2017 (9) TMI 121 - HC - Income Tax

Reopening of assessment - reopening was after the expiry of 4 years from the end of the relevant AY - Sanction for issue of notice u/s 151 - whether a scrutiny assessment was made? - Held that - It is not understood how from the records available for AY 2006-07 it was not clear whether a scrutiny assessment was made. The records obviously would have contained the order of the AO under Section 143 (3) of the Act. If, as is the case, there was no such order then clearly the only conclusion to be drawn was that the return was processed under Section 143 (1) of the Act. Since it is not the case of the Department that the file for AY 2006-07 went missing, as was the case for AY 2005-06, the above statement in the counter affidavit filed on 9th September 2014, more than a year after the reopening, is inexplicable. At the highest, the note prepared by the AO should have been candid in Column 8 that it was not clear whether the assessment was being made for the first time or not. That, at least, would have told the Court that the AO had applied his mind to the facts of the case. In any event, if such a note had been put up to the Addl. DIT and thereafter to the DIT, either of those officers could have applied their minds and ascertained if indeed the return was processed under Section 143 (1) of the Act or picked up for scrutiny. The explanation now offered in the counter affidavit only underscores the non-application of mind at all three levels in the Department.

Summary

Issues Involved:
1. Validity of the notice under Section 148 of the Income Tax Act, 1961.
2. Compliance with Section 151 of the Income Tax Act, 1961.
3. Non-application of mind by the Assessing Officer (AO) and supervisory officers.

Issue-wise Detailed Analysis:

1. Validity of the Notice under Section 148:
The petitioner, Yum Restaurants Asia PTE Ltd., challenged the notice dated 28th March 2013 issued under Section 148 of the Income Tax Act, 1961, for the Assessment Year (AY) 2006-07. The petitioner also contested the order dated 26th December 2013, which rejected the objections to reopening the assessment. The notice's validity was questioned on the grounds that the original return was processed under Section 143(1) and not scrutinized under Section 143(3). Therefore, the reopening after four years required compliance with Section 151(2) of the Act.

2. Compliance with Section 151:
Section 151 of the Act mandates specific approvals for issuing notices under Section 148, particularly after four years from the end of the relevant AY. The section differentiates between cases where returns were processed under Section 143(1) and those scrutinized under Section 143(3). For the former, approval from a Joint Commissioner is required, while for the latter, the approval of the Principal Chief Commissioner or Chief Commissioner is necessary. In this case, since the return was processed under Section 143(1), the approval of the Joint Commissioner was required. However, the AO incorrectly filled the form, indicating that the return had been scrutinized under Section 143(3), leading to approvals from the Additional DIT and the DIT, which was unnecessary and incorrect.

3. Non-application of Mind:
The AO's note contained several errors, including a negative response to whether the assessment was being made for the first time, which implied the return was scrutinized under Section 143(3). This was factually incorrect as the return was processed under Section 143(1). This error indicated a lack of due diligence and non-application of mind by the AO. Moreover, the supervisory officers, including the Additional DIT and the DIT, also failed to apply their minds and verify the factual accuracy of the AO's note. They concurred with the AO's reasons without realizing the procedural mistake, further compounding the error.

The court noted that the purpose of Section 151 is to provide a supervisory check over the AO's decisions, particularly in reopening assessments. The law expects the AO to exercise the power under Section 147 only after due application of mind, and any errors should be corrected by the superior officers. However, in this case, the errors were not corrected at any level, indicating a systemic failure in the application of mind.

The court also highlighted that the Department's counter affidavit did not clarify how it was unclear whether a scrutiny assessment was made, as the records should have clearly shown whether an order under Section 143(3) existed. The explanation offered in the counter affidavit underscored the non-application of mind by all three levels in the Department.

Conclusion:
The court concluded that the reopening of the assessment was invalid due to the procedural lapses and non-application of mind by the AO and the supervisory officers. The notice under Section 148 and the subsequent order rejecting the objections to reopening the assessment were quashed.