High-pitched assessments under the Income-tax Act – Some remedies

1. After the judgment of the Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. delivered on 23-5-2007 and reported at (2007) 291 ITR 500 (SC), a large number of actions are being initiated u/s. 147/ 148 of the Income-tax Act, 1961 (‘the Act’ for short) and often high-pitched Income tax assessments are being made at several places.

2. What is further disquieting is that the stay of recovery of tax demand is not being granted pending disposal of the appeal by the CIT (Appeal) and at least 50% of the tax demand including interest u/s. 234B, is being pressed for payment for which coercive action like attachment of bank accounts, levy of penalty u/s. 221(1) etc. are also being taken.

3. Board’s Instruction No. 1914 dated 2-9-1993 for stay of demand is often relied upon to reject the stay applications and to insist on payment of at least 50% of the demand till the decision of the CIT(A). This is causing great hardship to the concerned assessees and often brings about helplessness and frustration among certain tax practitioners.

4. It is, therefore, necessary to examine what can be the possible ways of mitigating hardship and inconvenience to such tax payers and to ensure that the assessments are opened u/s. 147/143(3) and consequential recovery of tax and interest are made only if they are justified in law.

5. The judgement of the Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) does not, in any manner, dilute the legal requirements established since long for taking action u/s. 147 of the Act. The ITO should have “reasons to believe” and not “reasons to suspect” and there “must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of the belief that there has been escapement of income of the assessee from assessment in a particular year”. The material for the formation of the belief has to be definite and relevant and not vague and fanciful. Ofcourse, the sufficiency of the material can not be challenged for taking action u/s. 147/148 and, therefore, to some extent, the formation of belief of the AO is within the realm of subjective satisfaction [(ITO vs. Selected Daluband Coal Co. (P) Ltd. (1996) 217 ITR 597 (SC); Raymond Woolen Mills Ltd. vs. ITO (1999) 236 ITR 34 (SC)].

6. The above proposition of law is well settled. In this connection, some of the important judgments are as under :­

(i) Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191(SC)

(ii) S. Narayanappa & Others vs. CIT (1961) 63 ITR 219 (SC)

(iii) ITO vs. Lakhmani Mewal Das (1976) 101 ITR 434 (SC)

(iv) S.P. Agrawala & Ors vs. ITO (1988) 140 ITR 1010 (Cal)

(v) Murlidhar Bhagwan Dass & Co. vs. CIT (1990) 181 ITR 319 (Bom)

(vi) United Electrical Co. (P) Ltd. vs. CIT (2002) 258 ITR 317 (Del)

Ratio of Rajesh Jhaveri’s case – Internal source of information

7. What was held in Rajesh Jhaveri Stock Brokers (P) Ltd’s case was that w.e.f. 1-6-1999 with the first proviso to the newly substituted section 143(1); the intimation u/s. 143(1) was not required to be sent. The acknowledgement of the return has to be deemed to be an intimation u/s. 143(1). Neither the acknowledgement nor the intimation u/s. 143(1) (a), where some tax becomes due on the basis of return, is not an order of assessment. As such, if the material available in the return and the accompanying documents, itself shows that some income has escaped assessment, the AO can be said to have ‘reasons to believe’ that income had escaped assessment. The consideration of such material for the purpose of initiating assessment proceedings u/s. 147 does not mean that there was a “change of opinion” and the principles relating to ‘change of opinion’ were not available to the assessee. Thus, Rajesh Jhaveri Stock Brokers (P) Ltd’s case was essentially in the realm of the source of information or material that could constitute the reasons for the formation of the belief that any income has escaped assessment where the returns were accepted without scrutiny and consequent passing of regular assessment orders u/s. 143(3)/144 of the Act.

8. In such cases of accepted returns and in cases of scrutiny assessments, the status of external source of information for reopening of assessments u/s. 147 are not affected in any manner by Rajesh Jhaveri’s case nor does it have any effect on the relevancy of reasons and their nexus for the formation of the belief that income chargeable to tax has escaped assessment. This will also be evident from the following observations of the Supreme Court on page 512 of the Report Vol. 291 :­

“In other words if the Assessing Officer for whatever reason has reasons to believe that income has escaped assessment it confers jurisdiction to reopen this assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.

So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding u/s. 147 and failure to take steps u/s. 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation u/s. 143(1) had been issued”.

No valid reasons for issue of notice u/s. 148

9. Often it is seen that the notices u/s. 148 are issued without there being legally valid reasons to meet the requirements of section 147 of the Act. Sometimes, the reasons recorded are “to make further investigation” or “there is huge concealment of income” or “Mr. X has stated that he used to do only hawala business” without any specific instances of such entries relating to the assessee. Such material is often vague or general and does not constitute a relevant material which could be construed as providing “direct nexus or live link” for the formation of the belief that any income of the assessee has escaped assessment.

Get reasons, file objections and seek a separate order on the validity of action u/s. 147

10. In such cases, rather than going through the process of assessment, appeals, requests for stay of demand, recovery through coercive measures etc., it will be better and perhaps, expeditious and inexpensive option, to challenge the legality of the notice u/s. 148 before the assessment is made by the AO u/s. 147/143(3) of the Act. This can be achieved by requiring him to comply with the judgment of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19 (SC). The following procedure has been laid down therein:­

“However, we clarify that when a notice u/s. 148 of the Income-tax Act is issued, the proper course of action for the notice is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order before proceeding with the assessment in respect of the above said five assessment years”.

11. The above judgement of the Supreme Court involves the following steps :–

(i) On receipt of the notice, the assessee should file the return

(ii) After filing the return or along with its filing, he should seek copy of the reasons recorded u/s. 147 before the issue of the notice u/s. 148.

(iii) On receipt of the reasons from the AO, the assessee should file objections to the issuance of notice u/s. 148. The objection should, inter alia, give reasons for challenging the legality of the action taken u/s. 147 based on an analysis of the reasons vis-a-vis the legal requirements. The assessee should specifically request the Ld. AO to pass a speaking order disposing of the objections by quoting, inter alia, the judgment of the Supreme Court in GKN Driveshafts (India) Ltd. (supra).

12. The object of the AO’s order/separate order disposing of the objections is to enable the assessee, to file a writ petition u/s. 148 in the respective High Court, if so advised, before the assessment order is passed; challenging the legality of the said notice u/s. 148 and the assessment sought to be framed in consequence thereof. In the writ petition, inter alia, the assessee should seek stay against the AO passing the order there being no valid case for the exercise of jurisdiction u/s. 147/ 148 of the Act.

13. Even in cases where assessment orders have been passed and are the subject matter of appeal before the CIT (Appeal), the assessee can approach the High Court by way of a writ challenging the validity of the notice u/s. 148 and the consequent assessment order made by the AO on the ground that the procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd. (supra) has not been followed and a separate speaking order disposing of the objections to the validity of the notice u/s. 148 has not been passed. The assessee will, of course, have to show that he had asked for the reasons for the issue of notice and/or after the supply of the reasons, he had raised objections or sought more information and requested for the passing of a separate reasoned order regarding the objections raised against the legality of the AO’s jurisdiction u/s. 147/148 of the Act. In that case, he could also ask for the setting aside of the assessment order u/s. 147/143(3) pending the passing of a separate order and disposing of the objections. In this connection, he can rely, apart from the judgment of the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd., a direct authority in the judgment of the Hon’ble Delhi High Court in Smt. Kamlesh Sharma vs. B.L. Meena ITO (2006) 287 ITR 337 (Del). In that case, their Lordships took a very strong view of the AO not following the procedure prescribed by the Hon’ble Supreme Court and imposed a cost of Rs. 3,500/- on the Department. They laid down the following proposition of law:­

“We are of the opinion that in view of the language of the Supreme court in GKN Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19, the Assessing Officer should have rejected the objection, if he thought it appropriate to do so, before passing the final order and not simultaneously.

This position was reiterated by this Court in Sita World Travels (India) Ltd. vs. CIT (2005) 274 ITR 186.(Del)

We cannot appreciate how, in spite of the clear language used by the Supreme Court as well as this Court, the Assessing Officer did not comply with the requirement of law.

Learned counsel for the respondent submits that the objections touched upon the merits of the controversy and the failure of the Assessing Officer to deal with the objections before passing the assessment order was only a technical error. We are mentioning this only to reject this argument in view of the clear language of the Supreme Court. The Assessing Officer cannot try to hide behind niceties, which are not even legal.

Under the circumstances, we set aside the assessment order dated January 31, 2005 and direct the Assessing Officer to deal with the objections dated October 19, 2004, filed by the petitioner within a period of eight weeks from today. Needless to say, the Assessing Officer should pass a speaking order.

For not following the law laid down by the Supreme Court and stressed by this Court, we impose costs upon the respondent of a sum of Rs. 3,500/- to be paid to the petitioner. The costs be paid within a period of four weeks from today”.

14. The High Court would not quash the notice u/s. 148 but would set aside the assessment and direct the AO to pass a separate order disposing of the objections against AO’s action u/s. 147/148. On receipt of such an order and before a fresh assessment is made, the assessee should challenge the legality of the notice u/s. 148 based on such a separate order. This would provide a remedy that would avoid long drawn-out appeals before CIT(A)/ITAT, and problems connected with the recovery of demand.

[Source: Paper presented at AIFTP’s Two Day National Tax Conference held on 13th and 14th December, 2008 at Kolkata.]