2017 (6) TMI 599 - HC - Income Tax

Reopening of assessment - donation to an educational institution - approval from competent authority - Held that - The Form for recording the reasons for initiating the proceedings under Section 148 for obtaining approval of the CIT/Additional CIT itself proceeds on the erroneous basis that the quantum of income which had escaped assessment was ₹ 28,75,000/- whereas the assessee had filed income returns of merely ₹ 20,56,145/- and it is on this basis that the Additional CIT and the CIT granted their approval. However, the CIT s date of approval is not recorded in the Form even though it is mentioned in the letter dated 28th January, 2016. The Petitioner had highlighted this fundamental error at the initiation of the case by stating that his income was mentioned as ₹ 20,56,145/- instead of ₹ 69,71,191/-. This was summarily rejected by the Respondent by an order dated 14th October, 2016 stating that the amount of ₹ 20,56,145/- instead of ₹ 69,71,191/- being mentioned as the income of the Petitioner was a clerical mistake and that the latter figure would be treated as his income. It is evident that the sanction of the Principal CIT as disclosed with the letter dated 25th May 2016 was obtained ex post facto. The Court is, however, of the view that if the correct income i.e. ₹ 69,71,191/- had been put before the CIT at the time of seeking his approval, he might perhaps have taken a different view. There is nothing on record to show that the clerical mistake of substituting ₹ 20,56,145/- for ₹ 69,71,191/- was ever brought to the notice of the CIT either before or after the so called approval/sanction under Section 151(1) of the Act. The initiation of the case for reopening of the assessment was erroneous and without application of mind especially since the AO had not examined the return filed, which if he had would have revealed that the Assessee had filed regular returns, had sufficient opening balance in his account and the withdrawals therefrom substantiated the donation made. - Decided in favour of assessee.

Issues:
1. Validity of notice issued under Section 147 of the Income Tax Act, 1961 for reopening assessment for AY 2010-11.
2. Compliance with Section 151(1) of the Act regarding prior approval for reopening cases after the expiry of four years.
3. Sufficiency of reasons for reopening assessment based on undisclosed income and donation made to an educational institution.
4. Approval process and application of mind by the competent authority for sanction under Section 151(1) of the Act.

Analysis:

Issue 1: Validity of Notice under Section 147
The petitioner challenged the notice dated 28th January, 2016 seeking to reopen his assessment for AY 2010-11 under Section 147 of the Act. The petitioner argued that the donation made to an educational institution did not imply undisclosed income. He contended that his returns showed sufficient funds and the donation was duly disclosed. The court held that the reasons provided for reopening were not substantive and cogent. The Assessing Officer had not examined the filed return, which would have revealed the petitioner's financial status and the source of the donation. The court quashed the notice as unsustainable in law.

Issue 2: Compliance with Section 151(1) for Prior Approval
The petitioner argued that prior approval from the Commissioner/Principal CIT was essential for reopening the case after four years, as per Section 151(1) of the Act. The petitioner highlighted that the sanction letter lacked the necessary satisfaction from the competent authority. The court noted that the approval process was flawed, with the space for satisfaction left blank and incorrect income figures considered for approval. The court emphasized that the sanction under Section 151(1) should involve substantive application of mind by the competent authority, which was lacking in this case.

Issue 3: Sufficiency of Reasons for Reopening Assessment
The respondent justified the reopening based on undisclosed income from the donation made to the educational institution. However, the court found that the reasons provided were not substantial. Merely because the recipient of the donation faced proceedings did not automatically imply undisclosed income for the donor. The petitioner's financial records and tax returns indicated a different picture, showing that the donation was accounted for from existing funds. The court emphasized that 'reasons to believe' must be substantive and not merely based on suspicion.

Issue 4: Approval Process and Application of Mind
The court highlighted discrepancies in the approval process, with the correct income figures not presented to the CIT for approval. The petitioner's contention regarding the clerical mistake in income figures was dismissed summarily by the respondent. The court concluded that the initiation of the case for reopening the assessment lacked proper application of mind, especially since the AO had not examined the filed return. The court held the notice as erroneous and quashed it, noting that the approval process was ex post facto and lacked proper consideration of the petitioner's financial status and tax compliance.

In conclusion, the court held the notice seeking to reopen the petitioner's assessment for AY 2010-11 as unsustainable in law and quashed it, allowing the writ petition in favor of the petitioner.

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