2017 (6) TMI 599 - HC - Income Tax

Court quashes notice reopening tax assessment, citing lack of evidence and flaws in approval process.

Shamshad Khan Versus Assistant Commissioner of Income Tax

Shamshad Khan Versus Assistant Commissioner of Income Tax - [2017] 395 ITR 265 Issues:1. Validity of notice issued under Section 147 of the Income Tax Act, 1961 for reopening assessment for AY 2010-11.2. Compliance with Section 151(1) of the Act regarding prior approval for reopening cases after the expiry of four years.3. Sufficiency of reasons for reopening assessment based on undisclosed income and donation made to an educational institution.4. Approval process and application of mind by the competent authority for sanction under Section 151(1) of the Act.Analysis:Issue 1: Validity of Notice under Section 147The petitioner challenged the notice dated 28th January, 2016 seeking to reopen his assessment for AY 2010-11 under Section 147 of the Act. The petitioner argued that the donation made to an educational institution did not imply undisclosed income. He contended that his returns showed sufficient funds and the donation was duly disclosed. The court held that the reasons provided for reopening were not substantive and cogent. The Assessing Officer had not examined the filed return, which would have revealed the petitioner's financial status and the source of the donation. The court quashed the notice as unsustainable in law.Issue 2: Compliance with Section 151(1) for Prior ApprovalThe petitioner argued that prior approval from the Commissioner/Principal CIT was essential for reopening the case after four years, as per Section 151(1) of the Act. The petitioner highlighted that the sanction letter lacked the necessary satisfaction from the competent authority. The court noted that the approval process was flawed, with the space for satisfaction left blank and incorrect income figures considered for approval. The court emphasized that the sanction under Section 151(1) should involve substantive application of mind by the competent authority, which was lacking in this case.Issue 3: Sufficiency of Reasons for Reopening AssessmentThe respondent justified the reopening based on undisclosed income from the donation made to the educational institution. However, the court found that the reasons provided were not substantial. Merely because the recipient of the donation faced proceedings did not automatically imply undisclosed income for the donor. The petitioner's financial records and tax returns indicated a different picture, showing that the donation was accounted for from existing funds. The court emphasized that 'reasons to believe' must be substantive and not merely based on suspicion.Issue 4: Approval Process and Application of MindThe court highlighted discrepancies in the approval process, with the correct income figures not presented to the CIT for approval. The petitioner's contention regarding the clerical mistake in income figures was dismissed summarily by the respondent. The court concluded that the initiation of the case for reopening the assessment lacked proper application of mind, especially since the AO had not examined the filed return. The court held the notice as erroneous and quashed it, noting that the approval process was ex post facto and lacked proper consideration of the petitioner's financial status and tax compliance.In conclusion, the court held the notice seeking to reopen the petitioner's assessment for AY 2010-11 as unsustainable in law and quashed it, allowing the writ petition in favor of the petitioner.