Floyd Filandro Linhares Vs ITO (Bombay High Court)
Summary: Bombay High Court quashed the reopening notice, reassessment order, demand notice and penalty notice after finding fundamental procedural defects in reassessment proceedings against Floyd Filandro Linhares for AY 2017-18. The petitioner had objected on 15 October 2021 to the reasons supplied with the Section 143(2) notice, pointing out, among other things, that the reasons wrongly referred to AY 2016-17 and alleged transactions in shares of M/s Toyam Industries Ltd., although the petitioner stated that no such purchase or sale had taken place. Despite these specific objections, the Assessing Officer did not dispose of them before proceeding with reassessment.
The High Court held that failure to decide the objections by a speaking order directly violated the procedure mandated by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income-tax Officer. The irregularity was aggravated by the Revenue’s affidavit before the High Court, which admitted that the reopening reasons originally furnished to the petitioner were incorrect. The Revenue attempted to rely instead on a different set of reasons that had accompanied the Section 151 approval and were disclosed to the petitioner for the first time through the affidavit filed before the Court.
The Court rejected the Revenue’s attempt to substitute these fresh reasons after completion of assessment. It held that reasons forming part of the Section 151 approval could not retrospectively replace the reasons actually communicated to the petitioner. The reassessment order had been passed on the basis of the communicated reasons, against which objections had been filed but never decided. Consequently, the proceedings were hit by the law laid down in GKN Driveshafts. The Court further held that the Revenue could not, after the assessment had already been completed, require the petitioner to respond to an entirely different set of reasons that had never been furnished in the manner known to law.
The High Court also recorded serious observations regarding the AO’s conduct. It noted that different reasons were furnished to the assessee from those placed before the Joint Commissioner for Section 151 approval, objections were not disposed of by a speaking order, and the AO nevertheless proceeded to complete the assessment. Ultimately, the writ petition was allowed and the reopening notice dated 30 March 2021, assessment order dated 31 March 2022, demand notice dated 31 March 2022 and penalty notice dated 31 March 2022 were all quashed.
Cases Discussed
- Asian Paints v. DCIT (Bombay High Court), 296 ITR 90 (Bom) — Referred to along with GKN Driveshafts in relation to the mandatory procedure governing objections against reopening.
- GKN Driveshafts (India) Ltd. v. Income-tax Officer (Supreme Court), [259] ITR 19 (SC) — Relied upon. Once reasons for reopening are furnished and the assessee files objections, the AO is bound to dispose of those objections by a speaking order. Failure to do so rendered the reassessment proceedings illegal.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This petition under Article 226 of the Constitution of India is filed praying for the following reliefs:
That this Hon’ble Court may be pleased to call for the records, and after perusing the same, be pleased to:
(a) Declare that the Impugned Reopening Notice dated 30 March 2021 (Exhibit A), Impugned Assessment Order dated 31 March 2022 (Exhibit B), Impugned Notice of Demand dated 31 March 2022 (Exhibit C) and Impugned Penalty Notice dated 31 March 2022 (Exhibit D) are illegal, arbitrary, in total contravention of the principles of natural justice, and liable to be quashed;
(b) Issue a writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction, quashing the Impugned Reopening Notice dated 30 March 2021 (Exhibit A), Impugned Assessment Order dated 31 March 2022 (Exhibit B), Impugned Notice of Demand dated 31 March 2022 (Exhibit C) and Impugned Penalty Notice dated 31 March 2022 (Exhibit D);
(c) Issue a writ of Prohibition or a writ in the nature of Prohibition restraining the Respondents from acting pursuant to or in furtherance of the Impugned Reopening Notice dated 30 March 2021 (Exhibit A). Impugned Assessment Order dated 31 March 2022 (Exhibit B), Impugned Notice of Demand dated 31 March 2022 (Exhibit C) and Impugned Penalty Notice dated 31 March 2022 (Exhibit D);
(d) Issue a writ of Mandamus or a writ in the nature of Mandamus, directing the Respondents to forthwith withdraw and cancel the Impugned Reopening Notice dated 30 March 2021 (Exhibit A), Impugned Assessment Order dated 31 March 2022 (Exhibit B) Impugned Notice of Demand dated 31 March 2022 (Exhibit C), and Impugned Penalty Notice dated 31 March 2022 (Exhibit D);
(e) Pending the hearing and final disposal of this petition, to stay the operation and implementation of the Impugned Reopening Notice dated 30 March 2021 (Exhibit A). Impugned Assessment Order dated 31 March 2022 (Exhibit B), Impugned Notice of Demand dated 31 March 2022 (Exhibit C) and Impugned Penalty Notice dated 31 March 2022 (Exhibit D), and to restrain the Respondents from acting in furtherance or the same;
(f) Ad-interim reliefs in terms of prayer clause (e);
(g) Costs of this Petition;
And grant such further or other reliefs as the nature of the case may demand and which this Hon’ble Court deems fit and in the interests of justice.
2. The basic contention as urged on behalf of the Petitioner in support of the prayers is that the notice issued under Section 148 of the Income-tax Act, 1961 (for short “the Act”) was not taken to the logical conclusion in accordance with law. This inasmuch as the impugned assessment order dated 30 March, 2021 itself was passed on a fundamental error.
3. The Petitioner had raised an objection to the reasons as furnished, by its communication dated 15 October, 2021 addressed to the Assessing Officer (“AO”), which was in response to the notice dated 30 September, 2021 issued under Section 143(2), to which the reasons for reopening were enclosed. The Petitioner’s objection inter alia recorded that there was an ex facie error inasmuch as the assessment year being 2017-18 was wrongly referred to the notice as assessment year 2016-17. The Petitioner stated that the Petitioner had in fact filed his return of income before the due date for the assessment year 2016-17 and there was no purchase or sale of any scripts by the name M/s Toyam Industries Ltd., as also confirmed by the stock brokerage firm of the assessee i.e., M/s. NNM Securities Ltd. The details in that regard were also furnished by the Petitioner. Although such objections were submitted by the Petitioner on 15 October, 2021, the Assessing Officer did not decide the same. The objections thus were not disposed of in accordance with law. Such inaction of the Assessing Officer, was against the principles of law as laid down by the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. Income-tax Officer1 as also the decision of this Court in Asian Paints v. DCIT2.
4. It is on such backdrop on 10 December, 2021 a notice under Section 142(1) of the Act to commence the reassessment proceeding was issued to the Petitioner. In the process of such assessment, there were further flaws as pointed out by the Petitioner, including the use of an erroneous e-mail ID of the Petitioner other than the registered e-mail ID, which was not used and considered in addressing communications to the Petitioner. All such errors as contended by the Petitioner have culminated into a show cause notice being issued to the Petitioner on 30 March, 2022 proposing an addition on the alleged transactions with a total stranger one M/s. Kushal Group, when in fact there were no such transactions with the said group. In fact what was earlier contained in the show cause notice was the transaction with M/s. Toyam Industries, being subject matter of the reasons as furnished to the Petitioner to reopen the assessment. The objections of the Petitioner in that regard were not disposed of. However, before the Petitioner could contest such show cause notice on these contentions, the AO proceeded to finalise the assessment, by issuing the impugned order dated 31 March, 2022 and raising the impugned demand notice as also penalty notice.
5. The Respondent-Revenue has filed reply affidavit to the petition. What is seen from the reply affidavit is something which is not only disturbing but quite surprising which compounds the careless approach of the AO. The reply affidavit now states that the reasons which were furnished to the Petitioner were not correct, and in fact the reasons which are annexed to the order of approval dated 30 March, 2021 under Section 151 of the Act as approved by Shri. V. Vinod Kumar, Joint Commissioner of Income-tax, are the correct reasons. Such reasons for the first time have been placed on record in the reply affidavit. As per the procedure as known to law, such reasons ought to have been furnished to the Petitioner at an earlier point in time, however, they have emerged for the first time, in the reply affidavit, filed before the Court which is dated 10 October, 2022, of Smt. Jyoti N. Dhirwani, Income-tax Officer-24(1)(1), Mumbai. The relevant contents of the reply affidavit in this context are required to be noted which read thus:-
“During the assessment proceedings, reason for reopening as annexure to notice u/s. 143(2)dated 30.09.2021 was inadvertently enclosed, however while seeking approval from the competent authority, proper reason for re-opening was submitted before him. Hereto annexed & marked Exhibit R-1 is a copy of correct reason of reopening under section 151 of the Income Tax Act. Further, the assessee, during the assessment proceedings was asked to provide the details as per notice issued u/s 142(1) dated 10.12.2021 which is extractedas under:
“As per information available with this office, you are not furnishedthe true and correct particulars of income of Rs.1,78,78,967/- in thereturn of income field for A.Y.2017-18 relating to the M/s. Kushalgroup, Ahmedabad. The said company indulged in the activity ofaccommodating the long term capital gains/loss or short term capitalgains/loss by way of rigging the price of its scrip certain level. In thisregard, please furnish your reply with documentary evidences.”
6. Mr. Naniwadekar, learned Counsel for the Petitioner would submit that for more than one reason the impugned assessment order is required to be quashed and set aside, as also it be held that the Section 148 proceedings initiated against the Petitioner are illegal and invalid in law. The primary submission of Mr. Naniwadekar is to the effect that the objections which were raised by the Petitioner to the reasons as furnished, as annexed to the notice dated 30 September, 2021, issued under Section 143(2) read with Section 147 of the Act, itself were not disposed of. It is submitted that the non-disposal of such objections by the AO go to the root matter, as such approach of the AO would be contrary to the decision of the Supreme Court in the case of GKN Driveshafts (India) Ltd. (Supra), wherein the Supreme Court has categorically observed that the AO is bound to furnish reasons in a reasonable time, and on basis of such reasons the noticee is entitled to file objections to the issuance of notice, and the Assessing Officer is bound to dispose of the same by a speaking order, which admittedly is not passed in the present proceedings. Since, the Assessing Officer had not disposed of the objections by a speaking order, the assessment as undertaken by the AO would required to be held to be illegal.
7. This apart, Mr. Naniwadekar would next submit that now the department cannot for the first time furnish fresh reasons and support the impugned reassessment order dated 31 March, 2022, as this would bring about a situation wherein the original reasons as furnished to the Petitioner and in regard to which the objections were raised by the Petitioner are being substituted and without a lawful procedure being followed and an opportunity being made available to the Petitioner as per the procedure in law, to raise objections. It is therefore his submission that there cannot be any sanctity to such fresh reasons which are now set out in the reply affidavit and which are part of the annexure to the order of approval under Section 151 of the Act. It is his submission that on these peculiar facts, the Petitioner would be entitled to the reliefs as prayed for.
8. On the other hand, Mr. Sharma has opposed this petition. He would not dispute as to what would be the position in law as laid down by the Supreme Court in the case of GKN Driveshafts (India) Ltd. (Supra) that once objections were raised by the Petitioner it would be incumbent on the AO to dispose of the same by a speaking order. However, Mr. Sharma has tried to justify the impugned assessment order on the ground of fresh reasons set out in the Section 151 approval for reopening of the Petitioner’s assessment. His contention is that in the event, the impugned assessment order is quashed and set aside, the department ought to be permitted to complete the proceeding under Section 148 by permitting the Petitioner to raise fresh objections which can be decided by the Assessing Officer in accordance with law.
9. We have heard learned Counsel for the parties. We have perused the record.
10. In the facts as noted by us above, we need to agree with the primary contention as urged by Mr. Naniwadekar, that the entire procedure as adopted by the AO/Respondents appears to be flawed. In fact this is a classic case where the AO himself has acted quite recklessly and/or in an irresponsible manner, inasmuch as the reasons which were furnished to the Petitioner are now stated to be different from what were presented for consideration in seeking approval under Section 151 of the Act. For the first time in the reply affidavit it is discovered that reasons which are completely different than as communicated to the Petitioner were placed for consideration of the Joint Commissioner to seek approval under Section 151 of the Act. Thus, the earlier reasons as furnished are being substituted by fresh reasons as annexed to the approval granted by the Joint Commissioner to be the real reasons. We are quite astonished at such stance being taken on behalf of the Respondents-Revenue. As the facts stand, leading to the impugned reassessment order dated 31 March, 2022, it is quite clear that such order was passed on the basis of reasons which were furnished to the Petitioner under a notice issued under Section 143(2) read with Section 147, and to which objections were raised by the Petitioner vide reply dated 15 October, 2021 which were not disposed of by passing a speaking order. Thus, as observed hereinabove, the case is clearly hit by the principles of law as laid down by the Supreme Court in the case of GKN Driveshafts (India) Ltd. (Supra) and on this basic issue, the impugned order will be required to be quashed and set aside.
11. We also cannot countenance an argument as urged on behalf of the department that sanctity should be attributed to the fresh reasons which form part of the approval granted by the Joint Commissioner under Section 151 of the Act, and which now ought to be considered as the appropriate reasons. Such a plea cannot be taken after the assessment order is already passed. In our opinion, it is not permissible for the Respondents-Revenue to raise such contentions as this will be completely contrary to the well settled principles of law and the sanctity of the procedure under Section 148 as it stood applicable for the assessment year in question (assessment year 2017-18). We therefore reject the case of the Respondents-Revenue in this regard that now the Petitioner needs to respond to the reasons which form part of the approval granted under Section 151 and that too without the same being issued to the petitioner in a manner known to the law by the Assessing Officer.
12. This is a clear case where the AO in fact has adopted different approaches, firstly, in furnishing different reasons to the assessee than what was placed before the Joint Commissioner. Things did not stop here, the AO thereafter decided to proceed in breach of the law, as if he was not aware about the rules which are required to be followed by him, namely, that once he had furnished reasons and to which objections were raised by the Petitioner, as a mandate of law, he was required to pass a speaking order disposing of the objections. He failed to pass such order and nonetheless he proceeded to pass the impugned assessment order. It appears to us that the Assessing Officer was quite aware that the assessment order when looked from any angle, was illegal and could be set aside by the Court. Thus, the AO permitting this to happen, as an eye wash the AO purports to take a plea that the reasons as set out before the Joint Commissioner be now set up as a defence to the present proceedings knowing well that referring to such reasons would be an untenable argument. The AO in the present case has acted against the interest of the Revenue, and all of his actions has in fact helped the assessee in the present proceedings. This inasmuch as if the AO was to follow the correct path as per the record and if he was to be right, income of such large amount would not have escaped assessment. The AO however, maintained technical defects which appears to be quite a conscious attempt. He has failed to diligently discharge his official duties, expected from him in law. We don’t know what happens to such officers and whether any action is taken against such Officers in such cases questioning their performance and more particularly when they are responsible to deal with such large amounts of revenue, being not brought to tax, and as to whether any performance audit, vigilance or enquiry is conducted against such Officers and their actions in respect of several assessees is subjected to any scrutiny by the concerned Principal Commissioner of Income-tax under whose jurisdiction, such Assessing Officer discharges their duties. We are required to make these observations as the facts in the present case are quite glaring. The assessee in our opinion is correct in questioning the actions of the department that these are flawed, however, whether the AO ought to have been so reckless is the issue, which is an issue which the high officials of the department need to ponder on.
13. For all these reasons the petition needs to succeed, it is accordingly allowed in terms of prayer clause (b) which reads thus:-
“(b) Issue a writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction, quashing the Impugned Reopening Notice dated 30 March 2021 (Exhibit A), Impugned Assessment Order dated 31 March 2022 (Exhibit B), Impugned Notice of Demand dated 31 March 2022 (Exhibit C) and Impugned Penalty Notice dated 31 March 2022 (Exhibit D);”
