Notice issued without sufficient reasons to initiate reassessment is not sustainable

The Hon'ble Bombay High Court in B.U. Bhandari Autolines Pvt. Ltd. v. The Assistant Commissioner of Income Tax, And Ors. [Writ Petition No. 5059 of 2022 dated February 10, 2023] has quashed the notice under Section 148 of the Income Tax Act, 1961 ('the IT Act') for escaping the income assessment, and set asidethe consequential order passed, on the ground that the notice was issued without sufficient reasons to initiate reassessment proceedings without satisfying the conditions precedent under Section 147 of the IT Act. Held that, the Revenue Department had not independently applied its mind to the information received or had conducted its own inquiry into the matter. Further held that, It is settled law, that the issue of reopening of assessment has to be tested on the basis of reasons recorded and cannot be substituted by an affidavit or oral submissions.

Facts

B.U. Bhandari Autolines Pvt. Ltd. ('the Petitioner') filed its income tax return which was processed under Section 143(1) of the IT Act for the Assessment Year ('A.Y.') 2016-17. Subsequently, a notice dated March 30, 2021 ('the Impugned Notice') was issued by the Revenue Department ('the Respondent') under Section 148 of the IT Act, seeking to reopen the assessment for the A.Y. 2016-17, on the ground that income chargeable to tax had escaped assessment as the Petitioner had sold goods amounting to INR 2,08,76,068/- to M/s Magnum Tradex Pvt. Ltd, which was allegedly a shell entity. The Petitioner filed its objections for the said reopening of the assessment which was disposed of vide order dated February 24, 2022 ('the Impugned Order').

Being aggrieved, this petition has been filed.

The Petitioner contended that the reasons for the re-opening of assessment proceedings furnished to the Petitioner were vague, general and had no direct link with the formation of the belief that its income had escaped assessment, therefore, the requirement of Section 147 of the IT Act having not been fulfilled and the Impugned Notice was without jurisdiction.

Issue

Whether the Respondent had enough material and reasons for initiating the reassessment proceedings as per Section 147 of the IT Act?

Held

The Hon'ble Bombay High Court in Writ Petition No. 5059 of 2022 held as under:

• Relied on the judgment of the Hon'ble Supreme Court in Income-tax Officer v. LakhmaniMewal Das [[1976] 103 ITR 437 (SC) dated March 30, 1976] wherein, it was held that the reopening of the assessment after a lapse of many years is a serious matter and while the IT Act contemplates the reopening of the assessment if grounds exist for believing that income of the assessee had escaped assessment, yet the words of the statute were 'reason to believe' and not 'reason to suspect'.
• Noted that, the reasons given by the Respondent for reassessment, alleged that the Petitioner had sold goods to a shell entity. However, there was no materialor basis in such reasons by the Respondent, to conclude that M/s Magnum Tradex Pvt. Ltd., was indeed a shell entity.
• Observed that, it is settled law that the issueof reopening of assessment has to be tested on the basis of reasons recorded by the Respondent and cannot, therefore, be improved upon the reply affidavit or oral submissions.
• Stated that, thereasons for the reopening of assessment do not suggest that the Respondent had independently applied its mind to the information received or conducted its own inquiry into the matter for the purpose of coming to a conclusion that income assessable to tax had escaped assessment or that the transaction in question with the alleged shell entity was only a paper transaction.
• Held that, the Impugned Notice was issued without satisfying the conditions precedent under Section 147 of the IT Act.
• Quashed the Impugned Notice and set aside the Impugned Order.

Relevant Provisions

Section 147 of the IT Act

'Income escaping assessment-

If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).
Explanation-For the purposes of assessment or reassessment or re-computation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.'

Section 148 of the IT Act

'Issue of notice where income has escaped assessment-

Before making the assessment, reassessment or re-computation under section 147, and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within such period, as may be specified in such notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:

Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.

Provided further that no such approval shall be required where the Assessing Officer, with the prior approval of the specified authority, has passed an order under clause (d) of section 148A to the effect that it is a fit case to issue a notice under this section.

Explanation 1.-For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means-

(i) any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;
(ii) any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act; or
(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or
(iv) any information made available to the Assessing Officer under the scheme notified under section 135A; or
(v) any information which requires action in consequence of the order of a Tribunal or a Court.

Explanation 2.-For the purposes of this section, where,-

(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or

(ii) a survey is conducted under section 133A, other than under sub-section (2A) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or

(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or under section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee,

the Assessing Officer shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee where the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.

Explanation 3.-For the purposes of this section, specified authority means the specified authority referred to in section 151.'