2016 (5) TMI 115 - HC - Income Tax

Court Invalidates Income Tax Notices for Assessment Years, Emphasizes Need for Clear Reasons

The court found that the notices issued under Section 148 of the Income Tax Act for various Assessment Years were invalid due to being beyond the ... Reopening of assessment - reasons recorded under Section 148 - failure to disclose fully and truly all material facts - live link between reasons and formation of belief that income escaped assessment - change of opinion - prohibition on supplying fresh reasons after recording - validity of reassessment jurisdictionReasons recorded under Section 148 - failure to disclose fully and truly all material facts - live link between reasons and formation of belief that income escaped assessment - Adequacy of the reasons recorded for reopening the assessments under Section 148 for AYs 2007-2008 to 2012-2013. - HELD THAT: - The recorded reasons were incoherent, grammatically defective and failed to indicate a clear basis for the formation of belief that income had escaped assessment. The Court examined the statutory requirement that reasons must demonstrate (i) failure by the assessee to disclose fully and truly all material facts necessary for assessment and (ii) a live link between those facts and the belief that income escaped assessment. Applying the authorities cited, the Court held that the reasons as recorded (and as partly deciphered by the Revenue) did not satisfy these jurisdictional requirements. The facts relevant to the various assessment years were jumbled together and material averments relied upon subsequently were absent from the reasons as recorded, so that the foundational trigger for reopening under Section 147/148 was not established. [Paras 9, 11, 12, 17, 18]The reasons recorded for reopening are inadequate and do not satisfy the requirements of Section 147/148; the notices issued on 28th March 2014 are quashed.Prohibition on supplying fresh reasons after recording - validity of reassessment jurisdiction - change of opinion - Permissibility and legal effect of supplying or supplementing reasons for reopening subsequently (by order rejecting objections or by affidavit). - HELD THAT: - The Court reiterated the settled principle that the validity of the assumption of jurisdiction under Section 147 must be tested by reference to the reasons recorded under Section 148(2) alone, and that the Assessing Officer cannot supply or expand reasons later in an order rejecting objections or in affidavits. Reliance on additional factual allegations in the objection-rejection order and in the counter-affidavit cannot cure the deficiency in the original reasons. Even the reasons advanced later were examined and found insufficient to establish the required failure to disclose and the live link to escapement of income. [Paras 14, 15, 16, 17]Reasons introduced subsequently cannot validate an otherwise deficient Section 148 record; the post hoc explanations do not cure the jurisdictional defect.Final Conclusion: The Court quashed the notices dated 28th March 2014 issued under Section 148 and the orders dated 24th October 2014 rejecting objections for the Assessees in respect of AYs 2007-2008 to 2012-2013; the writ petitions are allowed and disposed of with no order as to costs. Issues Involved:1. Validity of the notices issued under Section 148 of the Income Tax Act, 1961.2. Adequacy and clarity of the reasons recorded for reopening the assessments.3. Jurisdictional requirements under Section 147(1) of the Income Tax Act.4. Application of mind by the Additional Commissioner of Income Tax in granting approval.5. Procedural compliance in recording reasons for reopening assessments.Detailed Analysis:1. Validity of the Notices Issued under Section 148:The writ petitions challenge the notices issued on 28th March 2014 under Section 148 of the Income Tax Act for Assessment Years (AYs) 2007-2008 to 2012-2013. The primary contention is that the notices were beyond the permissible period of four years for certain AYs and were not duly served for others. The court directed that no further steps be taken pursuant to these notices and treated one of the petitions as the lead matter for all related cases.2. Adequacy and Clarity of the Reasons Recorded for Reopening the Assessments:The main ground of challenge is the ambiguity and incoherence in the reasons recorded for reopening the assessments. The reasons are described as 'lacking clarity' and 'incapable of being understood.' The court noted that the reasons recorded were grammatically incorrect, incomplete, and did not indicate the basis for reopening the assessments. The court emphasized that the reasons should provide a clear link to the formation of the belief that income had escaped assessment, as required under Section 147(1) of the Act.3. Jurisdictional Requirements under Section 147(1):The court reiterated the legal requirement that the reasons recorded for reopening an assessment should state that the assessee had failed to disclose fully and truly all material facts necessary for the assessment. The reasons must provide a 'live link' to the formation of the belief that income has escaped assessment. The court cited the case of Madhukar Khosla v. Assistant Commissioner of Income Tax, emphasizing that the reasons must relate to objective facts external to the materials on record.4. Application of Mind by the Additional Commissioner of Income Tax:The petitioners contended that the Additional Commissioner of Income Tax had accorded approval to the reasons for reopening without application of mind. The court found that the reasons recorded were incoherent and did not justify the reopening of assessments, indicating a lack of proper application of mind by the approving authority.5. Procedural Compliance in Recording Reasons for Reopening Assessments:The court highlighted that the reasons recorded for reopening the assessments must be explicit and self-contained. Any additional reasons provided in subsequent orders or affidavits cannot be considered. The court referred to the decision in Northern Exim (P) Ltd. v. DCIT, which stated that the validity of the assumption of jurisdiction under Section 147 can only be tested by the reasons recorded under Section 148(2) and not by any subsequent explanations.Conclusion:The court concluded that the essential requirements of Section 147 of the Income Tax Act were not satisfied. The reasons recorded were incoherent, lacked clarity, and did not provide a live link to the formation of the belief that income had escaped assessment. Consequently, the impugned notices dated 28th March 2014 and the orders dated 24th October 2014 rejecting the objections were quashed. The writ petitions were allowed, and the applications were disposed of with no orders as to costs.