Prasenjit Singh
Commissioner, Income Tax (TDS)
Vadodara
[email protected]
Prasenjit Singh is an Indian Revenue Service (IRS) officer of 1990 batch and is currently posted as Commissioner of Income Tax, TDS, Vadodara. The present article is based on my experience while adjudicating the appeals as Commissioner (Appeals) and also from the posting at ITAT as Senior Departmental Representative and CIT, DR from time to time. I have been a regular visiting faculty at NADT, Nagpur and DTRTI- Ahmedabad, Mumbai, Lucknow, Bhopal. A lot of inputs and ideas have also been taken and gathered as a result of interaction with the participants at these Training Institutes.
Executive Summary
The mistakes committed by the assessing officers while completing the assessment proceedings are fatal. Such mistakes, both legal and procedural, are used by the taxpayers to get the entire assessment proceedings struck down before the various appellate authorities. The entire hard work done by the Assessing Officer of gets completely washed away due to such mistakes. It is important that as tax administrators, we should ensure that such legal and procedural lapses do not occur so that the taxpayers do not get away scot free by getting the assessment proceedings vitiated on technical grounds.
Page Contents
- (A) Introduction: Common Mistakes in the Assessment Proceedings
- (B) Natural Justice is Foundation of Assessment Proceedings
- (C) Examination/ Cross Examination and use of Powers U/S 131 of Act
- (D) Affidavits
- (E) Generally Observed Mistakes in Assessment Order
- F) Reassessment Proceedings
- G) Issuance Of Notice and Service of Notice is Mandatory
- (H) Making a mistake” is not the same thing as “failing.”
(A) Introduction: Common Mistakes in the Assessment Proceedings
It is well said that the mistakes are the stepping stones to learning. It is inevitable that when certain acts are performed there are chances of committing mistakes. But two important things are to be learned from such mistakes is that firstly such mistake should be bonafide. Secondly, learning from the mistakes should be taken as feedback to improve our performance and such mistakes should not be repeated in future. The use of technology by the Department in the last few years has grown many folds with the advent of CPC-ITR, CPC- TDS, CASS based selection, e-assessment, Project INSIGHT and now faceless assessments. The role of the Department for the implementation of the effective tax administration in the country has grown by leaps and bounds in the last few years.
The effective use of the technology by the Income Tax Department has brought a massive data of the financial transactions of several categories under its ambit which has led to successful creation of 360 degree profile under the Project Insight and the complete profile of the persons are available on the click of the button.
The selection of the cases nowadays for scrutiny assessments and investigations is based on specific inputs relating to financial transactions. The quality of the inputs of such financial transactions is very authentic and accurate and generally these transactions, which are often entered by the persons with the intention to evade/avoid taxes, is now available to the AO. The taxpayer and the professional counsels representing taxpayers, are very much aware about the accuracy and authenticity of the information involving evasion of tax, and therefore realize that there is no scope of getting away without the tax liability and penalty at the assessment stage as well as appellate stage. In such a scenario, the taxpayers and the tax professionals, are looking for the mistakes which are often committed by the Assessing Officers (will be referred as AO’s) during the various proceedings. Such mistakes both legal and procedural are used by the taxpayers to get the entire assessment proceedings struck down before the various appellate authorities. It is a well- known fact that the Department has been losing a large number of cases before the various appellate forums on account of procedural lapses, such as issue of re-opening of assessment u/s 147 of the IT Act, issuance of statutory notice u/s 143(2) of the IT Act, initiation of penalty proceedings, violation of principles of natural justice, etc. Keeping in view these developments, it is important as the tax administrator that we should ensure that such legal and procedural lapses/mistakes do not occur so that the taxpayers do not get away scot free by getting the assessment proceedings vitiated on technical grounds. In the subsequent paragraphs, an attempt has been made to highlight common mistakes which occur during the assessment proceedings which are both of legal and procedural lapses.
(B) Natural Justice is Foundation of Assessment Proceedings
Though it is important that the assessment order is drafted very carefully, it is equally important that each and every step taken by the AO in the course of the assessment proceedings is by itself legally justified and is in accordance with the prescribed procedure of law. The taxpayers are not weary of the assessment proceedings but are apprehensive of the AO’s investigations to bring facts on record. Once the facts are on record as a result of field inquiries, investigations, etc., the taxpayer is very much aware that his chances of getting any relief before any appellate authorities are minimal. So, as a defensive measure, he avoids the assessment proceedings by seeking adjournments on flimsy grounds to ensure that the AO reaches the fag end of the limitation period of completing the assessment and has little time to make investigations and inquiries to verify the facts. In such a scenario, the AO’s fall in the well laid trap of not providing sufficient and adequate opportunity to the taxpayer due to the paucity of time. It is a well settled law that irrespective of facts on record, if the Principles of Natural Justice has not been followed, the subsequent actions cannot stand the judicial scrutiny. The Courts are very strict and conservative on the issue of violation of principles of natural justice. A large number of cases are lost only on this issue of lack of proper and adequate opportunity.
The right to a fair hearing requires that person should not be penalized by decisions affecting their rights or legitimate expectations unless they have been given prior notice of the case, a fair opportunity to answer it, and the opportunity to present their own case. The Principles of Natural Justice are enshrined in two immemorial Latin maxims –‘nemo judex in causa sua’ and ‘audi alteram partem’. Translated literally, these maxims mean respectively that-(i) no one can be a judge in his own cause, and (ii) let the other side be heard. In other words, the first is to the effect that no Judge should have personal interest in a case before him, and the second that no one should be condemned unheard. It means that every action taken by the AO in the course of assessment proceedings should stand the test of appeal on the grounds of impartiality and fairness. The assessment proceedings are quasi- judicial proceedings and therefore every action of the AO is tested on the touchstone of natural justice. The Income Tax Act 1961(now referred as Act) gives the AO an immense authority and it is difficult to compare with any other legal authority under any other legal act, having parallel or similar powers and authority. The AO is an investigator – cum – prosecutor -cum – inquiry officer, rolled into one. Every action of his/her must conform to the procedure laid down in the Act read with the Income Tax Rules. Therefore, all his actions must pass the Test of Procedural Fairness. The procedural fairness requires that a fair and proper procedure must be used when making a decision. It is akin to Mahatma Gandhi’s idea of ‘purity of means’ i.e. means is as important as end.
Prima facie indications of `fairness’ on the part of the AO is:
i) Adequate notice,
ii) Opportunity of hearing, and
iii) Speaking order.
The adequate notice is embedded with the opportunity of hearing. It means that the principle of ‘audi alteram partem’ has been well- recognized by the legislature and a large number of procedural provisions in the Act have expressly incorporated this principle. For eg. Chapter XIV of the Act dealing with the ‘Procedure for Assessment’ incorporates this principle in sub-section 3 of Section 142 which read “(3) The assessee shall, except where the assessment is made under s.144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) (or any audit under sub-section (2A) and proposed to be utilized for the purposes of the assessment.” Similarly Sections 144A, 144BA,144C,153A,153C 154, 158, 163, 170, 171, 263, 274 and 275 specifically provide for hearing. This list is not exhaustive but is merely illustrative.
The adequate notice means that the notice should have been properly served on the taxpayer at the address as per the PAN database. Sub-rule (1) of the Rule 127 of the Income Tax Rules, 1962 provides that for the purposes of sub-section (1) of section 282, the addresses (including the address for electronic mail or electronic mail message) to which a notice or summons or requisition or order or any other communication under the Act may be delivered or transmitted shall be as per sub-rule (2). There is a lot of confusion among AO’s on the issue of notice to be sent on which address? Some issue at the last known address, some on PAN address, and some as per last return of income. The taxpayers challenge the service of notice in all such cases as of no service at all. The section 139A(5)(d) of the Act puts the onus on the taxpayer to intimate the change of his PAN address to the AO. The various Courts have also taken divergent views on the address on which the notice is to be served. The controversy of issuance of notice on PAN address or other addresses has been settled by the recent decision of the Apex Court wherein the Hon. Supreme Court in the case of M/s I-Ven Interactice Limited, Mumbai in {CIVIL APPEAL NO.8132 OF 2019} vide order dated 18.10.2019 held that the notices are to be issued at the PAN address as per the legal provisions and it is the responsibility of the taxpayer to update the PAN address. Legally the notices have to be served on the PAN address but as a matter of natural justice,the copy of the notice should be also sent to the other addresses to avoid any adverse views at appellate stages. It is not sufficient to ensure that the prescribed statutory notices are duly issued and served on the taxpayer. The notice must provide for sufficient time so that the opportunity can be said to be a reasonable opportunity of hearing. In large number of cases especially during the fag end of limitation period, the AO’s issue show cause notices with large number of details to be furnished within 2- 3 days of notice. Such an opportunity is considered to be inadequate opportunity by the appellate authorities.
The assessment order must be a speaking order. A speaking order is one in which each and every point of controversy has been properly dealt with. The order itself bears evidence to ‘due application of mind’ on the part of the authority. Due application of mind has been judicially defined to mean that there is something in the order which shows that the point or the issue has been duly considered by the AO after taking into account the objections of the assessee. Any evidence, be it a statement, document or a report from any officer or agency or any field inquiry, can be used in making the assessment only after contents are duly intimated to the assessee and he is given an opportunity to rebut the same. Opportunity for hearing should not be a mere formality. It should be adequate, real and substantive. For instance, where an assessee is required to explain certain entries in a seized or impounded diary, he should be given copy of the relevant pages of the diary and then should be given sufficient time for furnishing his explanation. Where the taxpayer does not comply with the statutory notice and the AO proposes to make an ex-parte assessment, the AO should not pass the assessment order without giving the taxpayer a specific opportunity. It is seen in large number of cases that the AO after making extensive inquiries gathers certain facts and information which he feels is incriminating evidence to prove the tax evasion. But the AO has a lurking and unfounded fear that in case he confronts such information to the taxpayer, then the taxpayer will come with some explanations to controvert his findings, which may whitewash all his efforts to prove the tax evasion. Due to this apprehension which is a part of natural human behavior, he/she do not provide adequate time or notice to the taxpayer and complete the assessment by making the additions. Such an act is against the principles of the natural justice.
(C) Examination/ Cross Examination and use of Powers U/S 131 of Act
The law relating to examination of witness is contained in section 135 to 165 of the Indian Evidence Act. The AO must know the complete facts of the case and by putting himself in the state of taxpayer must be mentally clear of the modus operandi adopted by the taxpayer. Section 131 also empowers the AO to issue commissions. This power can also be utilized to obtain a report relating to any vital fact – be it the site report or examination of witnesses etc. – from the officer under whose jurisdiction the site or witnesses are situated. For this purpose, the officer has the powers of the court as prescribed under Rule 19 of Order XVI of the Civil Procedure Code which provides that no witness shall be coerced to attend in person to give evidence unless he resides – (a) within the local limits of the court’s jurisdiction, or (b) outside such limits as laid down in the said Rule. The procedure for examination of witnesses etc. under the commission is given in Rules 1 to 8 of Order XXVI of CPC. The officer issuing commissions and the officer discharging the commission should strictly abide by these rules.
Where the AO proposes to use an oral testimony of a witness, he should provide a copy of the testimony to the taxpayer and also give him an opportunity to cross-examine the witness. Where, however, a taxpayer asks a particular witness to be produced, the AO must issue summons on the said witness and allow the taxpayer to examine the witness and thereafter himself cross-examine the witness. A large number of cases in which the assessments were completed on the basis of the statement on oath of accommodation entry providers recorded by the Investigation Wing during the search or survey proceedings have been knocked down by the appellate authorities. The common factor is all these cases were twofold: First, the assessment was solely completed on the basis of the Investigation Wing Report where the AO’s have not made any efforts to conduct independent inquiries to re-establish the findings of the Investigation Wing. Secondly, the request made by the taxpayer to the AO during the assessment proceedings to provide opportunity to cross-examine the accommodation entry provider on whose statement the AO is relying to make the addition was not attended or no cognizance taken.
The mistake of the AO’s in such cases was naturally twofold: First, the AO’s should have conducted independent inquiries at the time of the assessment proceedings instead of solely relying on the report of the Investigation Wing.
The information received from any source by the AO has to be independently verified to show the ‘due application of mind’ in the assessment proceedings. In such cases the statement on oath recorded by the Investigation Wing becomes the ‘primary evidence’ for the AO’s to make the addition as no independent inquiry for the verification was done. Secondly, the AO’s ignored the request of the taxpayer for cross examination of the accommodation entry provider. This failure on the part of the AO’s was fatal as it was in violation of the principles of natural justice. In the case, where the AO made independent inquiries to establish that the transactions reported by the Investigation Wing, were bogus and in nature of accommodation entries, the independent inquiries conducted during the assessment proceedings were the ‘primary evidence’ and the statement on oath recorded by the Investigation Wing became the ‘corroborative/ secondary evidence’. In such a situation, even if the AO does not entertain the request of cross examination, it is legally tenable as AO had primarily relied on his own investigations and the statement on oath was the secondary evidences. In such a scenario, the denial of cross-examination is not against the principles of natural justice.
Summons u/s 131 can be issued by the AO only during the pendency of some pending proceeding. Where it is urgently required to issue summons to a witness and no proceedings are pending, the AO should take the help of the Directorate of Investigation. Reasons must be recorded in the order sheet before issuing summons. In other words, there should be evidence on record to satisfy the courts that there was due application of mind by the AO. It has been held by the courts that application of judicial mind is essential for invoking the extra-ordinary powers u/s131. ‘Application of Judicial Mind’ can be evidenced only from the noting of the AO. So the recording of the reason on the order sheet or ITBA system before issuance of summons, such as ‘The summons u/s 131 of the Act are being issued to XYZ for the verification of the unsecured loans given to PQR’ is sufficient that there was due application of mind by the AO.
Though Section 13 of the Indian Oaths Act 1873 provides that any omission to take an oath would not invalidate the evidence, it would still be proper if an oath is administered and it is duly noted before the narration of the statement of the witness begins. It would also be better if the main statement is written out not in the hand of the AO but in the hand of the witness. The reason is that subsequently the witness or the taxpayer could not say that the statement recorded by the AO was not true or that the AO put words into his mouth. As far possible, the statement should be recorded in the language in which the taxpayer or the witness gave his deposition. If it is recorded in English, the taxpayer must state in his own hand that he or she understands English language and also give his educational qualifications.
In case any documents are impounded in the course of the proceedings u/s131, the AO must record detailed reasons before impounding the documents. If no such reasons are recorded, the impounding is invalid. Likewise, all requests seeking extension for retention of impounded documents must give specific reasons for extension so that the Commissioner/ Principal Commissioner may apply his mind. Though the reasons need not be communicated to the taxpayer, the fact of approval by the Commissioner/Principal Commissioner must be communicated immediately on receipt of such approval. One of the most undesirable practices which has developed in the last few years by a large number of AO’s is the handing over and taking over of the impounded documents without physically verifying the documents. Such practices has led to the situation that when the impounded documents are called by the appellate authorities for verifying the claim of the taxpayer, it is not traceable in large number of cases. This allows the taxpayer to have a favourable disposition at appellate stage as the primary evidence is missing.
Another issue which plagues the field formation at AO level is the non-compliance of the summons. In majority of cases the AO’s take no action when there is a non -compliance to the summons and only in few cases the proposal for penalty is forwarded to the Additional Commissioner. In such a scenario, it is double whammy for the AO. First, the investigation process gets hampered as the summoned person does not comply and the primary evidence collection process remains incomplete. Secondly, it encourages other persons for non-compliance to summons, to avoid the investigation process. In a large number of cases the AO’s are clueless of how to tackle such a situation.
Section 131 of the Income Tax Act, 1961 has empowered the ADIT/ACIT/AO with the same power as those vested in a court under the Code of Civil Procedure, 1908 when trying a suit in respect of the following matters:-
a. Discovery and inspection.
b. Enforcing the attendance of any person including any officer of a banking company and examining them on oath.
c. Compelling the provision of books of account and other documents.
d. Issuing commission.
The doubt arises in the minds of ADIT/ACIT/AO that what should be the next course of action in case there is a non-compliance of the summons issued by him u/s 131(1) of the Income Tax Act, 1961. Simply imposition of penalty will not serve any purpose as the examination of the witness may be very crucial to prove evasion by taxpayer and have a high revenue implication.
Section 131(1)(b) empowers the authorities enumerated in Sec.131(1) to enforce the attendance of any person including any Officer of Banking Company and examining him on oath. For purposed of Sec.131(1) authority shall have the same powers as are vested in Court under Code of Civil Procedure 1908. The relevant order is Order 16 of CPC and in case persons so summoned fails to attend despite summons having been served, the authority sees reasons that such person has without lawful excuse fails to attend it may issue a Proclamation requiring him to give evidence at a time and place to be named therein and copy of such proclamation shall be affixed on the outer door or other conspicuous part of the house in which he ordinarily resides. Thereafter, the authority may in its discretion issue warrant of arrest either without or without bail for the arrest of such person and may make an order for the attachment of his property.
Section 131 of the Income Tax Act gives the ADIT/ ACIT/AO the same power as those vested under the Code of Civil Procedure 1908 for limited purposes as discussed above. Therefore, in order to seek the alternatives available with the ADIT/ ACIT/AO in case of non-compliance of summons, one has to refer to section 32 of the Civil Procedure 1908 “Penalty for such Default Committed”.
Section 32 of the CPC 1908 reads as follows:-
“The court may compel the attendance of any person to whom a summons has been issued under section 30 and for that purpose may:-
a. Issue of warrant for his arrest
b. Attach and sell his property
c. Impose a fine upon him not exceeding five hundred rupees
d. Order him to furnish security for his appearance and in default commit him to the Civil Prison.”
The fine which is levied under the Civil Court Procedure, 1908 is not exceeding Rs.500/- but since section 272-A of the I.T. Act, 1961 provides that the penalty can be upto Rs.10,000/- but not less than Rs.10,000/- as I.T. Act, 1961 being special act has an overriding effect over the provision of CPC, 1908.
The normal practice observed in the field with the ADIT/ACIT/AO, is the tendency to use the third option available u/s. 32 of CPC, 1908 i.e. leviable find not exceeding Rs.10,000/- and not resort to other options available. It is seen that in such case the person to whom summons have been issued is not affected immediately as he feels the brunt only when recovery procedure are initiated against him after formal order is passed by the Addl CIT/ Addl.DIT u/s.272-A of the Income Tax Act, 1961. This takes away the seriousness and the urgency of the matter pending before the ADIT/ACIT. A more expedient weapon in the hands of the ADIT/ ACIT/AO which is much more effective and has a great deterrent value is to issue a warrant of arrest for the person who does not comply with the requirements of the summons u/s.131 of the I.T. Act, 1961.
The procedure to utilize this provision i.e., issue warrant for arrest for the person not complying with the requirement of summons issued u/s.131 of the I.T. Act, has to be completed. It should be ensured that the summons issued u/s.131 should be received by the taxpayer after it is properly filled up i.e., place of attendance; time and date etc. are legibly filled up. In case the taxpayer is not available for service, then the summons should be served by “affixture”. For this, the report of the Inspector in presence of two witnesses should be duly put on record. After this if the AO sees reasons that such persons has without lawful excuse failed to attend or furnish the required information as per the summons issued and duly served, the ADIT/ ACIT/AO may issue a proclamation requiring the person to give evidence at the time and place mentioned in the proclamation. The format of the proclamation is as per Form No.14 and 15 (Order 15 Rule 10) of Appendix B of CPC, 1908. Form No. 14 is applicable in case a witness is untraceable and summons could not be served on him. Form No. 15 is applicable when summons have been duly served upon the witness. The copy of the same proclamation shall be affixed on the other door or on some conspicuous part of the house in which the taxpayer normally resides. This is said to have been completed after the affixture of the proclamation has been made and signature of two witnesses obtained.
If the taxpayer fails to attend/comply with the provision of summons even after issue of proclamation as discussed at para 3.7.5 to 3.7.7. above, then the ADIT/ACIT/AO can issue warrant of arrest either with or without bail for the arrest of such person and even make orders for the attachment of the property. The ADIT/ ACIT/AO can do so in his own discretion and no formal approval/ permission from the JDIT/JCIT is required as under the provision of CPC not the IT Act, 1961 requires so. The proforma of the Warrant of Arrest is in accordance with the order 16 Rule 10 of the CPC, 1908 form No.17 Appendix ‘B’ of CPC, 1908.
Normally the court sends the Warrant of Arrest through Amin’s who are in the regular employment of the Civil Court but since there is no such Amin under the Income Tax Act, as such, the warrant of arrest can be served through the Inspector of Income Tax. At the first go the warrant of arrest should be bailable and in case the person summoned does not attend before the authority then and only then non-bailable warrant can be issued by the ADIT/ACIT/AO. The value of the bail is to be fixed in the case of bailable warrant after judging the gravity of the non-compliance and the financial status of the taxpayer. When executing bailable warrants the Inspector can either go alone or take the help of concerned local police after making request to the SSP for providing such police force.
While executing non-bailable warrant the Inspector is to take police force after such force is provided to him on the basis of the request made by the ADIT/ACIT/AO to the SSP and have such person arrest and bring him to the summon issuing authorities. Thereafter the authority shall have the right to release the taxpayer bail after furnishing security and bonds to the satisfactory of the authority concerned. The role of the police is limited to the extent of providing help and aiding the ITI in executing the warrant of arrest as is done while executing warrants u/s. 132 of the I.T. Act, 1961 through the authorized officer.
(D) Affidavits
An affidavit is a written sworn statement of fact, voluntarily made by an affiant or deponent under an oath or affirmation administered by a person authorized to do so by law. Such statement is witnessed as to the authenticity of the affiant›s signature by a taker of oaths, such as a Notary Public or Commissioner of Oaths. An affidavit is a type of verified statement which contains verification, meaning it is under oath or penalty of perjury, and this serves as evidence to its veracity and is required for court proceedings. Affidavit is treated as “evidence” within the meaning of Section 3 of the Indian Evidence Act, 1872.
The filing of an affidavit before the AO is a potent weapon used by the taxpayers. In majority of cases, the AO simply ignores the filing of the affidavits and don’t take any cognizance of the affidavits to the extent that it is not mentioned also in the assessment order. It is a settled legal position that if an affidavit is filed by a taxpayer and he is neither cross-examined on its content nor called upon by the AO to produce any corroboratory evidence, the rejection of the affidavit will not be justified. If the AO has any evidence which contradicts the affidavit, the taxpayer must be duly confronted. The evidentiary value of an affidavit has been discussed by the Supreme Court in the case of Mehta Parikh & Co.(1956) 30 ITR 181 (SC). This decision lays down that if there is no material whatsoever on record for doubting the veracity of the statements made in the affidavit and if the deponent has also not been subjected to cross-examination for bringing out the falsity of his statements, then the Tribunal will not be justified in doubting the correctness of the statements made in the affidavit . A large number of cases are lost before the judicial authorities as the taxpayer relies on the affidavit to prove his viewpoint which has not been confronted or contradicted by the AO during the assessment proceedings. It is imperative to understand that the affidavits are not sacrosanct but the claims made in the affidavit needs to be proved otherwise by the AO. An affidavit is a piece of evidence, which along with other material on record, has to be taken into consideration by the AO before arriving at a finding. If there is no material whatsoever on record for doubting the veracity of the statements made in the affidavits and if the deponents has also not been subjected to cross-examination for bringing out the falsity oftheir statements, then the AO would not be justified in doubting the correctness of the statements made by the deponents in the affidavit.
(E) Generally Observed Mistakes in Assessment Order
The assessment order is an end product. The assessment includes the entire process of assessment and all steps which need to be taken in finally determining the income tax payable by the taxpayers. Each and every steps taken by the AO is required to be legally justified and in accordance with the prescribed procedure. It has been seen that in a large number of assessment orders, the following mistakes of general nature are found:
The basic facts are missing in the assessment order. The AO should ensure that in the initial paragraphs, the basic facts should be clearly mentioned which includes date of filing of return of income, returned income, nature of business etc.
If it is a reassessment or a fresh assessment (consequent on setting aside of the earlier order), a brief history of the assessment should be given in the beginning of the order itself.
The details of the opportunities provided to the taxpayers are missing in the order or the details of the notices issued are not mentioned in the assessment order. Sometimes, it is seen that the AO only refers that the notices under various sections such as 142(1)/143(2)/148 etc., have been issued, without any date of the notices and service of the notices. In such a situation, the problem arises when after many years, at the appellate stage the taxpayer challenges the issuance of the notice. Keeping in view, the shortcomings in record management, the notices which have been issued are difficult to trace and the taxpayer gets a relief on the basis of non-production of the notices. It is imperative that the AO’s provide the complete details of the opportunities and the details of the notices along with the date of notice in a chart form in the assessment order itself. It has generally been seen that when the date of notice is mentioned in the assessment order with some inputs about the service i.e. mentioning of speed post/e-mail etc., the Appellate Authorities generally reject the contention of the taxpayers of non-service of the notice even if Income tax Department fails to produce the records regarding the issuance of the notices. Nowadays with the advent of ITBA and e-assessment, this issue is largely tackled by use of technology but still the important facts remains that such crucial basic information should always a part of the assessment order.
It is well said that technology is double edged sword. On one hand it brings efficiency and speed, but on the other hand the indiscriminate use of ‘copy paste option’ brings several errors which can be fatal to the entire assessment proceedings. It is seen that the AO’s mechanically use ‘cut paste option’ in the initial paragraphs of the assessment order such as, books of accounts produced and examined, but the fact is that they have not seen books of accounts. Similarly, use of phrases like GP rate is higher than the last year. Then in the subsequent paragraphs, the AO gives contradictory findings mentioning that books of accounts are not reliable or have not been produced. Such contradictory findings are exploited by the taxpayers before the Appellate Authorities for getting the assessment orders set aside.
One of the most common mistakes which the AOs make is the rejection of the books of accounts u/s. 145(3) of the Act. The book results as per the legal provision u/s 145(3) of the Act can be rejected only if the AO is not satisfied about the correctness or completeness of the accounts or where the method of accounting or accounting standards have not been regularly followed by the taxpayers. In a large number of cases, the AO’s reject the books of accounts by merely passing general observations and without pointing out any specific defects or discrepancies in the books of accounts. It is imperative that once the books of accounts have been rejected by invoking the provision of section 145(3) of the Act, then AO is under legal obligation to assess the income to the best of his judgment in terms of section 144 r.w.s. 145(3) of the IT Act. This is very rarely done by the AOs and the assessment is completed u/s 143(3) of the IT Act which is again is challenged by the taxpayers before the Appellate Authorities of not completing the assessment as the best judgment assessment and therefore the invoking of the section 145(3) of the Act is erroneous. In such a situation, where the books of accounts have been rejected u/s 145(3) of the IT Act, the AO should complete the assessment u/s 143(3) (in case of compliance) r.w.s. 144 of the IT Act
It is important for AOs that while making the best judgment assessment the AO must give the basis for such assessment and the failure to give the basis makes the assessment arbitrary and erroneous. Such basis may be taxpayers own record, comparable cases, Inspectors report, and local knowledge of the AO or any other relevant material on the basis of which the estimation of the income is possible. It is to be remembered that apple and orange cannot be compared.
The ad-hoc additions and disallowances made without any reason or discussion and without pinpointing any specific defects or discrepancies in the books of accounts will fail to stand judicial scrutiny. Such ad-hoc disallowances do not have any legs to stand before the appellate authorities.
Non recording of satisfaction for initiation of penalty proceedings and non-indication of sections under which penalty proceedings are initiated. The penalty u/s 271(1)(c) is leviable only upto A.Y. 2016-17. The penalty u/s 270A is required to be levied from A.Y. 2017-18 onwards. Two different rates of penalty i.e. 50% & 200% are required to be levied u/s 270A. Hence, after each addition, it must be clearly specified whether penalty is being initiated for:
i) under-reporting of income or
ii) under-reporting income which is in consequence of misreporting thereof
The most important fact which is vital for the assessment is to ascertain facts. At the assessment stage, the AO should be only making efforts to bring Facts! Facts! Facts! on records. But the AO’s fall into the folly of quoting case laws instead of ascertaining facts on records. This helps the taxpayer as in absence of facts it can be easily proved that the AO has wrongly relied on case laws which have different sets of facts and circumstances.
F) Reassessment Proceedings
The reasons for reopening not recorded as per requirements of law and the basis for initiating action u/s 148 of the Act is not indicated. The required details are not available in the recorded reasons. The AO must be able to show that he has reasons to believe that income chargeable to tax has escaped assessment. The phrase “reasons to believe” means that there should be some cause or justification for his belief and that belief should show that income chargeable to tax has escaped assessment
- No indication on file that approval of competent authority was obtained.
- Non-indication of provisions under which notice is issued.
- Reasons not communicated upon demand by the assessee after submission of the return.
- Once the assessment is re-opened, the AO can tax not only such escaped income but also any other income which comes to his notice subsequently.
- If the return has been filed after 30 days of issuance of notice u/s 148 then the return of income is to be treated as ‘non-est’
G) Issuance Of Notice and Service of Notice is Mandatory
- A clear distinction has been made out between ‘issue of notice’ and ‘service of notice’ under the 1961 Act. Section 149 prescribes the period of limitation. It categorically prescribes that no notice under section 148 shall be issued after the prescribed limitation has lapsed. Section 148(1) provides for service of notice as a condition precedent to making the order of assessment. Once a notice is issued within the period of limitations, jurisdiction becomes vested in the AO to proceed to reassess. The mandate of section 148(1) is that reassessment shall not be made until there has been service. The requirement of issue of notice is satisfied when a notice is actually issued. The service of notice under the Act is not a condition precedent to conferment of jurisdiction in the AO to deal with the matter but, it is a condition precedent to making of the order of assessment. If the AO had issued notice through speed post/ registered post within limitations, it is considered to fulfill to conditions. {R.K. Upadhyaya v. Shanabhai P. Patel 166 ITR 163(SC)}
(H) Making a mistake” is not the same thing as “failing.”
A failure is the result of a wrong action, whereas a mistake usually is the wrong action. So, when you make a mistake, you can learn from it and fix it, whereas you can only learn from a failure. To ‘err is human’- there can be great opportunities to learn, and to develop on a personal, as well as an organizational, level. We just need to learn from them, and to put that learning into practice. No matter the mistake, we need to examine the outcome and make notes that will prevent it from happening again. In the end we all should always remember what the famous American Football Coach Paul Bear Bryant said “When you make a mistake, there are only three things you should ever do about it: admit it, learn from it and don’t repeat it.”
Acknowledgements
I am grateful to Mrs. Swati Joshi, ADG (Legal and Research), CBDT who is a dear friend and was responsible for pushing me out of inertia to contribute for the 2nd Edition of ‘Taxalogue’.
REFERNCES
[1] Mehta Parikh & Co.(1956) 30 ITR 181 (SC)
[2] R.K. Upadhyaya v. Shanabhai P. Patel 166 ITR 163(SC)