2023 (12) TMI 1164 - HC - Income Tax

Validity of Reopening of assessment - Sanction for issue of notice u/s 151 - whether valid approval was granted in terms with Section 151? - What are the essential requirements for initiation of a reassessment proceedings under Section 147 of the Act of 1961 and to what extent the Court under Article 226 can interfere? - HELD THAT - First, the power to be exercised by the authority to grant the approval for issuance of the notice under Section 148 is not a mere formality but is an important safeguard against any arbitrary exercise by the Income Tax Officer to reopen reassessment proceedings. The second aspect is that Section 151 of the Act of 1961 specifically mandates who would be the authority inasmuch Sub-Section (1) of Section 151 of the Act of 1961 relates to issuance of notice under Section 148 after the expiry of the period of 4 (four) years from the end of the relevant assessment year and the authority would be the Principal Chief Commissioner or the Chief Commissioner or the Principal Commissioner or the Commissioner who had to arrive at the satisfaction on the reasons recorded by the Assessing Officer for issuance of such notice. On the other hand, in respect to all other cases, i.e. up to four years, the authority would be the Joint Commissioner which is the authority defined in Section 2(28C). It is also pertinent that the Act of 1961 does not stipulate that the power which had been entrusted by the Act to an Officer can be exercised by any superior officer. Whether the non-communication of the entire satisfaction note would vitiate the reassessment proceedings? - For conferment of jurisdiction, the recording of reasons is no more essential but recording of reasons would only be essential in terms with Sub-Section (2) of Section 148 for the Assessing Officer to issue any notice under Section 148. It is also pertinent herein to take note of that the words he, may, subject to the provisions of Section 148 to 153 as appearing in Section 147, makes the legislative intent further clear that for assessing or reassessing such income and also any other income chargeable to tax which had escaped assessment, the Assessing Officer has to do so or for that matter exercise the jurisdiction by satisfying the mandate of Section 148 to 153. This Court also finds it relevant to mention that the provisions of Section 147 as well as the provisions of Section 148 to 153 do not mention that the reasons so recorded prior to issuance of notice under Section 148 is required to be furnished to the assessee. As decided in S. Narayanappa 1966 (9) TMI 36 - SUPREME COURT there is no requirement in any of the provisions of the Act or any Section laying down as a condition for initiation of proceedings that the reasons which induced to the Commissioner to accord sanction to proceed under Section 34 must also be communicated to the assessee. Furnishing of the reasons is not required as per the provisions of the Act of 1961 and the said aspect had been judicially also accepted. Now therefore the question arises as to why the Supreme Court in the case of GKN Driveshafts (India) Ltd. 2002 (11) TMI 7 - SUPREME COURT had observed that the reasons upon being requested has to be furnished which would provide an opportunity to the assessee to file objection against such reasons and further the Assessing Officer has to pass an order on the said objection and thereupon proceed - From a perusal of the said judgment in the case of GKN Driveshafts (India) Ltd. (supra), it would clearly show that the said judgment is not an authority that the reassessment proceedings would be nullified for not furnishing the reasons. It is the opinion of this Court that if an objection is filed on the basis of the reasons so provided and the said objection is rejected, then it may be a good ground for the assessee to assail the assessment/reassessment order in an appeal. However, the reassessment proceedings cannot be nullified by way of writ petition on the ground that the reasons in the entirety was not furnished. The rationale behind the said opinion of this Court is taking into account that it is well settled that the existence of the belief is justiciable whereas the sufficiency of the reasons for forming the belief is not. Therefore, if an assessee has to challenge the existence of the belief, the same can be done so in a proceedings under Article 226 of the Constitution which is also well settled. Further, it is also the opinion of this Court that the existence of the belief cannot be challenged before the Assessing Officer as it touches upon his own jurisdiction. However, as the sufficiency of reasons for forming the belief cannot be challenged in a proceeding under Article 226 of the Constitution, the assessee would have a right to file objections against the sufficiency of the reasons for forming the belief by the Assessing Officer. It is in that context, the Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) made the said observations. Bogus LTCG - exemption u/s10(38) denied - assessee sold shares (penny stocks) as identified by SEBI and Investigation Wing, Kolkata during FY 2010-11 - HELD THAT - From the reasons so recorded as above noted and reading conjointly with the computation of income with the detail so given in the reasons for issuance of notice under Section 148 of the Act of 1961, it cannot be said that there was no existence of reasons to believe that the income had escaped assessment. Further to that, the reasons so assigned were neither vague nor indefinite. The reasons had a live link for the formation of the requisite belief. This Court during the course of hearing inquired with the learned counsel for the Petitioner as to how certain shares were shown in the computation of the income as purchased at nil value whereas were sold at certain amounts. The learned counsel for the Petitioner submitted that they were bonus shares which had no purchase costs. He however admitted that in the computation of the income, the same were not reflected as bonus shares issued at nil value. Under such circumstances also this Court is of the opinion that there existed reasons to believe for reopening of the assessment. Non-compliance to Section 151 - The plea of non-compliance of Section 151 of the Act of 1961 is plea challenging the very reassessment proceedings and in the opinion of this Court, the said plea had to raise specifically in the pleadings else entertaining such plea on oral submissions would violate the principles of natural justice. This Court finds it relevant to refer to a judgment of the Supreme Court in the case of S.S. Sharma and Others Vs. Union of India and Others 1980 (11) TMI 171 - SUPREME COURT wherein the Supreme Court observed that the Court should ordinarily insist on the parties being confined to their specific written pleadings and should not permit deviation from them by way of modification or supplementation except through the well known process of formally applying for amendment. It was further observed that if undue laxity and a too easy informality is permitted to enter the proceedings of a Court, it will not be long before a contemptuous familiarity assails its institutional dignity and ushers in chaos and confusion undermining its effectiveness. It was categorically observed that oral submissions raising new points for the first time tend to do grave injury to a contesting party by depriving it of the opportunity to which the principles of natural justice hold it entitled of adequately preparing its response. In view of the above settled propositions and the facts that the Petitioners in all the writ petition above have not taken the plea of non-compliance to Section 151 of the Act of 1961, the same cannot be allowed to be raised by way of an oral submissions.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
2. Compliance with Section 151 of the Income Tax Act, 1961.
3. Effect of non-communication of reasons for reassessment.

Summary:

Issue A: Validity of Reassessment Proceedings under Section 147
WP(C)/5437/2016:
The Petitioner disclosed Long Term Capital Gains in the return. The reassessment was initiated based on information that the Petitioner sold shares identified as "penny stocks" by SEBI and the Investigation Wing, Kolkata, but did not disclose income/loss from such sales. The Court found that there were reasons to believe that income had escaped assessment, justifying the reassessment proceedings.

WP(C)/5530/2016:
Similar to WP(C)/5437/2016, the Petitioner disclosed Long Term Capital Gains. Reassessment was initiated on the same grounds of undisclosed income from "penny stocks". The Court upheld the existence of reasons to believe that income had escaped assessment.

WP(C)/5535/2016:
The Petitioner disclosed Long Term Capital Gains from shares identified as "penny stocks". The reassessment was based on information from the ITD Application and the Investigation Directorate that the transactions were manipulated to generate bogus gains. The Court found the reasons for reassessment to be valid.

WP(C)/5536/2016:
Similar to WP(C)/5535/2016, the Petitioner disclosed Long Term Capital Gains from "penny stocks". The reassessment was based on the same grounds. The Court upheld the reasons for reassessment.

Issue B: Compliance with Section 151
The Petitioners did not plead non-compliance with Section 151 in their writ petitions. The Court found that the approval for reassessment was taken from the Joint Commissioner of Income Tax, as required. The plea of non-compliance raised during oral submissions was not entertained due to lack of foundational pleadings.

Issue C: Effect of Non-Communication of Reasons
WP(C)/5535/2016 and WP(C)/5536/2016:
The Petitioners argued that the entire satisfaction note was not furnished. The Court held that non-communication of the entire satisfaction note does not invalidate the reassessment proceedings. However, the Petitioners were granted the right to file objections regarding the sufficiency of reasons for reassessment.

Court's Observations and Directions:
1. WP(C)/5437/2016:
- The Court did not quash the reassessment proceedings despite the records being lost/not traceable.
- Directed the Income Tax Department and the Central Board of Direct Taxes to inquire into the loss of records and take appropriate action.

2. WP(C)/5530/2016, WP(C)/5535/2016, and WP(C)/5536/2016:
- The reassessment proceedings were upheld.
- Petitioners were granted liberty to file objections on the sufficiency of reasons within 30 days.
- The Assessing Officer was directed to dispose of the objections by passing a speaking order.

3. General Directions:
- The reassessment records produced were returned.
- All interim orders were vacated.

The Court emphasized that the sufficiency of reasons for reassessment can be challenged in an appeal following the reassessment order.