Tax Reassessment Dispute: Tribunal’s Decision Quashed for Ignoring Key Sections

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Case Name:

Principal Commissioner of Income Tax & Ant. Vs Rajkumar C (Huf) (High Court of Karnataka)

ITA No. 503 of 2016

Date: 11th January 2021

Key Takeaways:

• The court emphasized the importance of considering all relevant legal provisions when making a decision.
• The tribunal’s decision was quashed because it did not account for Sections 150 and 153 of the Income Tax Act.
• The case highlights the procedural requirements for initiating reassessment proceedings under the Income Tax Act.

Issue

The central legal question was whether the tribunal was correct in setting aside the reassessment order without considering the provisions of Sections 150 and 153 of the Income Tax Act.

Facts

• A search was conducted at the premises of C. Rajkumar, revealing undisclosed income from real estate transactions for several assessment years.
• The income was initially assessed in the hands of Rajkumar as an individual, but he contended it should be assessed as part of a Hindu Undivided Family (HUF).
• The Commissioner of Income Tax (Appeals) directed the income to be assessed in the hands of the HUF, leading to a reassessment order.
• The tribunal set aside this reassessment order, prompting the Income Tax Department to appeal.

Arguments

• For the Revenue: The tribunal erred by not considering Sections 150 and 153, which allow reassessment in certain circumstances. The reassessment was valid as it followed the Commissioner of Income Tax (Appeals)'s directions.
• For the Assessee: The reassessment was invalid as the Assessing Officer did not independently record reasons for reopening the assessment, acting instead on the directions of a higher authority.

Key Legal Precedents

• Section 147 of the Income Tax Act: Pertains to the conditions under which income can be reassessed.
• Section 150 and Section 153: These sections allow reassessment in cases where income is excluded from one person and assessed to another, following a legal order.

Judgement

The court quashed the tribunal’s decision, stating it failed to consider Sections 150 and 153. The tribunal was directed to reassess the case, taking these sections into account, and provide an opportunity for both parties to be heard.

FAQs

Q1: Why was the tribunal’s decision quashed?

A1: The tribunal’s decision was quashed because it did not consider the relevant legal provisions, specifically Sections 150 and 153 of the Income Tax Act.

Q2: What does this mean for the parties involved?

A2: The case will be reconsidered by the tribunal, which must now take into account the specified sections of the Income Tax Act.

Q3: What are Sections 150 and 153 about?

A3: These sections deal with the reassessment of income in cases where it is excluded from one person and assessed to another, following a legal order.

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2005-06. The appeal was admitted by a bench of this Court vide order dated 21.11.2017 on the following substantial questions of law:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in setting aside the re-assessment order passed by the assessing authority by holding that the are no valid reasons recorded by the assessing authority to invoke re-assessment proceedings under section 147 even when the assessing authority has given valid reasons for invoking re-assessment proceedings and all the ingredients of section 147 are satisfied in the case of assessee to invoke re-assessment proceedings?".

2. Today, the appeal is admitted on the following additional substantial question of law: 'Whether on the facts and in the circumstances of the case, the tribunal is right in law in holding that re-assessment order is bad in law ignoring Section 150 read with Section 153 and Explanation 2 to Section 153 of the Act whereby Assessing Authority is empowered to include any income excluded from total income of one persona and held to be the income of another person, then an assessment of such income on such other person shall be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order?'

3. Facts leading to filing of this appeal briefly stated are that a search was conducted in the premises of one K.Purushottham Reddy on 26.08.2008 and also at the residence of one A.R.Chandrashekar and C.Rajkumar. During the course of the search, at the premises of C.Rajkumar undisclosed income from sale and purchase of immovable properties was noticed for the Assessment Years 2005-06, 2006-07 and 2007-08 for amounts of Rs.1,44,75,000/-, Rs.160,62,250/- and Rs.2,94,58,337/- respectively. Aforesaid C.Rajkumar who worked as real estate agent filed return of income in individual capacity and not as HUF. During the course of the search on 26.08.2008, it was stated by him that he had not declared / disclosed income from real estate transaction and the same would be declared in the return of income of HUF. The Assessing Officer vide order dated 28.02.2010 concluded the assessment under Section 143(3) read with Section 153(c) in the hands of the individual by making several additions mainly with regard to sale of properties.

4. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals). In the appeal also the assessee again contended that the income belongs to HUF. It was held that the land belongs to HUF , which devolved on HUF by a registered partition deed dated 05.08.1978 and income arising from sale of the property has to be assessed in the hands of HUF and assessment of income in the hands of individual was held to be incorrect. The Commissioner of Income Tax (Appeals) by an order dated 05.08.2011 directed the Assessing Authority to proceed to against HUF to assess the income as belonging to HUF. The revenue challenged the order passed by the Commissioner of Income Tax (Appeals) before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 25.08.2014 dismissed the appeal preferred by the revenue. A notice under Section 148 of the Act was issued to the HUF for the period under consideration and the assessing authority after recording reasons for taking up the re-assessment proceedings passed an order of re-assessment under Section 144 and Section 147 of the Act by an order dated 25.03.2013 and subjected the income to tax which had escaped assessment. The assessee thereupon challenged the aforesaid order in an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 25.08.2014 affirmed the order passed by the Assessing Officer. The assessee thereupon approached the tribunal. The tribunal by an order dated 27.04.2016 allowed the appeal preferred by the assessee. In the aforesaid factual background, this appeal has been filed by the revenue.

5. Learned counsel for the revenue submitted that the tribunal grossly erred in setting aside the order of the re-assessment solely on the ground that the Assessing Authority has not recorded any independent findings to revoke re-assessment proceedings and the same was initiated on account of directions issued by Commissioner of Income Tax (Appeals) who is a superior authority. It is also urged that the tribunal has not considered the applicability of provision of Section 150 read with Section 153 and Explanation 2 to Section 153 of the Act which empowers the Assessing Authority to include any income excluded from total income of one person and to hold the same to be the income of another person and on assessment of such income of such other person shall be deemed to made in consequence or to give effect to any finding or direction contained in the order. It is also contended that the tribunal has not interfered with the finding of the Commissioner of Income Tax (Appeals) that a colorable device has been adopted by the assessee and about the conduct of the assessee as well as the applicability of provisions of Section 171 of the Act. It is also submitted that satisfaction recorded by the Assessing Authority for invoking re-assessment proceeding under Section 147 of the Act satisfied all the conditions set out therein and the tribunal ought to have appreciated that the instant case is covered under clause (a) to Explanation 2 to Section 147 and Section 150 read with Section 153 of the Act and Explanation 2(b) of Section 153 of the Act were attracted to the facts of the case.

6. It was also pointed out that Commissioner of Income Tax (Appeals) by an order dated 05.08.2008 deleted the addition of undisclosed income in the hands of the assessee and directed the Assessing Authority to include the same in the hands of HUF and on receipt of the aforesaid order, the re-assessment proceeding was initiated by the Assessing Authority within parameters of Section 147 of the Act. It is also pointed out that the assessee is blowing hot and cold as in the case of the individual the assessee has contended that HUF is liable to pay tax and incase of HUF, it is contended that reasoning recorded for re-assessment is not in accordance with Section 148 of the Act, which shows the conduct of the assessee who is trying to avoid payment of admitted tax. It is further submitted that the tribunal ought to have appreciated that the assessee has accepted the order of Commissioner of Income Tax (Appeals) holding that HUF is liable to pay tax and if HUF did not exist as per the assessee then the order ought to have challenged before the tribunal by the assessee. Therefore, the assessee cannot now contend that the HUF cannot be taxed. It is also urged that intention of the assessee is to avoid tax and the same is a colorable device. It is submitted that the matter requires re-consideration by the tribunal. In support of aforesaid submissions, reliance has been placed on 'MAHADEO PRASAD RAIS (DECD) VS. INCOME TAX OFFICER & ANR.', (1991) 192 ITR 402, 'COMMISSIONER OF INCOME TAX VS. FARUK ANVAR COMPANY', (1993) 199 ITR 433, 'POONJA ARCADE VS. ASSISTANT COMMISSIONER OF INCOME TAX', (2010) 326 ITR 123, 'KALYAN ALA BAROT VS. M.H.RATHOD', (2010) 328 ITR 521, 'R.B.BANSILAL ABIRCHAND FIRM VS. COMMISSIONER OF INCOME TAX', (1968) 70 ITR 74, 'INCOME TAX OFFICER VS. BACHU LAL KAPOOR', (1966) 60 ITR 74, 'COMMISSIONER OF INCOME TAX VS. ABDUL KHADER AHMED', (2006) 285 ITR 57.

7. On the other hand, learned counsel for the assessee submitted that the condition precedent for initiating re-assessment proceedings under Section 147 of the Act is that the Assessing Officer should have the reason to believe that the income chargeable to tax had escaped assessment. In the instant case, the Assessing Officer has not recorded any reasons for re-opening the assessment and has merely acted with reference to the directions issued by the Commissioner of Income Tax (Appeals). It is also urged that initiation of re- assessment proceedings should be done by the Assessing Officer only on the satisfaction recorded by him and not on the direction of the higher authority and a quasi judicial authority which is expected to perform statutory function cannot act on the dictates of any authority. It is further submitted that the directions of the Commissioner of Income Tax (Appeals) to the Assessing Officer to re-open the assessment in case of assessee (HUF) cannot be sustained in the eye of law. It is also submitted that when once the partition has taken place, the assessment has to be conducted under Section 171 and not under Section 147 of the Act. Since, the notices have been issued under Section 147 the aforesaid notices are ab initio void. Alternatively, it is submitted that in case, contentions of the assessee are not accepted the matter may be remitted to the tribunal for decision afresh in accordance with law. In support of his submissions, reliance has been placed on decisions in 'INCOME TAX OFFICER, A WARD SITAPUR VS. MURLIDHAR BHAGWAN DAS HUNGERFORD INVESTMENT TRUST LIMITED (IN LIQUIDATION) INTERVENER', (1964) 6 SCR 411, 'CONSOLIDATED COFFEE LIMITED VS. INCOME TAX OFFICER', 1983 SCC ONLINE KAR 301, 'CONSOLIDATED COFFEE LIMITED VS. INCOME TAX OFFICER', 1991 (187) ITR 43, 'PEICO ELECTRONICS AND ELECTRICALS LIMITED VS. DEPUTY COMMISSIONER OF INCOME TAX AND OTHERS', 1992 SCC ONLINE CAL 368, 'COMMISSINOER OF INCOME TAX, U.P.VS. M/S MOHD. SHAKOOR MOHD. BASHIR', (1973) 4 SCC 107.

8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of relevant extracts of clause (a) to Explanation 2 to Section 147, Section 150 and clause (a) and (b) to Explanation 2 to Section 153, which read as under: Explanation 2 - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

Clause (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income- tax;

150. Provision for cases where assessment is in pursuance of an order on appeal, etc.

(1) Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or recomputation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision 1 or by a court in any proceeding under any other law].

Explanation 2 - for the purposes of this section, where, by an order referred to in clause (i) of sub-Section (6) -

(a) any income is excluded from the total income of the assessee for an Assessment Year, then, an assessment of such income for another assessment year shall, for the purposes of Section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order; or

(b) any income is excluded from the total income of one person and held to be the income of another person then, an assessment of such income on such other person shall, for the purposes of Section 150 and this section, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order, if such other person was given an opportunity of being heard before the said order was passed:

9. From perusal of the order passed by the tribunal, it is evident that the tribunal has set aside the order of assessment mainly on the ground that the Assessing Authority has not recorded independent findings to revoke re-assessment proceeding and the order of re-assessment has been passed on the direction sof the Commissioner of Income Tax (Appeals). The tribunal has not considered the provisions of Explanation 2(b) to Section 153 of the Act, by which the Assessing Authority is empowered to include any income excluded from total income of a person and is treated to be income of another person, then such an assessment of the income on such other person shall be deemed to be paid in consequence of or to give effect to any finding or direction contained in the said order. Therefore, since the order of assessment has been passed by the tribunal without taking note of Section 150 read with Section 153 as well as explanation 2 to Section 153 of the Act, we answer the additional substantial question of law in favour of the revenue and against the assessee. Therefore, we do not propose to deal with the rival contentions. In the result, the order passed by the tribunal dated 27.04.2016 is quashed and the tribunal is directed to decide the appeal by taking into account the provisions of Section 150 and Section 153 of the Act after affording an opportunity of hearing to the parties.

In the result, the appeal is disposed of.

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JUDGE

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JUDGE