Spring arrives in March, When March arrives, what are the first things you think of? Spring, colours, flowers blooming but the month has a notoriously stormy history. Increasingly warm, humid air, lingering cold air from winter, and a powerful jet stream often spins up major March storms. The atmosphere in March in Income Tax Department is often much less tranquil. Based on history, one could make an argument that March consistently sees the hard job of issuance of notices u/s147/148 based on AIR information. The conditions of uncertain weather are no less change in Income Tax Department, the weather of issuance of notices end with all silence for storms and outbreaks of laws for the next fiscal.
Year after year the department receive details about a certain class of transactions (criteria like amount, mode etc) which certain class of persons need to furnish annually were included in the Act by inserting Section 285BA and related rules (Rule 114E to 114H). The information with the department through AIR is an indiscriminate weapon in the hands of the officials for harassing the assessee. The proceedings originating from AIR are free in the hands of assessing officers. There are no standards to deal it. The biggest fault of the verification of transactions in the absence of any order passed by the assessing officer. The transactions carried by the department are in perpetual succession. The CBDT & High Courts guidelines have never been enforced. The senior officers have no saying to deal with it. The last fortnight exercise at the end of March of the seventh year of taking and making approvals for the issuance of notices u/s 147/148 made whole of the exercise void into in the true spirit of the judgements pronounced against the issuance of notice u/s 147/148.
ANNUAL INFORMATION REPORT (AIR)
A provision of Section 285BA has been inserted by the Finance Act, 2003 w.e.f. 01.04.2004, which was later on substituted by the Finance (No.2) Act, 2004 w.e.f. 01.04.2005. These provisions regarding furnishing of information by “specified persons” are required to record and report high-value financial transactions of individuals referred to as “Annual Information Return” commonly known as AIR. High-value transactions are those that are above a certain limit. The list of high-value transactions, for which AIRs have to be filed, as specified in rule 114E of the Income-tax Rules, 1962. some significant information is as under.
-A bank has to file an AIR when the aggregate cash deposits of all the savings bank accounts of a client exceed R10 lakh in a year.
-Registrars or sub-registrars have to file AIRs for every individual involved in any transaction of an immovable property (land, house or building), where the value of the deal exceeds R30 lakh. In case a deal involves joint parties, and the share of one or more parties is less than R30 lakh, even then AIRs are filed for all the individuals.
-CBDT expanded the scope of AIR effective 1 April 2016, now a bank has to report every person who makes one or more term deposits, which total more than Rs 10 lakh in a year. The amount excludes renewal or reinvestment of the deposits.
-A credit card issuer had to file an AIR for those whose aggregate annual spending on a card exceeded Rs 10 lakh earlier this limit was Rs 2 lakh. However, now an AIR has to be filed even for those who pay their credit card bills by cash (instead of making the payment by cheques or bank transfers), and the total of such payments exceeds Rs 1 lakh in a year.
– A mutual fund company had to file AIRs for those unitholders who had invested more than Rs10 lakh earlier this limit was Rs 2 lakh.
The application of information collected from the huge pond of information, in case of a particular assessee, has been an overwhelming task for the department.
AIR AND REOPENING OF ASSESSMENT U/S 147/148
No notice under Section 148 shall be issued for the relevant Assessment Year:
(a) If 4 years have elapsed from the end of the relevant assessment year, unless the case falls under following two categories;
(b) If 4 years, but not more than 6 years, have elapsed from the end of relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to Rs. 1 Lac or more for that year;
(c) If 4 years, but not more than 16 years, have elapsed from the end of relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.
Before making an assessment or re-assessment, the Assessing Officer (AO) has to serve a notice under section 148. Assessing Officer (AO) should have a valid reason to re-open the case and must record the reason for issuing the notice. This notice is also issued to re-open a case that has already been assessed earlier by an officer. The case is re-opened if the officer believes that any chargeable income is not mentioned in the return. Further the notice under Sec 143(2) must be served within 6 months from the end of financial year in which return was filed, otherwise, assessment/ assessment under Sec 147 shall be void.
Section 147 and 148 is a well-designed weapon for the Income Tax Department empowering it to assess, re-assess or re-compute income, turnover etc, which has escaped assessment. Sec. 147 and Section 148 of the Act contain the pre-requisite conditions to be fulfilled for invoking the jurisdiction to reopen the assessment.
Powers of the Assessing Officer to re-open a completed assessment are not un-abundant or luxuriant. The fine points related to the reopening should pass the following test.
-The AO must have reasons. The existence of reasons is mandatory. On the basis of such reasons, the OA must form a belief that there is a situation of actual or deemed escapement of Income and therefore action is required u/s 147. AO must record such reasons in writing. No reassessment notice can be served just to make an enquiry or verification.
– AO must obtain sanctions from higher authority u/s 151, wherever necessary. Section 151 put a condition on AO to take the prior approval from an appropriate authority. If the AO obtain the approval from any other authority, even from higher authority, then also proceeding u/s 148 is invalid.
– AO must issue notice u/s 148 within a prescribed time limit. A formal notice must be served upon the assessee. Mere signing of notice cannot tantamount to the issuance of notice as contemplated under Sec 149. The date of issue would be the date on which notice was handed over to the proper officer for the purpose of effecting service on the assessee. Further, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice.
– Normally time limit for issue of the Notice period is 4 or 6 years. 4 years if the escaped Income less than Rs. 1,00,000/- and 6 years if the escaped income is Rs. 1,00,000/-. Exceptionally the time limit of 16 years is only related to Asset located outside India.
– If there is any specific direction contained in an order passed by the authority in any proceeding under the act by way of appeal/ revision or by a court, in that situation there shall not be any time limit and the time limit shall be an indefinite period. But, if at the time when the order which was the subject matter of appeal or revision was passed, the time-limit for the issuance of Notice u/s 148 had already expired, the time limit of the indefinite period will not apply.
REASON TO BELIEVE
Before issuing any notice U/S 148 the assessing officer must have reason to believe that any income chargeable to tax has escaped assessment. Reason to believe cannot be a reason to suspect merely. There must be a direct nexus between the material coming to the notice of the assessing officer 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 formation of belief must be relevant and not vague. The assessing officer must record reasons in writing before issuing notice u/s 148. Mere a reason recorded that “there is a huge concealment of income’ or ‘For further investigation’ without any specific instance of entries or material relevant to the assessee will not constitute a valid reason as it is vague and general in nature.
To constitute a valid reason to believe there must be some new material coming into the light with the assessing officer, merely a change of opinion cannot constitute a reason to believe. If the assessee has disclosed basic and all the true facts during the course of assessment and the assessment are completed. Later on, notice u/s 148 cannot be issued merely because there is another inference possible from the same documents and the facts placed before the assessing officer during the course of assessment as it will amount to change of opinion. There must be some new material coming to light for action u/s 147/148. But if the assessee has suppressed some relevant facts which leads to concealment of income and later those facts come before the assessing officer the notice u/s 147/48 can be issued validly.
While dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hon’ble Supreme Court in the case of ITO Vs Lakhmani Mewal Das [(1976) 103 ITR 437], “the reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of the belief.
Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening the assessment. At the same time, we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.
REASONS TO BE RECORDED
The reasons are to be examined only on the basis of the reasons as recorded. The next important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment all that is necessary is the formation of the prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to the detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment.
Shri Mahavir Prasad Vs I.T.O (ITAT Delhi); Reassessment for mere cash deposit info received through AIR is invalid: Let us, in the light of this legal position, revert to the facts of the case before us. 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 for holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative.
REVENUE TO ADHERE GUIDELINES OF DELHI HIGH COURT
Delhi High Court in case of Sabah Infrastructure Ltd dated 25/09/2017 in W.P.(C) 1357/2016 wherein following guidelines are given in the matter of reopening under section 148:
“19. Before parting with the case, the Court would like to observe that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under Sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. In this background, the Court would like the Revenue to adhere to the following guidelines in matters of reopening of assessments:
(i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the Assessing Officer to the Assessee is to be avoided;
(ii) the reasons to believe ought to spell out all the reasons and grounds available with the AO for re-opening the assessment – especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any inquiry conducted by the AO on the same and if so, the conclusions thereof;
(iii) where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons;
(iv) the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.”
Further, The judgements of Hon’ble Delhi High Court in the case of Dr Nalini Mahjan Vs. CIT 257 ITR 123 and that of Hon’ble Supreme Court in the case of L. Hirday Narain 78 ITR 26 (SC), wherein it has been held that certain things which are required to be done in a prescribed manner to be done in the same manner.
CBDT INSTRUCTIONS FOR UNAUTHORISED EXPANSION
CBDT on 30th November 2017 issued instructions with the subject reads as “Unauthorized expansion of the scope of limited scrutiny- instructions- reg.” Para 3 of such order made it quite clear about how seriously CBDT looks this as a concern
“Instances have come to notice of CBDT where some Assessing Officers are travelling beyond their jurisdiction while making assessments in Limited Scrutiny cases by initiating inquiries on new issues without complying with mandatory requirements of the relevant CBDT Instructions dated 26.09.2014, 29.12.2015 and 14.07.2016. These instances have been viewed very seriously by the CBDT and in one case the Central Inspection Team of the CBDT was tasked with an examination of assessment records on receipt of allegations of several irregularities. Amongst other irregularities it was found that no reasons had been recorded for expanding the scope of limited scrutiny, no approval was taken from the PCIT for conversion of the limited scrutiny case to a complete scrutiny case and the order sheet was maintained very perfunctorily. This gave rise to a very strong suspicion of mala fide intentions. The Officer concerned has been placed under suspension.”
OTHER IMPORTANT ASPECTS
There are certainly other important aspects, which are quite relevant regarding the re-opening of the assessment under section 147. Some of them are, as follows:
(i) The mere change of opinion cannot form the basis:
When the primary facts necessary for assessment are fully and truly disclosed, the ITO will not be entitled, on change of opinion to commence proceedings for reassessment. Similarly, if he has raised a wrong legal inference from the facts disclosed, he will not, on that account, be competent to commence reassessment proceedings – CIT Vs. Bhanji Lavji  79 ITR 582 (SC)
Having second thoughts on the same material, and omission to draw the correct legal presumption during original assessment does not warrant the initiation of a proceeding under section 147 – ITO Vs. Nawab Mir Barkat Ali Khan Bahadur  97 ITR 239 (SC).
(ii) Reassessment based on new views on the same facts is not permissible:
Income-Tax Department cannot be permitted to bring fresh litigations because of new views they entertain on facts or new versions which they present as to what should be the inference or proper inference either of the facts disclosed or the weight of the circumstances – Sirpur Paper Mills Ltd. Vs. ITO  114 ITR 404 (AP).
(iii) Ignorance of the law cannot form the basis:
Where the relevant materials or facts were admittedly already available in the concerned original assessment proceedings and there were no new facts which came to the possession of the assessing authority, the said officer could not be heard to say that the legal position was not known to him even though the relevant facts and materials were available, the ignorance of law would be no ground or any excuse for the ITO concerned to reopen the assessment. – Century Enka Ltd. Vs. ITO  143 ITR 629 (Cal.)
(iv) Statement by third parties cannot form the basis:
A mere confessional statement by a third party (who is a lender of the assessee) that he was a mere name-lender and that all his transactions of loans were bogus, without naming the assessee as one who had obtained bogus loans, would not be sufficient to hold that the assessee’s income had escaped assessment – S.P. Agarwal alias Sukhdeo Prasad Agarwalla Vs. ITO  140 ITR 1010 (Cal.)
(v) Supreme Court decision cannot be the basis:
The ITO cannot seek to reopen an assessment under section 147 on the basis of a Supreme Court decision in a case where the assessee had disclosed all material facts – Indra Co. Ltd. Vs. ITO  80 ITR 559 (Cal.)
(vi) Ignorance of Board’s Circular is not sufficient:
The mere fact that the ITO was not aware of the circular of the Board is not sufficient to reopen an assessment – Dr H. Habicht Vs. Makhija  154 ITR 552 (Bom.)
(vii) Omission to notice facts by oversight cannot be the basis:
When at the time of the original assessment primary facts were already before the ITO and after some routine enquiry, the ITO could have assessed the income on the basis of such information, it is not open to him to invoke the provisions of section 147 and reopen the assessment even though he may have omitted to notice the facts mentioned in the return by oversight – Lokendrasingh Vs. ITO  128 ITR 450 (MP).