2008 (11) TMI 2 - HC - Income Tax

Reassessment under Sections 147/148 invalid where AO accepted share application details under Section 143(3); reassessment quashed

HC held that reassessment proceedings under Section 147/148 could not be sustained where the AO had recorded receipt, verification and acceptance of ... Reopening of assessment beyond four years under proviso to section 147 - failure to disclose fully and truly all material facts - requirement to furnish reasons and dispose objections by a speaking order - change of opinion - production of books or evidence will not necessarily amount to disclosure (Explanation 1 to Section 147)Reopening of assessment beyond four years under proviso to section 147 - failure to disclose fully and truly all material facts - Validity of the notice under Section 148 issued after four years where reasons supplied did not allege failure to disclose fully and truly all material facts - HELD THAT: - The Court held that where a re-opening is sought after the four year period carved out by the proviso to Section 147, the jurisdiction to reopen is dependent not only on a belief that income has escaped assessment but also on the proviso condition that such escapement is by reason of the assessee's failure to disclose fully and truly all material facts necessary for assessment. The reasons supplied to the petitioner contained no allegation of such failure. Merely having a reason to believe that income escaped assessment was insufficient to overcome the statutory bar; the proviso's condition is a necessary precondition. On this basis the notice dated 29.03.2004 and the consequential proceedings were held to be without jurisdiction and liable to be quashed. [Paras 19, 20]Notice under Section 148 dated 29.03.2004 and consequent proceedings were without jurisdiction and set aside.Requirement to furnish reasons and dispose objections by a speaking order - Validity of proceedings where reasons actually relied upon (as per departmental form) differed from the reasons communicated to the assessee and objections were decided on the latter - HELD THAT: - The Court found that the reasons communicated to the petitioner in September 2004 were different from the reasons the respondents later relied upon in the internal form (Annexure-A). The respondents could not be permitted to substitute or rely on reasons not communicated when the assessee had filed objections to the reasons actually supplied. The statutory and judicially mandated procedure - recording reasons, communicating them within a reasonable time, permitting objections and disposing of them by a speaking order (GKN Driveshafts) - was not followed in substance. Allowing the respondents to fall back on reasons not supplied would render the mandated procedure a sham. The Court also rejected the suggestion of treating the form-reasons as fresh communication at a much later stage because that would defeat the requirement of furnishing reasons within a reasonable time and run afoul of limitation provisions. [Paras 21, 22, 23, 24]Proceedings and the speaking order were vitiated by failure to communicate the actual reasons and are set aside.Production of books or evidence will not necessarily amount to disclosure (Explanation 1 to Section 147) - change of opinion - Whether the assessee had failed to disclose fully and truly all material facts so as to permit reopening; and whether the reassessment was merely a change of opinion - HELD THAT: - The Court examined the material and the original assessment record and noted that the Assessing Officer had specifically queried and received documents relating to the share application money from Hallmark Healthcare Ltd, had recorded that details were filed and verified in the assessment order dated 07.03.2001, and had accepted the claim after verification. Explanation 1 does not rule out disclosure in every case, but on the facts the assessee had made full and true disclosure of the material facts necessary for assessment. The reopening could not be justified as action on subsequent specific information because the essential proviso condition of failure to disclose was not satisfied; nor was the impugned action a permissible exercise beyond being a mere change of opinion when the Assessing Officer had already applied his mind and accepted the documents in original assessment. [Paras 27]Assessee did not fail to disclose fully and truly all material facts; reopening was unjustified and cannot be sustained.Final Conclusion: Writ petition allowed; the notice under Section 148 dated 29.03.2004, the order dated 02.03.2005 and all proceedings pursuant thereto are quashed and set aside; parties to bear their own costs. Issues Involved:1. Legality of the notice under Section 148 of the Income Tax Act, 1961 for reopening the assessment.2. Applicability of the proviso to Section 147 of the Income Tax Act, 1961.3. Allegation of failure to disclose fully and truly all material facts necessary for assessment.4. Validity of the reasons provided for reopening the assessment.5. Compliance with the Supreme Court's directions in GKN Driveshafts (India) Limited v. Income Tax Officer and Others.6. Examination of whether the case involves a mere change of opinion.Detailed Analysis:1. Legality of the Notice under Section 148:The writ petition challenges the notice dated 29.03.2004 issued by the Assistant Commissioner of Income Tax under Section 148 of the Income Tax Act, 1961, for reopening the assessment for the assessment year 1998-99. The petitioner had filed a return declaring nil income, and the assessment was completed under Section 143(3) at nil income. The notice under Section 148 was issued on the grounds that the petitioner had allegedly taken accommodation entries from Hallmark Healthcare Limited.2. Applicability of the Proviso to Section 147:The case involves the issuance of a notice under Section 148 beyond four years from the end of the relevant assessment year. Therefore, the proviso to Section 147 is applicable. This proviso allows action after four years only if the income chargeable to tax has escaped assessment due to the assessee's failure to make a return or to disclose fully and truly all material facts necessary for the assessment.3. Allegation of Failure to Disclose Fully and Truly All Material Facts:The reasons supplied to the petitioner for reopening the assessment did not contain any allegation that the petitioner failed to disclose fully and truly all material facts necessary for the assessment. The petitioner had disclosed all relevant documents during the original assessment proceedings, including details of the share application money received from Hallmark Healthcare Limited. The assessment order noted that the details required were filed and verified.4. Validity of the Reasons Provided for Reopening the Assessment:The reasons provided to the petitioner indicated that the assessee had taken accommodation entries from Hallmark Healthcare Limited. However, the petitioner contended that the transaction was genuine and had been fully disclosed during the original assessment. The court found that the reasons supplied did not allege any failure to disclose material facts, which is a necessary condition for reopening the assessment after four years.5. Compliance with the Supreme Court's Directions in GKN Driveshafts (India) Limited v. Income Tax Officer and Others:The Supreme Court in GKN Driveshafts directed that the reasons for issuing a notice under Section 148 must be supplied to the assessee within a reasonable time, and the assessee is entitled to file objections to the notice. The Assessing Officer is then bound to dispose of the objections by passing a speaking order. In this case, the reasons were supplied to the petitioner after a significant delay, and the objections were not disposed of in a timely manner, violating the Supreme Court's directions.6. Examination of Whether the Case Involves a Mere Change of Opinion:The petitioner argued that the notice under Section 148 was based on a mere change of opinion, which is not permissible under law. The court observed that the original assessment had been completed after due verification of the details provided by the petitioner. The court held that the reopening of the assessment was based on a mere change of opinion and not on any new material or information.Conclusion:The court allowed the writ petition, setting aside the notice dated 29.03.2004 under Section 148 and the order dated 02.03.2005. The court held that the reasons supplied to the petitioner did not contain any allegation of failure to disclose material facts, which is a necessary condition for reopening the assessment after four years. The court also found that the proceedings were vitiated due to non-compliance with the Supreme Court's directions in GKN Driveshafts. All proceedings pursuant to the notice were set aside, and the parties were directed to bear their own costs.