Breaking: Reopening Of Income Tax Assessment is Not Allowed On Ground Of Future Contingencies: Bombay High Court

In the case of Pawan Morarka Vs ACIT, the Bombay High Court has held that:

On the submissions of Mr. Pardiwalla that respondent had issued impugned notice under Section 148 relying on the Delhi High Court order and judgment despite agitating the conclusion of the Delhi High Court before the Apex Court, Mr. Suresh Kumar submitted that an SLP has been filed against the decision of the Delhi High Court to cover the contingency of an adverse outcome in the SLP. It is Revenue’s contention before the Apex Court that the deemed dividend under Section 2(22)(e) is assessable in the hands of P&A. This is certainly not permissible because the jurisdictional requirement is that respondents must entertain a belief that income chargeable to tax has escaped assessment in the hands of petitioner. It is not possible for respondents to entertain such belief if they are agitating the matter against P&A. On this ground also, the impugned notice should be held as invalid. The Division Bench of this Court in DHFL Venture Capital Fund V/s. Income Tax Officer5 held that where the Assessing Officer sought to make protective assessment by reopening an assessment on the ground that a contingency may arise in future resulting in escapement of income that would be wholly impermissible and would amount to rewriting of the statutory provision. Paragraph 18 of the said judgment reads as under:

18. A protective assessment as the learned author indicates is regarded as being protective because it is an assessment which is made ex abundanti cautela where the department has a “doubt as to the person who is or will be deemed to be in receipt of the income”. A departmental practice, which has gained judicial recognition, has emerged where it appears to the Assessing Officer that income has been received during the relevant Assessment Year, but where it is not clear or unambiguous as to who has received the income. Such a protective assessment is carried out in order to ensure that income may not escape taxation altogether particularly in cases where the Revenue has to be protected against the bar of limitation. But equally while a protective assessment is permissible a protective recovery is not allowed. However, such an exercise which is permissible in the case of a regular assessment must necessarily yield to the discipline of the statute where recourse is sought to be taken to the provisions of section 148 . Protective assessments have emerged as a matter of departmental practice which has found judicial recognition. Any practice has to necessarily yield to the rigour of a statutory provision. Hence, when recourse is sought to be taken to the provisions of section 148, there has necessarily to be the fulfillment of the jurisdictional requirement that the Assessing Officer must have reason to believe that income has escaped assessment. To accept the contention of the Revenue in the present case would be to allow a reopening of an assessment under Section 148 on the ground that the Assessing Officer is of the opinion that a contingency may arise in future resulting an escapement of income. That would, in our view, be wholly impermissible and would amount to a rewriting of the statutory provision. Moreover, the reliance which is sought to be placed on the provisions of Explanation 2(a) to Section 147 is misconceived. Explanation 2 provides a deeming definition of cases where income chargeable to tax has escaped assessment and clause (a) includes a case where no return of income has been furnished by the assessee although his income or the income of any other person in respect of which he is assessable exceeds the maximum amount which is not chargeable to tax. As the reasons which have been disclosed to the assessee would indicate, this is not a case where an assessee has not filed a return of income simplicitor. The whole basis of the reopening is on the hypothesis that if the provisions of Sections 61 to 63 are attracted as has been claimed by the assessee, and the income of Rs.32.83 Crores which has been claimed by the assessee to be exempt is treated as exempt, in that event an alternate basis for taxing the income in the hands of the AOP of the contributories is sought to be set up. For the reasons already indicated, the entire exercise is only contingent on a future event and a consequence that may enure upon the decision of the Tribunal, that again if the Tribunal were to hold against the Revenue. A reopening of an assessment under Section 148 cannot be justified on such a basis. There has to be a reason to believe that income has escaped assessment. ‘Has escaped assessment’ indicates an event which has taken place. Tax legislation cannot be rewritten by the Revenue or the Court by substituting the words ‘may escape assessment’ in future. Writing legislation is a constitutional function entrusted to the legislature.

In the circumstances, the notice dated 10th January 2014 issued by respondent no.1 under Section 148 of the said Act to petitioner and notice dated 14th February 2014 issued by respondent no.1 to Rachna Morarka for Assessment Year 2006-2007 are quashed and set aside. Consequently, the orders rejecting petitioner’s objections are also quashed and set aside.

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