OCTOBER 30, 2017

By Faizan Nursumar (CA) and Bhumit Gangar (CA)

UNDER the Income-tax Act, 1961 (IT Act), the tax authorities have been specifically empowered to assess or reassess income that has escaped assessment. There are safeguards prescribed in the provisions relating to reopening of assessments before tax authorities can seek to reassess/ reopen concluded assessments. However, it is seen that resorting to reassessment has become a common phenomenon. Owing to this, reassessment of income has always been a contentious issue between taxpayers and tax authorities. Time and again, taxpayers have challenged the validity of assessments. There is a plethora of judgements on this subject, some upholding the action of the tax authorities while some in favour of taxpayers.

The recent ruling of the Hon'ble Delhi High Court in case of Sabh Infrastructure Limited vs. ACIT [2017-TIOL-2041-HC-DEL-IT] brings some respite to this hotly contested issue. The High Court has laid down certain important guidelines for tax authorities before initiating reassessments. In this article, we have discussed the key provisions relating to reassessment, ruling of the High Court and guidelines laid down by the High Court.

Key provisions relating to reassessment

Income escaping assessment

Section 147 of the IT Act provides deals with income escaping assessment. As per the provisions of this section, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he or she may assess or reassess such income and any other income chargeable to tax that has escaped assessment and that comes to his or her notice subsequently in the course of proceedings under this section, or recompute the loss or depreciation allowance or any other allowance for the assessment year concerned.

Pre-requisites for initiating reassessments

1. The Assessing Officer should have a "reason to believe."

2. The Assessing Officer shall serve a notice to the taxpayer requiring him or her to furnish a return of income within such time as prescribed in the notice for the concerned assessment year as prescribed therein.

3. The Assessing Officer shall, before issue of the notice, record his or her reasons for initiating the reassessment

Bar on reassessment where original assessment is already made

Where an assessment under section 143(3) or section 147 has been made for the relevant assessment year, no action can be initiated under section 147 after the expiry of four years from the end of the relevant assessment year, unless the income chargeable to tax has escaped assessment by reason of failure on the part of the taxpayer to make a return under section 139, in response to a notice under section 142(1) or section 148 or failure to fully and truly disclose all material facts necessary for the assessment.

Cases where income chargeable to tax is deemed to have escaped assessment

1. No return of income is furnished even when income exceeds the maximum amount that is not chargeable to tax.

2. Return of income is furnished but no assessment has been made, and it is noticed that the taxpayer has understated the income or has claimed excessive loss/ deduction/ allowance or relief.

3. Where the taxpayer has failed to furnish the transfer pricing report.

4. Where assessment has been made but income is under-assessed or assessed at too low a rate, or excess relief is claimed or excessive loss or depreciation or any other allowance has been computed

5. Where return of income is not furnished or it is furnished,and based on information received from the tax officer under section 133C(2) of the IT Act, it is noticed that income exceeds the maximum amount that is not chargeable to income-tax or,as the case may be, the taxpayer has claimed excessive loss/ deduction/ allowance or relief.

6. Where the taxpayer is found to have assets located outside India.

Principles laid down by the Hon'ble Supreme Court in case of GKN Driveshafts (India) Ltd. [2002-TIOL-634-SC-IT]

The Supreme Court has laid down the procedure to be followed in reassessment proceedings. According to the Apex Court, when a notice under section 148 of the IT Act is issued, the proper course of action is as follows:

- The taxpayer files the return of income.

- The taxpayer seeks reasons for issuance of the notice.

- The tax officer shall furnish reasons within a reasonable time.

- On receipt of reasons, the taxpayer is entitled to file objections to issuance of the notice.

- The tax officer is bound to dispose of the same by passing a speaking order.

- The taxpayer, if so desires, can file a writ challenging the order or can proceed with the assessment.

- However, the taxpayer still has a right to challenge the reopening of assessment before the Appellate Authority after the assessment order is passed.

Recent ruling of Delhi High Court in case of Sabh Infrastructure Ltd.

Facts

In this case, the taxpayer was engaged in the business of real estate and property development. It filed its return of income for AY 2008-09 on 30 September, 2008, declaring a certain income. Thereafter, a questionnaire was issued by the tax officer as part of the assessment proceedings and one detail sought was with respect to the "share application money received, if any, during the year." The taxpayer furnished the following details on record in this regard:

- Details of the companies from whom the share application money was received;

- Confirmation received from said companies;

- Copy of their return of income and PAN cards; and

- Audited Financial Statements of the companies from whom the share application money is received.

The assessment was completed by the tax officer on 20 December, 2010, without any discussion in respect of share application money. It thus appeared that the tax officer accepted the information furnished by the taxpayer and raised no further doubts or queries in respect to the same.

Subsequently (i.e. after expiry of four years from the relevant assessment year), the tax officer issued a notice under section 148 of the IT Act on the ground that income had escaped assessment. As per the reasons recorded, the tax officer had received a letter from the Investigation Wing of the Tax Department, wherein it was stated that during the investigation carried out by another Investigation Wing, a statement was recorded that admitted that the companies from whom the taxpayer received the share application money were "paper companies."

The taxpayer's objections to such reasons were rejected by the tax officer.

Issue before the High Court

Before the High Court, the taxpayer sought the quashing of the notice issued under section 148 of the IT Act and the order passed by the tax officer disposing the objections filed by the taxpayer.

Ruling of the High Court

The High Court held that the power to reopen assessment after the expiry of four years from the end of the relevant assessment year can be exercised only if there is failure to fully and truly disclose all material facts and information. Further, the reasons to believe have to be self-explanatory and cannot be thereafter supported by any extraneous material. The order disposing of the objections or any counter affidavit filed before the High Court in a writ proceeding could not act as a substitute for the reasons to believe.

In the present case, the reasons to believe contained the names of the very same five companies that were initially disclosed by the taxpayer during the assessment proceedings. The number of shares subscribed by said companies was the same, and the amount received had been disclosed by the taxpayer. There was no new material found or mentioned in the reasons to believe that was not contained in the information provided by the taxpayer prior to the conclusion of assessment under section 143 (3) of the Act. Consequently, the High Court quashed the notice and the reasons for reopening the assessment.

The key observations of the High Court are summarised below:

- The reasons for reopening did not mention what fact or information was not disclosed by the taxpayer. This is vital and in fact goes to the root of the matter.

- An allegation that the companies are "paper companies" without further facts is by itself insufficient to reopen assessments that stand closed after passing of the order under section 143(3) of the IT Act.

- The assessment proceedings, especially those under section 143(3), have to be accorded sanctity, and any reopening of the same has to be on a strong and legal basis. Mere conjectures or surmises are not sufficient.

- There must be reasons to believe and not merely to suspect that income has escaped assessment.

- If the Revenue had any basis to show that the primary facts were incorrect, the same ought to have been set out in the reasons to believe. That has not been done in the present case

Guidelines laid down by the High Court

The High Court observed 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 IT Act, and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities. Considering this, the High Court laid down the following guidelines stating that it would like the Revenue to adhere to these in the matters of reopening of reassessments.

1. While communicating the reasons for reopening the assessment, the copy of the standard form used by the tax officer for obtaining approval of the Superior Officer should itself be provided to the taxpayer. This would contain the comment or endorsement of the Superior Officer.

2. The reasons to believe ought to spell out all the reasons and grounds available with thse tax officer for reopening the assessment, especially in cases where the first proviso to section 147 is attracted (i.e. where four years have lapsed from the end of the relevant assessment year). The reasons to believe ought to also paraphrase any investigation report that may form the basis of the reasons for any enquiry conducted by the tax officer on the same and, if so, the conclusions thereof.

3. Where the reasons refer to another document, whether a letter or report, such document and/or relevant portions of such a report should be enclosed along with the reasons to believe.

4. The exercise of considering the taxpayers' objections to the reopening of assessment is not a mechanical ritual but 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.

Conclusion

By laying down guidelines for the Revenue, the High Court has made an earnest attempt to put an end to the routine practice of reopening of assessment and bring about greater transparency in such matters. One hopes that the guidelines laid down by the High Court are followed by all Revenue authorities concerned. This ruling of the High Court is a welcome decision on the subject and should hold the Government to its objective of reducing litigation in the country.

(Faizan Nursumar is a Director at Pricewaterhouse Coopers Private Limited (PwC) and Bhumit Gangar is a Manager at PwC. The views expressed are strictly personal.)