Expressing reservations about the speed at which the assessment officer (AO) re-opened assessment proceedings after four years and passed an assessment order without furnishing the reasons, the Bombay High Court (HC) quashed the proceedings initiated against a taxpayer.
In an order last week, the bench of justice MS Sonak and justice Jitendra Jain says, "In our view, the action of the AO to furnish the reasons recorded at the fag end and thereafter to complete the assessment proceedings in haste without following the due process of law and decisions of this Court on a time frame for furnishing the reasons deciding the objections and passing the assessment order is unconstitutional and therefore even on this count, the impugned proceedings and the decision-making process is bad in law."
"It is also important to note that the petitioner had raised various objections to the reasons furnished for re-opening the case. In the order rejecting the objection, none has been rebutted. In our view, even on these grounds, the present proceeding is required to be quashed in the absence of any rebuttal in the order rejecting the rejection," the bench says.
The bench was hearing a writ petition filed by Pune-based Jayant Avinash Dave challenging an order assessing his income for assessment year (AY) 2015-16 - Rs86.03 crore by disallowing short-term capital loss of Rs13.18 crore.
On 30 September 2015, Mr Dave filed his return of income for AY15-16 under Section 139 of the Income Tax Act, declaring a total income of Rs69.68 crore consisting of long-term and short-term capital gains.
On 19 September 2016, his case was selected for limited scrutiny by issuing a notice under Section 143(2) for examining long-term capital gain (LTCG). On 13 December 2017, the AO converted the limited scrutiny to complete scrutiny after obtaining prior approval from the principal commissioner of income tax (PCIT) to more particularly examine the transaction of sale and purchase of shares resulting in capital gain.
On 29 December 2017, the AO passed an assessment order under Section 143(3) of the Act assessing Mr Dave's income at Rs72.84 crore. He challenged the assessment order by filing an appeal before the commissioner of income-tax (appeals), who vide an order dated 19 November 2018, gave partial relief to Mr Dave. Mr Dave challenged the order before the income-tax appellate tribunal (ITAT).
However, during the pendency of the appeal before ITAT, the tax department issued a notice on 23 March 2021 to Mr Dave under Section 148 of the Act proposing to reassess the income for the AY15-16. Mr Dave filed his return of income in response to the notice on 1 April 2021 and also requested reasons recorded for the issue of the notice.
Mr Dave further reiterated the request for the reasons twice; however, he did not receive any response from the AO.
On 11 March 2022, at the fag end of the assessment getting time-barred after one year, the AO provided reasons for re-opening the assessment of Mr Dave for AY15-16.
On 22 March 2022, the AO issued a draft assessment order proposing to assess Mr Dave's income at Rs86.03 crore by disallowing short-term capital loss of Rs13.18 crore.
On 24 March 2022, Mr Dave filed his objection to re-opening and requested to drop the re-assessment proceedings on the grounds more particularly set out therein. On 25 March 2022, he also filed his reply to the draft assessment order and requested the AO not to proceed with the assessment until the objections to re-opening the case were decided.
However, on 27 March 2022, the AO passed a brief one-page order rejecting the objections filed by Mr Dave, and immediately, within three days, on 30 March 2022, an order was passed assessing income at Rs86.03 crore.
The HC observed that there is no reason mentioned about why the AO did not furnish the reasons to Mr Dave immediately on him filing his return of income and making requests for the same on 1 April 2021 more so, when the reasons have to be recorded before issuing the notice under Section 148 which was dated 23 March 2021. The object of furnishing the reasons is to give the assessee an adequate opportunity to file his objections and thereafter give sufficient time to the AO to decide the objections before proceeding with the assessment proceedings.
"In this case, the decision-making process adopted by the AO is found to be unfair and unreasonable since the reasons recorded were furnished after repeated requests only at the fag end of the assessment proceedings getting time barred," the bench says, adding, "Mr Dave objected to the reasons vide letter dated 24 March 2022 and the AO without deciding the objections proposed a draft assessment order even before the same. On 27 March 2022, the order rejecting the objection was passed and thereafter, immediately within three days, an assessment order on 30 March 2022 was passed."
The HC also observed that there is no mention in the reasons recorded about what are the material facts which Mr Dave ought to have disclosed and which came to the notice of the AO after the assessment order from any source outside the assessment records. "Mere mentioning that there was a failure to disclose fully and truly material facts does not confer jurisdiction on the AO to re-open the case after the expiry of four years."
During the assessment proceedings, Mr Dave provided details on LTCG and short-term capital loss, including the date of acquisition and transfer. He also gave details of the loss of the transfer of mutual funds. Only after examining all the details relating to capital gain and capital loss was an assessment order passed under Section 143 of the Act.
"In our view, based on these very details, the present proceedings have been initiated, which is impermissible since it does not satisfy the pre-condition prescribed under the first proviso to Section 147 of the Act, it would amount to a review of the assessment order which is not permissible," the bench says while quashing the re-opening of assessment and passing of an order by the AO in Mr Dave's case.
(Writ Petition No5087 of 2022 Date: 15 January 2025)