Reassessment Quashed as Reasons Were Based on Incorrect Facts & Mechanical Recording

Allen De Noronha Vs ACIT-1 (ITAT Lucknow)

The Lucknow ITAT allowed the assessee’s appeal and quashed the reassessment proceedings initiated under Sections 147/148 of the Income-tax Act, holding that the reasons recorded by the Assessing Officer were arbitrary, mechanically recorded, and lacked a direct nexus with the alleged escapement of income.

The assessee challenged the order of the CIT(A) and also raised additional legal grounds before the Tribunal, contending that the Assessing Officer had mechanically recorded reasons for reopening the assessment and that the reasons were vague and based on incorrect and non-exhaustive facts. The Tribunal admitted the additional grounds, observing that they involved pure questions of law requiring no further factual verification.

The reasons recorded by the Assessing Officer stated that the assessee had sold a property during the relevant financial year for ₹4.68 crore, whereas the value adopted for stamp duty purposes was ₹6.68 crore, resulting in a difference of ₹2.00 crore. Based on this difference, the Assessing Officer formed a belief that capital gains taxable under Section 50C had escaped assessment and initiated proceedings under Section 147.

The assessee objected to the reopening and specifically contended that the reasons were not based on relevant material or credible information. The assessee pointed out that the facts recorded by the Assessing Officer were incorrect. According to the assessee, the property in question had been sold jointly by several co-owners for ₹2.34 crore, and the assessee’s share was only one-fourth. It was argued that the very foundation of the recorded reasons was factually incorrect and therefore the reopening proceedings were invalid.

While disposing of the objections, the Assessing Officer merely stated that the reasons were based on credible and relevant information because they referred to the sale of immovable property by the assessee, a fact which had also been acknowledged by the assessee. However, the Assessing Officer did not identify the material or information relied upon, nor did he address the assessee’s specific contention that the facts recorded in the reasons were incorrect.

The Tribunal examined the recorded reasons, the objections filed by the assessee, and the order disposing of those objections. It referred to the decision of the Bombay High Court in Hindustan Lever Ltd. v. R.B. Wadkar, which held that the validity of reopening must be judged only on the basis of the reasons originally recorded and that new grounds cannot later be supplied through replies or affidavits. The Tribunal observed that although the assessee had specifically challenged the factual correctness of the reasons, the Assessing Officer failed to deal with those objections and merely repeated that the reopening was based on credible information without identifying such information.

The Tribunal also referred to its earlier decision in Ajay Singh Chandraul v. ITO, where it was held that reasons recorded without basic details such as the property description, ownership status, date of sale, or correct sale consideration indicate mechanical recording of reasons without application of mind.

Further reliance was placed on the Supreme Court’s judgment in ITO v. Lakhmani Mewal Das, which held that there must be a rational connection or live link between the material available with the Assessing Officer and the belief that income had escaped assessment. The Tribunal emphasized that the reasons must stand on their own and demonstrate a direct nexus between the material available and the formation of belief regarding escaped income.

Applying these principles, the Tribunal found that neither the recorded reasons nor the order disposing of the objections established any direct nexus between the alleged material and the belief that income had escaped assessment. The Tribunal noted that the objections raised by the assessee regarding incorrect facts were never properly rebutted by the Department. The language used in the order rejecting the objections was found to be arbitrary and lacking any specific findings or factual basis.

The Tribunal therefore concluded that the reasons recorded for reopening the assessment were arbitrary and legally unsustainable. Since the very initiation of proceedings under Sections 147/148 was invalid, the reassessment order passed pursuant to those proceedings was held to be illegal, void ab initio, and liable to be quashed.

Accordingly, the Tribunal set aside the order of the CIT(A), declared the reassessment proceedings bad in law, quashed the reassessment order, and allowed the assessee’s appeal. Since the legal issue was decided in favour of the assessee, the remaining grounds of appeal were treated as infructuous.

FULL TEXT OF THE ORDER OF ITAT LUCKNOW

This appeal preferred by the assessee emanates from the order passed by the ld. CIT(A)-II, Kanpur dated 10/11/2014.

2. Assessee has taken multiple grounds of appeal which appears on record as per grounds of appeal. Further more, assessee has preferred additional grounds before us and placing reliance on the Apex Court decision in the case of National Thermal Power Co. Ltd. vs. CIT, 229 ITR 383 has been pleaded that since these additional grounds are absolutely on law point and no factual verification is required, therefore, these may be taken up.

3. We have perused the additional grounds of appeal and we are convinced that these are legal grounds and needs no factual verification and thus we admit the additional grounds which go to the root of the matter. The assessee in these grounds have stated that the Assessing Officer has mechanically recorded reasons for reopening of assessment under section 147/148 and reasons are vague and based on non-exhaustive facts.

4. At the time of hearing before us, the ld. A.R. of the assessee invited our attention to the reasons recorded in the paper book page 92. For ready reference, the reasons recorded are being reproduced hereunder:-

“REASONS RECORDED FOR INITIATING PROCEEDINGS U/S 147 OF THE INCOME TAX ACT, 1961

Name of the assessee :Shri Allen D Narohna, 63/2-C, The Mall, Kanpur

Asstt. Year : 2003-04

It has come to my knowledge that during the financial year 2002­03 relevant to assessment year 2003-04, Shri Alleh D Narohna has sold a property showing sale consideration of Rs.4,68,00.000/-while the value of the property adopted for stamp duty purpose is Rs.6,68.86,000/-. Thus there is a difference of Rs.2,00,86,000/-between the value adopted for stamp duty purposes and that shown as sale consideration.

In other words, I. have reason to believe that a sum of Rs.2.00,86,000/- representing capital gain u/s 50C of the Income Tax Act, 1961 has escaped taxation for assessment year 2003-04. Therefore, in order to bring this income as well as any other income noticed during the reassessment proceedings to follow, action u/s 147 is necessary.

Sd/-
DCIT-I, KANPUR”

5. To this reason for initiating proceedings u/s. 147/148 of the Act, assessee has filed objections which are appearing from pages 98 to 103 of the paper book. Para 5 of the objection is relevant where the assessee has categorically stated that reasons recorded are not based on relevant material and credible information. It is further stated therein that assessee has sold any property for sale consideration of Rs.4,68,00,000/- stamp value of which has been taken at Rs.6,68,86,000/-. On the other hand, the assessee and other co-owners have executed sale deed of a portion of the property no. 63/2/C, the Mall, Kanpur for a sum of Rs 2,34,00,000/- wherein the assessee’s share is only 1/4^th. This shows that “reasons recorded” are not based on ‘credible ‘and ‘relevant information’ and on this reasoning alone, the proceedings initiated should be dropped. Then the ld. A.R. of the assessee invited our attention to the reply given by the Department and copy of the order disposing the objections raised by the assessee finds place at pages 104 and 105 of the paper book filed by the assessee. The ld. A.R. of the assessee therein stated that from para 2 of that order the Assessing Officer has stated that “The assessee has stated that reasons recorded are not based on credible and relevant information. In this context, it is stated that the reasons recorded are based on credible and relevant information since the reasons recorded mentioned sale of immovable property by the assessee and this fact has also been accepted by the assessee in his letter dated 09.12.2010. Thus this objection raised by the assessee is hereby disposed off.” The ld. A.R. of the assessee vehemently argued that this is an arbitrary and irrational way wherein no specific finding or no materials on record have been stated wherein it can be understood that these are the materials based on which reasons are recorded. Here the Assessing Officer is simply mentioning that reasons are based on credible and relevant information but what are those credible and relevant information is absolutely nowhere to be found in the order of the Assessing Officer. For such arbitrary and illegal action of the Department, this re-assessment proceedings and order passed under section 147/148 should therefore be quashed.

6. The ld. D.R., on the other hand, relied on the orders of the authorities below.

7. We have perused the case records, heard the rival contentions and in order to address the issue before us regarding validity of the reasons recorded for initiation of proceedings under section 147/148 and to determine the fate of re-assessment order let us consider the judgment of Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [2004] 137 Taxman 479 wherein it is categorically held that reasons that are recorded by the Assessing Officer for reopening of assessment are only reasons which can be considered when formation of belief is impugned, such reasons cannot be allowed to grow with age and ingenuity by devising new grounds in replies and affidavits not envisaged when reasons for reopening an assessment are recorded. In the case before us, assessee has categorically objected to the reasons that the facts by which reopening are done are wrongly mentioned. While disposing of this objection of the assessee, Assessing Officer in his order dated 9/12/2010 has not at all stated whether these objections were correct or not and has simply stated that the reason to believe is based on credible and relevant information. However, again the Assessing Officer has failed to elaborate on those credible and reliable information. This is nothing but devising new grounds for replies and affidavits and it is something which cannot be said to be a proper reasons to form a belief for reopening an assessment. We also refer to the co-ordinate ITAT Bench decision in ITA No.557/LKW/2016 in the case of Ajay Singh Chandraul vs. Income Tax Officer 2(1), Kanpur wherein it was held that in absence of basic details of property in the reasons recorded, like address, location, whether the assessee was owner or co-owner, date of sale, correct sale consideration, then it is to be inferred that the reasons were recorded mechanically without application of mind.

8. Hon’ble Apex Court in the case of Income Tax Officer Vs Lakhmani Mewal Das 1976] 103 ITR 437 (SC) has held that reasons for formation of belief contemplated by section 147 for reopening of assessment must have rational connection with or relevant bearing on formation of belief, and rational connection postulates that there must be direct nexus or live link between material coming to Income Tax Officer’s notice and formation of his belief that there has been escapement of assessee’s income from assessment in particular year because of his failure to disclose fully and truly all material facts. Meaning whereby reasons must be on a stand alone basis and it should have direct link or nexus between materials coming to the knowledge of the Assessing Officer because of which he is forming belief that income has escaped assessment.

9. In the present case when we perused and examine the documents placed before us namely reasons recorded, objections raised by the assessee and the order of the Department disposing of those objections, we do not find any direct nexus which is brought on record by the Department that on these factors the Assessing Officer believes or Assessing Officer necessitates that there is an income escaping assessment. Most of the wordings in the order disposing of objections of the assessee regarding reasons recorded seems to be arbitrarily worded without any specific finding or basis or even reader of that particular order cannot find a direct link as to why Department has reason to believe that income has escaped assessment so far as assessee is concerned. The objections of the assessee stating that certain wrong facts are recorded that is also not categorically rebutted by the Department. We are, therefore, of the considered view as per our aforesaid discussion based on the case laws and on the factual matrix, we hold that reasons recorded for initiation of proceedings under section 147/148 is arbitrary and bad in law and therefore assessment framed consequent thereto is obviously illegal and void ab initio and liable to be quashed. We accordingly set aside the order of the ld. CIT(A) and hold re-assessment proceedings bad in law and also directing quashing of the re-assessment order.

10. We have addressed the legal issue raised before us in favour of the assessee, therefore, all other grounds taken before us in the grounds of appeal becomes infructuous.

In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 07/05/2018.