DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

Reassessment Proceedings

A discourse on recording of reasons and communication of the same

Abhinav Nagar

Submitted to: Mr. Anil Sain

Submitted by: Abhinav Nagar, Roll no. 03, VII semester, section A

Law of Taxation I FINAL DRAFT

 TABLE OF CONTENTS

1. PRELIMINARIES .............................................................................................................. 3

2. INTRODUCTION .............................................................................................................. 5

3. ASSESSEES ARGUMENTS ............................................................................................ 5

4. REVENUES ARGUMENTS ............................................................................................ 7

5. CONCLUSION .................................................................................................................. 9

6. BIBLIOGRAPHY ............................................................................................................ 10

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 TABLE OF CASES

Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 161

TAXMAN 316 (SC). ............................................................................................................. 8

Commissioner of Income-tax v. Rajindra Rosin & Turpentine Industries [2008] 305 ITR 161

(PUNJ. & HAR.). ................................................................................................................... 5

GKN Driveshafts (India) Ltd. v. Income-tax Officer [2002] 125 TAXMAN 963 (SC)..... 5, 7, 8

GVK Gautami Power Ltd. v. Assistant Commissioner of Income-tax, [2012] 20 taxmann.com

710 (AP). ............................................................................................................................ 7, 8

Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38 (Delhi). ............................ 7, 8

Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax [2008] 175 TAXMAN

262 (DELHI). ..................................................................................................................... 6, 7

K.M. Bansal v. CIT [1992] 195 ITR 247 (All.).......................................................................... 6

Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287. ................................................................. 5

Mithlesh Kumar Tripathi v. Commissioner of Income-tax [2005] 149 TAXMAN 692 (ALL.).

................................................................................................................................................ 6

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 1. PRELIMINARIES

OBJECTIVE OF THE STUDY

To learn about the nature of the compensation amount involved in this case; to learn
whether such income is taxable under the Income Tax Act or not by analysing the case
decided by the Authority of Advance Rulings (AAR).

RESEARCH METHODOLOGY

The methodology used in the course of this research is purely doctrinal and non empirical.
Primary sources such as statutes and case laws have been used. Secondary sources such as
books, journal articles, newspaper articles and speeches have also been referred to. The
author has taken a mono-disciplinary approach. There has been the use of analytical,
descriptive, applied, qualitative, conceptual methodology.

STATEMENT OF PROBLEM

Recording of reasons is a condition precedent to invoke jurisdiction under section 147/148 of

the Income Tax Act, 1961. When a notice under section 148 of the Act is issued, the proper
course of action for the noticee is to file return and if he so desires, to seek reasons for issuing
notices and the Assessing Officer is bound to furnish reasons within a reasonable time. On
receipt of reasons, the noticee is entitled to file objections to issuance of notice and the
Assessing Officer is bound to dispose of the same by passing a speaking order.

It has been observed that the requirement of recording the reasons, communicating the same
to the assessee, enabling the assessee to file objections and the requirement of passing a
speaking order are all designed to ensure complete transparency and adherence to the
principles of natural justice.

Thus the problem is whether issuance of notice for reassessment, recording of reasons before
issuance of notice and communicating the same to the to the assessee within a reasonable
time (and particularly keeping in mind the limitation period), as a whole, shall be considered
as a mandatory obligation communication of reasons recorded within reasonable time are
directory provisions?

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RESEARCH QUESTIONS TO BE ADDRESSED

whether legislature under section 148(2) of the Act, which in unequivocal terms
require reasons to be recorded, intended such reasons not to be
communicated/disclosed along with Notice?
Whether non-disclosure of reasons, while giving notice, fulfils the contention
and the object of the framers?

LITERATURE SURVEY

The author referred to volume 2 of the commentary Income Tax Law by Chaturvedi &
Pithisaria to read about the literature available on section 56 of the Act. The author also
referred to volume 4 of the same book to read about the literature on section 195 of the Act.
The author also referred to volume 6 of Sampath Iyengars commentary on Law of Income
Tax to read about literature on section 195 and volume 3 of the same commentary to read
about section 56.

CONTRIBUTION OF AUTHOR

The author has done some original research by researching cases concerning recording of
reasons before issuance of notice for reassessment. The author felt that this was necessary
because there have been situations where notices for reassessment are issued haste when the
limitation period for reassessment are about to expire and assesses are not given opportunity
to seek reasons, in consonance with principles of natural justice, before filing their revised
returns.

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 2. INTRODUCTION

The primary contentions which the assessee may raise in his favour are that the date on which
reasons are supplied by the department for reassessment proceedings are beyond limitation
period of law as prescribed in the Income Tax Act, 1961. The assessee may contend that
notice for reassessment should not be devoid of the reasons and in case where notice is issued
within time period but reasons are supplied beyond limitation period, the whole reassessment
proceedings would be held to be barred by the limitation period.

However, the revenue will argue that by the plain reading of the provisions pertaining to
limitation period of issuing notice the only requirement provided is that reasons should be
recorded by the AO before issuing the notice. The provisions of the act nowhere provide that
reasons should also be supplied along with the notice and so if notice was sent well within the
limitation period hence the reassessment proceedings are valid.

The project will thus argue from both the assessees and the revenues side and hence try to
draw a fair conclusion.

3. ASSESSEES ARGUMENTS

The Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Rajindra
Rosin & Turpentine Industries,1 relying on the judgment of the Supreme Court in Kalyanji
Mavji and Co. v. CIT,2 held that recording of reasons is a condition precedent to invoke
jurisdiction under section 147/148 of the Income Tax Act, 1961. Earlier, Supreme Court in
the case of GKN Driveshafts (India) Ltd. v. Income-tax Officer3 had held that when a notice
under section 148 of the Act is issued, the proper course of action for the noticee is to file
return and if he so desires, to seek reasons for issuing notices and the Assessing Officer is
bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is
entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose
of the same by passing a speaking order.

1
Commissioner of Income-tax v. Rajindra Rosin & Turpentine Industries [2008] 305 ITR 161 (PUNJ. & HAR.).
2
Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287.
3
GKN Driveshafts (India) Ltd. v. Income-tax Officer [2002] 125 TAXMAN 963 (SC).

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Following the principles laid down in the GKN Driveshafts (India) Ltd.4case, the High Court
of Delhi in the case of Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax5
has held that there is a strong logic and purpose behind the directions issued by the Supreme
Court and that is to prevent high-handedness on the part of Assessing Officers and to temper
any action contemplated under section 147 of the Act by reason and substance. It further
observed that the requirement of recording the reasons, communicating the same to the
assessee, enabling the assessee to file objections and the requirement of passing a speaking
order are all designed to ensure complete transparency and adherence to the principles of
natural justice. Thus, a deviation from these directions would entail the nullifying of the
proceedings. The entire process would be a sham and would amount to making a mockery of
the law settled by the Supreme Court.

Further, in the case of Mithlesh Kumar Tripathi v. Commissioner of Income-tax,6the

Allahabad high court quoting its judgement in the case of K.M. Bansal v. CIT,7 observed that
section 148(2) neither expressly nor impliedly, provides for reasons to be communicated to
the assessee. It is only by virtue of judicial pronouncements that Apex Court and other High
Courts, while interpreting the provision laid down that reasons ought to be communicated to
avoid arbitrary action or to avoid abuse of the power/office by tax authorities with an
object to save assessee from harassment. It further observed that in the process of
interpretation, one has to ascertain whether legislature under section 148(2) of the Act,
which in unequivocal terms require reasons to be recorded, intended such reasons not to
be communicated/disclosed along with Notice? Whether non-disclosure of reasons, while
giving notice, fulfils the contention and the object of the framers? Preference is to be
given to an interpretation which fulfils legislative intent and also not opposed to principles
of natural justice, unless otherwise expressly excluded by the legislature. In case
reason/ground is disclosed along with the notice (without disclosing source of information
or other material) it will definitely facilitate expeditious filing of revised return and also
enable the assessee to declare, apart from the escaped income pointed out in the notice,
other escaped income or undisclosed income.

4
Ibid.
5
Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax [2008] 175 TAXMAN 262 (DELHI).
6
Mithlesh Kumar Tripathi v. Commissioner of Income-tax [2005] 149 TAXMAN 692 (ALL.).
7
K.M. Bansal v. CIT [1992] 195 ITR 247 (All.).

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It is thus contended that when section 148(2) of the Act contemplates that Assessing
Authority has to record reasons, the natural inference is that it must be supplied with the
notices of the reassessment.

Apart from this, section 149(1)(b) stipulates the outer limit of six years from the end of the
relevant assessment year where the income chargeable to tax which has escaped assessment
amounts to or is likely to amount to rupees one lakh or more for that year. This means that a
notice under section 148, could not, in any event, have been issued after six years from the
end of the assessment year. In any case, a notice under section 148 without the
communication of reasons therefore is meaningless inasmuch as the Assessing Officer is
bound to furnish the reasons within a reasonable time. And in a case where notice has been
issued within six years, but the reasons have not been furnished within that period, any
proceedings pursuant thereto would be hit by the bar of limitation inasmuch as the issuance
of the notice and the communication and furnishing of reasons go hand-in-hand. The
expression within a reasonable period of time as used by the Supreme Court in GKN
Driveshafts (India) Ltd.s8 case cannot be stretched to such an extent that it extends even
beyond the six years stipulated in section 149.9

4. REVENUES ARGUMENTS

Considering the assessees contention, the assessee has relied on the Haryana Acrylic
Manufacturing Co. v. CIT10 where Delhi High Court relying on GKN Driveshafts (India)
Ltd.11 held that a notice under section 148 without the communication of the reasons
therefore is meaningless in as much as the Assessing Officer is bound to furnish the reasons
within a reasonable time; in a case, where the notice has been issued within the said period of
six years, but the reasons have been furnished beyond that period, any proceedings pursuant
thereto would be hit by the bar of limitation in as much as the issuance of the notice, and the
communication and furnishing of reasons, go hand-in-hand.

However, the revenue will argue that both these judgements have been dissented by a very
recent judgement of Andhra Pradesh High Court in the case of GVK Gautami Power Ltd. v.
Assistant Commissioner of Income-tax.12 The High Court in this case quoting various

8
GKN Driveshafts (India) Ltd. v. Income-tax Officer [2002] 125 TAXMAN 963 (SC).
9
Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax [2008] 175 TAXMAN 262 (DELHI).
10
Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38 (Delhi).
11
Ibid.
12
GVK Gautami Power Ltd. v. Assistant Commissioner of Income-tax, [2012] 20 taxmann.com 710 (AP).

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judgements held that under the substituted section 147 if the Assessing Officer, for whatever
reason, has reason to believe that income has escaped assessment, he has the jurisdiction to
reopen the assessment.13 The honourable Andhra High Court in this case observed that
....We respectfully disagree with the opinion expressed by the Delhi High Court in Haryana
Acrylic.14 Section 148(2) of the Act merely requires the Assessing Officer, before issuing
notice under section 148(1), to record his reasons for doing so. If reasons are recorded, the
requirement of section 148(2) must be held to have been complied with.... Also, as per the
case of GVK Gautami Power Ltd. v. Assistant Commissioner of Income-tax,15 it is submitted
that there was no need to supply the reasons for reassessment along with the notice and the
department has fully complied with the requirement of section 148(2) of the Act.

It is further argued by the revenue that the time limit for issuing a notice under section 148, in
cases where the income which has escaped assessment is more than one lakh rupees, is six
years under section 149(1)(b) of the Act. The limitation prescribed therein is merely for
issuance of notice under section 148, and not for supplying reasons along with the notice. The
judgment of the Delhi High Court, in Haryana Acrylic,16 runs contrary to the plain language
of section 147, 148 and 149 of the Act. The Supreme Court, in GKN Driveshafts (India)
Ltd.17, did not hold that the period of limitation should be reckoned on the date of
communication of reasons by the Income-tax Officer. The observations of the Delhi High
Court in Haryana Acrylic18, are contended to be a logical consequence of the law laid down
in GKN Driveshafts (India) Ltd.19 hence it is contended that observations of courts are neither
to be read as Euclids theorems nor as provisions of a statute, and that too taken out of their
context. The period of limitation prescribed in section 149(1)(b) of six years is to be reckoned
from the end of the relevant assessment till the date on which the notice under section 148(1)
is issued, and not till the date on which reasons are furnished by the Assessing Officer at the
assessees request.

13
Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 161 TAXMAN 316
(SC).
14
Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38 (Delhi).
15
GVK Gautami Power Ltd. v. Assistant Commissioner of Income-tax, [2012] 20 taxmann.com 710 (AP).
16
Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38 (Delhi).
17
GKN Driveshafts (India) Ltd. v. Income-tax Officer [2002] 125 TAXMAN 963 (SC).
18
Ibid.
19
Ibid.

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 5. CONCLUSION

As per section 148(1) - Before making the assessment, reassessment or recomputation under
section 147, the Assessing Officer shall serve on the assessee a notice requiring him to
furnish within such period, as may be specified in the notice, a return of his income or the
income of any other person in respect of which he is assessable under this Act during the
previous year corresponding to the relevant assessment year.and the provisions of this Act
shall, so far as may be, apply accordingly as if such return were a return required to be
furnished under section 139.

And as per section 148(2) - The Assessing Officer shall, before issuing any notice under this
section, record his reasons for doing so.

In conclusion, the author supports the revenues contentions that by the plain reading of the
provisions pertaining to limitation period of issuing notice the only requirement provided is
that reasons should be recorded by the AO before issuing the notice. The provisions of the act
nowhere provide that reasons should also be supplied along with the notice and so if notice
was sent well within the limitation period hence the reassessment proceedings are valid. The
section clearly says that reasons must be recorded and not served upon the assessee.

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6. BIBLIOGRAPHY

Income Tax Act, 1969.

http://manupatra.com/roundup/334/Articles/Interpretation%20of%20Section%20147
%20of%20the%20Income.pdf
http://law.incometaxindia.gov.in/Directtaxlaws/act2005/section148.htm
http://taxguru.in/income-tax/notice-for-assessment-or-reassessment-us-148-of-the-
income-tax-act-1961.html
Chaturvedi and Pithisaria, Income Tax Law (New Delhi, India: Lexis Nexis
Butterworths Wadhwa, 2012) volume 5 and 8.
Sampath Iyengar, Law of Income Tax (New Delhi India: Bharat Law House Pvt. Ltd.,
2013) volume 1 and 7.
http://www.itatonline.org/articles_new/index.php/guide-to-the-law-on-reopening-of-
assessments-us-147-of-the-income-tax-act/

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