,38,108/­ has only been shown in the P&L account for

taxation. Further, the amounts set off from liabilities are actually

deposits made by the assessee which are in the nature of capital

expenditure, hence, cannot be set off against liabilities.

Moreover, an amount can only be written off if it was earlier offered

for taxation as revenue income. It is pertinent to mention here that the

amount of Dakshin Gujarat Vij Company Ltd. of Rs.23,15,699/­ was

not even shown as deposits in the balance sheet of the F.Y. 2010­11.

Thus, it is clear that the same was not offered for taxation in earlier

years as revenue receipts. Therefore, the set off of expenditure which

were capital in nature and did not offer earlier as revenue receipts are

not allowable to be set off from creditor liabilities. This has resulted

into under­assessment in the case of the assessee to the tune of

Rs.43,04,523/­ for A.Y.2012­13.

In view of the above facts the capital expenditure which has been set

off against revenue receipts, are not allowable. The burden of proving

the set­off of capital deposits against revenue income has not been

discharged by the assessee during the course of assessment proceedings

as discussed above. I have, therefore, reason to believe that income to

the extent of capital expenses set off against revenue receipts of

Rs.43,04,523/­ has escaped assessment due to failure on the part of

the assessee to offer the whole of the creditor liabilities written off as

income. I am satisfied that this case is fit for issue of notice u/s.148 of

the Act to assess the unexplained income which has escaped assessment

for A.Y. 2012­13. Accordingly, notice u/s.148 of the Act may be issued

subject to prior sanction of the Pr. CIT u/s.151(1) of the I.T. Act.”

4. The assessee lodged his objections to the afore­said reasons vide

communication dated 18th October 2018.

5. The objections raised by the assessee came to be overruled by the

Assessing Officer vide order dated 5th November 2018.

6. Being dissatisfied with the impugned notice of reopening, the

writ­applicant is here before this Court with the present writ­application.

7. We have heard Mr. Manish Shah, the learned counsel appearing

for the writ­applicant and Mrs. Mauna Bhatt, the learned senior standing

counsel assisted by Mr. Karan Sanghani, the learned counsel appearing

for the revenue.

8. Mr. Shah, the learned counsel has raised manifold contentions to

make good his case that the impugned notice of reopening is not

sustainable in law. However, we have noticed something which in our

opinion should not be overlooked. It is a settled position of law that if

the Assessing Officer intends to reopen the assessment, he is obliged to

assign reasons for the same. Once such reasons are assigned, the

assessee has a right to lodge his objections to the same. Once the

objections are lodged, it is obligatory for the Assessing Officer to take

such objections into consideration and pass a speaking order. When we

say speaking order, it means a meaningful order dealing with the

objections raised by the assessee. The exercise which the Assessing

Officer is supposed to undertake while dealing with the objections raised

by the assessee is not an empty formality. The order disposing of the

objections should reflect application of mind.

9. In the afore­said context, we may only say that in the case on

hand, none of the objections raised by the assessee could be said to have

been dully considered by the Assessing Officer in a meaningful manner.

10. In such circumstances referred to above, we are of the view that

we should quash and set aside the order disposing of the objections and

remit the matter to the Assessing Officer for fresh consideration of the

objections at his end.

11. In view of the above, this writ­application succeeds in part. The

order disposing of the objections filed by the assessee dated 5th October,

2018, Annexure­N to this petition Page­93 is hereby quashed and set

aside and the matter is remitted to the Assessing Officer. The Assessing

Officer shall take into consideration the objections raised by the assessee

and pass a fresh speaking order in accordance with law.

12. Let this exercise be undertaken within a period of four weeks from

the date of the receipt of this order. We may clarify that we have

otherwise not expressed any opinion on the merits of the case and we

should otherwise also not do so as we are remitting the matter to the

Assessing Officer.

In the event, if the order that the Assessing Officer may pass a

fresh, is adverse in any manner to the assessee, then it shall be open for

him to challenge the same before the appropriate forum in accordance

with law. However, in the event, if the order is adverse, then atleast a

period of 04 weeks shall be granted to the assessee to take recourse of

the remedy available to him in law.