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The Genesis
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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.
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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.
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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.
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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.
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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. Of course, 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)].
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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 (Born)
(vi) United Electrical Co. (P) Ltd. vs. CIT (2002) 258 ITR 317 (Del)
Ratio of Rajesh Jhaveri’s case – Internal source
of information
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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.
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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
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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
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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”.
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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).
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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.
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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”.
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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 Two Day National Tax
Conference held on 13th and 14th December, 2008 at Kolkata.]
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