Invalid Notice: Reasons Recorded After Issuance Renders Section 148 (of Income Tax Act, 1961) Notice Void

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Case Name:

Ferrous Infrastructure Pvt. Ltd. & Anr. Vs Deputy Commissioner of Income Tax (High Court of Delhi)

W.P.(C)5229/2014 & CM No.10401 /2014

Date: 21st May 2015

Key Takeaways:

• The court emphasized the importance of recording reasons before issuing a notice under Section 148 (of Income Tax Act, 1961).
• The decision reinforces the procedural safeguards to prevent arbitrary reassessment notices.
• The ruling highlights the necessity for transparency and adherence to legal protocols by tax authorities.

Issue

Was the notice under Section 148 (of Income Tax Act, 1961) valid if the reasons for its issuance were recorded after the notice was issued?

Facts

Ferrous Infrastructure Pvt. Ltd. received a notice dated 30.08.2012 under Section 148 (of Income Tax Act, 1961) for reassessment of income for the Assessment Year 2008-2009. However, the reasons for this notice were recorded only on 18.09.2012, after the notice had already been issued. This procedural misstep was the crux of the legal challenge.

Arguments

• Petitioners (Ferrous Infrastructure Pvt. Ltd.): Argued that the notice was invalid as the reasons were recorded after its issuance, violating Section 148(2) (of Income Tax Act, 1961). They also contended that their objections to the notice were not addressed in a separate speaking order, contrary to the Supreme Court’s directive in G.K.N. Driveshafts (India) Ltd. v. ITO.
• Respondent (Deputy Commissioner of Income Tax): Claimed that the date on the reasons was an inadvertent mistake and that the reasons were indeed recorded before the notice was issued.

Key Legal Precedents

• Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax: Emphasized the necessity of recording reasons before issuing a notice under Section 148 (of Income Tax Act, 1961).
• G.K.N. Driveshafts (India) Ltd. v. ITO: Established that reasons must be communicated to the assessee, who can then file objections, which must be addressed by a speaking order.
• Baldwin Boys High School: Reinforced the requirement that reasons must be recorded prior to issuing a notice under Section 148 (of Income Tax Act, 1961).

Judgement

The court ruled that the notice under Section 148 (of Income Tax Act, 1961) was invalid because the reasons were recorded after the notice was issued, violating Section 148(2) (of Income Tax Act, 1961). Consequently, all proceedings based on this notice were also invalidated. The court quashed the notice dated 30.08.2012 and all subsequent actions, including the reassessment order dated 30.03.2014.

FAQs

Q1: Why is it important to record reasons before issuing a notice under Section 148 (of Income Tax Act, 1961)?

A1: Recording reasons beforehand ensures that the notice is based on a legitimate basis and prevents arbitrary or whimsical actions by tax authorities.

Q2: What happens if the reasons are recorded after the notice is issued?

A2: If reasons are recorded after the notice, the notice and any subsequent proceedings are considered invalid.

Q3: What is a ‘speaking order’?

A3: A speaking order is a detailed order that addresses the objections raised by the assessee, providing reasons for the decision, ensuring transparency and fairness.

1. This writ petition is directed against the notice dated 30.08.2012

issued by the DCIT, Circle 11(1), New Delhi, under Section 148 (of Income Tax Act, 1961) of the

Income Tax Act, 1961. The writ petition is also directed against the order

dated 30.03.2014 passed by the Assessing Officer re-assessing the

income of the assessee in respect of the Assessment Year 2008-2009.

2. When this matter came up for hearing on the first occasion, i.e.,

19.08.2014, we had recorded that the learned counsel for the petitioners

had raised two points in this petition. The first point was that the

petitioners came to know, after the re-assessment order, that the purported

reasons for initiating reassessment proceedings had been recorded after

the issuance of notice under Section 148 (of Income Tax Act, 1961). It was submitted that the clear

position in law is that the reasons have to be recorded prior to the

issuance of notice under Section 148 (of Income Tax Act, 1961). The second point urged by the

learned counsel for the petitioners was that the objections furnished by

the petitioners to the Section 148 (of Income Tax Act, 1961) notice had not been disposed of by a

separate speaking order prior to the re-assessment order dated

30.03.2014. He submitted that this was in clear contradiction to the

Supreme Court decision in the case of G.KN Driveshafts (India) Ltd. v.

ITO : 259 ITR 19(SC).

3. The counter-affidavit has been filed on behalf of the Revenue and a

very surprising stand has been taken. In reply to paragraph No.1 of the

petition on merits, the counter-affidavit reads as under:-

“1. With respect to the content of Paragraph no. 1 it is

respectfully submitted that the factual position in the

matter is that the notice u/s.148 (of Income Tax Act, 1961) dated

30.08.2012 was issued and duly served upon the assessee

company. The notice u/s.148 (of Income Tax Act, 1961) was issued after recording

the reasons for issuance of notice u/s.l48 however, in the

lower portion of the reasons recorded; the date was

inadvertently mentioned as 18/09/2012. Thus the

contentions and grounds of challenge made by the

Petitioner are denied as being frivolous and baseless.”.

(underlining added)

In the above statement an impression is sought to be created that

the date mentioned as 18.09.2013 was incorrectly recorded. No reasons

have been given or explanation offered as to how such a circumstance

could, at all, have arisen. We asked the learned counsel for the Revenue

to produce the relevant file and on examining the same, we find that the

reasons for issuance of the notice under Section 148 of the Income Tax Act, 1961 which

have been recorded bears the date 19.09.2012. The said date is printed.

It is, first of all, inconceivable that when a document is being typed on or

before 30.08.2012 (the date on which the notice under Section 148 (of Income Tax Act, 1961) was

issued) that a future date of 19.09.2012 would be typed. Secondly, what

is even more shocking is the fact that the printed date 19.09.2012 has

been corrected in hand to read 18.09.2012. In other words, if there was a

mistake in the printing of the date, the same has been corrected to read

18.09.2012. Therefore, it cannot be said that the date mentioned in the

reasons, i.e., 18.09.2012 was an inadvertent mistake. The date had been

consciously corrected. That being the position, the factual situation is

that the reasons were recorded on 18.09.2012, they were also furnished to

the petitioners on 18.09.2012, but the notice under Section 148 (of Income Tax Act, 1961) had

already been issued on 30.08.2012. It is evident that the notice was

issued prior to the recording of the reasons.

Section 148(2) (of Income Tax Act, 1961) of the Income-Tax reads as under:-

“148. (2) The Assessing Officer shall, before issuing

any notice under this section, record his reasons for

doing so.”

It is absolutely clear from the said provision that the Assessing

Officer is required to record his reasons before he issues the notice under

Section 148 (of Income Tax Act, 1961).

4. This aspect has been dealt with by a Division Bench of this Court

in Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax:

308 ITR 38(Delhi).

“32. Secondly, let us assume for the sake of argument

that the actual reasons were those as noted in the said

form. Then why did the Assessing Officer

communicate a different set of reasons to the

petitioner? Did he think that the supplying of reasons

and the inviting of objections were mere charades?

Did he think that it was a mere pretence or a formality

which had to be gotten over with? At this point, it

would be well to remember that the Supreme Court in

GKN Driveshafts (supra) had specifically directed

that when a notice under Section 148 of the Income Tax Act, 1961

is issued and the noticee files a return and seeks

reasons for the issuance of the notice, the Assessing

Officer is bound to furnish reasons within a

reasonable time. On receipt of the reasons, the noticee

is entitled to file objections to the issuance of notice

and the Assessing Officer is bound to dispose of the

same by passing a speaking order. These are specific

directions given by the Supreme Court in all cases

where notices under Section 148 of the Income Tax Act, 1961 are

issued. Surely, the Assessing Officer could not have

construed these specific directions to be a mere empty

formalities or dead letters? There is a strong logic and

purpose behind the directions issued by the Supreme

Court and that is to prevent high-handedness on the

part of Assessing Officers and to temper any action

contemplated under Section 147 of the Income Tax Act, 1961 by

reason and substance. In fact, even Section 148(2) (of Income Tax Act, 1961)

stipulates that the Assessing Officer shall, before

issuing any notice under the said Section, record his

reasons for doing so. The Supreme Court has only

carried forward this mandatory requirement by

directing that the reasons which are recorded be

communicated to the assessee within a reasonable

period of time so that at that stage itself the assessee

may point out any objections that he may have with

regard to the initiation of action under Section 147 (of Income Tax Act, 1961) of

the said Act. The requirement of recording the

reasons, communicating the same to the assessee,

enabling the assessee to file objections and the

requirement of passing a speaking order are all

designed to ensure that the Assessing Officer does not

reopen assessments which have been finalized on his

mere whim or fancy and that he does so only on the

basis of lawful reasons. These steps are also designed

to ensure complete transparency and adherence to the

principles of natural justice. Thus, a deviation from

these directions would entail the nullifying of the

proceedings.....”

(underlining added)

5. Furthermore in the decision of the High Court of Karnanataka –

Commissioner of Income Tax, (Exemptions) v. Baldwin Boys High

School: 364 ITR 637(Karnataka) - this very question of whether a

notice under Section 148 of the Income Tax Act, 1961 could be issued without

recording reasons came up for consideration. The Karnataka High Court

observed as under:-

“6. Section 148 (of Income Tax Act, 1961) provides for issue of notice

where the income has escaped assessment. Sub-

section (2) of section 148 (of Income Tax Act, 1961) provides that the

Assessing Officer shall, before issuing any notice

under this section, record his reasons for doing so. In

view of this provision, no dispute was raised before

us about the procedure contemplated under this

provision. From a bare perusal of section 148 (of Income Tax Act, 1961) of the

Act, it is clear as crystal that the Assessing Officer is

obliged to record reasons before issuing notice under

section 148 (of Income Tax Act, 1961)....”

(underlining added)

6. The decision sought to be relied upon by Mr Madan on behalf of

the Revenue in the case of Adobe Systems Software Ireland Ltd. v.

Assistant Dirctor of Income Tax, 2014(7) AD 244, is not at all relevant

for the present discussion. That was a case which dealt with the

furnishing of the reasons to the assessee. The issue which had arisen was

whether the assessee was entitled to the reasons without even filing a

return. That is not the question before us. The only question here is

whether reasons could at all be recorded after issuance of the notice under

Section 148 (of Income Tax Act, 1961). And, secondly, that as the reasons were recorded

after the issuance of Section 148 (of Income Tax Act, 1961) notice, whether the proceedings were

not vitiated.

7. We have seen from the provisions of Section 148(2) (of Income Tax Act, 1961) as also the

decisions of this Court in Haryana Acrylic(supra), and that of the

Karnataka High Court in Baldwin Boys High School (supra), that the

reasons have to be recorded prior to the issuance of notice under Section

148. If they are not so recorded, then the notice under Section 148 (of Income Tax Act, 1961) and

proceedings pursuant thereto are without authority of law. In the present

case, it is evident that the reasons were recorded only on 18.09.2012, i.e.,

after the notice under Section 148 (of Income Tax Act, 1961) had been issued on 30.08.2012.

Clearly, the statutory provisions, as explained by judicial decisions,

indicate that the notice under Section 148 (of Income Tax Act, 1961) would be invalid and

consequently all proceedings pursuant thereto would also be vitiated.

8. We may also point out that the second issue raised by the learned

counsel for the petitioners also deserves some consideration. In GKN

Driveshafts (supra), the Supreme Court had directed as under:-

“However, we clarify that when a notice under

Section 148 (of Income Tax Act, 1961) is issued, the

proper course of action for the noticee is to file return

and if he so desires, to seek reasons for issuing

notices. The assessing officer is bound to furnish

reasons within a reasonable time. On receipt of

reasons, the noticee is entitled to file objections to

issuance of notice and the assessing officer is bound

to dispose of the same by passing a speaking order. In

the instant case, as the reasons have been disclosed in

these proceedings, the assessing officer has to dispose

of the objections, if filed, by passing a speaking order,

before proceeding with the assessment in respect of

the abovesaid five assessment years.”

(underlining added)

8. On going through the same, it is evident that the Assessing Officer

has to pass a speaking order disposing of the objections “before

proceeding with the assessment”. In the present case, a separate

speaking order has not been passed and the objections have been dealt

with, if at all, in the re-assessment order itself. On this ground also, the

petitioner is liable to succeed.

9. For all the reasons indicated above, the petition is allowed. The

notice under Section 148 (of Income Tax Act, 1961) dated 30.08.2012 is quashed so also all

proceedings pursuant to the said notice under Section 148 (of Income Tax Act, 1961) including the

order dated 30.03.2014.

10. The writ petition is allowed on the above terms.

BADAR DURREZ AHMED, J

SANJEEV SACHDEVA, J

MAY 21, 2015