By Pradip Kapasi, Gautam Nayak, Bhadresh Doshi, Chartered Accountants
Issue for
Consideration
Section 147 of the Income Tax Act, 1961
provides that if an Assessing Officer has reason to believe that any income
chargeable to tax has escaped assessment, he may assess or reassess such
income, subject to the provisions of sections 148 to 153 of the Act. Section
148 provides for issue of notice to an assessee, requiring him to furnish his
return of income in response to the notice, for the purposes of reassessment.
Section 148(2) requires an Assessing Officer to record his reasons for issue of
notice, before issuing any notice under this section. Courts have held that
recording of such reasons is mandatory, and issue of notice without recording
of such reasons is invalid.
The Supreme Court, in the case of GKN
Driveshafts (India) Ltd. vs. ITO 259 ITR 19, held that:
“when a notice under section 148 is
issued, the proper course of action for the noticee is to file return and if he
so desires, to seek reasons for issuing notice. The Assessing Officer is bound
to furnish reasons within a reasonable time. On receipt of reasons, the noticee
is entitled to file objections to issuance of notice and the Assessing Officer
is bound to dispose of the same by passing a speaking order. In the instant
case, as the reasons had been disclosed in the proceedings, the Assessing
Officer had to dispose of the objections, if filed, by passing a speaking
order, before proceeding with the assessment.”
Following this decision of the Supreme
Court, various cases have come up before different High Courts, requiring the
courts to consider the consequences in cases where the Assessing Officer passed
the reassessment order without disposing of the objections raised by the
assessee against the issue of notice for reassessment. The courts are of the
unanimous view that the reassessment order is not sustainable on account of
such lapse. The issue however has arisen in such cases as to whether the
reassessment proceedings are null and void, or whether the defect is curable by
providing a fresh innings to the AO for curing the defect by disposal of the
objections and pass a fresh order of reassessment after following the correct
procedure. While in some cases, the Gujarat, Bombay and Delhi High Courts have
quashed or set aside the reassessment order on the ground that the necessary
procedure had not been followed, effectively nullifying the order of
reassessment, in other cases, the Gujarat, Bombay, Delhi and Madras High
Courts, while setting aside the reassessment order, have restored the matter to
the Assessing Officer for disposing of the reasons and thereafter proceeding
with the reassessment.
MGM Exports’ case:
The issue came up before the Gujarat High
Court in the case of MGM Exports vs. DCIT 323 ITR 331.
In this case, for assessment year 2001-02,
the assessment was completed in September 2006 u/s. 143(3) read with section
254, after the original assessment order u/s. 143(3) was remanded back to the
Assessing Officer by the Tribunal. On 3rd March 2008, the Assessing
Officer issued notice u/s. 148 proposing to reopen the completed assessment.
Vide communication dated 8th March 2008, the assessee requested the
Assessing Officer to treat the original return of income as return of income
filed in response to notice u/s. 148 of the Act and also asked for a copy of
the reasons recorded by the Assessing Officer. The Assessing Officer supplied
the copy of the reasons recorded for reopening on 21st October 2008.
On receipt of the reasons recorded, the assessee filed its objections, both on
jurisdiction and on the merits, vide communication dated 11th
December, 2008. The Assessing Officer passed the reassessment order on 16th
December, 2008.
The assessee filed a writ petition before
the Gujarat High Court. Before the High Court, it was argued on behalf of the
assessee that the Assessing Officer was under an obligation to first dispose of
the preliminary objections raised by the assessee, and could not have framed
the reassessment order. It was also submitted that until such speaking order
was passed, the Assessing Officer could not have undertaken reassessment.
Reliance was placed on the decisions of the Gujarat High Court in the cases of Arvind
Mills Ltd. vs. Asst. CWT (No. 1) 270 ITR 467, and Arvind Mills Ltd. vs. Asst.
CWT (No. 2) 270 ITR 469 for supporting the proposition.
On behalf of the Revenue, it was submitted
that the Assessing Officer had dealt with the objections in the reassessment
order itself, and hence, the same should be treated as sufficient compliance
with the directions and the procedure laid down by the Supreme Court in the
case of GKN Driveshafts (supra).
The Gujarat High Court considered the
decisions cited before it, and observed that the position in law was well
settled, and the Assessing Officer was accordingly required to decide the
preliminary objections and pass a speaking order disposing of the objections
raised by the assessee. Until such a speaking order was passed, the Assessing
Officer could not undertake reassessment.
Applying the settled legal position to the
facts of the case, the Court noted that it was apparent that the action of the
Assessing Officer in framing the reassessment order, without first disposing of
the preliminary objections raised by the assessee, could not be sustained.
Accordingly, it quashed and set aside the reassessment order. It however
directed the Assessing Officer to dispose of the preliminary objections by
passing a speaking order, and only thereafter proceed with the reassessment
proceedings in accordance with law.
A similar view was taken by the High Courts
in the following cases, where the reassessment order was quashed but the
Assessing Officer was directed to dispose of the objections and then proceed
with the reassessment:
Garden Finance Ltd. vs. Asstt. CIT 268
ITR 48 (Guj.)(FB)
IOT Infrastructure & Energy Services
Ltd. vs. ACIT 233 CTR 175 (Bom)
Rabo India Finance Ltd. vs. DCIT 346 ITR
81 (Bom)
SAK Industries (P) Ltd. vs. DCIT 19
taxmann.com 237 (Del)
Torrent Power SEC Ltd. vs. ACIT 231
Taxman 881 (Guj)
V. M. Salgaoncar Sales International vs.
ACIT 234 Taxman 325 (Bom)
Banaskantha District Oilseeds Growers
Co-op. Union Ltd. vs. ACIT 59 taxmann.com 328 (Guj)
Pr. CIT vs. Sagar Developers 72
taxmann.com 321 (Guj)
Simaben Vinodrai Ravani vs. ITO 394 ITR
778 (Guj)
In Home Founders Housing Ltd. vs. ITO 93
taxmann.com 371, the Madras High Court went a step further, and held that
non-compliance of the procedure indicated in the GKN Driveshafts (India)
case (supra) would not make the order void or non est, while
remitting the matter to the Assessing Officer for passing a fresh order, after
disposing of the objections. A Special Leave Petition against the said decision
has been rejected by the Supreme court.
Bayer Material Science’s case
The issue again came up before the Bombay
High Court in the case of Bayer Material Science (P) Ltd v DCIT 382 ITR 333.
In this case, relating to assessment year
2007-08, the assessee filed its return declaring certain taxable income. The
return was accepted by issuing intimation u/s. 143(1). On 6th
February 2013, a notice u/s. 148 was issued seeking to reopen the assessment.
On 15th March, 2013, the assessee filed its return of income, in response to the notice,
and sought a copy of the reasons recorded in support of the notice. The
Assessing Officer did not furnish the reasons recorded, in spite of the
assessee’s letters dated 15th March, 2013 and 12th
September, 2013 seeking the reasons recorded for issuing the notice. The
Assessing Officer finally furnished the copy of the reasons recorded for
issuing the notice to the assessee only on 19th March, 2015.
On 25th March, 2015, the assessee
filed its objections to the reasons recorded. The Assessing Officer, without
disposing of the assessee’s objections, issued a draft Assessment order,
required for a Transfer Pricing assessment, dated 30th March, 2015.
The Bombay High Court noted that, as the
case involved transfer pricing issues, the period of limitation to dispose of
an Assessment consequent to reopening notice as per the 4th proviso to section
153(2) was two years from the end of the financial year in which the reopening
notice was served. The reopening notice was issued on 6th February,
2013, and the reasons in support were supplied only on 19th March,
2015 in spite of the fact that the
Revenue was aware at all times that the period to pass an order of reassessment
on the impugned reopening notice dated 6th February 2013 would
expire on 31st March, 2015.
The Bombay High Court observed that there
was no reason forthcoming on the part of the Revenue to satisfactorily explain
the delay. The only reason made out in the affidavit filed by the Assessing
Officer was that the issue was pending before the Transfer Pricing Officer
(TPO) and it was only after the TPO had passed his order on transfer pricing,
that the reasons for reopening were provided to the assessee. The Bombay High
Court expressed its surprise as to how the TPO could at all exercise
jurisdiction and enter upon enquiry on the reopening notice, before the notice
was upheld by an order of the Assessing Officer passed on objections. Besides,
the recording of reasons for issuing the reopening notice was to be on the
basis of the Assessing Officer’s reasons. The High Court observed that the
TPO’s reasons on merits, much after the issue of the reopening notice, did not
have any bearing on serving the reasons recorded upon the party whose
assessment was being sought to be reopened.
The Bombay High Court further noted that, in
the affidavit filed before it by the Department, it was stated that the
Assessing Officer was under a bonafide impression that the TPO would pass an
order in favour of the assessee. The Bombay High Court expressed its surprise
as to how the assessing officer could
then have any reason to believe that income chargeable to tax had escaped
assessment.
On 23rd December 2015, when the
Department again sought more time from the High Court, the High Court indicated
that in view of the gross facts of the case, the Principal Commissioner of
Income Tax would take serious note of the above, and after examining the facts,
if necessary, take appropriate remedial action to ensure that an assessee was
not made to suffer for no fault on its part particularly so as almost the
entire period of two years from the end of the financial year in which the
notice was issued was consumed by the Assessing Officer in failing to give
reasons recorded in support of the notice.
When the matter again came up for hearing on
27th January 2016, the High Court was informed that, on 22nd January,
2016 the Principal Commissioner of Income Tax had passed an order u/s. 264, by
which he set aside the draft Assessment order dated 30th March 2015,
and thereafter restored the matter to the Assessing Officer for passing order
after deciding the objections filed by the assessee. However, during the course
of hearing, the learned Additional Solicitor General, on instructions, stated
that the order dated 22nd January, 2016 passed by the Principal
Commissioner of Income Tax was being withdrawn.
The Bombay High Court noted that the draft
Assessment order was passed on 30th March, 2015 without having
disposed of the assessee’s objections to the reasons recorded in support of the
notice. The reasons were supplied to the assessee only on 19th
March, 2015 and the assessee had filed the objections to the same on 25th March,
2015. According to the Bombay High Court, thes passing of the draft Assessment
order without having disposed of the objections was in defiance of the Supreme
Court’s decision in GKN Driveshafts (India) (supra). Thus, the Bombay
High Court held that the draft Assessment order dated 30th March,
2015 was not sustainable, being without jurisdiction, and set it asideas it had
been passed without disposing of the objections filed by the assessee to the
reasons recorded in support of the notice.
A similar view has been taken by the Gujarat
High Court in the case of Vishwanath Engineers vs. ACIT 352 ITR 549,
where, in spite of repeated reminders by the assessee even by pointing out the
law laid down by the Supreme Court, the Assessing Officer failed to dispose of
the said objections and instead of that, straightaway passed the order of
reassessment. In that case also, the Gujarat High Court, in the context of the
issue under consideration, held that AO was bound to disclose the reasons
within a reasonable time and on receipt of the reasons, the assesseee was
entitled to raise objections and if any such objections were filed, the
objections must be disposed of by a speaking order before proceeding to
reassess in terms of the notice earlier given.. The order of reassessment was
held to be not valid.
Similarly, in Ferrous Infrastructure (P)
Ltd. vs. DCIT 63 taxmann.com 201, the Delhi High Court considered a case
where the objections furnished by the petitioners to the section 148 notice had
not been disposed of by a separate speaking order prior to the reassessment
order. The Delhi High Court quashed the notice under section 148, the
proceedings pursuant to the notice and the reassessment order, on two grounds –
that the reasons had been recorded by the Assessing Officer after issue of the
notice u/s. 148, and that a separate speaking order had not been passed in
response to the objections, with the objections having been dealt with, if at
all, in the reassessment order itself.
Observations
The rationale for remanding the matter back
to the Assessing Officer, while quashing the reassessment order, has been
explained in detail by the Gujarat High Court, in the case of Sagar
Developers (supra):
“the question that arises is, whether if
the Assessing Officer defaults in disposing of the objections but proceeds to
frame the assessment without so doing, should the reassessment be terminated
permanently. In other words, the question is, should the assessment be placed
back at a stage where such defect is detected or should the Assessing Officer
for all times to come be prevented from carrying out his statutory duty and
functions.
It is by now well settled principle of
administrative law that whenever administrative action is found to be suffering
from breach of principles of natural justice, the decision making process
should be placed at a stage where the defect is detected rather than to
permanently annul the action of the authority.
Further it is also well settled that
whenever an administrative action is found to be tainted with defect in the
nature of breach of natural justice or the like, the Court would set aside the
order, place back the proceedings at the stage where the defect is detected and
leave the liberty to the competent authority to proceed further from such stage
after having the defect rectified. In other words, the breach of principle of
natural justice would ordinarily not result in terminating the proceedings
permanently.
The requirement of supplying the reasons
recorded by the Assessing Officer issuing notice for reopening and permitting
the assessee to raise objections and to decide the same by a speaking order are
not part of the statutory provisions contained in the Act. Such requirements
have been created under a judgment of the Supreme Court in the case of GKN
Driveshafts (India) Ltd. (supra). It is true that when the Assessing Officer
proceeds to pass the final order of assessment without disposing of the
objections raised by the assessee, he effectively deprives the assessee of an
opportunity to question the notice for reopening itself. However, the assessee
is not left without the remedy when the Assessing Officer proceeds further with
the assessment without disposing of the objections. Even before the final order
of assessment is passed, it would always be open for the assessee to make a
grievance before the High Court and to prevent the Assessing Officer from
finalizing the assessment without disposing of the objections.
The issue can be looked from slightly
different angle. Validity of the notice for reopening would depend on the
reasons recorded by the Assessing Officer for doing so. Similarly the order of
reassessment would stand failed on the merits of the order that the Assessing
Officer has passed. Neither the action of the Assessing Officer of supplying
reasons to the assessee nor his order disposing of the objections if raised by
the assessee would per se have a direct relation to the legality of the notice
of reopening or of the order of assessment. To declare the order of assessment
illegal and to permanently prevent the Assessing Officer from passing any fresh
order of assessment, merely on the ground that the Assessing Officer did not
dispose of the objections before passing the order of assessment, would be not
the correct reading of the judgment of Supreme Court in the case of GKN
Driveshafts (India) Ltd. (supra). In such judgment, it is neither so provided
nor one think the Supreme Court envisaged such an eventuality.”
Similarly, in Home Finders Housing’s case
(supra), the Madras High Court explained the rationale as under:
“It is not in dispute that there is no
statutory requirement to pass an order taking into account the statement of
objections filed by the assessee after receiving the reasons for invoking
section 147. The Supreme Court in GKN Driveshafts (India) Ltd. (supra) has
given a procedural safeguard to the assessee to avoid unnecessary harassment by
directing the Assessing Officer to pass a speaking order taking into account
the objections for reopening the assessment under section 147.
The forming of opinion to proceed further
by disposal of the objections need not be a detailed consideration of all the
facts and law applicable. It must show application of mind to the objections
raised by the noticee. In case the objections are such that it would require a
detailed examination of facts and application of legal provisions, taking into
account the assessment order sought to be reopened, the string of violations,
suppression of material particulars and transactions which would require considerable
time and would be in the nature of a detailed adjudicatory process, the
Assessing Officer can dispose of the objections, by giving his tentative
reasons for overruling the objections.
The disposal of objections is in the
value of a procedural requirement to appraise the assessee of the actual
grounds which made the Assessing Officer to arrive at a prima facie
satisfaction that there was escape of assessment warranting reopening the
assessment proceedings. The disposal of such objection must be before the date
of hearing and passing a fresh order of assessment. In case, on a consideration
of the objections submitted by the assessee, the Assessing Officer is of the
view that there is no ground made out to proceed, he can pass an order to wind
up the proceedings. It is only when a decision was taken to overrule the
objections, and to proceed further with the reassessment process, the Assessing
Officer is obliged to give disposal to the statement of objections submitted by
the assessee.
The core question is as to whether
non-compliance of a procedural provision would ipso facto make the assessment
order bad in law and non est. The further question is whether it would be
permissible to comply with the procedural requirement later and pass a fresh
order on merits.
In case an order is passed without
following a prescribed procedure, the entire proceedings would not be vitiated.
It would still be possible for the authority to proceed further after complying
with the particular procedure.
The enactments like the Land Acquisition
Act, 1894, contain mandatory provisions like section 5A, the non compliance of
which would vitiate the declaration under section 6 of the Act. Even after
quashing the declaration for non compliance of section 5A, the Court would permit
the conduct of enquiry and pass a fresh declaration within the period of
limitation.
Therefore, that non compliance of the
procedure indicated in the GKN Driveshafts (India) Ltd. case (supra) would not
make the order void or non est and such a violation in the matter of procedure
is only an irregularity which could be cured by remitting the matter to the
authority.”
Therefore, the High Courts which have held
in favour of remand, have relied on three aspects – one is that the
non-consideration of objections is a breach of principles of natural justice,
which can be remedied by restoring the matter to the earlier stage, secondly,
that the requirement is merely a procedural requirement, and thirdly, that this
is not a statutory requirement, but one laid down by the Supreme Court.
In Garden Finance’s case (supra), the
Full Bench of the Gujarat High Court analysed the logic of the Supreme Court
decision in GKN Driveshaft’s case (supra), as under:
“it appears that prior to the GKN’s case
(supra), the Courts would entertain the petition challenging a notice under
section 148 and permit the assessee to satisfy the Court that there was no
failure on the part of the assessee to disclose fully and truly all material
facts for assessment. Upon reaching such satisfaction, the Court would quash
the notice for reassessment. The question is why did the Court not require the
assessee to appear before the Assessing Officer.
Earlier when the Court required the
assessee to appear before the Assessing Officer, the Assessing Officer would
not pass any separate order dealing with the preliminary objections and much
less any speaking order, and the Assessing Officer would deal with all the
objections at the time of re-assessment. Hence, if the assessee was not
permitted to challenge the re-assessment notice under section 148 at the
initial stage, the assessee would thereafter have to challenge the
re-assessment itself entailing the cumbersome liability of paying taxes during
pendency of the appeal before the Commissioner (Appeals), second appeal before
the Income-tax Appellate Tribunal and then reference/tax appeal before the High
Court. It was in this context that the Constitution Bench had observed in
Calcutta Discount Co. Ltd.’s case (supra) that where an action of an executive
authority, acting without jurisdiction subjected, or was likely to subject, a
person to lengthy proceedings and unnecessary harassment, the High Courts would
issue appropriate orders or directions to prevent such consequences and,
therefore, the existence of such alternative remedies as appeals and reference
to the High Court was not always a sufficient reason for refusing a party quick
relief by a writ or order prohibiting an authority acting without jurisdiction
from continuing such action and that is why in a fit case it would become the
duty of the Courts to give such relief and the Courts would be failing to
perform their duty if reliefs were refused without adequate reasons.
What the Supreme Court has now done in
the GKN’s case (supra) is not to whittle down the principle laid down by the
Constitution Bench of the Apex Court in Calcutta Discount Co. Ltd.’s case
(supra) but to require the assessee first to lodge preliminary objection before
the Assessing Officer who is bound to decide the preliminary objections to
issuance of the re-assessment notice by passing a speaking order and,
therefore, if such order on the preliminary objections is still against the
assessee, the assessee will get an opportunity to challenge the same by filing
a writ petition so that he does not have to wait till completion of the
re-assessment proceed- ings which would have entailed the liability to pay tax
and interest on re- assessment and also to go through the gamut of appeal,
second appeal before Income-tax Appellate Tribunal and then reference/tax
appeal to the High Court. Viewed in this light, it appears that the rigour of
availing of the alternative remedy before the Assessing Officer for objecting
to the re-assessment notice under section 148 has been considerably softened by
the Apex Court in the GKN’s case (supra) in the year 2003. Therefore, the GKN’s
case (supra) does not run counter to the Calcutta Discount Co. Ltd.’s case
(supra) but it merely provides for challenge to the re-assessment notice in two
stages, that is: (i) raising preliminary objections before the Assessing
Officer and in case of failure before the Assessing Officer, and (ii )
challenging the speaking order of the Assessing Officer under section 148 of
the Act.”
From the above observations of the Courts,
it is clear that the requirement of disposal of objections by a speaking order
is not just a mere procedural formality, but a procedural safeguard introduced
by the Supreme Court, just as the recording of reasons by the Assessing Officer
is a procedural safeguard built in into the statute.
This safeguard, as analysed by the Gujarat
High Court Full Bench in Garden Finance’s case (supra), was to prevent
unnecessary harassment – to ensure that in cases where the issue of notice was
not justified, the assessee does not have to wait till completion of the
reassessment proceedings, which would entail the liability to pay tax and
interest on reassessment and also to go through the gamut of appeal, second
appeal before Income-tax Appellate Tribunal and then reference/tax appeal to
the High Court. The Supreme Court decision in GKN Driveshaft’s case (supra)
now provides for challenge to the reassessment notice in two stages, that is:
(i) raising preliminary objections before the Assessing Officer and (ii) in
case of failure before the Assessing Officer, challenging the speaking order of
the Assessing Officer u/s. 148. The requirement of disposal of objections is
therefore an additional level of protection granted to an assessee, and not
just a mere procedural requirement. This decision is delivered by the Full
Bench of the high court and shall, in any case, have a binding force over the
decisions of the division bench.
While disposing of the reasons, the
Assessing Officer has to pass a speaking order dealing with the objections, as
held by the Courts, and not just dispose of it mechanically without application
of mind, or in a standard format. The requirement of disposal of objections
cannot therefore be taken lightly.
It is at the same time important to appreciate
that in the matters of revenue laws, an order is to be conferred with a
finality at some point of time; an assessment cannot be kept open on one count
or another and certainly not for the lapses and latches of those in governance
and vested with power. Income tax Act, like many tax laws, is enshrined with
not one but various provisions that require the authorities and the tax payers
to carry out a task within the prescribed time limit; respecting these
statutory deadlines is not only essential for administration but also for the
dispensation of timely justice. ‘Satvar Nyay’, within the prescribed
time, is one of the promised objective of the tax laws.
An order of reassessment is required to be
necessarily passed within the time provided by section 153 of the Act and any
license even by the court to act beyond the prescribed time limit, will amount
to doing violence to the statutory law. In our considered view, a breach or a
lapse, in administration of a civil law or a procedure, should not be equated
with a breach in revenue laws and a breach here, should as a rule, be viewed as
fatal to the dispensation of justice. Significantly, one would find, not a few,
but hundreds of cases wherein the reassessment orders are routinely passed
without paying any heed to the need to dispose of objections by a speaking
order as mandated, under the law of the land, by the Supreme court; these
orders are passed with the knowledge of the law and, in most of the cases, are
passed in spite of being informed of the law. We are unable to side with a view
that seeks to provide a fresh innings to
an officer who consciously, knowingly has chosen to disrespect the law, even
where it is held to be administrative.
The fact that this safeguard has been
introduced by the Supreme Court and not incorporated in the statute itself,
should not make any difference – after all, what the Courts are doing is
interpreting the law as enacted. In the course of such interpretation, if a
view is taken by the Courts that a particular procedural safeguard is necessary
to avoid misuse of the provisions, such procedural safeguard should be regarded
as inherently built into the provisions itself.
Reassessment itself is a tool of harassment
of the assessee, as noted by the Gujarat High Court, in cases where it is not
justified. It is therefore a serious imposition on the taxpayer, for which
safeguards have been built in. If these safeguards are flouted by the Assessing
Officer, should the assessing Officer be given a second chance, is the moot question
that needs to be addressed.
Recording of reasons is the other safeguard
that has been built in. This is also a procedural safeguard. Almost all the
courts have been unanimous in their view that in a case where reasons have not
been recorded in writing before issue of notice u/s. 148, the reassessment
proceedings are invalid, and deserve to be quashed. Why should the same logic
not apply to the procedural safeguard of disposal of reasons before completion
of assessment?
Emphasising the need for such an order, the
Bombay High Court, in the case of Asian Paints Ltd. vs. DCIT 296 ITR 90,
recognised the importance of the safeguard of disposal of reasons, by holding
that if the Assessing Officer does not accept the objections filed to the
notice u/s. 148, he cannot proceed further in the matter for a period of four
weeks from the date of receipt of service of the order on the assessee,
disposing of objections with a view to enable the assessee to challenge the
order disposing of the objections, before the appropriate forum to prevent the
AO to proceed further with reassessment, if desired to do so.
Given the importance of this safeguard, and
the harassment that a reassessment causes to an assessee, the better view
therefore seems to be that in case these safeguards are not observed, the
Assessing Officer cannot be given a second chance to rectify his blatant
disregard of the safeguards put in place by the Supreme Court.
