Case Note & Summary
The petitioner, an individual assessee, filed his income tax return for assessment year 2013-14 on 27 September 2013, declaring taxable income of Rs.73,08,942/-. The return was subjected to scrutiny assessment under Section 143(2) of the Income-tax Act, 1961, and an assessment order was passed on 11 March 2016, making an addition of Rs.1,14,329/-. The additional tax was paid on 12 April 2016. On 31 March 2021, more than seven years after the end of the assessment year, the Assistant Commissioner of Income Tax issued a notice under Section 148 proposing to reassess the income, claiming that income had escaped assessment. The stated reason was that the returns had not been subjected to scrutiny assessment, which was factually incorrect. Subsequently, the Revenue communicated that the basis for reassessment was information from the Deputy Director of Income-tax (Investigation) that stock brokers had misused client code modification facilities, leading to fictitious profits and losses, and that the petitioner had benefited to the tune of Rs.20,69,450/-. The petitioner objected, asserting that his returns had been scrutinized and that there was no failure to disclose material facts. The Revenue disposed of the objections, asserting that reason to believe alone sufficed. The petitioner challenged the reassessment proceedings by way of a writ petition under Article 226 of the Constitution. The court examined the legal framework under Sections 147, 148, 149, and 151 of the Act. It noted that since the original assessment was a scrutiny assessment and more than four years had elapsed from the end of the assessment year, the proviso to Section 147 required that reassessment could only be initiated if income escaped assessment due to the assessee's failure to disclose fully and truly all material facts. The court found that the Revenue had not alleged or demonstrated any such failure. The information about client code modifications did not, by itself, indicate any failure by the petitioner to disclose material facts. The court also noted that the approval under Section 151(ii) was not placed on record, and the Revenue's assertion that no scrutiny assessment had taken place was factually incorrect. Consequently, the court held that the reassessment notice and all subsequent proceedings were without jurisdiction and liable to be quashed. The writ petition was allowed, and the impugned notices and order were set aside.
Headnote
A) Income Tax - Reassessment - Section 147, 148, 149, 151 Income-tax Act, 1961 - Reassessment Beyond Four Years - Condition Precedent - Where original assessment was a scrutiny assessment and more than four years have elapsed from the end of the assessment year, reassessment under Section 147 is permissible only if income escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. In the instant case, the Revenue's reason to believe was based on information about client code modifications, but there was no allegation or demonstration that the petitioner failed to disclose material facts during the original scrutiny assessment. Held, the reassessment notice is invalid and liable to be quashed (Paras 2-11).
Issue of Consideration
Whether reassessment proceedings initiated beyond four years from the end of the assessment year are valid when the original assessment was a scrutiny assessment and there is no allegation of failure to disclose material facts
Final Decision
The writ petition is allowed. The impugned notice dated 31 March 2021 under Section 148, the notice under Section 143(2) dated 30 June 2021, the notice under Section 142(1) dated 21 December 2021, and the order dated 14 February 2022 disposing of objections are quashed and set aside.
Law Points
- Reassessment beyond four years requires failure to disclose material facts
- Reason to believe must be based on tangible material
- Approval under Section 151(ii) must be by specified authority and communicated
