Mere bald assertions by AO in reasons for reopening would confer valid jurisdiction to AO to Reopen?

Executive Summary : Each aspect of Section 147 has been a subject matter of careful scrutiny by the court of law. One such main issue is with respect to the validity of the assumption of jurisdiction by the AO to reopen the assessment beyond four years, merely by making a Bald Assertion in the reasons as to the failure of the Assessee to disclose fully and truly all the material facts. The author has made an analysis veracity of such practice with the help of available judicial pronouncements

1. Section 147 of the Act is code in itself, it provides a complete mechanism for the powers of the AO for reopening the Assessments to tax the income which has escaped assessment. However, at the same time the power conferred upon the AO by sections 147 is not an unbridled one. The provisions of section 147 contain basic conditions and the safeguards which have been inbuilt for ensuring that the assessments are reopened only for lawful reasons and in a transparent manner. The power of the AO in reopening the Assessment is hedged with several safeguards conceived in the interest of eliminating room for abuse of such power. The idea is to save the Assessees from harassment resulting from mechanical reopening of assessments. In case, any of such safeguards are flouted, it would invalidate the exercise of jurisdiction u/s 147 and 148.

2. First proviso to Section 147 comes up with one of such safeguards, which restrict the power of the AO to make reassessment beyond a period of four years from end of the Assessment Year in a case, where: –

a) An assessment has already been made previously u/s 143(3) or u/s 147; AND

b) the income has escaped by the reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.

3. It is settled position of the law that in the AO has to make an averment in the reasons recorded u/s 148 that the income has escaped by the reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment.

4. The very next question arise as to whether mere making such bald assertion in the reasons recorded, would suffice the requirement of the law.

5. In this article, we have tried to analyse this crucial aspect with the help of the relevant judicial pronouncements.

6. It is held by various court of law that the adequacy or sufficiency of the reasons cannot be subject matter of the challenge at the threshold, but the existence of the belief can validly be subject matter of the challenge.

7. Hon’ble Supreme Court in the case of CIT Vs Sati Oil Udyog Ltd. 372 ITR 746 has held that “The burden of proving that the assessee has so attempted to evade tax is on the revenue which may be discharged by the revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has, in fact, attempted to evade tax lawfully payable by it.”

8. First proviso to Section 147 of the Act also casts similar type of burden of proof on the AO to bring on record that the escaped income is on account of failure of the Assessee to disclose fully and truly all material facts necessary for his assessment. This condition precedent is to be shown to be fulfilled by the AO by positively stating in the reasons which particular material fact was not disclosed by the Assessee, he cannot be permitted to keep this onus to be proved at later states of the Re-Assessment.

9. Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. v. R. B. Wadkar, Asstt. CIT (2004) 268 ITR 332 (Bom) has made a very categorical finding, which is extracted as under: –

“The reasons recorded by the assessing officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind through reasons recorded by him. He has to speak through his rea’sons. It is for the assessing officer to reach the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the assessing officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. The reasons are the manifestation of the mind of the assessing officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The assessing officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the assessing officer cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the rea’sons which were lacking in the material particulars would get sup’plemented, by the time the matter reaches the court on the strength of the affidavit or oral submissions advanced.”

10. Subsequent to the above judgment, further detailed discussion on the issue of first proviso to Section 147 was made in by the Hon’ble Bombay High Court in case of Bombay stock Exchange Ltd. vs DCIT 365 ITR 0181. In this case the Assessee argued that apart from making a bald assertion that there was a failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment, no details whatsoever were given with reference to the same. On the other hand, the Department argued that the reasons for initiating the reassessment proceedings under section 147 of the Act clearly stated that there had been a failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment and, therefore, AO was fully justified in initiating the reassessment proceedings. Ultimately the High Court has held as under: –

10. In the present case, admittedly, there are no details given by the assessing officer (respondent No. 1) as to which fact or material was not disclosed by the petitioner that led to its income escaping assessment. There is merely a bald assertion in the reasons that there was a failure on the part of the petitioner to disclose fully and truly all material facts without giving any details thereof. This being the case, the impugned notice is bad in law and on this ground alone the petitioner is entitled to succeed in this writ petition.

11. Similar view has been taken by Bombay High Court in following cases: –

Anand Developers v. Asstt. CIT

BOMBAY HIGH COURT Writ Petition No. 17 of 2020

15. In the present case as well, apart from bald assertion that the Petitioner had not disclosed fully and truly all material facts, no details have been disclosed as to the material which was allegedly not disclosed either truly, or fully…

17. This means that normally, the limitation period for reassessment under Section 147 of the IT Act is 4 years. However, in a case where the assessment has been made under Section 143(3) of the IT Act where, inter alia, the assessee fails to disclose fully and truly all material facts necessary for assessment for that assessment year, reassessment can be made even beyond the period of 4 years in terms of Section 148 of the IT Act. Therefore, in order to sustain a notice seeking to reopen assessment beyond normal period of 4 years, it is necessary for the Respondents to establish, at least, prima facie that there was failure to disclose fully and truly all material facts necessary for the assessment for that assessment year.

18. In the facts of the present case, the Respondents have failed to establish this precondition even prima facie. Rather, the material on record establishes that there were full and true disclosures of all material facts necessary for the assessment of the Petitioner for the assessment year 2012-13. Despite this, the impugned notice seeking to reopen the assessment for the assessment year 2012-13 has been issued beyond the normal period of 4 years. According to us, on this short ground the impugned Notice dated 29-3-2019 and the impugned Order dated 17-12-2019 are required to be quashed and set aside.

S.S. Landmarks v. ITO

BOMBAY HIGH COURT (2020) 312 CTR 0402

11. It is also to be noted merely alleging that there is failure to disclose truly and fully all material facts necessary for assessment, would not satisfy the jurisdictional requirement unless the reasons indicate what material facts the Petitioner had failed to disclose fully and truly during the course of the regular assessment. In fact our Court in the case of Bombay Stock Exchange Ltd. v. Dy. DIT (E) & Ors. (2014) 365 ITR 181 (Bom) : 2014 TaxPub(DT) 2678 (Bom-HC) has observed as follows :

In the present case, admittedly, there are no details given by the assessing officer (respondent no.1) as to which fact or material was not disclosed by the petitioner that led to its income escaping assessment. There is merely a bald assertion in the reasons that there was a failure on the part of the petitioner to disclose fully and truly all material facts without giving any details thereof. This being the case, the impugned notice is bad in law and on this ground alone the petitioner is entitled to succeed in this writ petition .

In the above view also the impugned notice is without jurisdiction as the proviso to section 147 of the Act will be applicable in these facts.

CIT (LTU) v. IDBI Bank Ltd.

BOMBAY HIGH COURT Income Tax Appeal No. 1679 of 2017

12. Admittedly, there is no details given by assessing officer as to which the fact or material was not disclosed by the assessee which lead to escape assessment. Merely referring a bald assertion that I have reason to believe that it is a failure of assessee part or not to add back the amount of Rs. 58,94,437 to the total income under section. 40(a)(ia) of the Act is not sufficient to frame notice for re-opening concluded assessment beyond the four years. Thus the notice (impugned notice under section 48 is bad in law) and does not qualify a sustainable notice under the scrutiny of law, hence, the legal ground raised by the assessee is allowed and the re-opening of assessment is declared as invalid.”

Key Take Away to Sum up: –

12. All the above judgments clearly quashes the actions of AO in exceeding his jurisdiction to reopen the assessment beyond 4 years without bringing on record as to which material fact was not disclosed by the Assessee in the previous assessment.A specific burden has been casted on the AO by first proviso to Section 147, which has to be proved by the AO before validly assuming jurisdiction u/s 147 beyond a period of 4 years.

13. Further, it would be interesting to see whether the onus of the AO is to be interpreted in the very same manner in the cases of the Penalty u/s 271(1)(c) default for “furnished inaccurate particulars of such income”.The analogy appears to be similar and the author is of the view that above judgments through in the context of the reopening and first proviso to Section 147, can be equally applied and argued in the cases of penalties u/s 271(1)(c) for furnishing inaccurate particulars of such income, where the AO has not pinpointed as to which particular furnished by the Assessee is found to be INACCURATE.

– Views expressed above are personal