Madhukar Khosla v. Assistant Commissioner Of Income Tax

* IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 12.05.2014Pronounced on: 14.08.2014 +W.P.(C) 1320/2014, C.M. NO.2744/2014 & 2745/2014 MADHUKAR KHOSLA..... Petitioner Through : Sh. Salil Kapoor with Sh. Vikas Jain andSh. Varun Gupta, Advocates. Versus ASSISTANT COMMISSIONER OF INCOME TAX ..... RespondentThrough : Sh. Sanjeev Sabharwal, Sr. StandingCounsel with Sh. Ruchir Bhatia, Jr. StandingCounsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE VIBHU BAKHRU MR. JUSTICE S. RAVINDRA BHAT %C.M. NO. 2745/2014 (for exemption) Allowed, subject to all just exceptions. W.P.(C) 1320/2014, C.M. NO.2744/2014 1.The petitioner challenges the notice dated 25.03.2013 underSection 148 of the Income Tax Act (“the Act”) proposing to re-opentheassessmentforAssessmentYear2006-07@`1,12,760/-completed under Section 143 (3) by the Assessing Officer (“AO”). 2.The brief facts are that the petitioner filed income tax returns on30.10.2006 for AY 2006-07. The returns were selected for scrutiny; anotice was issued on 28.02.2008 along with a questionnaire. Therequired details were furnished by the petitioner on 07-03-2008. TheAO, accepting the explanations, framed the assessment on 28-03-2008. In this background of circumstances, the respondent AO soughtto re-open the assessment by the impugned notice, under Section 147of the Act. Responding to this notice, the assessee, on 22-04-2013stated that it stood by the returns filed originally (and accepted by theAO on 28-03-2008); it also requested that the reasons for re-openingthe assessment be furnished. 3.The Revenue acceded to the petitioner’s request; the reasonsfurnished are extracted below: “In this case assessment was completed under section143(3) vide order dated 28.3.2008 on an income of Rs.1,12,760/-. 2. On perusal of the records and the details filed by theassessee it came to the notice that the assessee has added anamount of Rs.25,31,003/- to its capital account of hisproprietorship concern M/s Madhukar Khosla & Co.(Rs.14,31,000/- as gift and Rs.11 ,00,003/- addition).During the course of assessment proceedings the assesseeoffered no explanation to the above addition to the capitalaccount. 3. In the absence of the source of the addition withdocumentary evidence on records, the same is required tobe brought on tax net as per provisions of section 68 of theIncome tax Act, 1961 as the assessee had offered no explanation about the nature and source of the saidadditions 4.Ihavetherefore,reasonstobelievethatomission/failure on the part of the assessee to disclose fullyand truly all material/facts necessary for assessment,incometotheextentofRs.25,31,003/-hasescapedassessment for the assessment year 2006-07 and hence issuenotice under section 148.” 4.On28-11-2013theassesseeobjectedtore-openingof assessment, stating, inter alia, that: “In this case, the assessee disclosed fully and truly allmaterial facts relating to the said issue. In the BalanceSheet said amounts showing the nature thereof have beenclearly shown. During assessment, the books of A/c wereproduced and were verified by the AO. The findings to thiseffect are available in Para - 3 of the Assessment Order.Hence, since, the conditions of first proviso to Section 147are not fulfilled, Section 147 cannot be invoked.” and further that: “there is no new information with your good self which wasnot available earlier. It is only on the basis of earlierexisting Information and details that your good self hasbeen forming an opinion that it is a case of escapement ofincome. Under the facts, it is a clear cut case of change ofopinion. Section 147, cannot be resorted to in case ofchange of opinion…” 5.By the letter dated 20-12-2013, the assessee’s objections to thereopening of assessment were rejected; the AO in his letter, stated asfollows: and further that: “there is no new information with your good self which wasnot available earlier. It is only on the basis of earlierexisting Information and details that your good self hasbeen forming an opinion that it is a case of escapement ofincome. Under the facts, it is a clear cut case of change ofopinion. Section 147, cannot be resorted to in case ofchange of opinion…” 5.By the letter dated 20-12-2013, the assessee’s objections to thereopening of assessment were rejected; the AO in his letter, stated asfollows: …you have raised the issue that section 147 has beenresorted to due to a change of opinion. It may be reiteratedthat the issues on which the case has been reopened, hadnot been discussed earlier. Thus the issue of change ofopinion does not arise. The onus was upon the assessee toprovide full and complete details during the earlierproceedings which he failed to do so and therefore Section147 is being resorted to. It is for the A.O to draw inferencesfrom the facts and apply the law determining the liability ofthe assessee. If there are sufficient reasons to believe thatincome has escaped assessment, then it is the discretion ofthe A.O to reopen the case. Various case laws alsosubstantiate the same….” 6.The assessee argues that the expression “reasons to believe”under Section 147 refers to objective circumstances. In the presentcase, the assessment was completed under Section 143 (3) after noticewas issued under Section 142 (1) was issued and explanation sought inrespect of all relevant matters. The assessee could not be faulted forthe omission to discuss the materials on record. Learned counselstressed that “reasons” were to be on the basis of “tangible materials”which must be in possession of the revenue, which alone can result ina valid re-opening. There was no such tangible material; the AO,argued counsel, acted without any jurisdiction in merely seeking torevisit the matter, which in effect amounts to a review or animpermissible change of opinion. Learned counsel relied on CIT,Delhi v. Kelvinator of India Ltd., (2010) 2 SCC 723 and CIT-V v.Orient Craft Ltd., [2013] 354 ITR 536 (Delhi). 7.Learned counsel for the Revenue supports the re-opening ofassessment in this case and urges that the Court should dismiss the petition. It was submitted that there was no explanation how theassessee added the amount to the capital account. The originalassessment shows that the AO did not direct his mind to the issue at allthough a questionnaire might have been issued. He relied on thedecision in CIT-VI v Usha International Ltd. (2012) 348 ITR 485 andcontends that having regard to the following observations of themajority (in that case), the notice issued by the AO is valid:- “23. The said observations do not mean that even if theAssessing Officer did not examine a particular subjectmatter, entry or claim/deduction and therefore had notformed any opinion, it must be presumed that he must haveformed an opinion. This is not what was argued by theassessee or held and decided. There cannot be deemedformation of opinion even when the particular subjectmatter, entry or claim/deduction is not examined”. 8.Section 147 permits the Assessing Officer to reopen anassessment, and issue notices if he “ has reason to believe that anyincome chargeable to tax has escaped assessment for any assessmentyear …” The scope of the phrase “reasons to believe” – introduced in1989 – was considered by the Supreme Court in various decisions. InM/s. Phool Chand Bajrang Lal and Anr. v. Income Tax Officer andAnr. [1993] 203 ITR 456 (SC) The Supreme Court held that the scopeof enquiry to decide whether there were “reasons to believe” wasrestricted, and “To that limited extent, the court may look into theconclusion arrived at by the Income-tax Officer and examine whetherthere was any material available on the record from which therequisite belief could be formed by the Income-tax Officer and furtherwhether that material had any rational connection or a live link for the formation of the requisite belief."This was based on the lawdeclared in several previous decisions of the Court (Central ProvincesManganese Ore. Co. Ltd. v. Income Tax Officer, Nagpur, [1991] 191ITR 662 (SC), Sri Krishna Pvt. Ltd. v. Income Tax Officer, Calcutta,(1996) 9 SCC 534). 9.In this case, the reasons provided under Section 148 are that in“absence of the source of the addition with documentary evidence onrecords, the same is required to be brought on tax net as perprovisions of section 68 of the Income tax Act, 1961 as the assesseehad offered no explanation about the nature and source of the saidadditions…” and thus, must be treated as income which escapedassessment. No details are provided as to what such information iswhich excited the AO’s notice and attention. The reasons mustindicate specifically what such objective and new material facts are,on the basis of which a reopening is initiated under Section 148. Thisreassessment is clearly not on the basis of new (or “tangible”)information or facts that which the Revenue came by. It is in effect are-appreciation or review of the facts that were provided along withthe original return filed by the assesse. The Supreme Court inKelvinator (supra) frowned against such exercise of power: “However, one needs to give a schematic interpretation tothe words "reason to believe" failing which, we are afraid,Section 147 would give arbitrary powers to the AssessingOfficer to re-open assessments on the basis of "mere changeof opinion", which cannot be per se reason to re-open. Wemust also keep in mind the conceptual difference betweenpower to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment ofcertain pre-condition and if the concept of "change ofopinion" is removed, as contended on behalf of theDepartment, then, in the garb of re-opening the assessment,review would take place. One must treat the concept of"change of opinion" as an in-built test to check abuse ofpower by the Assessing Officer. Hence, after 1[st]April, 1989,Assessing Officer has power to re-open, provided there is"tangible material" to come to the conclusion that there isescapement of income from assessment. Reasons must havea live link with the formation of the belief. ” 10.This Court recollects that even in case of an assessmentcompleted under Section 143 (1), the requirement of recording“reasons to believe” are mandatory – as the text of Section 147indicates. Rejecting an argument by the Revenue to the contrary, thisCourt in Orient Craft (supra) held that: “The assumption of the Revenue that somehow the words"reason to believe" have to be understood in a liberalmannerwherethefinalityofanintimationunderSection 143(1) is sought to be disturbed is erroneous andmisconceived. As pointed out earlier, there is no warrant forsuch an assumption because of the language employed inSection 147; it makes no distinction between an order passedundersection 143(3) andtheintimationissuedundersection 143(1). Therefore it is not permissible to adoptdifferent standards while interpreting the words "reason tobelieve" vis-à-vis Section 143(1)and Section 143(3). We areunable to appreciate what permits the Revenue to assumethat somehow the same rigorous standards which areapplicable in the interpretation of the expression when it isapplied to the reopening of an assessment earlier madeunder Section 143(3)cannot apply where only an intimationwas issued earlier under Section 143(1). It would in effectplace an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than anassessee in whose case there was a full-fledged scrutinyassessment made under Section 143(3). Whether the return isput to scrutiny or is accepted without demur is not a matterwhich is within the control of assessee; he has no choice inthe matter. The other consequence, which is somewhatgraver, would be that the entire rigorous procedureinvolved in reopening an assessment and the burden ofproving valid reasons to believe could be circumvented byfirst accepting the return under Section 143(1) and thereafterissue notices to reopen the assessment. An interpretationwhich makes a distinction between the meaning and contentof the expression "reason to believe" in cases whereassessments were framed earlier under Section 143(3) andcases where mere intimations were issued earlier underSection 143(1)may well lead to such an unintended mischief.It would be discriminatory too. An interpretation that leadsto absurd results or mischief is to be eschewed. 13.Certain observations made in the decision of RajeshJhaveri (supra) are sought to be relied upon by the revenueto point out the difference between an "assessment" and an"intimation". The context in which those observations weremade has to be kept in mind. They were made to point outthatwherean"intimation"isissuedundersection 143(1) thereisnoopportunitytotheassessingauthority to form an opinion and therefore when its finalityis sought to be disturbed by issuing a notice undersection 148, the proceedings cannot be challenged on theground of "change of opinion". It was not opined by theSupremeCourtthatthestrictrequirementsofsection 147 can be compromised. On the contrary, from theobservations (quoted by us earlier) it would appear clearthat the court reiterated that "so long as the ingredients ofsection 147 arefulfilled"anintimationissuedundersection 143(1) can be subjected to proceedings for reopening.The court also emphasised that the only requirement fordisturbing the finality of an intimation is that the assessingofficer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion,the said expression should apply to an intimation in thesame manner and subject to the same interpretation as itwouldhaveappliedtoanassessmentmadeundersection 143(3).Theargumentoftherevenuethatanintimation cannot be equated to an assessment, relying uponcertain observations of the Supreme Court in Rajesh Jhaveri(supra) would also appear to be self-defeating, because ifan "intimation" is not an "assessment" then it can never besubjected to section 147 proceedings, for, that section coversonly an "assessment" and we wonder if the revenue wouldbe prepared to concede that position. It is nobody's casethatan"intimation"cannotbesubjectedtosection 147 proceedings; all that is contended by theassessee, and quite rightly, is that if the revenue wants toinvoke section 147 it should play by the rules of that sectionand cannot bog down. In other words, the expression"reason to believe" cannot have two different standards orsets of meaning, one applicable where the assessment wasearlier made under section 143(3) and another applicablewhere an intimation was earlier issued under section 143(1).It follows that it is open to the assessee to contend thatnotwithstanding that the argument of "change of opinion" isnot available to him, it would still be open to him to contestthe reopening on the ground that there was either no reasonto believe or that the alleged reason to believe is notrelevant for the formation of the belief that incomechargeable to tax has escaped assessment. In doing so, it isfurther open to the assessee to challenge the reasonsrecorded under section 148(2) on the ground that they do notmeetthestandardssetinthevariousjudicialpronouncements.” 11.The foundation of the AO’s jurisdiction and the raison d’etre ofa reassessment notice are the “reasons to believe”. Now this shouldhave a relation or a link with an objective fact, in the form ofinformation or facts external to the materials on the record. Such 11.The foundation of the AO’s jurisdiction and the raison d’etre ofa reassessment notice are the “reasons to believe”. Now this shouldhave a relation or a link with an objective fact, in the form ofinformation or facts external to the materials on the record. Such external facts or material constitute the driver, or the key whichenablestheauthoritytolegitimatelyre-openthecompletedassessment. In absence of this objective “trigger”, the AO does notpossess jurisdiction to reopen the assessment. It is at the next stagethat the question, whether the re-opening of assessment amounts to“review” or “change of opinion” arises. In other words, if there are no“reasons to believe” based on new, “tangible materials”, then thereopening amounts to an impermissible review. Here, there is nothingto show what triggered the issuance of notice of reassessment – noinformation or new facts which led the AO to believe that fulldisclosure had not been made. The impugned notice, the AO’s orderrejecting the objections, and the arguments of the Revenue nowhereindicate how the AO was impelled to seek re-opening of the assessee’scase, as distinguished from the several other completed assessments. 12.For these reasons, this Court is of the opinion that the impugnedreassessment notice cannot be sustained; it is hereby quashed. Thewrit petition and the pending application are allowed in the aboveterms without order as to costs. S. RAVINDRA BHAT(JUDGE) AUGUST 14, 2014 VIBHU BAKHRU(JUDGE)