CA Vinamar Gupta
The ITAT Amritsar, in a recent Judgment has pronounced that the Income tax department should not issue Enquiry letters which do not with stand the touchstone of the legal bounds in which they are to be issued. ITAT Amritsar, in Amrik Singh, ITA 630/ASR/2015, pronounced on 11-05-2016, has dissected the provisions of the law to bring the real spirit behind issuing an Enquiry Letter. Further the ITAT has dealt with an important issue of practice of making assessment on the basis of stand alone AIR Information . In this Article the author has tried to bring out the words of wisdom shared by the bench on these two important issues:
Facts of The case:
The appellant is not an assessee and had not filed any income tax return. The department found some cash deposit with bank on the basis of AIR Information provided by a bank and an Enquiry letter was issued to explain the source of cash deposit. The opportunity went unavailed by the assessee and therefore the Assessing officer formed an opinion that income had escaped assessment. Assessment proceedings u/s 147 were initiated and the assessee opted not to file return even in response to notice u/s 148. Because of continuous non compliance on behalf of the assesse, the entire cash depost was treated as income of the assessee and the addition made was confirmed by the CIT(A). Against the order of the CIT(A) , the assessee filed an appeal before the Amritsar Bench of the ITAT.
Decision of ITAT Bench
The ITAT Bench first of all posed a querry, which goes to the root of the issue, as to under which section the enquiry letter has been issued. To this the department replied that it was a general enquiry letter. The reply didn’t deter the Bench from its effort to find out whether such enquiry letter can be issued with in the purview of the existing provisions of the law.
The Bench undertook an in depth examination of section 133(6) and section 131.
Observation of ITAT on Section 133(6)
An Income Tax Authority may require any person, inter-alia, to furnish information in relation to such points or matters, as in their opinion would be useful for, or relevant to, any enquiry or proceeding under the Act.
History of Section 133(6)
Section 133(6) corresponds to section 38 of the Income Tax Act, 1922. It was amended in 1995 and the words ‘enquiry or’ were inserted before the word ‘proceedings’ and the second proviso was also inserted, by the Finance Act, 1995, w.e.f. 1.7.1995. This second proviso, as amended by the Finance (No.2) Act, 1998, w.e.f. 1.10.1998, reads as follows:
Proviso to Section 133(6)
“Provided further that the power in respect of an enquiry, in a case where no proceeding is pending, shall not be exercised by any income-tax authority below the rank of Director or Commissioner without the prior approval of the Director or, as the case may be,the Commissioner.”
CBDT Circular on Section 133(6)
Then the Bench took note of CBDT Circular No. 717 dated 14-08-1995, which was issued to explain the above amendment and it says that :
41.2 At present the provisions of sub-section (6) of section 133 empower income-tax authorities to call for information which is useful for, or relevant to, any proceeding under the Act which means that these provisions can be invoked only in cases where the proceedings are pending and not otherwise. This acts as a limitation or restraint on the capability of the Department to tackle evasion effectively. It is, therefore, thought necessary to have the power to gather information which after proper enquiry, will result in initiation of proceedings under the Act.
41.3. With a view to having a clear legal sanction, the existing provisions to call for information have been empowered to requisition information which will be useful for or relevant to any enquiry or proceedings under the Income-tax Act in the case of any persons. The Assessing Officer, would, however, continue to have power to requisition information in specific cases in respect of which any proceeding is pending as at present. However, an income-tax authority below the rank of Director or Commissioner can exercise this power in respect of an enquiry in a case where no proceeding is pending, only with the prior approval of the Director or the Commissioner………..”
Observations on Pre Amendment Position of S.133(6)
The bench concluded that the pre-1995 amendment section 133(6) could be invoked only in cases where some proceedings were pending, and not otherwise, as taken note of in ‘D.B.S. Financial Services Pvt. Ltd. vs. Smt. M. George, Second Income Tax Officer and Others’, 207 ITR 1077 (Bom.) and ‘Grindlays Bank Ltd. vs. Income-Tax Officer and Others’, 231 ITR 612 (Cal.).
Observations on Post Amendment Position of S.133(6)
The 1995 amendment brought in power to the Department to gather information which, after proper enquiry, would result in initiation of proceedings under the Act. However, by virtue of the second proviso to the section, an Income Tax Authority below the rank of Commissioner can exercise this power in respect of an enquiry, in a case where no proceeding is pending, only with the prior approval of the Director or Commissioner, The ITAT drew support from ‘Karnataka Bank Limited vs. Secretary, Govt.of India’, 255 ITR 508 (SC) and ‘U.G. Upadhya, General Manager, Janatha Co-operative Bank Ltd’; ‘UDUPI vs. Director of Income Tax And Another’, 255 ITR 502 (Kar.) [the S.L.P. where-against was dismissed by the Hon’ble Supreme Court vide their order reported at 251 ITR (St.) 51].
Application of Analysis on S.133(6) to facts of the case
The ITAT held that since in the present case no proceedings were pending when the inqury letter had been issued by the Income tax officer and no prior approval of the CIT is on record, the enquiry letter does not withstand the rigours of section 133(6).
Switching to Section 131
However the ITAT said that even this does not go to annihilate the case of the department and it should be checked whether S.131 empowers the department to issue such inquiry letter, when no proceedings are pending against the assessee.
Section 131 reads as under:
131(1) The Assessing Officer, Deputy Commissioner (Appeals)], Joint Commissioner, Commissioner (Appeals), Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner and the Dispute Resolution Panel referred to in clause (a) of sub-section (15) of section 144C shall, for the purposes of this Act, have the same powers as are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), when trying a suit in respect of the following matters, namely :—
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a banking company and examining him on oath;
(c) compelling the production of books of account and other
(d) issuing commissions.
Analysis of Section 131(1) by ITAT
The ITAT observed that ,”……. section 131(1) confers on the Income Tax Authorities mentioned therein, the same powers as those vested in a court under the CPC, when trying a suit. The operative words in the section, for our present purposes, are ‘when trying a suit’. Section 131(1) of the I.T. Act, by conferment of the powers as envisaged therein, equates the powers of the Income Tax Authorities with those of a Court. And it provides for vesting on the Income Tax Authorities, the powers vested in a Court when trying a suit. Now, in juxtaposition to the trial of a suit by a Court, what would the equivalent before the Income Tax Authorities be? But obviously, proceedings under the Income Tax Act. Else, there would be no scope at all for the exercise of such power.
As a natural corollary, therefore, it follows that it is only during the pendency of some proceeding before it, that an Income Tax Authority can exercise the power vested on them under section 131(1), and not otherwise. The ITAT also drew support from Jamnadas Madhavji & Co. and Others vs. J.B. Panchal, ITO and Another’, 162 ITR 331 (Bom.) followed in James Joseph & Others’, 204 ITR 254 (Cal.). The ITAT Bench also supported its observation by :
Observations on Section 131(1A)
The ITAT Bench also took notice of the Section 131(1A), which concerns search or search contemplated, specifically provides that where the Authority has reason to suspect concealment or likely concealment of income by any person or class of persons within their jurisdiction, it shall be competent for the Authority to exercise powers conferred u/s 131(1), notwithstanding that no proceedings with respect to such person or class of persons are pending before him, or before any other Income tax Authority
Observations on Section 131(2)
The position u/s 131(2), which relates to enquiry or investigation concerning agreement with a foreign country or specified territory and adoption by Central Government, of agreements between specified associations for double taxation relief, is exactly similar to that of matters concerning section 131(1A). Under section 131(2) also, the Authority can exercise powers u/s 131(1) even in the absence of pendency of proceedings before them .
Combined Analysis of Section 131(1),(1A) and Section 131(2)
It is thus seen that whereas both sections 131(1A) and 131(2) deal with the situation where the powers u/s 131(1) can be exercised inspite of absence of pendency of proceedings and specific mention of such enablement is made by the legislature in both of these provisions, there is no such enablement contained in section 131(1). In other words, the legislative intent is clear from the words employed in sections 131(1), 131(1A) and 131(2), respectively. Whereas, in sections 131(1A) and 131(2), the Authorities are enabled to exercise the powers u/s 131(1) even in the absence of pendency of proceedings before them, there is no such enablement contained in section 131(1). Now, it is trite that the legislature chooses its words with utmost care and where the language employed in a provision is clear and unambiguous, there is no scope of interpretation thereof.
Observations of Jamnadas Madhav Ji (Bombay High Court) on Section 131
In Jamnadas Madhavji & Co. and Another’ (supra), it was observed that under section 131(1A), if the Assistant Director of Investigation has reason to suspect that any income has been concealed, then, for an enquiry or investigation relating thereto, it shall be competent for him to exercise the powers conferred u/s 131(1), notwithstanding that no proceedings with respect to such person are pending before him or before any other Income Tax Authority; that it is thus, obvious, that whereas an officer mentioned in section 131(1) can exercise powers thereunder only if a proceeding is pending before him, the officer mentioned in section 131(1A) can exercise such powers notwithstanding that no such proceedings are pending before him, or before any other officer.
Application of Analysis of Section 131 to facts of present case
Since in the present case, no proceeding was pending before the Income Tax Officer when he issued the letter of enquiry on requiring the assessee to, inter-alia, produce evidence, such letter of enquiry is not valid in the eye of law. It does not require any cognizance to be taken of. And that being so, the assessee was not obliged to respond to this invalid and non est so-called letter of enquiry, requiring the assessee, inter-alia, to produce evidence.
Reasons Recorded by AO to reopen the assessment
In present case, the AO reopened the case stating that certain cash deposits were found lying in the bank account and the assessee had filed to turn up to explain the source in response to enquiry letter (discussed above). The deposits remained unexplained and they had to be treated as having been made out of undisclosed income. In view of these facts, AO formed a reason to believe that income had escaped assessment.
Determination of Question of law by the ITAT
ITAT, in para 43 of its Judgement, observed that the only material available with the AO to enable him to form a belief that income had escaped assessment, was the information regarding the cash deposits, and as to whether this information can be said to constitute material which could lead to such a belief .
Application of Bir Bahdur Singh Sijwali 53 taxmann.com 366(Delhi Tribunal)
The ITAT took note of the observations made by the ITAT Delhi, when faced with a similar question. ITAT Delhi in above case has observed that
All that the reasons recorded for reopening indicate is that cash deposits aggregating to Rs.10,24,100/- have been made in the bank account of the assessee, but the mere fact that these deposits have been made in a bank account does not indicate that these deposits constitute an income which has escaped assessment. The reasons recorded for reopening the assessment do not make out a case that the assessee was engaged in some business and the income from such a business has not been returned by the assessee. As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether the assessee could be said to be engaged in any business; all that is to be examined is whether the fact of the deposits, per se, in the bank account of the assessee could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs.10,24,100/- has escaped assessment of income because the assessee has Rs.10,24,100/- in his bank account but then such an opinion proceeds on the fallacious assumption that the bank deposits constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escapement assessment…………..” ITAT Delhi also observed that “…………..the material must indicate income escaping assessment rather than desirability of further probe in the matter which may or may not lead to income escaping the assessment,
Observations of ITAT on Recorded Reasons
The ITAT held that “………..As observed in ‘Bir Bahadur Singh Sijwali’ (supra), the mere fact that the deposits had been made in the bank account does not indicate that these deposits constitute income which has escaped assessment……..”, and that the AO in the present case has proceeded on fallacious assumption that income has escaped assessment and hence the reopening of reassessment is quashed.
Conclusion: Stand alone AIR Information is not sufficient to hold that cash deposits constitute income. Cash deposits in bank account may or may not be Income. Hence when the treatment of the amount as Income is itself doubt , it definitely can not constitute “Income escaping assessment” and, therefore, it shall be too far fetched to hold that AIR Information constitutes “Reason to believe that Income has escaped assessment”. Though there is a set mandatory procedure under law to issue Enquiry letters u/s 133(6), often the enquiry letters are issued without requisite prior approval, or at the fag end of the year without providing the assessee a sufficient opportunity to explain the source u/s 133(6). The Courts having settled the issue of reopening on the basis of AIR Information, the assesses look forwards to decisions where in the practice of providing insufficient opportunity u/s 133(6) to answer AIR Information also comes under the legal scanner.