Assessing Officer must record ‘reasons’ before issuing notice u/s. 148

IN THE ITAT MUMBAI BENCH ‘D’

Dadanbai B. Bachani  v.  ITO

IT Appeal Nos. 2759 & 2760 (Mum.) of 2011

[Assessment Year 1996-97]

MAY 11, 2012

ORDER

Amit Shukla, Judicial Member – ITA No.2759/Mum/2011(A.Y. 1996-1997) : This appeal has been filed against the order dated 25-2-2011, passed by the CIT(A)-30, Mumbai for the quantum of assessment determined under Section 143(3), r.w.s. 147 r.w.s. 254 for the assessment year 1996-1997 on the following grounds :-

“1.  The learned CIT(A) erred in law and in facts in upholding the order passed by the Assessing Officer u/s.143(3) r.w.s. 147 r.w.s.254 of the Income Tax Act, 1961, which is illegal and bad in law.

 2.  The learned CIT(A) erred in law and in facts in upholding the order of the Assessing Officer passed in violation of the principles of natural justice.

 3.  The learned CIT(A) erred in law and in facts in upholding the validity of the reasons for reopening of the assessment recorded by the Assessing Officer.

 4.  The learned CIT(A) erred in law and in facts in confirming the order of the Assessing Officer in bringing to tax a sum of Rs. 1,87,02,463/- as long-term capital gains in respect of sale of 1/3rd share of the appellant in ‘Bachani Niwas’ as against Nil declared.

 5.  The learned CIT(A) erred in law and in facts in sustaining the order of the Assessing Officer denying deduction of the following amounts while computing capital gains in respect of sale of 1/3rd share of the appellant in ‘Bachani Niwas’ ignoring the provisions of S.54 of the Act :

 (i)  Rs. 85,00,000/- paid to Shri Brijlal Bachani;

(ii)  Rs. 85,00,000/- paid to Shri Ramchand Bachani;

(iii)  Rs. 24,00,000/- paid to M/s Haq Constitution; and

(iv)  Rs. 1,00,00/- being construction cost.

 6.  The learned CIT(A) has erred in law and in facts in upholding the order of the Assessing Officer charging the interest u/s 234 A and 234 B of the Income Tax Act.”

2. At the time of hearing both the parties addressed the preliminary issue first as has been raised in ground Nos.1 to 3, relating to the validity of re-opening under Sections 147 and 148. The factual matrix for adjudication of validity of proceedings under Section 148 are that the assessee, who is an individual, has filed original return on 27-7-1997 for the assessment year 1996-1997, declaring ‘Nil‘ income. The said return of income was duly processed and accepted under Section 143(1). Thereafter the assessee’s case was reopened by issuance of notice under Section 148, dated 10-2-2000 which was served on 14-2-2000. In response to the said notice, it seems that the assessee not filed her return of income. However, the copy of “reasons recorded” were also not supplied or made available to the assessee. Without these legal formalities by both the parties, the assessment was completed vide order dated 28-3-2001 and income was determined under the head ‘long-term capital gain’ at Rs. 1,87,02,460/-, after disallowing the claim of deduction under Section 54. Aggrieved by the said order, the assessee preferred an appeal before the CIT(A), who vide order dated 8-4-2002 dismissed the appeal of the assessee. The assessee against this order preferred a second appeal before the ITAT, contending that “reasons recorded” for re-opening the assessment has not been provided at any stage. The ITAT vide order dated 26-12-2005 passed in in ITA No. 3392/M/2002, restored the matter back to the Assessing Officer with the direction to provide “reasons recorded” for re-opening of the case and to give adequate opportunity of hearing to the assessee and decide the issue afresh not only the validity of the re-opening under Section 147, but also on merits.

3. In the second round of proceedings, the Assessing Officer did not comply with the directions of the ITAT. He neither supplied copy of “reasons recorded” nor adjudicated the validity of the proceedings u/s. 148 and instead, completed the assessment on the same figure vide order dated 8-12-2006, captioned as “143 (3) r.w.s. 147 r.w.s. 254” of the Income Tax Act. The assessee aggrieved by this second order, filed an appeal before the CIT(A), who vide order dated 21-1-2008 also dismissed the appeal of the assessee without verifying the fact that copy of “reasons recorded” have not been made available to the assessee as per directions of the ITAT, nor he himself called upon for such records from the Assessing Officer to verify the “reasons recorded” and adjudicate the objections for validity of Sections 147 & 148. For the second time aggrieved by the order of the CIT(A), the assessee carried the matter before the ITAT. This time the ITAT restored the matter to the file of the CIT(A) with the specific directions :-

“We, therefore, set aside the order of Ld. CIT(A) and restore the matter back to his file in terms of the direction of ITAT order dated 26.12.2005. The CIT(A) is directed to provide the reasons for reopening the assessment to the assessee and decide the issue afresh after giving opportunity to the assessee.”

4. In pursuance of the categorical direction of the ITAT , the CIT(A), required the Assessing Officer to provide the “reasons” for re-opening the assessment u/s.147, vide letter dated 10-11-2010. The Assessing Officer in compliance thereof submitted the “reasons recorded” for re-opening the assessment vide letter dated 13-12-2010 through the Addl. CIT Range 19(1), Mumbai. The entire content of the letter dated 13-12-2010 is reproduced hereunder as it has a vital bearing on the issue which needs to be decided by us :-

Office of the Income-tax Officer-19(1)3,

R.No.314, 3rd Floor, Piramal Chambers, Lalbaug, Mumbai-12, Tel No.24130874 Extn.2314

No.ITO-19(1)(3)/Appeal/2010-2011

Dated:13.12.2010

To,

The Commissioner of Income-tax(A)-30,

Mumbai

[Through Addl. CIT., Rg.19(1)]

Sir,

SUB: Appellate proceedings in the case of Smt. Dadanbai B Bachani-A.Y.1996-1997-Reg.

REF: No.CIT(A)-30/Misc./2010-11 dated 10.11.2010

Kindly refer to the above.

On verification of the case record, the reasons recorded for re-opening the assessment is as under :-

“On going through the computation of income filed along with the return of income, it is seen that the assessee has received an amount of Rs. 2,12,51,667/-(1/3rd share on sale price of Bachani Niwas at Khar (w) which includes Rs. 3,85,000/- received from Kishin B. for FSI). Against this figure, the assessee has claimed deduction for a total sum of Rs. 2,20,49,204/-, the details of which are as under :-

for new residential house at Hari Niwas. But since the same was in possession of the assessee since July, 1972, section 54 of the I.T. Act is not applicable. In this context the assessee has neither purchased of new house one year before or two year after the date of transfer nor has constructed the residential house within a period of 3 years after the transfer took place. Hence, notice u/s 148 was issued on 10-2-2000 to ascertain details of the aforesaid facts and was served on the assessee on 14.2.2000.”

The above reason for reopening of the assessment were not communicated to the assessee as the assessee did not file return of income in response to notice u/s 148 by relying the decision of Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. Income tax officer and others, 259 ITR 19. As per the said judgment of the Apex Court, the assessee is duty bound to file a valid return of income in response to notice u/s 148.

The above action has been confirmed by the learned CIT(A)-XX, Mumbai vide his order dated 21.1.2008 in Para 2.2 OF THE ORDER.

Submitted for your kind perusal and further direction if any.

Yours faithfully,

Sd/-

(ASHOK S CHOTIA)

Income Tax Officer-19(1)-3,

Mumbai

5. After receiving the aforesaid “reasons recorded”, the assessee vide letter dated 18-1-2011 raised objections not only on the “reasons recorded” but also strongly objected to assumption of jurisdiction under Section 148 on the ground that ‘reasons’ have been recorded after the issuance and service of notice under Section 148. Thus, it was contended that it is evident from the plain reading of “reasons recorded” itself. The relevant objection on this score made vide reply dated 18-1-2011 before CIT(A) are reproduced herein below :-

“5. Without prejudice, we submit that the reasons recorded are also invalid and illegal. The perusal of the reasons clearly shows that the reasons are corded after the issue of notice u/s 148 of the Act. We submit that as per sec. 148(2) of the Act, the Assessing Officer is required to record the reasons before issuing the notice u/s 148 of the Act. The relevant provisions are reproduced below :

(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.”

6. The clear and mandatory provisions of sec.148(2) of the Act clearly suggest that the Assessing Officer ought to have recorded the reasons first and there issue the notice u/s 148 of the Act.

7. The perusal of the reasons recorded by the Assessing Officer more particularly the last paragraph clearly shows that while recording the reasons itself, the Assessing Officer has observed that he has issued and served the notice u/s 148 of the Act to the appellant. This itself shows that the notice u/s 148 of the Act was issued first and thereafter the reasons were recorded. This is contrary to the express provisions of the Act as explained above. We therefore, pray that the notice u/s 148 ought to have quashed. On the above propositions, reliance is placed on the following decisions :-

(a)  UOI v. Rai Singh Deb Singh Bist [88 ITR 200 (SC)]

(b)  Johri Lal (HUF) v. CIT [88 ITR 439 (SC)]

(c)  Travancore Electro Chemical Ind. Lt. v. ITO [31 ITR 159 (Cochin)].

8. In view of the above, we pray that the assessment made in the present case may kindly be quashed as illegal and incorrect.”

6. Learned CIT (A) rejected the said objections of the assessee in the following manner :-

“2.4 I have carefully gone through the reasons recorded by the A.O., submissions made by the A.R. of the appellant and the facts of the case. At the outset, I find that the instructions of the order of the Hon. ITAT have been followed in as much as the reasons for reopening the case have been provided to the appellant. Besides, I also find that the case was originally reopened without any infirmity. I find that notice dated 10.2.2000 was duly served on the appellant on 14.2.2000. This is perfectly in terms of provisions of section 147 of the Act. In fact I find that it is the appellant who showed scant regard to this notice issued u/s.148 of the Act in as much as she defied the principles and procedures laid down by the Hon. Apex Court in the case of GKN Driveshafts (India) Ltd. v. ITO and Others, 259 ITR 19. I also find that despite this omission by the appellant, the reasons for reopening the assessment were communicated to the appellant. Accordingly I do not find any merit in the grounds of the appellant with regard to the reopening the case.

2.5 Besides I also find that in this case, the satisfaction of the A.O. that the appellant has neither purchased a new house one year before or two years after the date of transfer nor has constructed a residential house within a period of 3 years after the transfer took place is earlier than the notice issued u/s.148 of the Act as is evident from the reasons recorded by the A.O. The reason to believe that income had escaped assessment is also earlier than the notice issued uls.148 of the Act. Why it is so is well evident from the reasons recorded by the A.O. which has been provided to the appellant. It is also seen from the reasons recorded that the appellant had received an amount of Rs. 2,12,51,667/- (1/3 share on sale price of Bachani Niwas which included Rs. 3,85,000/- received from Shri Kishin B. for FSI). Against this figure the appellant has claimed deduction for a total sum of Rs. 2,20,49,204/-. Besides, the appellant has also claimed Rs. 25,00,000/- as cost of construction i.e. (i) expenditure directly incurred on construction till 30.10.96 Rs. 1,00,000/- and (ii) paid to contractors for construction work of Rs. 24,00,000/- for new residential house at Han Niwas. But since the same was in possession of the appellant since July 1972, section 54 of the Act is not applicable. Thus it is very much clear that deduction u/s.54 was wrongly claimed and to that extent income had escaped assessment. This satisfaction of the A.O. is very much there even before notice u/s.148 was issued. The material to derive satisfaction for escapement of income was there in the form of return of income which was filed on 27.7.1997. Further, even if it is assumed for argument sake that there was some problem in the issue of notice, it does not cause any prejudice to the appellant. Further, the mistake as pointed out by the appellant is not something which is not curable. Therefore, in my considered view, there is no infirmity in the notice issued by the A.O. u/s. 148 of the I.T. Act as claimed by the appellant. I find that reasons recorded by the A.O. and the notice issued u/s. 148 are in order and therefore the grounds of appeal in this regard raised by the appellant are dismissed.”

Aggrieved by the aforesaid order and finding, the assessee has now come before us.

7. Learned AR appearing on behalf of the assessee reiterated the same objections that provisions of Section 148(2) has been blatantly violated, which is evident from the bare reading of the “reasons recorded”, wherein it has been stated that the notice under Section 148 was issued on 10-2-2000 and was served on the assessee on 14-2-2000.From this observation, he submitted that the reasons have been recorded post service of the notice under Section 148 and as such the entire proceedings as have been initiated by issuance of notice under Section 148 dated 10-2-2000 is void ab initio and without jurisdiction. On the other hand, learned Senior DR relied upon the findings of the CIT(A) as given in para 2.4 & 2.5, which have been reproduced above.

8. We have heard the rival submissions and carefully perused the material placed on record and the finding of the learned CIT(A). From the facts narrated hereinabove, it is seen that the departmental officials have not only violated the judicial discipline but also the mandatory requirement of providing “reasons recorded”. It was after a gap of almost 11 years that so-called ‘reasons’ have been provided and that to when the assessee had to approach the ITAT twice to get the direction for providing the “reasons recorded”. The manner in which the CIT(A) has dealt this issue is wholly erroneous on two counts:-

Firstly :-, the observation that the assessee has defied the principle and procedure of the Hon’ble Supreme Court in the Case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 123 Taxman 963, is not correct was no longer relevant at his stage as in the first round of litigation, ITAT had specifically directed the Assessing Officer to provide “reasons recorded” and decide the issue afresh which was grossly violated. The CIT(A) in this round of proceedings was obliged to deal and decide from this angle, rather than blaming the assessee for defiance of law and shielding the Assessing officer, who blatantly disregarded the direction of higher judicial authority.

Secondly, the observation of the CIT(A) that material to derive satisfaction for escapement of income was there in the form of return and any mistake in recording of ‘reasons’ is curable, is again contrary to the provisions of law as the recording of “reasons” prior to issuance of notice, is the mandate of law and not mere formality. It is not an irregularity which can be cured but an illegality which strikes at the very root of initiation of proceedings and assuming jurisdiction.

9. Re-opening of an assessment can be done only if the Assessing Officer has “reason to believe” that any income chargeable to tax has escaped assessment for any assessment year. The question whether the Assessing Officer had ‘reason to believe’ is not only a question of limitation but also a question of jurisdiction, which is a very vital thing, which can always be investigated by the appellate authorities, if such a question has been raised. The procedure for acquiring jurisdiction as has been laid down under Sections 147 to 149 are that :-

Firstly, the Assessing Officer has to entertain “reason to believe” that any income chargeable to tax has escaped assessment for any assessment year.

Secondly, before making the assessment, re-assessment or recomputation under Section 147, the Assessing Officer shall serve a notice under Section 148 upon the assessee in accordance with the provisions of law, requiring him to furnish the return within a period prescribed therein.

Thirdly, the Assessing Officer shall before issuing any notice under Section 148, shall “record his reasons.”

Fourthly, notice has to be issued within the time limit prescribed under Section 149.

If any of these steps are lacking or has not been followed, the very basis for assuming jurisdiction under Section 147 gets vitiated and consequently the entire proceedings are rendered void ab initio. Section 148(2) exclusively provides that “The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so”. The word “shall” and “record his reasons” appearing in the said section makes it mandatory that the Assessing Officer has to record the ‘reasons’ before serving a notice under Section 148. If this mandatory requirement of the law is not fulfilled, the entire proceedings become without jurisdiction which has to be struck down. Section 148(2) has a definite purpose and is not mere a formality on paper otherwise it will lead to arbitrariness, bias or malafide action by the taxing authorities to justify the re-opening under Section 147 at any time.

10. Adverting to the present case, it is clearly evident that ‘reasons recorded’ were not provided to the assessee despite categorical directions by the ITAT and even when the so-called “reasons recorded” have been supplied after a gap of almost 11 years, it is amply clear from the face of it that the ‘reasons’ were not recorded prior to the issuance of notice under Section 148. The relevant portion of the alleged ‘reasons recorded’ as have been incorporated in the foregoing paragraphs reading as “hence notice under Section 148 was issued on 10-2-2000 to ascertain details of the aforesaid facts and was served on 14-2-2000”, abundantly shows that the date of issuance and service of notice has been mentioned in the ‘reasons’ itself, which, inter alia, means that “reasons” were not recorded prior to issuance of notice under Section 148 i.e. 10-2-2000. Nothing has been brought on the record to contradict that these are not the “reasons recorded.”

11. The assessee’s objection before the CIT(A) as has been reproduced above, is absolutely correct and the CIT(A) has grossly erred in law in rejecting the said objection simply on the ground that it is something which is curable and there is no infirmity either in the notice issued by the Assessing Officer or in the reasons recorded. Now, in view of the categorical averment of the Assessing Officer in the alleged “reasons recorded”, which have been made available to the assessee at the third round of proceedings, that notice had already been issued and served upon the assessee prior to the recording of reasons, the entire proceedings initiated under Section 148 has no legs to stand. Thus, in the present case, there is violation of statutory provision of Section 148(2). Accordingly, we hold that entire proceedings as have been initiated vide notice dated 10-2-2000 is void ab initio and the assessment order passed in pursuance of such notice is hereby cancelled being invalid.

12. Since on the preliminary ground itself, we have cancelled the assessment order and the proceedings under Section 147 read with Section 148, the other grounds of appeal on merit have been rendered academic. In the result, appeal filed by the assessee is hereby allowed.

ITA No.2760/Mum/2011(A.Y. 1996-1997) :

This appeal has been filed against the order dated 28-2-2011, passed by the CIT(A)-30, Mumbai in relation to the penalty proceedings under Section 271(1)(c).

2. For the same assessment year 1996-1997 as aforesaid in the quantum appeal passed in I.T.ANo.2759/M/2011, we have already held that the assessment order itself is invalid as the proceedings under Section 147, initiated vide notice under Section 148 on 10-2-2000, is void ab initio. Consequently, the very basis of imposition of penalty no more survives and the penalty imposed u/s. 271(1)(c) is liable to be cancelled having no legs to stand. We order accordingly.

3. In the result, the appeal filed by the assessee is allowed.