Delhi HC Issues Guidelines for Re-Opening of Assessment under Income Tax Act [Read Order]

Justices S Muralidhar and Prathiba M Singh of Delhi High Court, in a significant ruling, issued guidelines to be followed by the income tax authorities while re-opening an assessment under section 147/148 of the Income Tax Act.

In the instant case, the department sought the details regarding share application money received by the petitioners. During the course of enquiry, the petitioners submitted all the necessary details including PAN/ IT returns of the respective companies. Later, the department initiated re-assessment proceedings against the petitioners on the basis of information received from the Investigation Wing of the Department.

Before the High Court, the petitioners submitted that the ‘reasons to believe’ as specified in the re-assessment notice do not contain any allegation as to what material facts and information the Petitioner had failed to disclose.

After hearing both the sides, the bench opined that the ’reasons to believe’ have to be self-explanatory.

“The reasons to believe rely upon a letter received from the Investigation Wing and Mr.Chaudhary submits that this letter was in fact an investigation report. The report does not form part of the reasons and neither was it annexed to the reasons. Interestingly, even the counter affidavit is silent as to the material which has not been disclosed by the Petitioner. The counter affidavit merely states that the information was specific and the information would be provided to the Petitioner during the assessment proceedings. Thus, if the Revenue had any basis to show that the primary facts were incorrect, the same ought to have been set out in the reasons to believe.”

While concluding, the bench added that the Court is receiving a large number of writ petitions challenging the reopening of assessments by the Revenue under Sections 147 and 148 of the Act on a routine basis. “Despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities.”

In this background, the Court laid down the following guidelines in matters of reopening of assessments.

1. While communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the AO to the Assessee is to be avoided.
2. the reasons to believe ought to spell out all the reasons and grounds available with the AO for re-opening the assessment – especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO on the same and if so, the conclusions thereof.
3. where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons;
4. the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.

Read the full text of the Order below.