2016 (3) TMI 972 - HC - Income Tax

High Court sets aside Income Tax notices under Section 148, stresses credible material for re-assessment

Rajiv Agarwal, Vijay Laxmi Agarwal Versus Assistant Commissioner of Income Tax & Another

The High Court allowed the writ petitions, setting aside the notices issued under Section 148 of the Income Tax Act and the orders rejecting objections by ... Reopening of assessment - failure to consider the objections filed by the Assessees - Held that:- Revenue's contention that the AO is not required to apply his mind to the facts in relation to the escapement of income at the stage of considering objections is wholly without merit. Whilst, the AO is not expected to finally decide whether income of an assessee has escaped assessment at the stage of considering the objections he, nonetheless, has to consider the facts presented in support of the objections in a meaningful manner and at least to consider whether his reason to believe that income escaped assessment is justified or is without sufficient basis. Since in the present case, the AO has failed to consider the objections filed by the Assessees, the order dated 11th September 2015 passed by the AO rejecting the objections raised cannot be sustained. Reopening set aside -Decided in favour of assessee Issues Involved:1. Validity of notices issued under Section 148 of the Income Tax Act for re-assessment.2. Basis and sufficiency of material for forming 'reason to believe' that income had escaped assessment.3. Consideration of objections raised by the Assessees against the re-assessment notices.4. Compliance with procedural requirements for re-assessment under Section 147 of the Income Tax Act.Detailed Analysis:1. Validity of Notices Issued Under Section 148:The Assessees challenged the validity of the notices dated 31st March 2015 issued under Section 148 of the Income Tax Act for the Assessment Year 2008-09. The notices were based on a complaint received by the Income Tax Authorities alleging tax evasion. The Assessees argued that the complaint was malafide and stemmed from disputes with their erstwhile auditor, Naveen Chaudhary. The Court noted that the reasons for re-opening the assessments were disclosed to the Assessees, indicating that the proceedings were initiated based on the complaint.2. Basis and Sufficiency of Material for Forming 'Reason to Believe':The Court examined whether the Assessing Officer (AO) had sufficient material to form a 'reason to believe' that income had escaped assessment. The AO relied solely on the complaint dated 10th December 2014, which alleged that Keyman Insurance Policies were sold to the Assessees at a meager amount, resulting in escaped income. The Court found that in the case of Rajeev Agarwal, no such transaction occurred, and thus, the fundamental premise for re-opening his assessment was factually erroneous. In the case of Vijay Laxmi Agarwal, the Assessee had provided evidence that the policy was assigned for a consideration equal to its surrender value, negating any escaped income. The Court emphasized that mere suspicion or unsubstantiated complaints could not constitute tangible material for re-assessment.3. Consideration of Objections Raised by the Assessees:The Assessees filed objections to the re-assessment notices, arguing that the complaint was baseless and that there was no failure on their part to disclose material facts. The AO rejected these objections, stating that the sufficiency of the material could not be questioned at this stage. The Court criticized the AO for not considering the specific facts and evidence presented by the Assessees, rendering the objections process meaningless. The Court highlighted that the AO must meaningfully consider the objections and the facts presented by the Assessees.4. Compliance with Procedural Requirements for Re-assessment:The Court reiterated that the procedure for providing reasons to believe and enabling the Assessee to file objections is an essential safeguard against arbitrary re-assessment. The AO's failure to consider the objections meaningfully and to apply his mind to the facts presented by the Assessees violated this procedural safeguard. The Court held that the AO must have credible material and a close nexus between the material and the reason to believe that income had escaped assessment.Conclusion:The High Court allowed the writ petitions, setting aside the impugned notices dated 31st March 2015 issued under Section 148 of the Income Tax Act and the orders dated 11th September 2015 rejecting the objections filed by the Assessees. The Court emphasized that re-assessment proceedings must be based on tangible and credible material, and the AO must meaningfully consider the objections raised by the Assessees. No order as to costs was made.