Law of Reassessment – An examination of recent judgments of various High Courts (Part II)

Introduction

In Part 1 of the series on recent decisions of various high courts on reassessment law successfully published in the AIFTP journal in the March 2023 edition at pages 19-27, I discussed a few important decisions pertaining to reassessment. In Part II of the series, the saga continues and decisions of various high courts across India having far reaching importance in reassessment law have been discussed below.

    1. BLACKSTONE CAPITAL PARTNERS (SINGAPORE) VI FDI THREE PTE. LTD. vs. ACIT 1 The Petitioner, a company located in Singapore, having a valid Tax Residency Certificate(TRC) issued by the authorities in Singapore, challenged the reopening notice dated March 31, 2021 issued under Section 148 of the Income- tax Act, 1961 ( “Act”) for AY 2016-2017 primarily on the ground that there was no reason to believe income chargeable to tax had escaped assessment for the relevant assessment year. The facts in a nutshell are that during AY 2014-2015, the petitioner acquired shares of an Indian company Agile, in two tranches, and subsequently sold these shares to another Indian company Igarashi during AY 2016-2017. The Department issued the notice under Section 148 on the grounds that the beneficial owner who actually invested funds into the Petitioner for acquisition of the shares of Agile was actually a company located in the USA being the holding company viz. Blackstone Pvt Ltd. under the Blackstone group of companies and not the petitioner and therefore the capital gains had accrued to the petitioner which was taxable in India and the genuineness of the transaction had to be established.Before the Delhi High Court, the petitioner contended that it was issued a valid TRC and was therefore a resident of Singapore entitled to claim treaty benefits arising under Section 13(4) of the DTAA between India and Singapore and capital gains was taxable only in Singapore under the said provision. Counsel for the petitioner also relied on various Supreme Court judgments such as UOI vs. Azadi Bachao Andolan2 which upheld CBDT Circulars 682 and 789 dated 30th March, 1994. The Department challenged the maintainability of the petition by stating that ordinarily no challenge lies against a show cause notice and the merits of the matter cannot be decided by the court in exercise of its writ jurisdiction. The Department also contended that it was astounding that a company with a paid-up capital of 1 USD independently took on the purchase of shares for 53 million USD and then sold the same for 109 million USD. Hence, the company was simply a shell/conduit for avoiding payment of tax in India. Also, the limitation of benefits clause for incurring expenditure above 200,000$ was not satisfied and hence the petitioner was a shell company only.

      The Delhi High Court observed that it was not uncommon for companies to be incorporated as Special Purpose Vehicles(SPV’s) for carrying on investments even if they are incorporated with a paid up capital of 1$. The Court noted that no evidence is led to show that the petitioner is a tax resident of USA and the Indo-US DTAA would therefore be appliable as contended by the Department. The Petitioner was clearly incorporated in Singapore and managed by directors in Singapore. Also, under the Indo-Singapore DTAA, at the relevant time, capital gains tax was levied based on legal ownership and not beneficial ownership, unlike dividend, interest, and royalty income which were taxed based on beneficial ownership as well. Importantly, the Court held that only allocation of taxation rights is contemplated by Article 13(4) of the DTAA. Also, the expenditure incurred is above 200,000$ and thus the limitation of benefits clause is satisfied. After an elaborate discussion of Section 90 of the Act and various provisions of the DTAA between India and Singapore the Court came to the conclusion that it was not permissible to go behind the TRC issued by the foreign authorities and having been issued a valid TRC by the authorities in Singapore, the same would be conclusive to avail of the treaty benefits. Also, that an act which was within the four corners of the law could not be deemed illegal only because there is a lack of economic advantage to the source country.

      In the author’s view, unless there is a defect in jurisdiction, ordinarily a writ petition ought not be entertained. In the above case, it could not be said that there is any defect in jurisdiction for the High Court to entertain the petition. Whether or not a TRC is conclusive or whether Article 13(4) of the DTAA applies to the petitioner is not a jurisdictional ground to be decided by the constitutional courts. What constitutes an error of jurisdiction is settled by the Supreme Court in a plethora of decisions. Prima facie, the Department did have some reasons to cast liability upon the Petitioner. It is only when the notice is completely devoid of reasoning or is palpably absurd, that the Courts must interfere. Sufficiency of reasons is not a ground to entertain the writ petition. As such, I am of the view that the Delhi High Court committed an error in invoking its writ jurisdiction in the present case. Further, on the merits, one of the objects of DTAA’s is prevention of tax evasion, if the petitioner company was carrying on substantial business in Singapore it could be said that it is entitled to the benefits of the DTAA, the limitation of benefits clause under the DTAA having been satisfied, but in the absence of carrying on of such business, and simply being formed for further repatriation to the holding company Blackstone USA as alleged, it would not be correct to decide the issue simply on the basis of there being a valid TRC. The satisfaction of the limitation of benefits clause cannot be decided in writ petition and the issue ought to have been decided in appeal.

    2. COGNIZANT TECHNOLOGY SOLUTIONS INDIA P. LTD. VS. ACIT & ANR. 3An important issue regarding change of opinion was decided by the Madras High Court in the above case. The petitioner challenged the notice dated March 29, 2018 issued under Section 148 for AY 2013-2014 on the grounds that certain queries raised by the AO during assessment proceedings which culminated into an assessment order under Section 143(3) were those very queries/reasons provided in the notice issued under Section 148 and would therefore amount to a change of opinion. That the reasons formed part of the record of the assessment proceedings. That various notices were issued under Section 142 calling for information on transactions such as Mark- to-Market loss, Repairs and Maintenance, Long term capital loss etc. and the assessee duly submitted documents and replies to the above queries during assessment proceedings. Hence, the reasons to reopen were based upon a mere change of opinion forming part of the record of assessment proceedings and could thus not be proceeded with.The Madras High Court upheld the contentions of the assessee by holding that no new material was within the knowledge of the AO and all the information pertaining to the old record were relied upon to reopen completed proceedings. The decision was subsequently upheld by the Supreme Court 4 by dismissing the SLP of the Revenue. The Supreme Court noted that the findings to be recorded in the assessment order is not within the power of the assessee and hence the assessment order cannot be relied upon to say that there is no change of opinion.

      In the authors view, the concept of change of opinion does not find place in the Act or any other statute book; it is a creature of judge made law 5 and is therefore to be applied cautiously. There may be a situation when the query is raised during assessment proceedings but the AO does not wish to embark upon a detailed inquiry at that stage unless there is further information. Now when the information is subsequently provided, the AO may wish to reassess in light of the new information received. Such a situation ex-facie is possible and therefore in my view, greater latitude ought to be given to other jurisdictional requirements such as limitation, tangible material etc and not change of opinion while dealing with a case of reassessment under the Act.

    3. NAGESH TRADING CO. VS. ITO 6

The Petitioner challenged the notice dated 2nd June, 2022 issued under Section 148A(b), as well as the order dated 28th July, 2022 issued under Section 148A(d) and notice also dated 28th July, 2022 issued under Section 148 for AY 2017-2018.

The notice issued under Section 148A(b) was issued in compliance with the judgment of the Hon’ble Supreme Court in Ashish Agarwal and provided information alleging that the petitioner was the beneficiary of accommodation entries and had booked bogus sales amounting to Rs. 3,02,00,636/-. The petitioner replied to the show-cause notice stating that there was already a notice issued dated 31st March, 2021 under the unamended law(Section 148) alongwith notices issued under Section 142(1) which were responded to. Since the reassessment order to be passed pursuant to issue of the notice dated 31st March, 2021 would be beyond limitation, that is the only reason why the notice under Section 148A(b) is being issued to the petitioner.

The Hon’ble Court noted that the decision in Ashish Agarwal would be applicable to only those notices issued between 1st April, 2021-30th June, 2021 and not for the relevant period hence the said judgment was completely inapplicable. The Court was also of the view that no second notice could be issued under Section 148A(b) once a prior notice was already issued under the unamended law. The notice issued under Section 148A(b) and order passed under Section 148A(d) and notice issued under Section 148 were quashed. However, the notice dated 31st March, 2021 issued under Section 148 was kept alive.

    1. INDUS TOWERS LTD. (EARLIER KNOWN AS BHARTI INFRATEL LTD.) VS. ITO & ORS. 7

The Petitioner challenged the order dated 31st March, 2022 issued under Section 148A(d) and the notice also dated 31st March, 2022 issued under Section 148 for AY 2018-2019.

The Petitioner contended that its preliminary objection that the AO at Jaipur had no jurisdiction to reopen and only the AO at Delhi possessed jurisdiction was not appreciated and the AO at Jaipur proceeded to pass the order under Section 148A(d) and issue the notice under Section 148. Counsel for the Respondents furnished a detailed letter wherein it was stated that pursuant to information received through the INSIGHT portal, the assessee was found to have purchased a property in Barnmer, Jaipur, the PAN of the assessee was not available at the relevant time and the address of the assessee as per the information received was at Jaipur. Therefore, the AO at Delhi was not provided the papers. Upon receiving the PAN furnished by the assessee, the AO at Delhi was intimated and the information was sent to the AO at Delhi.

However, the Court noted that since the proceedings were undertaken by an AO who had no jurisdiction over the petitioner, there is a want of jurisdiction and the notice issued under Section 148 and the order passed under Section 148A(d) both are liable to be quashed.

In the authors view, the above issue is squarely covered by the decision of the Supreme Court in PCIT vs. M/s I-Ven Interactive Limited, Mumbai 8 wherein it was held that if the assessee does not intimate the AO about change in address by updating his PAN then the AO cannot be faulted for issuing the notice at the wrong address. In the present case, the notice has been issued where there is no PAN provided by theassessee and subsequently, when the assessee furnished the PAN corrective action was taken by sending the information to the AO at Delhi. Hence, in my view, the issue stood squarely covered by the decision of the Supreme Court and the Delhi High Court fell into error in quashing the reassessment proceedings for want of jurisdiction on the facts of the above case.

    1. EXCEL COMMODITY & DERIVATIVE (P) LTD. VS. UOI & ORS. 9

The appellant-assessee challenged the order passed by the ld. Single Judge of the Calcutta High Court dated 30th June, 2022 vide an intra- court appeal. Although the order passed under Section 148A(d) was quashed, the matter was remanded by the ld. Single Judge to the AO for fresh consideration. This aspect of remand to the AO formed the subject matter of appeal.

The appellant-assessee was issued a notice dated 22nd March, 2022 under Section 148A(b) alleging fictitious derivative transactions carried on with M/s. Blueview Tradecom(P) Ltd. A reply was provided stating that no fictitious transaction was carried on by the assessee. Thereafter an order under Section 148A(d) was passed.

The ld. Single Judge quashed the order issued under Section 148A(d) as devoid of reasons with a further remand to the AO. The Hon’ble Court noted that in cases where the AO accepts the explanation/reply of the assessee then there is no necessity of passing the order under Section 148A(d). However, in the present case, the order under Section 148A(d) was passed since the objections were rejected. The Court observed that the AO has indirectly accepted the assessee’s submission that no fictitious transactions were carried on by it and therefore the remand to the AO was unnecessary. The Court observed that the AO has alleged that the transaction was carried on with some other company which provided the accommodation entry. Hence, the appeal of the assessee was allowed and no further action to be taken by the Department was directed.

The Court also relied upon Circular dated 22nd August, 2022 issued by CBDT wherein it is provided that before information available on the database portal is acted upon by issuing the reopening notices, the AO shall verify the information since the information may not be accurate due to human error or inadvertence and any consequential action of reopening taken might be prejudicial to the assessee’s. The Court observed that the present case fell within the terms of the CBDT Circular and the AO was required to verify the information available and therefore there was no valid information to reopen the assessment.

In the authors view, the order under Section 148A(d) suffered from the vice of non- application of mind by the AO. In such circumstances, it could be and is most probably only due to a bona-fide mistake that the AO stated the name of a different company which provided the accommodation entry rather than the one referred in the notice under Section 148A(b). The AO would not deliberately issue the order by alleging accommodation entry by a different company than the one mentioned in the notice. Hence, the remand to the AO was necessary otherwise there would be no reassessment proceedings at all which is prejudicial to the interests of the Revenue.

    1. ASHOK DEVICHAND JAIN VS. UOI & ORS. 10

The Petitioner challenged the notice dated March 30, 2019 issued under Section 148 for AY 2012-2013. It was the case of the Petitioner that since the income declared in the return was above Rs. 20 lakhs, the Income Tax Officer had no jurisdiction to issue the notice and the only authority that could issue the notice was the DCIT or Assistant Commissioner in terms of CBDT Instruction 1 of 2011 dated January 31, 2011 which incorporates the said procedure.

The Bombay High Court upheld the submissions of the petitioner by holding that the issue of the notice by the proper officer is a jurisdictional requirement and any such defect is not curable under Section 292BB. Since the officer had no jurisdiction over the petitioner, the notice is not valid in law. The order passed rejecting the petitioners objections was also set aside.

    1. AMBIKA IRON AND STEEL PVT. LTD. VS. PCIT & ORS. 11

The issue before the Orissa High Court was whether the notices issued under Section 148 prior to the commencement of the Finance Act, 2021, were valid notices having been issued before 1st April, 2021 and in most cases having been issued on 31st March, 2021. In each of the cases the relevant AY expired more than four years before the date of issue of the notices. In other words, more than four years elapsed from the end of the relevant assessment year.

The Court rather peculiarly gave the following reasons for quashing the notices:

‘The stand of the Revenue that in view of the notifications issued by the Central Government in terms of the provisions of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the said time limits stood extended is clearly untenable as those notifications were issued to deal with the situation arising from the amendment to the Income-tax Act by the Finance Act, 2021 with effect from April 1, 2021 whereas in these cases the notices were issued prior to April 1, 2021.’

In the author’s view, the above enunciation of law is absolutely erroneous and inconsistent with the object of the TOLA, 2020. The reason why the timelines were extended was not to deal with the situation arising from the amendment to the Act by the Finance Act, 2021- this statement infact has no significance and is erroneous. As rightly argued by the Revenue, the timelines were broadened to deal with the COVID-19 pandemic and therefore the limitation stood enhanced by reason of the notifications.

On the question of sanction, before amendment by the Finance Act, 2021 w.e.f. 1-4-2021 the provisions were different, the date of the notices are March 31, 2021 and hence the law as existing before amendment by the Finance Act, 2021 would apply. Therefore, as rightly held by the Hon’ble Court, the Chief Commissioner and not the Joint Commissioner, was the only authority to grant sanction since four years elapsed from the end of the relevant assessment year.

    1. PRAKASH TATOBA TORASKAR vs. ITO & ORS. 12

      The Petitioner challenged the notices dated June 30, 2021 and June 20, 2022 issued under Section 148 and the order passed under Section 148A(d) dated June 30, 2022 on the ground that the reassessment proceedings have been initiated against a dead person.

      The notice dated 30 June, 2021 was issued in the name of the petitioner who had already expired on November 4, 2019. Subsequently a notice under Section 148A(b) dated May 20, 2022 purportedly complying with the decision of the Supreme Court in Ashish Agarwal was issued in the name of the petitioner. In response to the notice, the death certificate issued by the MCGM was placed on record to support the factum of death of the petitioner. Thereafter an order under Section 148A(d) was passed.

      The Bombay High Court held that if the initial notice under Section 148 is in the name of the deceased and if the subsequent notice under Section 148A(b) is also in the name of the deceased, the notices would be bad in law unless the assessee submits to the jurisdiction of the Assessing Officer without raising any objection. Therefore, the notices dated June 30, 2021 and June 20, 2022 issued under Section 148 and the order passed under Section 148A(d) were quashed and set aside.

    2. DINESH KUMAR GOYAL VS. UOI & ORS. 13

The Petitioner challenged the order dated 5th September, 2022 passed by the single judge of the Calcutta High Court vide an intra-court appeal.

The petition was filed challenging the order dated 28th July, 2022 issued under Section 148A(d) for AY 2014-2015. The said order was challenged primarily on the grounds of violating principles of natural justice and procedural irregularity. The Ld. Single Judge held that the assessee has an appropriate remedy in appeal.

A notice was issued under Section 148A(d)(sic: 148A(b)) alleging that information was received through the INSIGHT portal that the assessee had opened a bank account with Axis Bank, Burrabazar branch in the name of Bengal Steel Sales & Industries and during the financial year relevant to AY 2014-2015 there was a credit of approx. Rs. 15~crore and a debit of another 15~crore. The AO alleged that such high value transactions was not commensurate with the financial status of the assessee and therefore the source of funds remained unexplained. The assessee submitted a reply that it had no account at Axis Bank, Burrabazar branch but in fact had an account at Axis bank, Dalhousie branch. Further, two persons named in the notice under Section 148A(b) were strangers to the assessee and the assessee did not know how they had a nexus with the bank account of the assessee at Burrabazar when there was none and the assessee had no opportunity to cross examine them. The assessee also requested for an opportunity of personal hearing for producing books of account and other documents. The AO however proceeded by stating that the transactions were high value transactions and the account number was also furnished. The requirement of personal hearing, according to the AO, was not desirable at that stage.

The Court noted that if such credible information is received by the Department as in the present case then on the facts and circumstances of the case a personal hearing ought to have been provided to the assessee. The matter was remanded to the file of the AO and a personal hearing was directed to be provided whereby the assessee could agitate for cross-examination of the two persons named in the notice and the plea that the notice under Section 148A(b) was beyond limitation. The order passed under Section 148A(d) was set aside and the appeal was allowed.

In the authors view, at the stage of the notice under Section 148A(b) and the speaking order under Section 148A(d), no cross examination ought to be permitted to the assessee. This is for the reason, that only the sufficiency of reasons is required to be proven at the stage of issuing the said notice and the reasons do not have to be conclusive after cross examination is allowed. Cross-examination may only be permitted after the matter is before the AO and the alternative remedy is invoked. Even the High Courts are not concerned with the merits of the matter and are only to decide whether there are any infractions on jurisdiction. Hence no cross examination ought to be allowed at the stage of Section 148A(b) or Section 148A(d).

Conclusion

From the above recent decisions it is crystal clear that there are several issues which the Courts have decided in reassessment be it in the realm of international tax, change of opinion, or interpretation of CBDT Instructions. Although the above cases are illustrative of some of the issues, several other diverse issues are sub judice before the Courts every single day and if any person were to walk into the tax court in the High Court one would mostly find issues pertaining to reassessment being adjudicated. I hope the examination of the decisions above have provided an overview of the process and have supplemented the readers’ understanding of the subject.

 

There are two kinds of people, those who do the work and those who take the credit. Try to be in the first group; there is less competition there.

— Indira Gandhi

 

  1. [2023] 452 ITR 111 (Del)
  2. [2003] 263 ITR 706 (SC)
  3. [2021] 439 ITR 571 (Mad)
  4. [2023] 452 ITR 224 (SC)
  5. CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC)
  6. W.P.(C) 13781/2022 decided on 12.10.2022(Del)
  7. (2022) 326 CTR (Del) 885
  8. [2019] 418 ITR 662 (SC)
  9. (2022) 328 CTR (Cal) 710
  10. [2023] 452 ITR 43 (Bom)
  11. [2023] 452 ITR 285 (Ori)
  12. [2023] 452 ITR 59 (Bom)
  13. APO/83/2022 decided on September 15, 2022(Cal)