The Bombay High Court of Judicature quashed the reassessment Notices issued by Income Tax Authorities demanding the reassessment under section 147 of the Income Tax Act, 1961. The court finds no ingredients to invoke reassessment.
The Petitioner, Aashish Niranjan Shah is an individual who filed the relevant tax returns on 27th September, 2013, offering taxable income of Rs. 73,08,942/-. The returns were scrutinized under section 142(2) of the Income Tax Act,1961 (IT Act, 1961). The assessment order was passed on 11th March, 2016. An addition of Rs.1,14,329/- was made to the returned income. In compliance with the same, the additional tax amount as assessed was paid on 12th April, 2016.
On 31st March, 2021 i.e. seven years after the end of the relevant assessment year, a notice under Section 148 (“Impugned Notice”) was issued to the Petitioner by the Assistant Commissioner of Income-tax (ACIT), Circle 7 in Pune, i.e, Respondent No.2.
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The sanction for the issuance of the notice under Section 148 had been issued by the Principal Commissioner of Income-tax-4, Pune, Respondent No.3. In response, the Petitioner submitted that he had no change to make to the originally filed returns and therefore, the very same returns were again filed by him on 28th April, 2021.
On 30th June, 2021 Respondent No.2 issued a notice under Section 143(2) along with the reasons for reassessment. The stated reason provided for the proposed reassessment was that the returns had not been subjected to scrutiny assessment.
On 3rd July, 2021, the Petitioner submitted his written objections to the impugned notice questioning the validity of the reasons for which reassessment had been proposed. The Petitioner asserted that his returns for AY-2013-14 had indeed been subjected to scrutiny assessment. He also submitted that under Section 147 as then applicable, no reassessment would be permissible after the expiry of four years from the end of the relevant assessment year unless the escapement of income was attributable to failure on his part to disclose fully and truly all material facts necessary for assessment at the time of the original assessment.
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In short, the Petitioner’s primary objection was that since he had filed his return for AY-2013-14 without default, and such return had been subjected to a scrutiny assessment, unless and until there had been a demonstrated failure on his part to disclose fully and truly any material facts, the jurisdictional fact necessary to effect reassessment cannot be said to be in existence.
On 21st December, 2021, the Revenue communicated a rebuttal of objections raised by the Petitioner against the issuance of the notice for reassessment. In a nutshell, the case of Respondent No.2 was that income from trading in shares to the tune of Rs.20,69,450/- had escaped assessment, because of which reassessment was being proposed. The basis of such computation was said to be the stock broker of the Petitioner having modified client codes under which transactions had been effected on the stock exchange.
However, the transactions in respect of which any client code had been modified; whether it was modified from the Petitioner’s client code to another client code or vice versa; and the manner in which any such modification would lead to a different level of taxable income in the hands of the Petitioner even on a prima facie basis, was not spelt out.
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On 15th January, 2022, the Petitioner wrote a letter pointing out that the satisfaction and approval of the appropriate authority had not been shared until then, and asked for a copy of the same. On 14th February, 2022 Respondent No.2 passed an order disposing of the objections raised by the Petitioner. This order, according to the Petitioner, does not record the basis on which it can be said that the Petitioner has not disclosed truly and fully all material facts during the original assessment.
In a nutshell, the order asserted that the power to effect the reassessment beyond the period of four years and within a period of six years would be available to the Revenue even in cases where there has been a complete disclosure of all relevant facts during the original assessment.
It was asserted by the Revenue that so long as there is some information in the possession of the Revenue which gives the Revenue “reason to believe” that income has either escaped assessment or is under assessed, the existence of such belief would confer jurisdiction for conducting a reassessment.
The “information” in question was stated to be the modification of client codes by the stock broker, which could have led to fictitious profits and fictitious losses being claimed by different clients of the stock broker.
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Such information, according to the Revenue, pointed to the Petitioner having had a benefit of Rs.20,69,450/-, due to which the Revenue had “reason to believe” that income had escaped assessment. Such reason to believe would suffice to shift the onus to the Petitioner to substantiate and prove the genuineness of the transactions about which information was not in the possession of the Revenue.
The Petitioner also questioned the manner of approval of the reassessment proceedings. According to him, since a period of four years from the end of AY-2013-14 had expired on 31st March 2018, when reassessment was being considered in 2021, even assuming this was permissible under Section 149, it was incumbent for the more senior specified authorities under Section 151(ii) to have applied their mind to approve such reassessment.
Authorities specified under Section 151(i) could only approve reassessments proposed within a period of three years, the petitioner submitted.
Such senior specified authority ought to apply his mind and pass an order as to how he has been satisfied that the reassessment is necessary. Moreover, since the Petitioner was not given the order approving the reassessment, the Petitioner has challenged the entire reassessment proceedings.
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Consequently, the Petitioner sought intervention u/s Article 226 of the Constitution of India for quashing various Notices and Orders.
In these proceedings, in an affidavit in reply dated 31st March, 2022 but filed on 6th August, 2022, the Revenue has asserted that the element of income through client code modification to the extent of 20,69,450/- had not been covered during the original assessment. Therefore the issue was not examined by the assessment officer in the earlier round.
Therefore, invoking Section 148 and Section 151, the Revenue has asserted that the proposal to initiate reassessment was valid in law because the “main ingredient required to issue notice” is to form a “reason to believe” that income had escaped assessment.
In rejoinder, by an affidavit dated 11th August, 2022, the Petitioner asserted that once scrutiny assessment had been conducted, when there has been an expiry of four years after the end of the assessment year, for the Revenue to initiate reassessment, it must be demonstrated that the escapement of income from assessment was due to failure on the part of the assessee to disclose material facts during the original assessment.
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In the case, the Revenue asserted that no scrutiny had taken place, which is the very foundation of the reassessment and that is disturbed. The Petitioner has asserted that all documents connected to securities trading by the Petitioner during the relevant period had been examined during the scrutiny assessment and there was nothing to show that there had been any failure on the part of the Petitioner to disclose any material fact.
The Petitioner also submitted that even in the proceedings before this Court a copy of the approval given by a specified authority under Section 151(ii) has not been filed although a specific ground has been taken up in the Writ Petition on this count.
On 14th March, 2022, a Division Bench of this Court had granted ad-interim relief restraining the Revenue from taking any further steps pursuant to the reassessment notice dated 31st March, 2021. Later in September, 2022, this court allowed the petitioner to amend the petition to bring on record the order dated February, 2022 purporting to deal with the objections raised. The interim protection granted on 14th March, 2022 has continued till date.
Based on the objections of the parties i.e Mr. Sagar Tilak, a/w Sachin Hande, Payal Rathod, Advocates for the Petitioner and the materials examined it was noted that the recorded reasons for initiating proceedings under Section 147 and Section 148 for reassessment, simply states that the Petitioner had bought shares of Rs.20,69,450/- through modified client codes and that such transactions had not been explained.
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It was categorically stated that the return for AY-2013-14 had not been subjected to scrutiny assessment and therefore the Petitioner’s case would be deemed to be one where income has escaped assessment.
By producing certain evidence such as bank account statements, ledger accounts, and other relevant documents it has been verified that the scrutiny has been done. The petitioner has also paid certain charges related to the assessment and also it is evident that a questionnaire had been served on the petitioner asking various details during the scrutiny process of assessment, which also includes the calculation of short-income and long-term capital gains and its explanation.
There is also a reference to charges said to have been paid by the Petitioner to the securities depository, stock exchange, and other transaction charges, with explanations being sought for justification of such amounts.
The Petitioner also attended a personal hearing through an authorized representative. All of this culminated in the assessment order dated 11th March, 2016. Therefore, it is evident to us that the original assessment was an outcome of a robust examination of the returns, which included a detailed scrutiny of the trades in securities during the relevant financial year.
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In these circumstances, it is bluntly incorrect for the revenue to base its reassessment on the assertion that the returns had not been subjected to scrutiny assessment.
Evidently, such an assertion presents a false picture, namely, that the absence of past scrutiny would justify the need to take a closer second look as to whether income may have escaped assessment.
Also in case of failure to disclose material facts, it was clear that the invocation of Section 148 for reassessment was initiated only on 31st March, 2021, which is seven years after the end of the relevant assessment year. Section 147, as applicable at the time of issuance of the Impugned Notice (31st March, 2021), sets out certain essential ingredients for initiating reassessment after the expiry of four years from the end of the relevant assessment year.
The vital ingredient for invoking Section 147 r.w Section 148 is that the assessee should have failed to disclose all material facts fully and truly during the original assessment which is missing here.
Even a plain reading of the foregoing would show that a vital precondition for invoking Section 147 of the Act after the expiry of four years from the end of the relevant assessment year, is that during the original assessment, the assessee ought to have failed to fully and truly disclose all material facts necessary for the assessment.
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It is because the Revenue cannot demonstrate a failure on the part of the Petitioner to make full and truthful disclosure of facts in his possession, that its stance has been moulded to state that such demonstration is not necessary, and it would suffice if the Revenue formulates a “reason to believe” that income has escaped assessment. We are afraid that we cannot agree to such a proposition, which would require ignoring the explicit provisions of Section 147 and supplanting it with a new formulation as is being canvassed by the Revenue.
The Division Bench comprising of Justice G.S Kulkarni and Justice Somesekhar Sundaresan observed that the the essential ingredient for attracting the Section 147 and 148 is that no action for reassessment can be taken after the expiry four years from the end of the relevant assessment year, unless the income escaping assessment has been caused by the failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. That vital element is sorely missing in the instant case.
So without showing anything to prove that the Petitioner had failed in disclosing any material facts fully and truly, there is no scope for initiating reassessment. Consequently the writ petition is allowed by the court, quashing the Impugned Notices (dated 31st March, 2021), and both consequential notices under Section 143(2) (dated 30th June, 2021) and the notice under Section 142(1) (dated 21st December, 2021).
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