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Effectively Challenging Reopening Under Section 148 Of The Income Tax Act, 1961

Effectively Challenging Reopening Under Section 148 Of The Income Tax Act, 1961. CA Rohan Sogani. Re-opening of assessment. Power of Assessing Officer. REASON TO BELIEVE Any income which is chargeable to tax has ESCAPED ASSESSMENT

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Effectively Challenging Reopening Under Section 148 Of The Income Tax Act, 1961

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  1. Effectively Challenging Reopening Under Section 148 Of The Income Tax Act, 1961 CA Rohan Sogani

  2. Re-opening of assessment

  3. Power of Assessing Officer • REASON TO BELIEVE • Any income which is chargeable to tax has ESCAPED ASSESSMENT • Phrase: “if the AO has reasons to believe” stronger than the words “IF THE AO IS SATISFIED” • [Ganga Saran & Sons Pvt Ltd [(1981) 130 ITR 1 (SC)] • Reopening on MERE SUSPICION OR RUMOUR - Not justified

  4. Instances of escapement of income • No return is filed • No assessment done • Under statement of income or excessive allowance claimed • Non filing of report u/s 92E • Assessment done but • Under assessment of income • Assessed at a lower rate • - Excess allowance given • An assessee is found to have income > taxable limit or claimed excessive allowance - On the basis of information received u/s 133C • A person is found to have any asset (including financial interest in an entity) located outside India

  5. Scope of reassessment • Can ASSESS OR REASSESS any income which has escaped assessment • Can RECOMPUTEthe loss or depreciation allowance • Can assess or reassess any other income (which is not the subject matter of any appeal or revision)which has escaped assessment • CANNOT REDUCE THE INCOME below what has already been assessed in the original assessment

  6. Procedure To ChallengeThe Reassessment Proceedings Notice u/s 148 of Income Tax Act, 1961 issued to the assessee File the return AO is bound to furnish reasons within reasonable time. Seek reasons for issuing the notices, if assessee so desires. On receipt of reasons, the assessee is entitled to file objections to issuance of notice AO is bound to dispose of the same by passing a speaking order. GKN Driveshafts (India) Ltd. v/s. ITO (2003) 259 ITR 19 (SC)

  7. Time limit for reopening • Time limit is for ‘ISSUE’and not ‘SERVICE’ of notice under section 148 [Mayawati vs. CIT (2010) 321 ITR 349 (Del.)] • Notice u/s 148 cannot be ISSUEDbeyond limits prescribed in section 149 • STARTING TIME for issue of notice u/s 148 - End of the relevant assessment year • Normal limit - FOUR YEARS from the end of the relevant assessment year • If income escaped is Rs. One Lakh or more- SIX YEARS from the end of the relevant assessment year • If income escaped is from FOREIGN ASSET - SIXTEEN YEARS from the end of the relevant assessment year

  8. Issue of Notice u/s 148 • Before giving such notice, REASONS TO BE RECORDED by AO. • AO CANNOT SEEK BOOKS AND OTHER RECORDS at the time of notice. • PrahladraiAgarwalla v/s. ITO (1973) 87 ITR 655 (Cal.) • Notice can be given only by the AO having proper jurisdiction over the assessee. • [Mrs. UmaLoomba v/s. CIT (2000) 108 TAXMAN 232 (DELHI)] • Notice u/s 148 should be properly served. Service on wrong person vitiates section148. eg. Service of Notice on Dead Person [P.N. Sasikumar v/s. CIT (1987) 35 TAXMANN 131 (KER)]

  9. SANCTION FOR ISSUE OF NOTICE U/S 151 Previously Current scenario Whether assessment u/s 143(3)/147 has already been made Within 4 years After 4 years Yes No Approval of PCC/CC/ PC/ Commissioner Approval of Joint Commissioner Within 4 years After 4 years • If Notice issued by ITO- Approval of JC • If Notice issued by AC/DC- No approval Approval of PCC/CC/ PC/ Commissioner After 4 years Within 4 years No approval required Approval of Joint Commissioner

  10. Approval And Sanction Aproval granted by CIT without application of mind is invalid and not sustainable Merely affixing “yes” is not proper sanction Sanction within 24 hrs. is not proper sanction Approval given by other authority SJ Communication Ltd. vs. DCIT [2014] 222 Taxman 129 (Bom. HC) • S. Goyanka Lime & Chemical Ltd. [2015] 64 taxmann.com 313 (SC) CIT v. S. Goyanka Lime & Chemical Ltd. [2015] 56 taxmann.com 390 (MP)

  11. Notice u/s 143(2) is Mandatory Issue of a notice u/s.143(2) is mandatory. The failure to do so renders the reassessment void (CWT v. HUF of H. H. Late Shri. J.M. Scindia (2008) 300 ITR 193 (Bom). One should note that a Jurisdictional error cannot be cured by section 292BB. A reference can be made to a recent decision of Delhi High Court in the case PCIT v. Silver Line (2016) 383 ITR 455 (Delhi)(HC).

  12. Reassessment Procedure – Not Followed

  13. Full and true disclosure of material facts – Exception to time limit • No action beyond 4 years from the end of the relevant assessment year; • If assessment / reassessment has already been made under section 143(3)/ 147; • Unless the income chargeable to tax has escaped assessment by reason for the failure on the part of the taxpayer • To file return of income under section 139(1)/142(1)/148; • To disclose fully and truly all material facts necessary for his assessment

  14. Reopening Beyond 4 Years • lf the material facts were fully and truly disclosed by the assessee at the time of original assessment, invoking the provisions of Section 147 after the expiry of four years from the end of the relevant asst. year was not valid. • [German Remedies Ltd. v. DCIT (2006) 287 ITR 494 (Bom)] • Notice after expiry of four years – As there is no allegation in the reasons for failure to disclose material facts necessary for assessment reopening beyond four years was held to be not valid. • NYK Line (India) Ltd. v. Dy. CIT (2012) 68 DTR 90 (Bom)(High Court) • Reassessment – Despite “Wrong Claim”, reopening invalid if failure to disclose not alleged Titanor Components Limited v. ACIT (2011) 60 DTR 273 (Bom.)

  15. Any Other Income Comes To Notice During The Assessment Proceeding • Any other income comes to notice during the assessment proceeding – [Expln. 3 to sec. 147] • [CIT v Bestwood Industries & Saw mills (2011) 11 Taxmann.com 278 (Ker)(FB)] • If income for which reasons were recorded not assessed, any other income can’t be assessed – • CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 236(Bom)

  16. Mere Change Of Opinion No Basis For Reassessment • Kelvinator of India Ltd (2010) 320 ITR 561 (SC) • Reason to believe that the income has escaped assessment. • Conceptual difference between power to ‘review’ and power to ‘reassess’ needs to be observed. The Tax Authority has the power to reassess and not the power to review. • Reassessment needs to be based on tangible material. • The reason for reassessment must have a live link with the formation of the belief. • The legislative history of the amendments and the CBDT circular explaining the amendment support the conclusion that mere change of opinion, per se, cannot be the basis for reassessment of income.

  17. Mere Change Of Opinion No Basis For Reassessment • Usha International Ltd. (2012) 348 ITR 485 (Delhi) • Expression 'change of opinion' postulates formation of opinion and then a change thereof. • In context of section 147, it implies that AO should have formed an opinion at first instance. • If a query is raised and answered in regular assessment, but no addition is made by AO, it should be accepted that AO formed an opinion of not making addition, even though he had not recorded his reasons in assessment order. • If AO incorrectly or erroneously applies law or comes to a wrong conclusion and income chargeable to tax has escaped assessment, initiation of reassessment proceedings will be invalid on the ground of change of opinion. Revenue may resort to section 263 but not reassessment.

  18. Mere Change Of Opinion No Basis For Reassessment • Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007) 291 ITR 500 (SC) • Expressions "intimation" and "assessment order” are different and must be understood differently. • Intimation under section 143(1)(a) cannot be treated to be an order of assessment. • There being no assessment under section 143(1), there is no question of change of opinion. • At initiation of reassessment proceedings, what is required is "reason to believe", but not the established fact of escapement of income. • Failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.

  19. No Reassessment If No Reason To Believe • Orient Craft Ltd. (2013) 354 ITR 536 (Delhi HC) • There can be no review of an assessment in the guise of reopening and that a bare review without any tangible material would amount to abuse of the power. • Section 147 makes no distinction between an order passed u/s 143(3) and the intimation issued u/s 143(1). • Not permissible to adopt different standards while interpreting the words 'reason to believe' vis-à-vis section 143(1) and section 143(3). • An assessee whose return was processed u/s 143(1) cannot be placed in a more vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made u/s 143(3). • Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007) 291 ITR 500 does not give a carte blanche to AO to disturb the finality of the intimation u/s 143(1) at his whims; he must have reason to believe within the meaning of section 147.

  20. Reopening Based On Information From Investigation Wing • Reasons read as under: • “As per information received from DDIT (Inv.), Gurgaon, the assessee had taken bogus entry of capital gains Rs. 1,08,845 on June 22, 1996 (assessment year 1997-98) by paying cash along with some premium and taking cheque of same amount.” • Decision: • The information does not indicate the source of the capital gains (which in this case are shares). We do not know which shares have been transacted and with whom has the transaction taken place. There are absolutely no details available and the information supplied is extremely scanty and vague. • The Assessing Officer did not verify the correctness of the information received by him but merely accepted the truth of the vague information in a mechanical manner. The Assessing Officer has not even recorded his satisfaction about the correctness or otherwise of the information or his satisfaction that a case has been made out for issuing a notice under section 148 of the Act. • CIT v/s. Atul Jain (2008) 299 ITR 383 (DELHI) HC

  21. Statement of Unconnected Person • In the absence of any material before the AO a statement by an unconnected person does not constitute reason to believe that the income has escaped assessment especially when the assessee has produced all the material and relevant facts and therefore the reassessment proceedings can not be sustained • PrafulChunilal Patel v. M.J. Makwana, ACIT (1999) 236 ITR 832 (Guj) (Asst year 1991-1992) • JCIT & Ors v. George Williamson (Aassam) Ltd (2002) 258 ITR 126 (Guj) • If reassessment is based on statement of third party and assessee is not given an opportunity to be heard, then reassessment not valid. • Kothari Metals v. ITO (2015) 377 ITR 581 (Karn.)(HC) • Share premium amount: If there is no lack of disclosure or suppression of any material facts and no tangible reasons in notice, then notice is not valid. • Alliance Space P. Ltd. v. ITO (2015) 375 ITR 473 (Bom.)(HC)

  22. Re-assessment – Audit objection Reasons recorded without application of mind, merely on the basis of audit objection, not valid • If AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void. • Purity Tech Textiles Pvt. Ltd. vs. ACIT (2010) 325 ITR 459 (Bom) • JagatJayantilal Parikh vs DCIT (2013) 32 taxman 161 (Bom)

  23. SC Decision – Basis For Reopening AO cannot seek to reopen an assessment u/s 147 on the basis of the SC decision in a case where assessee had disclosed all material facts – Austin Engineering Co. Ltd v/s. JCIT (2009) 312 ITR 70 (Guj HC) A subsequent decision of a Court cannot justify reopening of an assessment after a period of four years as subsequent decision does not mean failure on part of an assessee to disclose fully and truly all material facts Sesa Goa Ltd v/s. JCIT (2007) 294 ITR 101 (Bom HC) Against ruling: Ventral Warehousing Corp.(2012) 67 DTR 356 (Delhi)

  24. Reassessment Based On Retrospective Amendment Not Justified

  25. Re-Reassessment Possible

  26. Reopening based on valuation report

  27. REASSMENT JURISDICTION BENEFIT OF REVENUE ONLY Since section 147 is aimed at gathering the escaped income of assessee the same cannot be allowed to be converted as revisional or review proceedings at the instance of the assessee, thereby making the machinery workable. CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC). Assessee cannot be permitted to seek relief in respect of items earlier rejected, or claim relief in respect of items not claimed in the original assessment proceedings unlessrelatable to the escaped income K. Sudhakar S. Shanbhag v. ITO (2000) 241 ITR 865 (Bom.) Assessee having not claimed deduction under section 80HHC, in its return because it had only income from other sources and no business income, claim made in the revised return by filing audit report under section 147 due to disallowances under section 43B is upheld. ITO v. Tamil Nadu Minerals Ltd. (2010) 124 ITD 156 (Chennai)(TM)

  28. Time limits for Reassessment • Time limit for completion of reassessment under section 153(2) • Notice served: • Before 1 April 2011 - To be completed within 9 months from the end of the FY in which notice served • After 1 April 2011 - To be completed within 1 year from the end of the FY in which notice served • In case of transfer pricing proceedings • Notice served after 1 April 2010 - To be completed within 24 months from the end of financial year in which • Notice served: • if reference to TPO is made before 1.07.2012 but order under section 92CA(3) is not made or ; • In case reference is made after 1.07.2012 • Otherwise, To be completed within 21 months from the end of financial year in which notice served

  29. Consequential Assessment – Section 150 • Notice u/s 148 is given to pass consequential orders: • then time limit u/s. 149 is not applicable • Finding or direction of the appellate authority: • necessary to dispose off the appeal • particular person for a particular year • ITO v/s. MurlidharBhagwan Das (1964) 52 ITR 335 (SC) • Finding must be clear and not discretionary: • RajinderNath v/s. CIT (1979) 120 ITR 14 (SC) • If direction for some other assessee – opportunity must be provided to such other person: • A.B. Parikh v/s. ITO (1993) 203 ITR186 (Gujarat) • Direction for relevant year, if direction or finding is for one year notice cannot be given for any other year: • Consolidated Coffee Ltd. v/s. ITO (1987) 155 ITR 729 (Karnataka) • No sanction u/s 151 required for cases u/s 150: • SukhdayalPahwa v/s. CIT (1983) 140 ITR 206 (Madhya Pradesh)

  30. Queries?

  31. THANK YOU!!rohan@soganiprofessionals.comwww.soganiprofessionals.com

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