U.S. Associates 3 Vs PCIT Raipur-2 (Chhattisgarh High Court)
Summary: The Chhattisgarh High Court, in U.S. Associates 3 Vs Principal Commissioner of Income Tax Raipur-2, quashed the reassessment proceedings initiated under Sections 148 and 148A of the Income-tax Act, 1961, holding that the Income Tax Department could not rely upon a transaction that was never disclosed in the original reassessment notice or the subsequent show-cause notice. The dispute arose because the Department included an additional transaction of ₹14 lakh involving Smt. Rekha Soni while determining whether the alleged income escaping assessment exceeded the ₹50 lakh threshold. Justice P. Sam Koshy, by order dated 1 December 2022, held that the Department’s action was inconsistent with the requirement that proceedings remain confined to the grounds disclosed to the assessee. The Court consequently set aside the impugned order and notice dated 22 July 2022, while reserving the Revenue’s right to take appropriate action in accordance with law.
The petitioner challenged the reassessment notice issued on 22 July 2022 and the preceding order passed under Section 148A. Its principal grievance was that the Department had relied upon a transaction of ₹14 lakh which was absent from the original notice issued under Section 148 on 29 June 2021 and the subsequent notice issued under Section 148A(b) on 25 May 2022. According to the petitioner, the introduction of this additional transaction at the decision-making stage deprived it of the opportunity to explain or contest the transaction before the reassessment proceedings were initiated. The petitioner argued that the statutory procedure contemplated proper disclosure of the information relied upon by the Assessing Officer and an effective opportunity to respond to that information before an adverse decision was taken.
The petitioner further submitted that the amount of alleged escaped income, excluding the disputed ₹14 lakh transaction, was only ₹36,99,555. This was below the ₹50 lakh threshold relied upon by the Department for reopening older assessments under the transitional reassessment framework. The petitioner invoked the CBDT Instruction dated 11 May 2022, issued following the Supreme Court’s ruling concerning reassessment notices issued under the earlier statutory provisions. It contended that once the transaction not forming part of the show-cause notice was excluded, the remaining amount did not satisfy the monetary requirement for continuation of the proceedings. Therefore, according to the petitioner, the reassessment itself was beyond the permissible statutory framework and could not lawfully continue.
The High Court examined the notices dated 29 June 2021 and 25 May 2022 and found that neither referred to the alleged ₹14 lakh transaction involving Smt. Rekha Soni. The Department had not disclosed in those notices that the petitioner had suppressed that transaction or that the amount represented income escaping assessment. The Court considered the subsequent inclusion of this transaction impermissible because the assessee had not been given an opportunity to respond to that specific allegation. Relying on the Supreme Court judgment in Commissioner of Customs, Mumbai Vs Toyo Engineering India Ltd., (2006) 7 SCC 592, the Court reiterated the settled principle that the Department cannot travel beyond the show-cause notice. Accordingly, an adverse order cannot ordinarily be sustained by introducing a new allegation or transaction which did not form part of the notice initiating the proceedings.
The Court also referred to the Bombay High Court decision in N.D. Bhatt, Inspecting Assistant Commissioner Vs I.B.M. World Trade Corporation, (1995) 216 ITR 811. That judgment established that the validity of a reassessment notice must be examined with reference to the reasons recorded before the notice was issued. The Department cannot subsequently introduce additional reasons or rely upon fresh material to justify the original decision to reopen an assessment. The Bombay High Court had, in turn, relied upon Equitable Investment Co. (P.) Ltd. Vs ITO, (1988) 174 ITR 714 (Calcutta High Court), which held that the validity of reopening must be determined on the basis of the material originally placed before the sanctioning authority. The Chhattisgarh High Court considered these authorities relevant to the petitioner’s objection that the Department had expanded the scope of the reassessment proceedings beyond the allegations disclosed in the statutory notices.
Further support was drawn from the Chhattisgarh High Court’s earlier decision in M/s Kishan Lal and Company and Another Vs Additional Commissioner of Commercial Tax and Another, decided on 17 May 2018. In that case, the Division Bench had applied the Supreme Court’s ruling in Toyo Engineering India Ltd. and reiterated that the Revenue could not travel beyond the show-cause notice. The Court considered this principle applicable to the present dispute because the additional ₹14 lakh transaction was introduced without having formed part of the original grounds communicated to the petitioner. The Court’s analysis therefore addressed not merely the amount involved but also the fundamental procedural requirement that an assessee must know the allegations it is required to answer before an adverse decision is taken.
After considering the facts, the judicial precedents and the Department’s Instruction dated 11 May 2022, the High Court concluded that the impugned reassessment proceedings were unsustainable. Excluding the additional ₹14 lakh transaction, the alleged escaped income was ₹36,99,555, below the monetary threshold relied upon for the proceedings. More importantly, the additional transaction had never been disclosed in either of the relevant notices, making its subsequent inclusion contrary to the principles governing the permissible scope of a show-cause notice. The Court accordingly set aside the impugned order under Section 148A and the notice under Section 148, both dated 22 July 2022. However, the Court expressly reserved the Department’s right to adopt any appropriate remedy available under law. The writ petition was allowed and disposed of.
The judgment reinforces two important principles governing income-tax reassessment proceedings. First, the Revenue must ensure that the jurisdictional requirements, including the applicable monetary threshold and limitation provisions, are satisfied on the basis of legally relevant material. Second, the Assessing Officer cannot introduce an undisclosed transaction at the stage of passing an order under Section 148A(d) and use that transaction to support the issuance of a reassessment notice without affording the assessee the prescribed opportunity to respond. The decision is particularly relevant to reassessment proceedings arising from notices issued under the pre-amendment regime and subsequently dealt with under the transitional procedure following the Supreme Court’s reassessment ruling. Its operative effect is confined to the facts and statutory framework considered by the Court, and the Department remains free to act afresh where legally permissible.
Cases Discussed
1. Equitable Investment Co. (P.) Ltd. Vs ITO (Calcutta High Court); (1988) 174 ITR 714 — Relied upon through N.D. Bhatt for the principle that the validity of a reassessment notice must be determined from the originally recorded material and cannot be supported by additional reasons introduced subsequently.
2. N.D. Bhatt, Inspecting Assistant Commissioner Vs I.B.M. World Trade Corporation (Bombay High Court); (1995) 216 ITR 811 — Applied for the principle that only the reasons recorded before issuing a reassessment notice can be considered while determining its validity, and that the Revenue cannot supplement those reasons subsequently.
3. Commissioner of Customs, Mumbai Vs Toyo Engineering India Ltd. (Supreme Court); (2006) 7 SCC 592; 2006 (201) ELT 513 (SC) — Followed for the settled principle that the Department cannot travel beyond the show-cause notice or introduce allegations not originally communicated to the affected party.
4. M/s Kishan Lal and Company and Another Vs Additional Commissioner of Commercial Tax and Another (Chhattisgarh High Court); Writ Appeal decided on 17/05/2018 — Relied upon for applying the Supreme Court’s ruling in Toyo Engineering India Ltd. that Revenue authorities cannot travel beyond the scope of the show-cause notice.
FULL TEXT OF THE JUDGMENT/ORDER OF CHHATTISGARH HIGH COURT
1. Challenge in the present writ petition is notice under Section 148 of the Income Tax Act, 1961 (in short, the Act of 1961) dated 22.07.2022 and also the order dated 22.07.2022 under Section 148A(b) of the Act, 1961.
2. The primary contention of the counsel for the petitioner is that the authorities while passing the order under Sections 148A(b) and Section 148 of the Act of 1961 on 22.07.2022 have considered certain transactions which were not part of the notice that was originally issued to the petitioner under Section 148 of the old Act and also under Section 148A(b) of the new Act.
3. The contention of the petitioner further is that if the said 14 Lakh rupees transaction which has been considered by the Department is excluded from the proceedings then the amount would be less than 50 Lakh rupees and would therefore be outside the purview of the assessment proceedings as per circular dated 11.05.2022.
4. The contention of the petitioner is that the authorities concerned have taken into consideration the transaction of an amount of Rs.14 Lakhs made by one Smt. Rekha Soni while carrying out the assessment, but the said 14 Lakhs transaction was not the contents of the notice that was issued. Therefore, the petitioner never had an opportunity to submit his explanation at the first instance. That, it is only during the assessment proceeding that the officers of the Department had taken this aspect and have also added the said amount while passing the order under Section 148A(b)(d). This, according to the petitioner is not otherwise permissible as the authorities could have proceeded to assess in respect of a transaction which did not form part of the notices that were issued initially under Section 148 of the old Act on 29.06.2021 nor did it form part of the notice that was subsequently issued under Section 148A(b) of the new Act that was issued on 25.05.2022.
5. It is the further contention of the petitioner that if the said 14 Lakhs rupees is excluded from the proceedings then the income that has escaped assessment would be of an amount of Rs.36,99,555 which is less than 50 Lakhs rupees and in terms of the circular dated 11.05.2022 wherein it has been specifically held that notice under Section 148 could be issued only if the case is one where the amount escaping the assessment of an asseessee in that year is likely to be more than 50 Lakhs rupees. In the instant case the amount minus (-) 14 Lakhs added by the Department which did not form part of the notice would bring the total amount to less than 50 Lakh rupees. Thus, prima facie the proceedings would have been attracted by the circular dated 11.05.2022 and it could not had been initiated itself.
6. It is also glaringly visible from the two notices that were issued on 29.06.2021 as also on 25.05.2022 i.e. the notice initially issued under Section 148 of the old Act and under Section 148A(b) of the new Act that the department has not disclosed the fact in its notice of the petitioner having suppressed this 14 Lakh rupees transaction and this has also escaped assessment of the Department. In the absence of the same being reflected in the notice, the assessment yet being made of the said amount would be prima facie bad in the light of the judgment of the Supreme Court in case of Commissioner of Customs, Mumbai Vs. Toyo Engineering India Ltd. 2006(7) SCC 592 wherein in paragraph 16 the Supreme Court has emphatically held that the Department cannot travel beyond the show cause notice.
7. There is another judgment rendered by the Bombay High Court in this respect in N.D. Bhatt, Inspecting Assistant Vs. I.B.M. World Trade Corporation, 1995 216 ITR 811 Bom, wherein in paragraph 18 it has been held as under:
“18. It is also well settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under Section 148 by virtue of the provisions of s. 148(2) at the relevant time. Only the reason so recorded can be looked at for sustaining or setting aside a notice issued under s.148. In the case of Equitable Investment Co. (P.) Ltd. vs. ITO (1988) 174 ITR 714 (Cal) a Division Bench of the Calcutta High Court has held that where a notice issued under Section 148 of the IT Act, 1961, after obtaining the sanction of the CIT, is challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the CIT has been obtained. The IT Department cannot rely on any other material apart from the report. In the case before it, the Calcutta High Court refused to take into consideration the affidavit filed by the IT Department giving some additional reasons. In the present case, the reasons which are given by the IAC for reopening the assessments which are annexed to the affidavit in rejoinder of the appellants are to the effect that in respect of the Assessment Year 1967-68 to 1973-74 there are errors in the principle of allocating headquarters expenses to India which have been deducted. The net effect is that there has been an excess charge of headquarters expenses allocated to India. Each of the notices sets out the relevant error for the accounting year. The reasons, therefore, do not indicate in any manner any deliberate omission or suppression of any fact or of this error, on the part of the assessee at the time of the original assessment. Nor do these reasons allege that the assessee was in possession of the facts which it has failed to prove. In these circumstances, the provision of s. 147(a) are not attracted.
8. Similar view has also been taken by the Division Bench of this High Court in a bunch of Writ Appeals which were decided on 17.05.2018, the leading of which being M/s Kishan Lal and Company and Another Vs. Additional Commissioner of Commercial Tax & Another, wherein in paragraph 8 it has been mentioned as under: “8. It is settled by the Supreme Court in Commissioner of Customs, Mumbai Vs. Toyo Engineering India Ltd. 1 at para 16 that the department/ Revenue cannot travel beyond the show- cause notice. Thus, the argument advanced by the learned counsel appearing for the State that as a matter of fact what is sought to be revised was the reassessment order and not the original assessment order need not be considered, as the same is not permissible in view of what has been held by the Supreme Court.”
9. Given the aforesaid facts and circumstances of the case and also keeping in view the circular of the Department dated 11.05.2022, this court is of the opinion that the order under Section 148A(b) and order Section 148 of the Act of 1961 dated 22.07.2022 in the given factual backdrop would not be sustainable. The same therefore deserves to be and is hereby set aside reserving the right of the Department, if the law permits, to take appropriate recourse available in accordance with law.
10. The writ petition accordingly stands allowed and disposed of.
