Failure TO Disclose All Material Facts Fully & Truly During Original Assessment Is Vital For Invoking Jurisdiction U/s 147: Bombay HC

The Bombay High Court recently clarified that it is not open to the Revenue to initiate reassessment on the premise that it can simply form a belief supported by its own reasons, thereby ignoring the explicit formulation of the jurisdiction within which reassessment may be initiated. The High Court therefore quashes the reassessment notice issued under old regime of Section 148 along with the order disposing off Assessee's objection against re-opening of the assessment. Section 147 of the Income Tax Act, provides for the reopening of assessment proceedings. This section gives discretion to the Assessing Officer to reopen the assessment proceedings when he/she has reason to believe that some of the income has escaped assessment. The Division Bench comprising Justice G. S. Kulkarni and Justice Somasekhar Sundaresan observed that “the Petitioner ought to have been in possession of facts for him to be able to disclose the same and despite him having such facts in its possession he ought to have failed to make a disclosure. In the absence of such necessary ingredients, it would be impossible to invoke a provisions u/s 147 unless such jurisdictional facts are present”. (Para 23) Facts of the case: The Assessee, an individual, had filed his return declaring income of Rs. 73.08 lacs and the AO completed the scrutiny assessment by making addition of Rs. 1.14 lacs and the Assessee also paid the additional tax amount. Subsequently, seven years later, the Assessee was served with a reassessment notice u/s 148 and the same was sanctioned by PCIT u/s 151 on the ground that the Assessee's returns were not subjected to scrutiny assessment. The Assessee filed objections asserting that his returns were already subjected to scrutiny assessment. The AO however, based on the information that Assessee's stock broker modified client codes under which transactions were affected on the stock exchange. This resulted in Assessee's income from trading in shares of Rs. 20.69 lacs escaping assessment. Hence, the AO passed reopening order. Observations of the High Court: The Bench noted as per Section 147 as applicable in the relevant point of time, no reassessment would be permissible after the expiry of four years from the end of the relevant AY unless the escapement of income was attributable to failure on his part to disclose fully and truly all material facts necessary for assessment at the time of the original assessment, which is not the case. Further, the Bench noted that since assessee had filed his return without default, and such return had been subjected to a scrutiny assessment, unless and until there had been a demonstrated failure on his part to disclose fully and truly any material facts, the jurisdictional fact necessary to effect reassessment cannot be said to be in existence. The Bench found that Department had initiated the reassessment proceedings based on the fact that Assessee's stock broker modified client codes under which transactions had been effected on the stock exchange, however could not verify if the transactions in respect of which any client code had been modified, was modified from the Assessee's client code to another client code or vice versa. Thus, Department could not spell out the manner in which any such modification would lead to a different level of taxable income in the hands of Assessee, added the Bench. The Bench observed that at the stage of initiating reassessment, “reason to believe” must be judged not as a judicial decision but as an administrative decision, and so long as any information may have become available from any source that is considered to be reliable, that would be adequate to justifying reopening the assessment. The bench also pointed out that the client code modifications for orders placed by the stock broker on the stock market system, are a matter of what the stock broker may have done as part of his operations and the Assessee pointed out that all the trades instructed by him had indeed been executed as instructed and they are reflected in contract notes issued to him, and indeed tally with his ledger. The trades executed by the Assessee form part of his books of accounts and financial statements and are reflected in his tax returns, which have been scrutinized and assessed, added the Bench. The Bench found that the information sought by the Revenue indeed relates to securities transactions and computation of capital gains, the material for all of which had been made available during the original assessment, thus there can be no reasonable basis to conclude that there had been any failure on the part of the Assessee in disclosing all material facts fully and truly, to thereby infer that any income had escaped assessment. “It is blatantly erroneous for the Revenue to base its reassessment on the assertion that the returns had not been subjected to...

Failure TO Disclose All Material Facts Fully & Truly During Original Assessment Is Vital For Invoking Jurisdiction U/s 147: Bombay HC

Pankaj Bajpai

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