Individual wins as income tax department failed to furnish the recorded reasons for reopening the assessment.

Case Name:

Ashraf Chitalwala v. Deputy Commissioner of Income Tax & Ors. (High Court of Bombay)

Key Takeaways:

1. The court held that the income tax department failed to provide the recorded reasons for reopening the assessment, as mandated by law, despite the petitioner's requests.

2. The petitioner had fully disclosed all material facts necessary for the original assessment, and the reopening was based on a mere change of opinion, which is impermissible.

3. The court emphasized the sanctity of the original assessment order and the strict conditions required for reopening an assessment under the Income Tax Act.

Issue:

Whether the income tax department's notice to reopen the petitioner's assessment for the financial year 2015-16 was valid and justified under the provisions of the Income Tax Act.

Facts:

1. The petitioner, an individual, filed his original and revised returns for the assessment year 2015-16.

2. The income tax department issued a scrutiny notice, and the petitioner provided all required details regarding the sale and purchase of immovable properties.

3. An assessment order was passed on May 25, 2017, after considering the petitioner's submissions.

4. On March 26, 2021, the department issued a notice under Section 148 (of Income Tax Act, 1961) to reopen the assessment for the same year.

5. The petitioner requested the reasons for reopening but did not receive them, despite multiple requests.

6. The department disposed of the petitioner's objections, passed an assessment order, and issued a penalty notice, all of which were challenged by the petitioner.

Arguments:

Petitioner's Arguments:

1. There was no failure to disclose material facts by the petitioner.

2. The reassessment was based on a mere change of opinion, which is impermissible.

3. There was no new tangible material to justify reopening the assessment.

4. Even on merits, there was no income that had escaped assessment.

Revenue's Arguments:

1. The petitioner's request for reasons went unnoticed due to an oversight.

2. The petitioner did not raise the issue of non-receipt of reasons.

3. The petitioner did not make a full and true disclosure, justifying reopening.

4. The reassessment was initiated after due approval and within the extended time limit.

Key Legal Precedents:

1. GKN Driveshafts (India) Ltd. v. D.C.I.T.: The reasons recorded for reopening an assessment must be conveyed to the assessee, who then has an opportunity to file objections.

2. Gemini Leather Stores v. ITO: Failure of the assessing officer to make an inquiry does not indicate any failure or omission to disclose facts by the assessee if any income chargeable to tax has escaped assessment.

3. Aroni Commercials Ltd. v. Deputy Commissioner of Income Tax: The power to reassess cannot be exercised based on a mere change of opinion if all facts are available on record.

4. Ananta (P) Ltd. v. Deputy Commissioner of Income Tax: When primary facts are fully disclosed, the assessing officer cannot reopen the assessment based on a change of opinion.

Judgment:

The court quashed the reassessment notice, order disposing objections, assessment order, and penalty notice, ruling in favor of the petitioner. The key reasons were:

1. The petitioner had fully disclosed all material facts necessary for the original assessment, including details of immovable property transactions and deductions claimed under Sections 54 (of Income Tax Act, 1961) and 54(F) (of Income Tax Act, 1961).

2. The reopening of the assessment was based on a mere change of opinion by the assessing officer, which is impermissible in law.

3. The income tax department failed to furnish the recorded reasons for reopening the assessment to the petitioner, despite his requests, violating the mandatory requirement under the law.

4. There was no new tangible material or information that justified reopening the assessment.

FAQs:

Q1: What is the significance of the court's decision?

A1: The court's decision upholds the sanctity of the original assessment order and emphasizes the strict conditions required for reopening an assessment under the Income Tax Act. It also reinforces the principle that a reassessment cannot be based on a mere change of opinion by the assessing officer.

Q2: What is the impact of the court's ruling on the income tax department?

A2: The ruling highlights the importance of following due process and providing recorded reasons to the assessee when reopening an assessment. It also serves as a reminder that reassessments cannot be initiated without proper justification and new tangible material.

Q3: Can the income tax department appeal against this decision?

A3: Yes, the income tax department can potentially appeal against this decision in a higher court if they believe there are grounds to challenge the ruling.

Q4: What should assessees do if they receive a reassessment notice?

A4: Assessees should carefully review the reasons provided for reopening the assessment and promptly seek legal advice to determine the validity of the notice and the appropriate course of action, including filing objections or challenging the notice in court, if necessary.

Q5: Does this decision set a precedent for future cases involving reassessment notices?

A5: While this decision is specific to the facts of this case, it reinforces the existing legal principles and precedents regarding the conditions for reopening assessments under the Income Tax Act. It may be cited as a persuasive authority in similar cases involving reassessment notices.

1. Rule. Rule is made returnable forthwith. Heard parties by consent.

2. The Petitioner has assailed notice dated 26th March 2021 issued by the Deputy Commissioner of Income Tax under section 148 (of Income Tax Act, 1961) (“the Act”) seeking to reopen the assessment for the assessment year 2015-16, order dated 24th March 2022 disposing the objections of the Petitioner and the assessment order dated 24th March 2022 under Section 147 (of Income Tax Act, 1961) read with Section 143(3) (of Income Tax Act, 1961) read with Section 144(B) (of Income Tax Act, 1961). Petitioner also seeks an order restraining the Respondents from taking any action pursuant to the assailed orders.

3. The facts of the case in brief are as follows:

The Assessment Year (‘AY’) under consideration is 2015-16. The Petitioner an individual resident of India filed his original return of income on 27th September 2015 and later a revised return on 7th December 2015. A notice dated 1st February 2017 issued under Section 143(2) (of Income Tax Act, 1961) initiated a scrutiny assessment. A specific query was raised regarding details of sale and purchase transactions of immovable property in the Assessment Year under consideration. By reply dated 13th February 2017 and 22nd February 2017, the Petitioner furnished all required details. Assessment order dated 25th May 2017 was passed after considering the submissions of the Petitioner.

4. A notice dated 26th March 2021 under section 148 (of Income Tax Act, 1961) was issued to reopen the AY 2015-16 assessment. Another Notice under Section 142(1) (of Income Tax Act, 1961) was also issued requiring the Petitioner to file return of income in response to notice under Section 148 (of Income Tax Act, 1961). The Petitioner filed the return of his income by replies dated 31st July 2021 and 2nd August 2021. The Petitioner sought the reasons recorded by the AO to issue notice under Section 148 (of Income Tax Act, 1961) but it is the case of the Petitioner that a copy of the recorded reasons has not been furnished to him till date. Once again by notice of 12th December 2021 followed by a reminder dated 24th January 2022, the Petitioner was specifically asked to explain the claim of deduction under Section 54(F) (of Income Tax Act, 1961). The Petitioner brought to the attention of the AO that he had already furnished the details but resubmitted the details required and once again placed on record that the reasons recorded have not been communicated to him despite innumerable requests. The Petitioner was required to show cause as to why the claim of deduction under Section 54(F) (of Income Tax Act, 1961) should not be disallowed by a notice in the form of a Draft assessment order of 16th March 2022.

5. Despite detailed submissions given by the Petitioner, the impugned order dated 24th March 2022 was passed by the Respondent No.4 disposing his objections in the proposed Assessment. The assessment order dated 24th March 2022 as well as notice for levy of penalty dated 24th March 2022 were also issued. All these are impugned in this Petition.

6. Mr. Gandhi learned Counsel appearing for the Petitioner assails the orders mainly on four grounds:-

i. There is no failure on the part of the Petitioner to disclose truly and fully material facts;

ii. The re-assessment is purely on the basis of change of opinion;

iii. There is no new tangible material; and

iv. Even on merits, there is no income that has escaped assessment.

7. At the very outset, Mr. Gandhi places reliance on the decision of the Supreme Court in the matter of GKN Driveshafts (India) Ltd. vD.C.I.T.1 to canvas his case that the reasons recorded are to be conveyed to the assessee, on the basis of which he gets an opportunity to file his objections. He reiterates the chronology of events to indicate the lapse of the AO in complying with the mandate of law. Thus, the Petitioner argues that having complied with the notice under Section 148 (of Income Tax Act, 1961), it was imperative on the AO to provide reasons and the Respondents are in gross violation of law as laid down by the Apex Court.

8. It is also argued on behalf of the Petitioner that the impugned notice dated 26th March 2021 under Section 148 (of Income Tax Act, 1961) was issued after the expiry of four years from the end of the relevant assessment year and resultantly the first proviso to Section 147 (of Income Tax Act, 1961) shall apply. Mr. Gandhi submits that there was no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment year under consideration. The reopening of assessment is simply on the basis of verified facts on record and there is no allegation of any failure of the Petitioner.

9. Thirdly, Mr. Gandhi also brings to our notice the Petitioner's reply to the notice which contains substantive information including a detailed computation of capital gains, deductions claimed under Sections 54 (of Income Tax Act, 1961) and 54(F) (of Income Tax Act, 1961), details regarding ownership of various properties of the Petitioner and details of transfer.

Considering this, there can be no allegation of failure to disclose facts by the Petitioner. Reliance has been placed on the decision of the Apex Court in the matter of Gemini Leather Stores v. ITO 2 to buttress the contention that failure of the assessing officer to make an enquiry does not indicate any failure/omission to disclose facts by the Petitioner if any income chargeable to tax has escaped assessment. Mr. Gandhi further says that since the Petitioner had furnished all the required details and answered specific queries as held in Aroni Commercials Ltd. v Deputy Commissioner of Income Tax 2(1), Mumbai & Anr., 3the AO had clearly applied his mind while computing the capital gains and deductions under Sections 54 (of Income Tax Act, 1961) and 54(F) (of Income Tax Act, 1961) after forming a view. Hence, this is a clear case of change of opinion which is impermissible in law. He further reiterates that there is no new tangible material on the basis of which the assessment can be reopened.

10. Ms Gokhale, learned Counsel appearing for the Revenue contests the Petitioner's arguments on the grounds that, firstly, the request of the Petitioner was made through Income Tax Business Application (“ITBA”) order sheet noting which went unnoticed by the AO by oversight;

Secondly, the Petitioner has never raised the issue of nonreceipt of reasons and has placed reliance on the decision of the Apex Court in the matter of Union of India v Major General Madan Lal Yadav4 to say that no man can take advantage of his own wrong; thirdly, there is no change of opinion as the assessee had only filed primary details and so long as conditions of Section 147 (of Income Tax Act, 1961) are fulfilled, the AO is free to initiate proceedings. She also places reliance on the judgment in CIT v Kelvinator of India Ltd5.

Thirdly, Ms. Gokhale states that the Petitioner has not made a full and true disclosure. Hence, the AO is well within his rights to reopen the subject assessment;

Fourthly, that the reassessment is reopened as per the relevant provisions of the Act after taking due approval from the Additional Commissioner of Income Tax. The original time-barring date for issue of notice under Section 148 (of Income Tax Act, 1961) for AY 2015-16 being 31st March 2020 stood extended by various Notifications of the Central Board of Direct Taxes (“CBDT”) and hence the sanction has been accorded by the Competent Authority.

11. We have heard both the parties and perused the documents on record. Section 147 (of Income Tax Act, 1961) authorizes the reopening of any assessment of a previous year.6 Section 148 (of Income Tax Act, 1961) contains conditions for reopening assessments, including the limitation period within which notices can be issued.7 Alluding straight away to the decision of the Supreme Court in the GKN Drive Shafts (supra) which clarifies that when a notice under Section 148 (of Income Tax Act, 1961) is issued, the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing the notice. The AO is bound to furnish reasons within a reasonable time. On the receipt of reasons, the notice is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order.

12. In the instant case perusal of letters dated 13th February 2017 and 22nd February 2017, (Exhibits 'B-2' and 'B-3' at page 61/63) clearly show that the Petitioner has furnished substantive information and answered the specific queries raised by the AO in his letter dated 1st February 2017 including detailed information of his properties and the transactions of sale and purchase. Paragraphs 5 and 6 of letter at Exhibit B-3 read as thus:

"5. Assessee, his three brothers and a sister jointly owned two properties – known as 'Chitalwala Building' and 'Rehmat Manzil'. Both these properties were bought by Saifee Burhani Upliftment Trust (SBUT). Working of LTG on sale of these properties is attached as Annexure D of our submission dated 13.02.17. Deed of Conveyance of these two properties are enclosed herewith, marked Annexure F and Annexure G respectively. Assessee and his brothers and sister had inherited these properties on death of their parents. Both properties were originally bought before 01-04-1981. As such valuation as on 01-04-1981 is taken as cost. Valuation Report given by Patwardhan & Associates – Govt Registered Valuers, in respect of both properties is also enclosed herewith, marked Annexure H.

6. Apart from the above two properties (mentioned in para 5), assessee's mother had tenancy right of the third floor in Chitalwala Building. On her demise, rights in tenancy devolved upon her sons and daughter. This tenancy right was surrendered to SBUT for a consideration of Rs.10,35,00,000. Deed of Surrender is enclosed herewith marked Annexure I. There being no cost, entire sale consideration is taxable as LTG. Assessee's share in this is included in his total income. Detailed working of assessee's share and LTG are given in Computation Income Returned already placed on record. Assessee has claimed deduction / exemption u/s 54EC (of Income Tax Act, 1961) and 54F (of Income Tax Act, 1961) as per relevant investment proofs enclosed herewith, marked Annexure C and Annexure D."

13. Based on the information and replies to the specific queries as provided by the Petitioner, the AO passed the assessment order on 25th May 2017. Clause 4 of the assessment order inter alia considers income from 'house property'. The assessment order is clearly passed on the basis of information furnished by the Petitioner including relating to his immovable property. Yet, the AO has issued a notice under Section 148 (of Income Tax Act, 1961) on 26th March 2021 clearly after a period of four years. That being so, the first proviso of Section 147 (of Income Tax Act, 1961) is clearly applicable. The test, therefore, is whether the assessee has disclosed fully and truly all material facts necessary for his assessment for that AY. The contents of the aforementioned letters are sufficient to hold that the Petitioner has disclosed information regarding the transactions of his immovable property and that also in response to specific queries raised during assessment proceedings. In these circumstances the Petitioner has clearly proved his credit worthiness by disclosing the relevant material and the Revenue cannot claim protection of the exception in the first proviso to Section 147 (of Income Tax Act, 1961). The relevant finding in the decision relied upon by the Petitioner in the matter of Gemini Leather Stores (supra) reads as follows:

“……Once all the primary facts are before the Assessing Authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the Assessing Authority what inferences, whether of facts or law, should be drawn.”

From the facts in the present case, it is evident that the AO had within his possession all the primary facts and it was for him to make necessary enquiry and draw proper inferences. Thus, the AO did not do and it is even admitted by the Respondents that the AO failed to appreciate the information provided by the Petitioner by ‘oversight’.

Thus, it cannot be said that the income chargeable to tax for the AY under consideration has escaped assessment by reason of the omission or failure on the part of the Petitioner to disclose fully and truly all material facts. The AO had all the material before him when he made the original assessment.

14. Another ground of objection by the Petitioner is that the assessment cannot be reopened on a mere change of opinion and more particularly, in the absence of any fresh tangible material. The first assessment order is based upon the information and details provided by the Petitioner including material relating to his immovable property and the deductions under Section 54(F) (of Income Tax Act, 1961) have been computed on the basis of the material provided by the Petitioner. Thus, the AO had in his possession all the primary facts and it was for him to make necessary inquiries and draw proper inference as to whether deductions as claimed under Section 54(F) (of Income Tax Act, 1961) were to be allowed or otherwise while working the computations. In a decision of this court in the matter of Ananta (P) Ltd. v Deputy Commissioner of Income Tax, Central Circle 5(3), Mumbai,it has been held as follows:

“16. .When the primary facts necessary for assessment are fully and truly disclosed, the Assessing Officer is not entitled on change of opinion to commence proceedings for reassessment. Even if the Assessing Officer, who passed the assessment order, may have raised too many legal inferences from the facts disclosed, on that account the Assessing Officer, who has decided to reopen assessment, is not competent to reopen assessment proceedings. Where on consideration of material on record, one view is conclusively taken by the Assessing Officer, it would not be open to reopen the assessment based on the very same material with a view to take another view."

15. It will also be useful to reproduce paragraphs 12 and 14 of Aroni Commercials (supra) which reads as under:

“12. Therefore the power to reassess cannot be exercised on the basis of mere change of opinion i.e. if all facts are available on record and a particular opinion is formed, then merely because there is change of opinion on the part of the Assessing Officer notice under Section 147 (of Income Tax Act, 1961)/148 of the Act is not permissible. The powers under Section-147 (of Income Tax Act, 1961)/148 of the Act cannot be exercised to correct errors/mistakes on the part of the Assessing Officer while passing the original order of assessment. There is a sanctity bestowed on an order of assessment and the same can be disturbed by exercise of powers under Sections 147 (of Income Tax Act, 1961)/148 of the Act only on satisfaction of the jurisdictional requirements. Further, the reasons for reopening an assessment has to be tested/examined only on the basis of the reasons recorded at the time of issuing a notice under Section 148 (of Income Tax Act, 1961) seeking to reopen an assessment. These reasons cannot be improved upon and/or supplemented much less substituted by affidavit and /or oral submissions. Moreover, the reasons for reopening an assessment should be that of the Assessing Officer alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the Assessing Officer comes to the reason to believe that income chargeable to tax has escaped assessment can come to him from any source, however, reasons for the reopening has to be only of the Assessing Officer issuing the notice. At the stage of issuing notice under Section 148 (of Income Tax Act, 1961) to reopen a concluded assessment the satisfaction of the Assessing Officer issuing the notice is of primary importance. This satisfaction must be prima facie satisfaction of having a reason to believe that income chargeable to tax has escaped assessment. At the stage of the issuing of the notice under section 148 (of Income Tax Act, 1961) it is not necessary for the Assessing Officer to establish beyond doubt that income indeed has escaped assessment.

14. We find that during the assessment proceedings the petitioner had by a letter dated 9 July 2010 pointed out that they were engaged in the business of financing trading and investement in shares and securities. Further, by a letter dated 8 September 2010 during the course of assessment proceedings on a specific query made by the Assessing Officer, the petitioner has disclosed in detail as to why its profit on sale of investments should not be taxed as business profits but charged to tax under the head capital gain. In support of its contention the petitioner had also relied upon CBDT Circular No.4/2007 dated 15 June 2007. (The reasons for reopening furnished by the Assessing Officer also places reliance upon CBDT Circular dated 15 June 2007). It would therefore, be noticed that the very ground on which the notice dated 28 March 2013 seeks to reopen the assessment for assessment year 2008-09 was considered by the Assessing Officer while originally passing assessment order dated 12 October 2010. This by itself demonstrates the fact that notice dated 28 March 2013 under Section 148 (of Income Tax Act, 1961) seeking to reopen assessment for A.Y.2008-09 is based on mere change of opinion. However, according to Mr. Chhotaray, learned Counsel for the revenue the aforesaid issue now raised has not been considered earlier as the same is not referred to in the assessment order dated 12 October 2010 passed for A.Y.2008-09. We are of the view that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. It is not necessary that an assessment order should contain reference and/or discussion to disclose its satisfaction in respect of the query raised. If an Assessing Officer has to record the consideration bestowed by him on all issues raised by him during the assessment proceedings even where he is satisfied then it would be impossible for the Assessing Officer to complete all the assessments which are required to be scrutinized by him under Section 143(3) (of Income Tax Act, 1961). Moreover, one must not forget that the manner in which an assessment order is to be drafted is the sole domain of the Assessing Officer and it is not open to an assessee to insist that the assessment order must record all the questions raised and the satisfaction in respect thereof of the Assessing Officer. The only requirement is that the Assessing Officer ought to have considered the objection now raised in the grounds for issuing notice under Section 148 (of Income Tax Act, 1961), during the original assessment proceedings. There can be no doubt in the present facts as evidenced by a letter dated 8 September 2012 the very issue of taxability of sale of shares under the head capital gain or the head profits and gains from business was a subject matter of consideration by the Assessing Officer during the original assessment proceedings leading to an order dated 12 October 2010. It would therefore, follow that the reopening of the assessment by impugned notice dated 28 March 2013 is merely on the basis of change of opinion of the Assessing Officer from that held earlier during the course of assessment proceeding leading to the order dated 12 October 2010. This change of opinion does not constitute justification and/or reasons to believe that income chargeable to tax has escaped assessment”

Thus, it can be safely held that the reopening of the assessment order is clearly on the basis of a change of opinion and that too without surfacing of any tangible new information.

16. As noted earlier, a perusal of the communications reveal that there was nothing more to disclose and a person cannot be said to have omitted or failed to disclose information which clearly has been placed before the AO at the time of issuance of the first assessment order. The reliance placed by the Revenue upon the judgment of Major General Madan Lal Sharma (supra) is wholly inapplicable in so far as we have concluded that there was no failure to disclose any information on the part of the Petitioner.

17. The response dated 2nd August 2021 submitted by the Petitioner to the notice dated 16th July 2021 issued under Section 142(1) (of Income Tax Act, 1961) clearly shows that the Petitioner has specifically sought reasons for reopening of the assessment for him to respond to the said notice. However, the ensuing communications of the Respondents do not reveal any such information being furnished to the Petitioner. The only justification offered by the Revenue seems to suggest an oversight of the AO to note the request of the Petitioner. The letter of 24th January 2022 issued on behalf of the Petitioner also reveals the truthfulness in the case of the Petitioner. Information relating to deductions under Section 54(F) (of Income Tax Act, 1961) was clearly provided by the Petitioner despite which no reasons recorded by the AO to justify reopening of the assessment were furnished to the Petitioner. Thereafter, the Draft assessment order in the form of a show cause notice dated 16th March 2022, was issued, which also did not contain any reasons as sought by the Petitioner. The reply of 21st March 2022 on behalf of the Petitioner also reiterates the background and facts of the case. The Petitioner has reiterated his objections of not being furnished any reasons recorded by the AO to reopen the assessment in the said letter. This entire communication trail corroborates the arguments advanced by the Petitioner that the Respondents have failed to comply the mandatory requirement of furnishing the reasons recorded to reopen the assessment, once the Petitioner files his returns pursuant to the notice under Section 148 (of Income Tax Act, 1961). It is settled law that the reasons for reopening an assessment can be tested and examined only on the basis of the reasons recorded at the time of issuing the notice under Section 148 (of Income Tax Act, 1961). The Revenue has not even placed on record any document to suggest that the reasons recorded have been furnished to the Petitioner. On this ground alone the assessment order impugned herein deserves to be quashed.

18. In view of the foregoing, we are satisfied that the Petitioner had fully and truly disclosed all material facts necessary for the purpose of assessment. The AO issued the first assessment order after carefully scrutinizing the material furnished by the Petitioner. The Respondents have failed to furnish any reasons for reopening as mandated by law. There is not even a whisper in the entire communication trail as to what was not disclosed. In our view, thus, this is not a case where assessment should be permitted to be reopened on the reasonable belief that income has escaped assessment on account of failure of the assessee to disclose truly and fully or material information necessary for computation of income.

Consequently, the notice dated 26th March 2021, the order disposing objections dated 24th March 2022, the impugned assessment order and the impugned notice of remand dated 24th March 2022 as well as the impugned show cause notice for levy of penalty dated 24th March 2022 are quashed and set aside.

19. Rule is thus made absolute in terms of prayer clause (a) which reads as follows:

“(a) that this Hon’ble Court may be pleased to issue a Writ of Certiorary or a Writ in the nature of Certioraty or any other appropriate Writ, Order or direction, calling for the records of the Petitioner’s case and after going into the legality and propriety thereof, to quash and set aside the said notice dated 26 March 2021 (Exhibit D”), order disposing objections dated 24.03.2022 (“Exhibit P”), the impugned assessment order dated 24.03.2022 (Exhibit R1) and the impugned notice of demand dated 24.03.2022 (Exhibit R2) as well as the impugned show-cause notice for levy of penalty dated 24.03.2022 (“Exhibit R3").

20. There shall be no order as to costs. All interim and ad-interim orders, if any, stand vacated forthwith.

(DR. N. K. GOKHALE, J.) (K. R. SHRIRAM, J.)