Bombay HC Cancels Income Tax Assessment Reopening, Citing Legal Constraints on Change of Opinion
The Bombay High Court (HC) has annulled the reopening of assessment proceedings initiated by the assessment officer (AO) after a lapse of four years, highlighting concerns over the swift manner in which the order was issued without proper justification.
In a ruling delivered last week, the bench comprising Justice MS Sonak and Justice Jitendra Jain stated, “We believe that the actions of the AO in providing reasons at the last moment and hastily concluding the assessment proceedings contravene the due process of law. This approach, which disregards the established timelines set by this Court for submitting reasons, addressing objections, and issuing assessment orders, is unconstitutional and renders the entire decision-making process flawed.”
The bench emphasized that the petitioner addressed multiple objections to the reasons provided for reopening the assessment. In its order rejecting these objections, the AO failed to counter any of the petitions raised. The bench opined that the absence of rebuttal necessitates the quashing of the current proceedings.
The petition was submitted by Pune resident Jayant Avinash Dave, who contested the tax assessment for the assessment year (AY) 2015-16, where his income was assessed at Rs86.03 crore after disallowing a short-term capital loss of Rs13.18 crore.
On September 30, 2015, Mr. Dave submitted his income return for AY 2015-16 under section 139 of the Income Tax Act, declaring a total income of Rs69.68 crore, which included long-term and short-term capital gains.
On September 19, 2016, his case underwent limited scrutiny through a notice under section 143(2) to assess long-term capital gains. Subsequently, on December 13, 2017, the AO escalated the scrutiny to a full review with the necessary approval from the principal commissioner of income tax (PCIT) to examine the transactions involving share sales that resulted in capital gains more closely.
On December 29, 2017, the AO concluded the assessment order under section 143(3), declaring Mr. Dave’s income as Rs72.84 crore. He contested this order before the commissioner of income tax (appeals), who granted him partial relief on November 19, 2018. Mr. Dave then appealed the decision to the income tax appellate tribunal (ITAT).
However, while the appeal was ongoing, the tax department notified Mr. Dave on March 23, 2021, under section 148 of the Act, intending to reassess his income for AY 2015-16. Mr. Dave filed his return in response to this notice on April 1, 2021, simultaneously demanding an explanation for the notice issuance.
Despite his repeated requests for clarification regarding the reasons for reopening the assessment, there was no response from the AO.
On March 11, 2022, as the assessment deadline loomed, the AO finally provided the reasons for reopening Mr. Dave’s case for AY 2015-16.
The draft assessment order issued on March 22, 2022, estimated Mr. Dave’s income at Rs86.03 crore, again disallowing the short-term capital loss of Rs13.18 crore.
On March 24, 2022, Mr. Dave lodged his objections against the reopening and urged the AO to halt the reassessment process until his grievances were addressed. Despite this, on March 27, 2022, the AO quickly dismissed Mr. Dave’s objections and finalized the assessment order by March 30, 2022.
The HC noted that the AO failed to articulate why there was a delay in providing reasons to Mr. Dave, especially considering that these should have been recorded before the notice under section 148 was issued on March 23, 2021. The intent of sharing these reasons is to afford the taxpayer a fair chance to contest them and for the AO to consider those objections prior to making a final assessment.
The method employed by the AO is found to be both unfair and unreasonable, particularly as the reasons for reopening were only disclosed at the last minute,” the bench remarked. Furthermore, it highlighted that Mr. Dave’s objections were raised but ignored by the AO, who expediently moved to issue a draft assessment order.
The HC also pointed out a lack of detail regarding material facts that Mr. Dave allegedly failed to disclose, which led the AO to reopen the case post the four-year threshold. Simply stating that there was a failure to disclose significant facts does not provide the AO the jurisdiction needed to reopen assessment after the permitted period.
In the course of the assessment, Mr. Dave had submitted extensive information on long-term capital gains and the short-term capital loss, inclusive of acquisition and transfer dates. The initial assessment order was based on thorough scrutiny of all relevant details.
The bench concluded, “Based on the existing documentation, the initiation of these proceedings is inconceivable as it does not meet the necessary pre-conditions outlined in the first proviso to Section 147 of the Act; it essentially constitutes an impermissible reassessment of the prior order.” Thus, the HC quashed both the reopening of the assessment and the AO’s order in Mr. Dave’s case.