2025 (5) TMI 598 - AT - Income Tax

Reassessment proceedings under Section 147 quashed for lack of tangible material and incorrect factual basis

The Indian Hotels Company Limited Versus Additional Commissioner of Income Tax Range 2 (2), Mumbai

The Indian Hotels Company Limited Versus Additional Commissioner of Income Tax Range 2 (2), Mumbai - TMI The core legal questions considered by the Tribunal in this appeal revolve around the validity and legality of reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, particularly focusing on whether the reasons recorded for reopening the assessment complied with the statutory requirements, and whether the reassessment was barred by limitation. The issues also touch upon the application of Section 68 additions and procedural fairness, but the Tribunal primarily adjudicated on the grounds challenging the reopening of assessment under Section 147.The principal issues presented and considered are:Whether the reassessment proceedings initiated under Section 147 of the Act for the Assessment Year 1998-1999 were valid, given the delay beyond four years from the end of the relevant assessment year.Whether the reasons recorded by the Assessing Officer for reopening the assessment complied with the First Proviso to Section 147, specifically the requirement of a categorical finding that the assessee failed to disclose fully and truly all material facts necessary for assessment.Whether the Assessing Officer had tangible new material to justify reopening the assessment, or whether the reassessment was initiated on an incorrect understanding of facts.Whether the reassessment proceedings and consequent assessment order were sustainable in law.Other grounds relating to additions under Section 68, natural justice, and reliefs under Chapter VIA and Section 234B were raised but not pressed before the Tribunal and were accordingly dismissed as infructuous.Issue-wise Detailed Analysis:1. Validity of Reopening Assessment Beyond Four Years and Compliance with Section 147 ProvisoLegal Framework and Precedents: Section 147 of the Income Tax Act empowers the Assessing Officer to reassess income that has escaped assessment, subject to reasons recorded in writing. The First Proviso to Section 147 restricts reassessment beyond four years from the end of the relevant assessment year unless the income escaped assessment is due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.In the precedent cited, the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. vs. R.B. Badkar (268 ITR 332) held that when reassessment is initiated after four years, the reasons recorded must explicitly and unambiguously state that the assessee failed to disclose fully and truly all material facts. The reasons must be self-explanatory and form a vital link between the conclusion and evidence, without any supplementation by affidavit or oral submissions. The absence of such clear reasons renders the reopening invalid and liable to be quashed.Court's Interpretation and Reasoning: The Tribunal examined the reasons recorded by the Assessing Officer for reopening the assessment as reproduced in the assessment order. The reasons referred to reports from the Enforcement Directorate alleging violations of FERA provisions and non-disclosure of foreign inward remittances and unauthorized payments. However, the Tribunal noted that nowhere in the reasons was there a categorical averment that the assessee failed to disclose fully and truly all material facts necessary for assessment of the year 1998-1999.The Assessing Officer relied on Clause (b) of Explanation 2 to Section 147, which deems income to have escaped assessment if a return is furnished but no assessment has been made. The Assessing Officer believed that since no assessment was framed, reopening was justified. However, the Tribunal found this to be a fundamental error because the record clearly showed that an original assessment under Section 143(3) was completed on 09/03/2001 and reassessment was also undertaken on 25/03/2004. Therefore, the basis of the Assessing Officer's belief was factually incorrect.The Tribunal held that the reasons recorded failed to meet the requirements of the First Proviso to Section 147. The Assessing Officer did not 'disclose his mind' through reasons that were clear, unambiguous, and linked to evidence of non-disclosure by the assessee. The reopening was thus based on an incorrect understanding of the facts and was not sustainable in law.Key Evidence and Findings: The Tribunal relied on the assessment records indicating prior assessment and reassessment, the Enforcement Directorate's report, and the reasons recorded by the Assessing Officer. The absence of a clear statement of failure to disclose material facts was critical. The Tribunal also emphasized the statutory requirement that reasons recorded cannot be supplemented later by affidavits or oral submissions.Application of Law to Facts: Given the prior completion of assessment and reassessment, and the absence of a clear finding of failure to disclose material facts, the reopening notice dated 28/02/2005 and the subsequent reassessment order dated 31/03/2006 were held to be invalid. The Tribunal applied the principles from the Hindustan Lever Ltd. case to conclude that the reassessment proceedings did not comply with Section 147 and its proviso.Treatment of Competing Arguments: The Departmental Representative argued that the Enforcement Directorate's report constituted sufficient tangible material and that the assessee had failed to disclose facts necessary for assessment. However, the Tribunal found that the Assessing Officer's belief was based on a mistaken fact that no assessment was made, which undermined the validity of the reassessment. The Tribunal rejected the Department's reliance on the report as a justification for reopening without proper reasons recorded.Conclusion: The reassessment proceedings initiated beyond four years without compliance with the First Proviso to Section 147 were quashed. The notice under Section 148 and the assessment order under Section 143(3) read with Section 147 were set aside as not sustainable in law.2. Additions under Section 68 and Other GroundsThe Assessee had challenged additions made under Section 68 of the Act on account of unexplained cash credits and operating fees, contending that such amounts were already recognized as income or should be allowed as bad debts or business loss. The Assessee also raised grounds regarding violation of principles of natural justice and entitlement to relief under Chapter VIA and interest computation under Section 234B.However, during the hearing, the Assessee pressed only Grounds No.1 and 4 relating to the validity of reassessment proceedings. The Tribunal accordingly dismissed all other grounds as rendered infructuous in view of the quashing of reassessment proceedings.Significant Holdings:'The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence.''The very basis on which the Assessing Officer formed the belief that the income liable to tax has escaped assessment was based upon incorrect understanding of the facts and is, therefore, not sustainable in the eyes of law. The reassessment proceedings initiated do not meet the requirements of Section 147 of the Act read with First Proviso thereto.'The Tribunal established the core principle that reopening of assessment beyond four years must strictly comply with the First Proviso to Section 147, requiring clear and categorical reasons that the assessee failed to disclose fully and truly all material facts. Failure to do so renders the reassessment invalid. The Tribunal also underscored that reasons recorded cannot be supplemented or amended post-facto.Final determination was that the reassessment proceedings initiated by the Assessing Officer for the Assessment Year 1998-1999 were invalid and quashed. Consequently, the appeal was allowed on Grounds No.1 and 4, while all other grounds were dismissed as infructuous.