2012 (3) TMI 266 - HC - Income Tax

Validity of notice issued u/s 148 for re-opening of assessment beyond 4 years A.Y. 2004-05 purport to be reopened on ground of escapement of income received in A.Y. 2003-04 assessment of which was framed after scrutiny belief formed on basis of letter of Additional DIT (Investigation) - approval u/s 151 for issue of notice u/s 148 granted by CIT Held that - It is impossible to comprehend as to how the Assessment for A.Y. 2004-05 can be reopened on the ground that income escaped assessment in A.Y. 2003-04. Moreover exfacie the reasons disclosed cannot form the basis of a reason to believe escapement of income for A.Y. 2004 05. Also letter dated 11.03.2010 of Additional DIT (Investigation) was much prior to the finalization of the Assessment for A.Y. 2003-04 on 27.12.2010. Thus no new tangible material is on record as required u/s 147. Further requirement of Section 151(2) could have only been fulfilled by the satisfaction of the Joint Commissioner that this is a fit case for the issuance of a notice u/s 148. In instant case approval was granted by CIT. There is no statutory provision here under which a power to be exercised by an officer can be exercised by a superior officer. When the statute mandates the satisfaction of a particular functionary for the exercise of a power the satisfaction must be of that authority. Therefore in view of non-compliance of the mandatory requirements of Section 147 and 151(2) the notice reopening the assessment cannot be sustained in law - Decided in favor of assessee.

Summary

The core legal questions considered by the Court in this proceeding under Article 226 of the Constitution were:

1. Whether the reopening of the assessment for Assessment Year 2004-05 by issuing a notice under Section 148 of the Income Tax Act, 1961 was legally valid and justified on the grounds disclosed by the Revenue.

2. Whether the reasons recorded for reopening the assessment for Assessment Year 2004-05 constituted a valid "reason to believe" that income chargeable to tax had escaped assessment within the meaning of Section 147.

3. Whether the mandatory procedural requirement of obtaining prior approval under Section 151(2) of the Income Tax Act for reopening the assessment beyond four years was complied with, specifically whether the approval was granted by the competent authority as defined by the statute.

4. Whether the timing and manner of issuance of the notice under Section 148, including the date of receipt of approval, affected the validity of the reopening.

Issue 1: Validity of Reopening Assessment for AY 2004-05 under Section 148

The legal framework governing reopening of assessments is primarily contained in Sections 147 and 148 of the Income Tax Act, which require that the Assessing Officer must have a "reason to believe" that income chargeable to tax has escaped assessment. The reopening notice must be issued within the prescribed time limits, and the reasons for reopening must be disclosed to the assessee.

In the present case, the reopening notice dated 30 March 2011 was issued beyond four years from the end of the relevant Assessment Year 2004-05, thus invoking the additional safeguards under Section 151.

The Revenue's case rested on a letter dated 11 March 2010 from the Additional Director of Income Tax (Investigation), which indicated that the assessee had received approximately Rs.10 crores during the financial year 2002-03 (AY 2003-04) which had not been taxed. The Assessing Officer had reopened AY 2003-04 and made an addition of Rs.4.9 crores in the order dated 27 December 2010. The reopening for AY 2004-05 was justified by the Revenue on the basis that Rs.5.1 crores remained untaxed for AY 2003-04 and was sought to be taxed in AY 2004-05.

The Court's interpretation was that the reopening for AY 2004-05 could not be sustained because the alleged escaped income related exclusively to AY 2003-04. The reopening of AY 2003-04 was already under challenge and pending appeal, and the Revenue could not transfer the issue of escaped income to the subsequent year without any tangible material indicating escapement in AY 2004-05. The Court emphasized that the "reason to believe" must be based on material relevant to the specific assessment year sought to be reopened.

The Court found that the reasons disclosed did not establish any escapement of income in AY 2004-05, as the income in question pertained to AY 2003-04. It was held that no reasonable person could form a valid reason to believe escapement of income for AY 2004-05 on the facts presented. Consequently, the reopening notice under Section 148 for AY 2004-05 was invalid.

Issue 2: Compliance with Section 151(2) Approval Requirement

Section 151(2) mandates that where reopening is proposed beyond four years from the end of the relevant Assessment Year, the Assessing Officer below the rank of Joint Commissioner must obtain prior approval from the Joint Commissioner of Income Tax or Additional Commissioner of Income Tax before issuing the notice under Section 148.

The legal question was whether the requisite approval was obtained from the competent authority as defined under Section 2(28C) of the Act, which includes Joint Commissioner or Additional Commissioner of Income Tax but excludes the Commissioner of Income Tax.

The facts revealed that the Assessing Officer submitted a proposal on 28 March 2011 to the Commissioner of Income Tax (CIT) through the Additional Commissioner of Income Tax. The Additional Commissioner merely forwarded the proposal to the CIT without recording his own satisfaction. The CIT granted approval on 29 March 2011, which was communicated to the Assessing Officer on 31 March 2011. The notice of reopening was issued on 30 March 2011, before the Assessing Officer had actually received the approval.

The Court held that the approval must be granted by the authority competent under the statute, namely the Additional Commissioner or Joint Commissioner, and cannot be substituted by the CIT's approval. The Court relied on the statutory definition and the principle of strict compliance with mandatory procedural requirements. It noted the absence of any statutory provision permitting delegation or substitution of this power to the CIT.

The Court referred to precedent where it was held that powers conferred on a particular authority cannot be exercised by another and the satisfaction mandated by the statute must be that of the specified authority.

Accordingly, the Court concluded that the approval granted by the CIT did not satisfy the requirements of Section 151(2), rendering the reopening notice invalid.

Issue 3: Timing and Manner of Issuance of Reopening Notice

The assessee contended that the notice dated 30 March 2011 was issued before the Assessing Officer had received the approval dated 29 March 2011, which was only communicated on 31 March 2011. The Revenue argued that the Assessing Officer was aware of the approval prior to issuance.

The Court found it unnecessary to decide this issue in detail in view of its conclusions on the substantive and procedural grounds above. However, it acknowledged the contention that the notice was issued before the Assessing Officer had formal receipt of the approval, further undermining the validity of the reopening.

Significant Holdings:

"Ex-facie, it is clear from the letter and from the reasons recorded that the case of the Revenue is that an amount of Rs.10 crores was received by the Assessee in the previous year relevant to Assessment Year 2003-04. Moreover, the reasons note that the Assessing Officer passed an order, having reopened the assessment for Assessment Year 2003-04, by making an addition of Rs.4.9 crores. The balance of Rs. 5.1 crores which remained to be taxed for Assessment Year 2003-04 is brought to tax for Assessment Year 2004-05. It is evident on these admitted facts that no reasonable person duly informed in law could have formed a reason to believe that there was an escapement of income in Assessment Year 2004-05."

"Section 151 (2) mandates that the satisfaction has to be of the Joint Commissioner. That expression has a distinct meaning by virtue of the definition in Section 2(28C). The Commissioner of Income Tax is not a Joint Commissioner within the meaning of Section 2(28C). ... When the statute mandates the satisfaction of a particular functionary for the exercise of a power, the satisfaction must be of that authority."

"Where a statute requires something to be done in a particular manner, it has to be done in that manner."

"Powers which are conferred upon a particular authority have to be exercised by that authority and the satisfaction which the statute mandates of a distinct authority cannot be substituted by the satisfaction of another."

Based on these principles, the Court quashed and set aside the impugned notice dated 30 March 2011 reopening the assessment for AY 2004-05, holding it to be illegal and without jurisdiction.