Reassessment and reasons

[JB]

As we know after GKN Driveshaft (259 ITR 19), furnishing of reasons to the Assessee has become mandatory. What if the A.O. completes the reassesment without giving the reasons to the assessee despite his request ? I find two way decisions in this regard. (1) the reassessment to be anulled. Hyderabad ITAT in case of S. Prasad Raju (96 TTJ 832) and Jharkhand HC in case of Kavee Enterprises Lrd. (301 ITR 156) have taken this view. (2) CIT(A) may remand and ITAT may set aside the cases to the file of the A.O.to do afresh My personal view is that the reassessment should be anulled. The spirit of GKN driveshaft is that validy of reassesment should be decided prior to completion of reassessment. If A.O. completes reassessment first without deciding validity of the same, later on it is not likely that in remand or set aside assessment, he would be able to decide validiy with a nutral mindset. I request learned friends and seniors to kindly share views on this topic.

[pawansingla]

There are many more judgements on this issue. But in most of the cases , the reassessment is set aside with direction to follow the principle laid down in GKN Driveshaft. Though , i agrre that in a rare case , after filing your objections , assessing office will drop the reassessment proceddings. The biggest reason for reassessment is audit objections raised by CAG office. As per instruction no.9 of 2006 , even if audit bjection is not acceptable , department has to take remedial action. So , when you are filig your objection against the reassessment , A.O may agree with you unofficially , but as he has to make addition on the issue raised by the A.G.(Audit) , he will not take into account your issue in right spirit.

[JB]

I agree with you sir. The chances that the A.O. will drop the reasessment proceedings in pursuance of objections are very rare. However, the cases where the audit objections were not accepted by the department may be challanged on the ground of absence of satisfaction. The relevant cases may be Gujarat HC in case of Adani Exports (240 ITR 224) and Bombay HC in case of IL&FS (298 ITR 32). It is settled principle of law that any board circular or instruction can not operate contrary to the provisions of law.

i further wish to discuss the situation where CIT(A) remands the case to the A.O. for furnishing the reasons and decide the objections. This situation appears to be confusing in view of following issues:

(1) Can the A.O. agree with the objections of the asessee? can he drop the reassessment when subject matter is pending before CIT(A)?
(2) If the A.O. disposes off objections by rejecting the same, can the assessee challange that order before HC in writ when the validity of reassesment is pending before CIT(A)? If not, the action of non furnihsing the reasons despite request will have effect of bye passing the procedures prescribed in GKN driveshaft and the assessee will be deprived off writ remedy. If such thing is allowed, the A.O. will be prompted not to give reasons.

[rajul5234]

please see 113 I T R 22(guj.) P. V. Doshi's case.

jurisdiction is confered by fulfillment of pre requisite conditions of statute.

it cannot be confered  by consent.

r.k.patel

[pawansingla]

(1) Once you have filed the appeal before CIT(A) , then only option with the A.O is accept your objections and recoomend dropping of 147 to the CIT(A) in his remend report. He has no jurisdiction to drop proceddings himself as no proceedings are pending with him. IT is the perogative of the CIT(A) to decide the case on merits.
(2) As far second issues is conerned , according to me , once you have filed appeal before CIT(A) , there is very limited chance of High court admitting the writ.

[JB]

Yes sir, Here also, I agree with you. As far as the first situation is concerned, it is clear that CIT(A) will have to anull the reassessment as the A.O. has accepted the objections of the assessee. However, what will be the fit course of action for second situation? (1) CIT(A) should himself decide the validity of reassessment considering the objections of the assessee and reply of the A.O.or (2) the reassessment should be anulled on the ground of non furnishing of reasons despite request. As i stated earlier, the decisions are both way. My point is that even if CIT(A) direct the A.O. to give reasons and decide objections of the assessee, the procedures laid down in GKN driveshaft can not be given full efferct in proper perspective. CIT(A) can not set aside the assessment with a direction to conduct the same afresh. Hence, due to this limitation, CIT(A) can not set the things in proper order which remained at assessment stage. Since the A.O. did not give reasons, there was no scope to file objections and get the order of the A.O. on the same and then approach the High Court against that order through writ. The asessee will have to file appeal before CIT(A) and in that case, it is unlikely that writ remeday would be available. Thus, the assessee will be deprived of writ remedy. This is compleltely against the GKN driveshaft.

In the other type of cases, the ITAT or HC have set aside the cases to do the same afresh. Hence, the reassessment is reset at point zero and the proper procedure in law can be followed thereafter. However, in none of the cases the issue was dealt from the angle of procedures before CIT(A) and deprivation of writ remedy. The issue is significant from the angle of tax effect also.

[pawansingla]

2011-TIOL-345-HC-DEL-IT

IN THE HIGH COURT OF DELHI

ITA No.355 of 2010
ITA No.412 of 2010

COMMISSIONER OF INCOME TAX

Vs

SAFETAG INTERNATIONAL INDIA PVT LTD

A K Sikri and M L Mehta, JJ

Dated: February 3, 2011

Appellant Rep by: Mr. Sanjeev Sabharwal, Sr. Standing Counsel
Respondent Rep by: Mr. S. Krishanan, Adv

Income tax – Sections 144, 147, 148 – Whether, in the case of reassessment, Revenue is bound by the law to suo moto supply copy of 'reasons to believe' recorded by the AO - Whether when assessee fails to demand reasons for reopening assessment because of lack of knowledge about his right to do so, he cannot avail such right at the appellate stage.

Assessee was engaged in exports of readymade garments to Russia. AO received an information from DRI that the assessee in association with the handling and forwarding agent was engaged in fraudulent exports. A search was conducted at the office of the agent and some incriminating documents were found which divulged that the assessee was involved in fraudulent export and money laundering and was availing undue export benefits. Assessment was reopened and show cause notice was issued as to why the deduction u/s 80HHC should not be disallowed. Reassessment was made u/s 144 and the deduction claimed u/s 80HHC of Rs. 47,07,317/- was held to be not allowable.

Before CIT (A) assessee challenged the reopening of the assessment under Section 147 of the Act as without jurisdiction and rejection of the books of account and the disallowance made by the AO for deduction claimed u/s 80HHC. CIT (A) dismissed the appeal of the assessee.

On appeal, the ITAT while accepting the plea of the assessee held that the assessee was not aware that the Revenue was bound to provide the copy of 'reasons to believe, he could not demand the same and raise objections thereto, and the case was remitted back to the AO with the direction to provide a copy of 'reasons to believe' and give him an opportunity to raise objections and thereafter pass speaking order on those objections and frame de novo assessment for both the assessment years, if objections were rejected.

After hearing both the parties, the High Court held that,

++ when notice under Section 148 of the Act was issued for reassessment proceedings, no doubt, the AO is required to record reasons which led him to believe that there was escaped income. Law does not mandate the AO to suo moto supply the copy of those 'reasons to believe' to the assessee. It is for the assessee and if the assessee so chooses can file objections thereto. Only when such objections are filed, it becomes the duty of the AO to dispose of all those objections first by passing speaking order and if the objections are rejected it gives a cause to the assessee to challenge the said order of the AO by filing appropriate writ petition;

++ that the assessee did not ask for these 'reasons to believe'. The assessee rather participated in the reassessment proceedings. The Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to 'reasons to believe' recorded by the AO. It was the assessee's own creation that it did not ask for the reasons or raise objection thereto. Merely because the assessee was oblivious of such a right would not mean that the Tribunal should have granted this right to the assessee, that too, at the stage when the matter was before the Tribunal and travelled much beyond the AO's jurisdiction.

Revenue's appeal allowed

JUDGEMENT

Per: A K Sikri:

1. Admit on the following substantial question of law:

"Whether on the facts of the present case the Tribunal was justified in law in setting aside the assessment framed by the AO under Section 148/143(3) of the Act with a direction to the AO to follow the procedure laid down by the Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. ITO, 259 ITR 19 = (2002-TIOL-634-SC-IT)"

2. This is the common question of law which arises in both these appeals. We have taken the matter for final hearing straightaway, as learned counsel for both the parties have made their submissions on the aforesaid question of law.

3. The fact of the matter is in a narrow compass and taking note of the facts in brief would suffice for our purpose. These Appeals pertain to the Assessment Years 1996-97 and 1997-98. The Assessing Officer (AO) had issued notice for reopening of the assessment under Section 148 read with 142(1) of the Income Tax Act (hereinafter referred to as 'the Act), pursuant to the information which the AO had received from the Directorate of Revenue, Intelligence (DRI).

4. The assessee was engaged in exporting the readymade garments, etc. to Russia. The information was received by the AO from the DRI that the assessee in association with the handling and forwarding agents M/s. Sam Aviation (P) Ltd. was carrying out fraudulent exports. On the basis of this information, a search was conducted by the DRI at the office of M/s. Sam Aviation (Pvt.) Ltd. During the course of search proceeding, some incriminating material, according to the DRI, was found and seized which divulged that the assessee was involved in fraudulent export and money laundering and was availing undue export benefits during the period 1993 to 1996. After reopening the assessment, the show cause notice was issued as to why deduction received under Section 80HHC of the Act be not withdrawn, etc. Thereafter, the proceedings were held and the AO passed orders of reassessment which was framed under Section 144 of the Act. As per this, 20% of the sale proceeds amounting to Rs. 69,84,926/- was held to be income of the assessee in addition to export incentive of Rs. 55,71,397/-. The deduction claimed under Section 80HHC of the Act amounting Rs. 47,07,317/- was held to be not allowable. In this manner, the assessment was framed at an income of Rs. 1,25,56,323/- for the assessment year 1996-97. On the same basis, reassessment order in respect of other years was also passed.

5. The assessee preferred appeal thereagainst. Before the CIT(A), the assessee also challenged the reopening of the assessment under Section 147 of the Act as without jurisdiction. Another ground of challenge was that the AO had wrongly rejected the books of accounts and also wrongly withdrew the deduction claimed by the assessee under Section 80HHC of the Act. The assessee was also aggrieved by the action of the AO taking note of the recourse to Section 144 of the Act.

6. The assessee carried the matter further by filing appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal). The Tribunal has adopted a short-cut method. It did not decide the appeal on merits. It has not even touched the issue as to whether the reassessment proceedings were valid or not. It, thus, chartered altogether a different course of action. Accepting the plea of the assessee that the assessee was not aware that the Revenue was bound to provide the copy of 'reasons to believe, he could not demand the same and raise objections thereto, the Tribunal has remitted the case back to the AO in both the years with direction to the AO to provide a copy of 'reasons to believe to the assessee and give him opportunity to raise objections and thereafter pass speaking order on those objections and frame de novo assessment in both the assessment years, if objections are rejected. This course of action, to our mind, is totally unsustainable. In the first place, we may record that when notice under Section 148 of the Act was issued for reassessment proceedings, no doubt, the AO is required to record reasons which led him to believe that there was escaped income. Law does not mandate the AO to suo moto supply the copy of those 'reasons to believe to the assessee. It is for the assessee and if assessee so chooses can file objections thereto. Only when such objections are filed, it becomes the duty of the AO to dispose of all those objections first by passing speaking order and if the objections are rejected it gives a cause to the assessee to challenge the said order of the AO by filing appropriate writ petition. This is the law declared by the Supreme Court in the case of GKN Drive Shafts (India) Ltd. Vs. Income Tax Officer [259 ITR 19] = (2002-TIOL-634-SC-IT).

7. In the present case, the assessee did not ask for these 'reasons to believe. The assessee rather participated in the reassessment proceedings. When the reassessment orders were passed and the assessee felt aggrieved thereagainst, the assessee filed appeal before the CIT (A). In this appeal, he challenged the validity of reassessment proceedings, which was the course of action available to the assessee. The CIT (A), thus, could examine the issue as to whether the assessment reopened was valid or not. Once the CIT (A) also dismissed the appeal of the assessee and against that the second appeal was also preferred before the Tribunal, the Tribunal could not have restored the matter back to the file of the AO and give another opportunity to the assessee to raise objections to 'reasons to believe recorded by the AO. Reassessment order passed by the AO in both the assessment years is even upheld by the CIT (A). It was the assessees own creation that it did not ask for the reasons or raise objection thereto. Merely because the assessee was oblivious of such a right would not mean that the Tribunal should have granted this right to the assessee, that too, at the stage when the matter was before the Tribunal and travelled much beyond the AOs jurisdiction. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuineness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted. Even otherwise, we are of the view that the assessee had not supplied any purchase inasmuch as it was still open to the assessee to challenge the validity of reassessment notice before the CIT (A) and in fact, the assessee did so for availing that opportunity.

8. We, thus, answer the question in favour of the Revenue and against the assessee. As a result, the impugned order passed by the Tribunal is set aside.

9. At this stage, it would be necessary to deal with another submission of the learned counsel for the respondent/assessee. He has pointed out that the CIT (A) while repelling the challenge laid by the assessee to the reassessment proceedings, as more than that the AO has duly recorded the 'reasons to believe as per which the reopening of the assessment is justified and on this ground, challenge to the validity of the notice is turned down. Learned counsel for the respondent is justified in his submission that at least at this stage, the assessee could have been provided with the 'reasons to believe recorded by the AO to accept the assessee to make his submission before the CIT (A) predicated on the said 'reasons to believe. While setting aside the order of the Tribunal, we direct that the matter be remitted back to the CIT (A). The Revenue shall supply 'reasons to believe recorded by the AO within four weeks from today. On the supply of these 'reasons to believe, it would be open to the assessee to make submissions before the CIT (A) based on those reasons, challenging the validity of reassessment proceedings and the CIT (A) shall decide this issue on merits after hearing both the parties