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Income Tax Appellate Tribunal, GAUHATI BENCH, “VIRTUAL
Before: Shri A. T. Varkey, JM]
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 All these appeals preferred by the revenue are against the separate orders of Ld. CIT(A), Jorhat dated 27-02-2020, 28.01.2020, 30.12.2019 and 28.01.2020 respectively for assessment year 2011-12. Since issues are common and facts are identical, we dispose of all these appeals by this consolidated order for the sake of convenience, by taking the ITA No. 140/Gau/2020 as lead case and the result of which will be applicable in all the other three cases.
At the outset, Ld. Counsel for the assessee Shri Sanjoy Modi pointed out that in all these four appeals the legal issue as raised by the assessee has been allowed by the Ld. CIT(A) on the ground that since four years have elapsed from the end of the relevant assessment year, no notice u/s. 148 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) should have been issued in the relevant assessment year as prescribed in section 149 of the Act without the AO indicating in the reasons recorded that Rupees one lakh or more income, chargeable to tax has escaped assessment for that year. The Ld. AR drew our attention to the reasons recorded in respect of ITA No. 140/Gau/2020 (Shri Ankit Agarwalla) as the test case (it is noted that in other cases also it is identically or similarly worded without mentioning anything about the escapement of income of more than one lakh rupees) which will be the lead case (Shri Ankit Agarwalla) and the decision of which will be followed in all the other three appeals. The reasons recorded by the AO which has been given to the assessee has been filed before us at paper book page 2 which is as under: “As per information provided by the Pr. Director of Income Tax (Inv.), NER, Guwahati vide letter in F. No. 32(E)/PDIT(Inv.)/NER/Ghy/Penny Stock/2017-18/3744 dated 13.03.2018, it was reported that during survey action conducted by the Directorate of Investigation, Kolkata various share brokers accepted their role of providing accommodation entry of bogus LTCG/STCL in the case of penny Stock “Twenty First Century (India) Limited”. Shri Ankit Agarwal is one such beneficiary who has booked LTCG in Twenty First Century (India) Limited during the FY 2010-11 relevant to the Ay 2011-12. On examination of data available in the ITD system, it is seen that Shri Ankit Agarwal has filed his return of income for the Assessment Year 2011-12 but has not disclosed his income/loss from transactions in the above mentioned shares of the company. Hence, the source of funds of such share transactions needs to be examined and verified. Therefore, I propose to assess the case under section 147 of the Income Tax Act, 1961 as I have reason to believe that income of the above assessee chargeable to tax for the Assessment Year 2011-12 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. However, as per the provision of section 151 of the Income Tax Act, 1961, your kind approval is required to issue notice under section 148 of the Income Tax Act, 1961. Therefore, I am
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 submitting herewith the proposal of the above case through ITBA Application for favour of your kind approval for issuing notice under section 148 of the Income Tax Act, 1961.” 3. According to the Ld. AR, the legal issue raised as aforesaid was adjudicated by the Ld. CIT(A) and has been pleased to allow the same in favour of assessee and, therefore, the revenue is in appeal before us.
The Ld. DR assailing the action of the Ld. CIT(A) submitted the following written submissions along with his oral argument (infra) : “In this instant case the assessee allegedly dealt in penny stock of Twenty First Century (India) Ltd. in the FY 2010-11. The fact came to the notice of the department through survey action of Investigation wing Kolkata. The case was reopened on 27-03-2018. As the notice u/s. 148 was issued after the expiry of 4 years the AO took sanction from the PCIT. The validity of the notice has been challenged by the assessee and accepted by the Ld. CIT(A). The assessee had argued that in the satisfaction note nowhere it has been mentioned that the likely amount of escapement is above Rs. 1 lakh as is mandated by section 149(l)(b) of the Act. Hence the action of issue of notice itself is bad in law. 2. The Ld. CIT(A) had not asked for a remand report before deciding the case. Had he asked for one then the AO would have been able to explain the system of ITBA. Nowadays all notices u/s 148 are issued online through ITBA and this one was no exception. In ITBA no notice u/s 148 can be generated or even sent by the AO to PCIT for sanction (where 4 years has expired from the relevant assessment year) unless the income chargeable to tax which has escaped assessment amounts to or likely to amount to one lakh rupees or more for that year. 3. From the attached screenshot of the relevant screen of ITBA it can be seen that proposal of AO that is to be sent to the PCIT has the following segments in ITBA: a. Menu: Selection of case u/s 147 is clearly mentioned b. Proposal for Scrutiny a. Basic Details: PAN, Name, A Y etc. are mentioned b. Basis of selection: the AO had marked Yes in the radio button beside Income Escaped Amount> = 1lakh. c. Selection Details: Approving authority is marked PCIT/CIT d. Reasons for Selection: The AO has mentioned the reasons here. 4. So it is evident that while seeking sanction to issue notice U/S 148 under Proposal for Scrutiny in the system, the AO had marked Yes in the radio button beside Income Escaped Amount> = 1 lakh. Based on such marking and the reasons mentioned in the system the PCIT had given his sanction. So the condition laid down u/s 149(1)(b) is embedded in the system. 5. The assessee had quoted only a part of the proposal i.e. Reasons for Selection. There is no need for the AO to mention the same fact again in the Reasons for Selection segment of ITBA after he has chosen Yes in the radio button beside Income Escaped Amount >= 1 lakh under Basis of Selection. In view of the above it is clearly seen all conditions as laid down by the law is satisfied and the notice u/s 148 was valid and flawless. Therefore it is prayed that the appeal of the department may kindly be allowed.”
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 5. According to Ld. DR, Shri Subhrajyoti Bhattacharya, the assessee at the time when reassessment proceedings were going on before the AO after reopening, has not objected/brought to the notice of the AO about this omission/defect of not recording in the reason recorded that the AO could not have issued section 148 notice without mentioning in it (reasons recorded) about the escapement of income was more than Rs. 1 lac. Therefore, when this issue was raised by the assessee before the Ld. CIT(A) for the first time, in all fairness the Ld. CIT(A) ought to have called for the remand report from the AO, which admittedly he did not do, so the impugned action of the Ld. CIT(A) is bad and thereafter he explained that the technicality of on-line approval which according to him is granted by the Ld. Pr. CIT as per section 151 of the Act only if the escapement of income is more than Rs. 1 lakh (after four (4) years). And according to Ld. DR, in this case, the Pr. CIT has given approval for reopening the assessment only after taking note that the condition precedent as prescribed u/s. 149((1)(a) and (b) of the Act has been satisfied (i.e. escapement of income is more than one lakh rupees). Therefore, according to him, the Ld. CIT(A) ought not to have allowed the appeal of the assessee on this legal issue. Therefore, he prayed that this Tribunal should reverse the order of the Ld. CIT(A) and uphold the action of the AO.
Per contra, the Ld. AR of the assessee Shri Sanjoy Modi contended that if four (4) years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b), no notice u/s. 148 of the Act could have been issued by the AO without recording his satisfaction in the ‘reasons recorded’ that the income chargeable to tax which has escaped assessment would be more than Rs. 1 lakh; and, according to him, it is also well settled law that reasons recorded for reopening has to be seen on a stand-alone basis as held by the Hon’ble Bombay High court in the case of Hindustan Lever Ltd. Vs. ACIT 268 ITR 332 (Bom); and since on a bare perusal of the reasons recorded by the AO in respect of all the appeals are conspicuously silent about the escapement of income of more than Rs. 1 lakh,; and according to Ld AR, the additional requirement as provided in section 151 of the Act is that after four years have elapsed/expired from the end of the relevant assessment, the sanction of PCIT/Commissioner on the reasons recorded by AO (to reopen) that it is a fit case for issue of notice u/s. 148 of the Act. According to ld. AR, without satisfying both the requirements as stipulated u/s 149 and section 151 of the Act, the jurisdictional condition-precedent to validly reopen the assessment by issuing notice u/s. 148 of the Act
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 would not be satisfied and in such an event, the AO does not enjoy jurisdiction to have validly reopened the assessment and, therefore, the Ld. CIT(A) has rightly allowed the appeal of the assessee and this Tribunal should not interfere in the order of the Ld. CIT(A) in all the four cases.
I have heard rival submissions and perused the material available on record. The AO has reopened the assessment for AY 2011-12 in all the four (4) appeals admittedly after four (4) years from the end of the relevant assessment year. In such a scenario, according to the Ld. AR, the AO could not have issued notice u/s. 148A of the Act without satisfying the condition precedent as prescribed in clause (b) of section 149 of the Act as well as the Ld. PCIT/CIT should not have given the sanction to issue notice u/s. 148 of the Act on the reasons recorded by AO as a fit case, without satisfying the legal requirement of section 149 of the Act and, therefore, the sanction of PCIT/CIT is bad in law for non-application of mind and so, the AO’s issue of notice u/s. 148 of the Act is bad in law being ‘Corum Non- Judice’. For adjudicating this legal issue, let us have a look at section 149(1)(a) and (b) of the Act as well as section 151(1) of the Act which is relevant for adjudicating this issue. “Time Limit for Notice Section 149(1) no notice u/s. 148 shall be issued for the relevant assessment year – (a) If four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) [or clause (c)]; (b) If four years, but not more than six years have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year; (c) ……”
Sanction for issue of notice Section 152(1) – In a case where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no notice shall be issued under section 148 (by an Assessing officer, who is below the rank of Assistant Commissioner (or Deputy Commissioner), unless the (Joint) Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice).”
From a mere reading of the aforesaid provision shows that AO could not have issued notice u/s. 148 of the Act, after four (4) years have elapsed from the end of the relevant assessment year, unless the income chargeable to tax which has escaped assessment amounts to one lakh rupees or more for that year. It is an admitted fact in respect of all the four (4) appeals (supra), that four (4) years have elapsed from the end of the relevant assessment year i.e. (AY 2011-12) for which notice u/s. 148 of the Act was issued by the
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 AO upon the assessee. In such a scenario, provision of section 149(1) and clause (b) is applicable. Therefore, the AO should not have issued notice without satisfying the condition precedent as laid down in clause (b) of section 149(1) of the Act. And the Ld. PCIT/CIT should not have given sanction to reopen on the basis of the reasons recorded by AO without satisfying the condition precedent as prescribed in section 149 of the Act. Failure to do so, makes the sanction of the authority u/s. 151 of the Act fragile for non- application of mind. Therefore, I am of the opinion that without satisfying both the legal requirements as stipulated u/s 149 and section 151 of the Act, the jurisdictional condition- precedent, the AO could not have validly reopened the assessment by issuing notice u/s. 148 of the Act and in such an event, the AO does not enjoy jurisdiction to have validly reopen the assessment. And it is noted that this issue is no longer res integra and the Hon’ble Allahabad High Court in the case of Amar Nath Agarwal Vs. CIT (2015) 371 ITR 183 (All) has held as under:
“Section 149 provides a time limit for issuance of a notice under Section 148 of the Act and, if a notice after four years but before six years is issued, the same could only be issued if the income chargeable to tax has escaped assessment amounts to or is likely to amount to Rs.1 lac or more for that year. For facility, Section 149(1(b) of the Act is extracted hereunder:-
"Time limit for notice.
149.(1) No notice under section 148 shall be issued for the relevant assessment year -
(a) ....................................................................
(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year."
From the aforesaid, it is clear that two distinct conditions must be satisfied before the Assessing Officer can assume jurisdiction to issue a notice under Section 148 of the Act, namely, that he must have reasons to believe that the income of the assessee had escaped assessment and, that he must have reasons to believe that such escapement was by reasons of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions are not fulfilled, the notice issued by the Assessing Officer would be without jurisdiction.
Further, from a perusal of Section 149(1)(b) of the Act, it is imperative that the Assessing Officer, in his reasons, should also state that the escaped income is likely to be Rs.1 lac or more, which is an essential ingredient for seeking the approval and satisfaction that is to be recorded by the Competent Authority under Section 151 of the Act.
Consequently, before taking any action, the Assessing Officer is required to substantiate his satisfaction in the reasons recorded by him. If the conditions mentioned are not satisfied, then the issuance of notice would be invalid.
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 The reasons recorded by the Assessing Officer is, that the assessee had sold the property within three years after converting lease hold land to free hold resulting into short term capital gains in view of the judgment in Dr. V.V. Mody (supra).
The aforesaid reasons, makes it clear that the assessee was required to pay short term capital gains tax instead of long term capital gains tax and, therefore, the Assessing Officer had reasons to believe that the income had escaped assessment. In the instant case, admittedly, the notice was issued after four years but before six years. In our opinion, the reasons so recorded by the Assessing Officer was not sufficient to intiate proceedings under Section 148 of the Act. We find from the reasons recorded by the Assessing Officer that no such reasons has been recorded to the effect that the escaped income is likely to be Rs.1 lac or more except for the assessment year 2001-02.
In Mahesh Kumar Gupta and others Vs. Commissioner of Income Tax and another, 363 ITR 300 a coordinate Bench of this Court held that it is imperative for the Assessing Officer to record in his reasons that the escaped income is likely to be Rs.1 lac or more so that the Chief Commissioner or Commissioner may record his satisfaction under Section 151 of the Act. The Court further held that if the said reason has not been recorded by the Assessing Officer, the initiation of the reassessment proceedings after more than four years would be clearly barred by time.
A similar provision, namely, Section 34(1A)(ii) existed under the Income Tax Act, 1922. A Full Bench of this Court in Jai Kishan Srivastava Vs. Income-Tax Officer, Kanpur and another, 40 ITR 222 held that non-recording of the reason by the Assessing Officer that the escaped income was likely to be Rs.1 lac or more was fatal to the issuance of the notice for reassessment.
In K.S. Rashid & Son and others Vs. Income Tax Officer, 52 ITR 355 a Constitutional Bench of the Supreme Court held:
"The second point which is very important is that in regard to the cases falling under Section 34(1A), action can be taken only where the income which has escaped assessment is likely to amount to Rs.1 lakh or more. In other words, it is only in regard to cases where the escaped income is of a high magnitude that the restriction of the period of limitation has been removed."
Since no reasons were recorded that the escaped income is likely to be Rs.1 lac or more so that the Chief Commissioner or Commissioner may record his satisfaction under Section 151, the initiation of reassessment proceedings after more than four years was clearly barred by time.
There is yet another aspect of the matter. The reason so recorded by the Assessing Officer is, that the petitioner has indicated the computation of long term capital gains tax liability, whereas the petitioner was liable to pay short term capital gains tax since the petitioner had sold off a portion of the property within three years from the date of conversion of lease land into a free hold land.
Short term capital asset is defined under Section 2(42A), which is extracted hereunder:-
"2(42A) 'short-term capital asset' means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer."
Section 2(29B) of the Act defines long term capital gains as under:
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 "2(29B). 'long term capital gain' means capital gain arising from the transfer of a long-term capital asset."
The difference between "short term capital asset" and "long term capital asset" is the period over which the property has been held by the assessee. It has nothing to do with the nature of the title over the property. The petitioner already had rights as owner of the property subject to the covenant of the lease for all purposes such as transfer of the lease hold rights of the property with the previous consent of the lessor. The petitioner's father was the lessee since 1958. The conversion of the rights of the lessee in the property from lease hold to free hold was only an improvement of the rights over the property, which the petitioner enjoyed and this would not have any effect on the taxability of capital gains from such property. Since the property was held by the petitioner for more than three years, short term capital gains would not be applicable. The conversion from lease hold to a free hold being an improvement of the title, does not have any effect on the taxability of profits as short term capital gains.
Reliance by the Assessing Officer in his reasons to believe on a decision of Karnataka High Court in Dr. V.V. Mody (supra) case is misplaced. In that case, the assessee was allotted a site by the Banglore Development Authority. The assessee had no transferable right. Subsequently, a sale agreement was executed pursuant to which the assessee became the owner and landlord and thereafter, within a period of three years, the said assessee sold the land. In that scenario, the Assessing Officer held that it was a case of short term capital gains since the assessee had sold the same within three years from the date of becoming the owner. The order of the Assessing Officer was upheld by the Karnataka High Court. The said decision is clearly distinguishable and is not applicable in the instant case. Similarly, reliance by the department on the decision of the Bombay High Court in Commissioner of Income Tax Vs. Dr. D.A. Irani, 234 ITR 850 is also misplaced and is clearly distinguishable, in as much as in the instant case, the petitioner continued to remain in possession of the property and only improved his title, when it converted its lease hold rights into free hold rights.
For the reasons stated aforesaid, we are of the opinion that the notices issued under Section 148 of the Act does not comply with the proviso to Section 147 and 149 of the Act. The reasons recorded does not indicate that the assessee has failed to disclose fully and truly all material facts necessary for his assessment and that the escaped income was likely to be Rs.1 lac or more.
Consequently, the notice issued under Section 148 of the Act cannot be sustained and is quashed. All proceedings initiated in pursuance of the notice under Section 148 of the Act would be wholly illegal and without jurisdiction and are also quashed. The writ petition is allowed.”
Since in these cases (appeals supra), since four years have elapsed from the end of the relevant assessment year, the AO before issuing notice u/s. 148 of the Act was required to record his satisfaction in the ‘reasons recorded’ for reopening that he (AO) has reason to believe escapement of income which is likely to be Rs. 1 lac or more, which is an essential ingredient for seeking approval /sanction u/s. 151 of the Act; and the competent authority u/s. 151 of the Act should give sanction only if the reasons recorded by the AO spells out in it that there is an escapement of income of Rs. one lakh or more. And it is noted from the reasons recorded by the AO before reopening in all the four cases the AO has not mentioned in the reasons recorded, about the escapement of income of one (1) lakh rupees or more
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 which was a condition precedent for reopening as prescribed u/s. 149(1)(a) and (b) of the Act. It is well settled that reasons as recorded for reopening the assessment are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor any thing can be deleted from the reasons so recorded. The Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. (supra) had only observed that “…… It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No addition can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded by him. He has to speak through the reasons.” Their Lordship added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reason. Reasons provide link between conclusion and the evidence…..”. Therefore, reasons are to be examined only on the reasons as recorded. Here, in this case, as noted by me (supra) the condition precedent as required u/s. 149(1)(a) and (b) having not been satisfied and since it was an essential ingredient for seeking the sanction u/s. 151 of the Act, the omission is fatal to the issue of notice u/s. 148 of the Act. Therefore, the AO lacked jurisdiction to issue notice u/s. 148 of the Act and, therefore, all consequent action is null in the eyes of law. And, therefore, I confirm the action of the Ld. CIT(A) and dismiss all the four appeals of the revenue.
In the result, all the appeals of revenue are dismissed.
Order is pronounced in the open court on 25th February, 2021. Sd/- (Aby. T. Varkey) Judicial Member Dated: 25.02.2021
JD(Sr.P.S.)
ITA No. 140/Gau/2020 Ankit Agarwalla, AY 2011-12 Copy of the order forwarded to:
Appellant – ITO, Ward-Dimapur. 2 Respondent – Shri Ankit Agarwalla, Shri Sanwarmall Agarwalla, Shri Bhama Agarwalla, and M/s Parsuram Sanwarmal, Nagaland Nursing Home, Ground Floor, Circular Road, Dimapur, Nagaland. 3. CIT(A), Jorhat..
CIT- Jorhat
DR, ITAT, Guwahati
/True Copy, By order,
Senior Pvt. Secy.