Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

Reopening of assessment – Precondition to be satisfied – Reasons recorded cannot be substituted

The petitioner challenged the notice u/s 148 dated 30th March, 2019 and the order dated 5th September, 2019 on the ground that the reasons recorded in support of the impugned notice do not indicate the manner in which the A.O. has come to the conclusion that income chargeable to tax has escaped assessment in the hands of the petitioner. It has also alleged that in the reasons for reopening, there is not even a whisper as to what was the tangible material in the hands of the A.O. which made him believe that income chargeable to tax has escaped assessment and in the notice issued four years after the assessment order, what was the material fact that was not fully and truly disclosed.

The Court observed that the law on this is well settled. To confer jurisdiction u/s 147(a), two conditions were required to be satisfied, firstly, the A.O. must have reasons to believe that income, profits or gains chargeable to income tax had escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions had to be satisfied before the A.O. could assume jurisdiction for issue of notice u/s 148 read with section 147(a). But under the substituted section 147 the existence of only the first condition suffices. In other words, if the A.O. has reason to believe that income has escaped assessment, it is enough to confer jurisdiction upon him to reopen the assessment.

Also, the reasons for reopening of assessment tested / examined have to be stated only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons cannot be improved upon and / or supplemented, much less substituted by affidavit and / or oral submissions. Moreover, the reasons for reopening an assessment should be that of the A.O. alone who is issuing the notice and he cannot act merely on the dictates of any another person in issuing the notice. Moreover, the tangible material upon the basis of which the A.O. comes to believe that income chargeable to tax has escaped assessment can come to him from any source; however, the reasons for the reopening have to be only of the A.O. issuing the notice.

It is also settled law that the A.O. has no power to review an assessment which has been concluded. If a period of four years has lapsed from the end of the relevant year, the A.O. has to mention what was the tangible material to come to the conclusion that there is an escapement of income from assessment and that there has been a failure to fully and truly disclose material facts. After a period of four years even if the A.O. has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

In the reasons for issuance of notice in this case it is recorded that the return of income for the assessment year under consideration was filed on 28th September 2012, further revised return of income was filed on 28th March, 2014 and on 9th May 2015 the return of income was processed u/s 143(1) and the assessment order u/s 143(3) read with section 153A was passed by the A.O. on 30th December, 2016. The entire basis for issuance of the notice is that information was received from the Deputy Director of Income Tax, Mumbai that a search and survey action u/s 132 was carried out in the case M/s Evergreen Enterprises and based on the statement recorded of the partner of M/s Evergreen Enterprises and documentary evidences found in the search of its premises, it unearthed an undisclosed activity of money-lending and borrowing in unaccounted cash being operated at the premises of M/s Evergreen Enterprises. It is also recorded in the reasons that based on the statements recorded of the partners of M/s Evergreen Enterprises and its employees, it came to light that one of the individuals / business concerns has lent cash of Rs. 30,00,000. It is alleged that the petitioner has lent cash loan of Rs. 30,00,000 in F.Y. 2011-12 and therefore the petitioner has been indulging in lending of cash loan and hence the amount of Rs. 30,00,000 has escaped assessment within the meaning of section 147.

The Court observed that there is absolutely no mention as to how either the partners of M/s Evergreen Enterprises or its employees or one Mr. Bharat Sanghavi are connected to the petitioner. The affidavit in reply of the respondent stated that Bharat Sanghavi was an employee of the  petitioner and, therefore, the reasons have been correctly recorded and the A.O. has reason to believe that income had escaped assessment.

As noted earlier, the reasons for reopening of assessment have to be tested / examined only on the basis of the reasons recorded and those reasons cannot be improved upon and / or much less substituted by an affidavit and / or oral submission. In the reasons for the reopening, the A.O. does not state anywhere that Bharat Sanghavi was an employee of the petitioner. Further, in the reasons for reopening, the A.O. does not even disclose when the search and survey action u/s 132 was carried out in the case of M/s Evergreen Enterprises, whether it was before the assessment order dated 30th December, 2016 in the case of the petitioner was passed or afterwards. The reasons for reopening are absolutely silent as to how the search and survey action on M/s Evergreen Enterprises or the statement referred to or relied upon in the reasons have any connection with the petitioner.

In the circumstances, the Court held that the impugned notice dated 30th March, 2019 and the impugned order dated 5th September, 2019 had been issued without jurisdiction and hence were quashed and set aside.