Effect of re-opening the assessment based on wrong facts or conclusions

The effect of re-opening the assessment based on wrong facts or incorrect facts or conclusions, are that the notice issued for re-opening cannot be sustained.

Income chargeable to tax has escaped must be based on correct facts and if the facts as recorded in the reasons are not correct and the assessee points out the same in his objections then the order on objections must deal with the same and prima facie establish that the facts stated in its reasons as recorded are correct. If the Assessing Officer has proceeded on fundamentally wrong facts to form reasonable belief that income chargeable to tax has escaped assessment and the Assessing Officer while disposing of the objections does not deal with the factual position asserted by the assessee, it would be safe to conclude that the Revenue does not dispute the facts stated by the assessee.

As per the ratio of the judgment in the case of Mumtaz Hazi Mohmad Menon v. ITO (2018) 408 ITR 268 (Guj.), the assumption of jurisdiction on the basis of wholly incorrect facts cannot be conferred in law. In this case also, the reasons cited were that the assessee did not file return and the capital gain on sale consideration was not brought to tax which reasons were found to be factually incorrect. The assessee had return of income which was not noticed by the Assessing Officer. Consequently, the notice issued under Section 148 for reopening the assessment was quashed for assumption of jurisdiction on factually incorrect premise.

In the similar fact situation, the Hon’ble Gujarat High Court also quashed the re-assessment proceedings in Sagar Enterprises v. ACIT (2001) 257 ITR 335 (Guj.) where reasons were recorded dehors the fact, i.e., return not filed when the return was actually filed.

Similarly, Hon’ble Delhi High Court in Dr. Ajit Gupta v. ACIT (2016) 383 ITR 361 : (2017) 79 taxmann.com 316 (Del.) has observed that reason for reopening of assessment based on mistaken factual premise is unsustainable in law.

Reassessment proceedings for being initiated on allegation of escapement of income arising from sale of shares which was actually loss incurred in commodity trading - Quashed and set aside reassessment proceedings as notice based on incorrect facts & conclusion on income escapement

Bombay High Court quashed reassessment proceedings for being initiated on allegation of escapement of income arising from sale of shares which was actually loss incurred in commodity trading in preceding Assessemnt year; Observes that the Assessee’s objection was disposed of without any speaking order leading to a conclusion that reassessment is without being any reason to believe that income escaped assessment; Assessee was issued notice under Section 148 for Asssessment year 2013-14 alleging escapement of income amounting to Rs. 9,90,314/- on account of profit on sale of shares which was objected by the Assessee on the premise that the alleged amount was not credited in the bank account and the said amount was actually a loss suffered in commodity trading which was reported in return of income for Assessment year 2012-13; Before High Court, Assessee relied on coordinate bench ruling in Tata Sons Ltd. v. DCIT (2022) 286 Taxman 587 : 137 taxmann.com 414 (Bom.)] and contended that: (i) reassessment proceedings are based on wrong facts and hence unsustainable in law, (ii) the Revenue failed to dispose of the objections by passing a speaking order which is contrary to law and (iii) the Revenue proceeded mechanically to re-open proceedings without there being any independent application of mind; High Court relies on Supreme Court ruling in Godrej Sara Lee wherein the difference between entertainability and maintainability of writ petition was explained to the extent that objection to ‘maintainability’ goes to the root of the matter and if such objection is found to be of substance, the Court would be rendered incapable of receiving the lis for adjudication while the question of ‘maintainability’ is within the realm of discretion of the High Court since writ remedy is discretionary in nature; Rejects Revenue’s contention on the maintainability of writ petition and relies on Calcutta High Court ruling in Magadh Sugar & Energy Ltd. v. State of Bihar & Ors. [Civil Appeal No. 5728/2021 decided on 24.09.2021 to observe that if a jurisdictional issue is raised and the controversy is purely a legal one that does not deserve to be thrown out at the threshold and in the present case, the challenge is only restricted to legality of the reassessment notice under Section 148; Relies on GKN Driveshafts (India) Ltd. v. ITO (2003) 259 ITR 19 : 1 SCC 72 (SC) as well as other rulings and observes that the order rejecting Assessee’s objections did not assign any reason whatsoever except reiterating that the Assessee failed to declare any profit/loss in the income tax return arising out of sale of shares, although the Assessee clearly contended that the said amount is towards loss suffered in commodity trading pertaining to Assessment year 2012-13 and not Assessment year 2013-14 which was also reported in the return of income, accordingly, the objections were disposed of without due application of mind; Relies on coordinate bench ruling in Tata Sons wherein it was held that if the reasons for re-opening the assessment are based on incorrect facts or conclusions, the notice issued for reassessment cannot be sustained; Accordingly, holds that reassessment notice is liable to be quashed and set-aside. Consequentially, further steps taken by the respondents based on said notice would no longer survive. [In favour of assessee] (Related Assessment year : 2013-14) – [Arvind Sahdeo Gupta v. ITO, Akola (2023) 153 taxmann.com 244 : [TS-446-HC-2023(BOM)] (Bom.)]

Calcutta High Court stays Section 148 writ dismissal order with consequential ‘Enforcement Directorate (ED) reference’ direction

Calcutta High Court Division Bench grants stay on the Single Judge's order that dismissed the writ petition against the reassessment proceedings involving loan transactions with a direction to jurisdictional PCCIT for referring the case to the Enforcement Directorate (ED); Assessee-Individual was subjected to reassessment post-search for Assessment year 2019-20 on the basis that he had transactions with a broker Anil Kumar Kasera, thus, Revenue alleged that Rs. 10.36 Cr. represented in the form of entry in the books of account which escaped assessment; The Single Judge dismissed the writ petition with an observation that the modus operandi adopted in the impugned loan transaction is that “the loan recipient acknowledges the receipt of cash loan through a paper popularly known as ‘Rukka’ and the unaccounted cash transactions are authenticated through a currency note number mutually agreed before receiving/giving the cash and the place of collection/delivery of cash is decided through SMS/Whatsapp massages exchanged prior to the transaction and the currency note number and the amount are mentioned in those massages and the cash is collected or delivered by the broker’s representative on the production of the pre-decided currency note number and the broker contacts the borrower on the due date of repayment of the loan and the loans are squared off or carried forward for a further specified period as per the mutual decisions of the parties involved and thereafter Rukka is destroyed on repayment of loan.”; The Single Judge also remarked that there is a huge financial scam and this case along with other cases involving Anil Kumar Kasera need to be referred to the ED and directed the PCCIT for the same before listing the matter for compliance on 13.06.2023; On the specified date, the Single Judge found that the compliance report was filed by ITO (Judicial) instead of PCCIT and expressed a hope that ED will expeditiously investigate the scam; The Division Bench admits Assessee’s appeal, finds that a prima facie case has been made and observes that the questions of law which has to be considered is ‘whether the alleged borrowing by the assessee can be brought to tax in the hands of the assessee.’; Notes Assessee’s submission that under Sections 69, 69A, 269SS and Section 271B, the alleged borrowing cannot be taxed as income in the hands of the Assessee; Grants time for completion of pleadings and directs the jurisdictional PCCIT, West Bengal and Sikkim  to communicate the stay order to the ED and also states that ED shall not proceed until further orders in this appeal. – [Shri Kalicharan Agarwalla v. Union of India and Ors. – Date of Order 21.06.2023 (Cal.)]

Re-assessment proceedings quashed - Inherent lack of jurisdiction under Section 147 of the Act - Reopening proceedings itself being not permissible on the basis of inherently wrong facts - Assessee had filed return of income and declared the transaction arising on sale of property which fact was not taken cognizance by the Assessing Officer while reopening the assessment.

ITAT Delhi held that reopening of assessment under section 147 of the Income Tax Act based on mistaken factual premise is unsustainable in law. During the year, the assessee sold agricultural land with constructed area for actual consideration of Rs. 24,69,000/-which represents 1/4th of total consideration of Rs. 98,76,000/- where 3/4th share belongs to one Shri Mashroof Ali. Assessing Officer reopened the assessment by issuing notice under section 148 of the Act dated 26.03.2014 alleging escapement of income with the allegation that the assessee sold residential/ agricultural land for Rs.98,76,000/- as against the circle rate of Rs.1,56,99,500/-. It was alleged that capital gain was derived from the said transaction but ITR was not filed resulting in escapement. The income was assessed at Rs. 72,11,880/- by an ex-parte order under section 144 r.w. Section 147 of the Act. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) however upheld the assumption of jurisdiction assumed under Section 147 but however granted partial relief on merits. Further aggrieved, the assessee preferred appeal before the Tribunal.

Hon’ble Delhi High Court in the case of Dr. Ajit Gupta v. ACIT, 383 ITR 361 (Del.) has observed that reason for reopening of assessment based on mistaken factual premise is unsustainable in law. We find merit in the plea of the assessee towards inherent lack of jurisdiction under Section 147 of the Act. In the instant case also, the assessee had filed return of income and declared the transaction arising on sale of property which fact was not taken cognizance by the Assessing Officer while reopening the assessment. –

In the light of the aforesaid judgment declaring the position of law, we find merit in the plea of the assessee towards inherent lack of jurisdiction under Section 147 of the Act. In the instant case, the assessee had filed return of income and declared the transaction arising on sale of property which fact was not taken cognizance by the Assessing Officer while reopening the assessment. The reopening proceedings itself being not permissible on the basis of inherently wrong facts, we do not consider it necessary to delve the merits of the addition. We thus set aside the action of the CIT(A) and quash the re-assessment proceedings giving rise to the present appeal. (Related Assessment year : 2009-10) - [Kunwar Ayub Ali v. ITO - Appeal Number : I.T.A No. 3137/DEL/2018 - Date of Judgement : 17.04.2023 (ITAT Delhi)

Reopening on the ground that the assessee had not filed Return of Income whereas the same was filed – Possibility of application of section 50C mentioned in the affidavit – In reply but not in reasons recorded – Though the Assessing Officer may be correct about applicability of section 50C notice issued under section 148 is bad in law

Petitioner raised objections to the notice of reopening under a letter dated 09.10.2017. In such objections, he pointed out that the property was sold on 28.04.2009 for a sale consideration of Rs. 50 lakhs and not for Rs.1,18,95,000/- as stated in the reasons. He produced copy of the sale deed. He therefore contended that the reasons proceeded on wrong factual foundation. He also pointed out that he had filed the return of income, in which, he had declared his share of Rs.16,66,667/of the sale consideration. After deducting the cost of acquisition and improvement charges, he also offered a sum of Rs. 2,45,900/by way of capital gain. He therefore contended that on both counts, the Assessing Officer had recorded wrong reasons.

Assessing Officer rejected such objections by an order dated 27.10.2017. In such order, he recorded that the co-owner Ayubkhan Pathan had declared the total sale consideration of the property at Rs. 1,18,95,000/. Further, the report received from the sub-registrar, Surat, would show that the market value of the said property was determined at Rs. 1,18,95,000/. He was therefore of the opinion that the assessee should have shown his share of the sale consideration at Rs.39,65,000/, in spite of which, he declared the sum at Rs. 16,66,667/. Primarily on these grounds, the objections were rejected. Notably, the Assessing Officer did not make any comment on the assessee’s contention that contrary to what was recorded in the reasons, the assessee had only filed the return of income for the relevant assessment year.

It was observed that if the Assessing Officer reopens the assessment on the incorrect premise that the assessee has not filed a return, the reopening is invalid. The fact that the Assessing Officer may be justified in the view that income has escaped assessment owing to the capital gains not being computed u/s 50C cannot save the reopening as the reasons do not refer to section 50C of the Act. Reasons recorded, in fact, ignored the fact that the sale consideration as per the sale deed was ` 50 lakhs and that the assessee had by filing the return offered his share of such proceeds by way of capital gain. In the result, impugned notice is quashed.

The Assessing Officer may be correct in pointing out that when the sale consideration as per the sale deed is Rs.50 lakhs but the registering authority has valued the property on the date of sale at Rs. 1,18,95,000/- for stamp duty calculation, section 50C of the Act would apply, of course, subject to the riders contained therein. However, this is not the cited reason for reopening the assessment. The reasons cited are that the assessee filed no return and that 1/3rd share of the assessee from the actual sale consideration of Rs. 1,18,95,000/- therefore, was not brought to tax.

These reasons are interconnected and interwoven. In fact, even if these reasons are seen as separate and severable grounds, both being factually incorrect, Revenue simply cannot hope to salvage the impugned notice. Through the affidavit-in-reply a faint attempt has been made to entirely shift the center of the reasons to a completely new theory viz. the possible applicability of section 50C of the Act. The reasons recorded nowhere mentioned this possibility. Reasons recorded, in fact, ignored the fact that the sale consideration as per the sale deed was Rs. 50 lakhs and that the assessee had by filing the return offered his share of such proceeds by way of capital gain. In the result, impugned notice is quashed. Petition is disposed of. (Related Assessment year : 2010-11) – [Mumtaz Hazi Mohmad Menon v. ITO (2018) 408 ITR 268 (Guj.)]

Reason for reopening of assessment was a mistaken factual premise that assessee had changed system of accounting from mercantile to cash system, reopening of assessment was not valid

Assessing Officer reopened the assessment of the assessee on the ground that since the assessee was following cash system of accounting certain expenses claimed by the assessee were not allowable.

Held that the reason for the reopening of the assessment was a mistaken factual premise that the assessee had changed the system of accounting from mercantile to the cash system. It was more than adequately explained by the assessee that this was an inadvertent error. The assessee has convincingly shown that he has consistently been following the mercantile system of accounting not only for assessment years in question but for the earlier and later assessment years as well. Hence, reassessment notice was to be quashed. [In favour of assessee] (Related Assessment years : 2006-07 to 2009-10) - [Dr. Ajit Gupta v. ACIT (2016) 383 ITR 361 : (2017) 79 taxmann.com 316 (Del.)]

High Court quashed the re-assessment proceedings where reasons were recorded dehors the fact, i.e., return not filed when the return was actually filed.

Assessing Officer issued a notice under section 148 in which he recorded reasons that assessee failed to file its return for assessment year 1991-92. It was also recorded that certain transactions relevant to assessment year 1991-92, which were disclosed in a search under section 132, had not been disclosed by assessee. However, in affidavit-in-reply, he stated that protective addition was made in assessment year 1992-93.

On going through the entire reasons recorded by the revenue, it was apparent that the factor of non-filing of the return for the assessment year 1991-92 had overbearingly weighed with the Assessing Officer for arriving at the satisfaction about the failure on the part of the assessee and escapement of assessment of income. On the basis of the same, even for the sake of argument, if the contention raised by the Assessing Officer was taken into consideration, the settled legal position would be that in such circumstances, it would not be possible to say with certainty as to which factor would have weighed with the officer concerned and once it was shown that an irrelevant fact had been taken into consideration, to what extent the decision was vitiated would be difficult to say. On that count alone, the petition required to be accepted.

In the affidavit-in-reply, it was the say of the Assessing Officer himself that the payment which was stated to be undisclosed income relevant for the assessment year 1991-92 could have been made during the financial year 1990-91 relevant to the assessment year 1991-92 and hence ‘to cover up that probability protective addition was made in the assessment year 1992-93’.

It was apparent that the Assessing Officer himself was not sure as to the year of taxability and whether the said item required to be taxed in the assessment year 1991-92 or assessment year 1992-93. In such a situation, it was not possible to agree with the stand of the revenue that any income could be stated to have escaped the assessment for assessment year 1991-92 as a consequence of any failure or omission on the part of the assessee. Therefore, the impugned notice was quashed and set aside. (Related Assessment year : 1991-92) – [Sagar Enterprises v. ACIT (2001) 257 ITR 335 : 124 Taxman 641 (Guj.)

From the aforesaid, it is clear that the reopening proceedings itself being not permissible on the basis of inherently wrong facts. Thus, it is a well settled position in reassessment law that reassessment cannot be made assuming jurisdiction on incorrect facts on the basis of a factually incorrect premise. This has been held in many Court decisions.