C I T vs. INDERJEET SEN GUPTA

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 27.2.2008, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench “B” Chandigarh (in short, “the Tribunal”) in ITA No.929/CHANDI/2004, for the assessment year 1999-2000, claiming following substantial question of law:- “Whether in the facts and circumstances of the case, the learned ITAT is right in quashing the reassessment order under Section 143(3) read with Section 148 of the income Tax Act, 1961 without giving a finding that the return of Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh income filed by the assessee on 31.10.2003 is not the return filed in response to notice under Section 148 in view of the fact that no request for communication for reasons of issue of 148 notice has been made after 31.10.2003 which is contrary to the observations of the Apex Court in GKN Driveshaft (India) Limited v. ITO (259 ITR 19)?”

Briefly, the facts as narrated in the appeal may be noticed. The assessee Ms. Protima Sen Gupta (since deceased) filed her return of income on 28.6.1999 declaring an income of ` 15,66,839/- inclusive of capital gain of `5,10,000/- which was subsequently revised on 27.6.2002 declaring income of ` 10,68,839/- inclusive of capital gain of ` 6250/-. Thereafter, the case was reopened under Section 147 of the Act after recording reasons. Notice under Section 148 of the Act was issued to the assessee and in response thereto, the assessee filed return of income on 31.10.2003 in which she showed the same income of `10,68,839/-. The case was taken up for scrutiny. The assessment was completed on 18.12.2003. The main source of income of the assessee was interest from banks and deposits. During the course of assessment proceedings, it was noticed that the assessee had sold Plot No.2 in Burmah Shell Cooperative Housing Society Limited, Rama Krishna Puram, Sector XIII, Ring Road, New Delhi, now known as Aradhana Colony, Sector XIII, R.K.Puram, New Delhi measuring 370 square yards for a sum of `2,60,00,000/-. This plot of land was purchased from Burmah Shell Cooperative Housing Society by means of sale deed dated 24.10.1983. After considering the facts, the Assessing Officer worked out capital gain of ` 5,10,000/- on the plot which had been sold by the assessee. In the revised return, the capital Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh gain was shown at ` 6250/- against the investment of ` 25,00,000/- on House No.250, Sector 7, Panchkula. This investment was taken at ` 31,00,000/- in the revised return. It was noticed that the assessee had claimed exemption of capital gain under Section 54 of the Act to the tune of ` 31,00,000/- and that this amount had been spent by her on the addition/alteration of her house No.250, Sector 7, Panchkula. While filing the return of income for the assessment year 1999-2000, the assessee took the market value of plot as on 1.4.1981 at ` 15,50,000/- and the indexed cost of valuation as on date of sale had been taken at ` 52,65,000/-. On going through the assessment record, it was found that this plot had been sold at `2,60,00,000/- which was purchased by the assessee on 24.10.1983. During the course of assessment proceedings, the Assessing Officer worked out the capital gain of `52,90,860/- which had been added to the returned income of the assessee. Aggrieved by the order of the Assessing officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 26.7.2004, Annexure A.2, the CIT(A) rejected the plea of the assessee regarding non-communication of reasons recorded for reopening the case by holding that the assessee's reliance on the Apex Court's decision in the case of GKN Drivesheft Limited v. ITO, (2003) 259 ITR 19 was misplaced as no request had ever been made by the assessee for supply of reasons after filing the revised return on 31.10.2003. On 27.3.2003, the assessee moved an application for supply of copy of the reasons recorded under Section 147 of the Act. The assessee's counsel was duly informed that the reasons recorded Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh under Section 147 of the Act could not be supplied till the income tax return in response to notice under Section 148 was filed. Feeling aggrieved, the assessee filed appeal before the Tribunal and vide order dated 27..2.2008, Annexure A.3 impugned herein, the Tribunal allowed

Learned counsel for the revenue submitted that the Assessing Officer had recorded the reasons as required under Section 148(2) of the Act. According to the learned counsel, the assumption of jurisdiction by the Assessing Officer was, thus, valid and the Tribunal had erred in holding re-assessment proceedings to be bad. Learned counsel for the revenue had produced the original file in support of his assertion that reasons had been recorded for re-opening the case of the Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh assessee.

Opposing the prayer made by learned counsel for the revenue, learned counsel for the assessee submitted that it was essential for the revenue to have communicated the reasons to the assessee for reopening the assessment and the revenue having failed to communicate the reasons recorded to the assessee, the Tribunal has rightly quashed the re-assessment proceedings. Support was drawn by the assessee from the judgments reported in Sohan Lal Singhania v. Income Tax Officer, (1992) 194 ITR 519 (All.), K.M.Bansal (deceased by Lrs) v. Commissioner of Income Tax and another, (1992) 195 ITR 247 (All.), Herbs (India) Pvt. Limited v. Deputy Commissioner of Income Tax, (1992) 198 ITR 554 (Allahabad), Baldev Singh Giani v. Commissioner of Income Tax, and others, (2001) 248 ITR 266 (P&H), Allana Cold Storage Limited v. Income Tax Officer and others, (2006) 287 ITR 1 (Bom.) and Haryana Acrylic Manufacturing Co. v. Commissioner of Income Tax and another, (2009) 308 ITR 38 (Delhi),

We have heard learned counsel for the parties and perused the record.

In order to effectively adjudicate the present appeal, following four facets are required to be answered:- i) Whether the reasons for re-opening/reassessment are required to be recorded? If Yes, whether in the present case, the reasons have been recorded by the assessing authority? Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh ii)If the reasons have to be recorded, whether the same are required to be communicated to the assessee? iii)If answer to the above is yes then at what stage i.e. prior or after the filing of the return in pursuance to notice under Section 147/148 of the Act, the reasons have to be communicated to the assessee? iv)The effect of non communication of the reasons to the assessee. Re: (i)

The relevant portion of Section 148 of the Act reads thus:- “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, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; 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. xx xx xx xx xx xx xx xx” (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.” Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh The answer to the first issue is contained in Section 148 (2) of the Act which provides that before making the assessment, reassessment or recomputation under Section 147, the assessing authority shall record reasons for doing so.

The original file was produced by the learned counsel for the revenue. We find that the reasons as required under Section 148(2) of the Act for initiating the assessment proceedings under Section 147 of the Act had been recorded which read as under: “Smt.Protima Sengupta, 250, Sector 7, Panchkula Assessment year 1999-2000. Reasons for reopening assessment under Section 147 of the IT Act, 1961. Processing under section 143(1)(a) of the I.T.Act, 1961 on the basis of the revised return filed by the assessee on 27.6.2000 (original filed on 28.6.99) was conducted by the then Assessing Officer i.e. The ACIT, Circle 5(1), Chandigarh on 29.3.2001. Later on, the case has been transferred to this Circle for the reason that the assessee's present address is that of Panchkula.

Later on, it has been noticed that the assessee has claimed exemption of capital gain under Section 54 of the Income Tax Act to the tune of Rs.31,00,000/- on the ground that this amount has been spent by her on the Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh addition/alteration of her house No.250, Sector 7, Panchkula in the revised return of her income, whereas similar deduction was claimed for an amount of Rs.25,00,000/- in the original return of her income. The assessee has annexed a report of approved valuer dated 16.6.2000 to the revised return of her income, wherein, the valuer has shown the date of commencement of the construction as 8.3.1999 and its completion on 15.2.2000. This report does not report any addition/alteration with regard to this house. In the meantime, information as to total area for which the assessee had got her plan approved for addition/alteration/construction of the house in question was called for from HUDA, the authority which approved the plans of the houses in the Area where the house in question is situated. It has been reported by the HUDA authorities that the assessee had got her plan for additional area of merely 38.65 square meters for new construction and not for any other addition/alteration of the said house.

Further, it was seen that there was no information annexed with the return as to whether the assessee had kept the amount of money for which exemption under Section 54 is claimed, in the Capital Gain account Scheme with a bank, as required under the provisions of Section Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh 54 for claiming the exemption on sale of one's property the proceeds of which are claimed to have been asked for acquisition/construction of the new house. In this case the property of the assessee at Delhi was sold in September 1998 and she was required to open such an account upto March 1999 or latest before filing her return of income in June 1999. 4. A letter dated 28.11.2002 was issued to the assessee seeking clarification about the addition/alteration and construction of the house and also about the fact as to whether the capital gain account was opened by the assessee within the stipulated period or not. Vide her reply dated 7.12.2002 filed through her counsel, it is admitted by the assessee that no capital gain account was opened by her and that the amount of Rs.31,00,000/- was spent by her on addition and alteration of her house besides construction of the additional area of 38.65 square meters. But the assessee has failed to file any proof of having spent any amount on alteration of her house.

Since the assessee has not opened the capital gain account as required under Section 54 of the Act and Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh also that the assessee has failed to prove that the amount of Rs.31,00,000/- was actually spent on alteration/construction of her house for which the exemption under Section 54 of the Act has been claimed and that this consideration amount cannot be spent on merely a covered area of 38.65 square meters, I have reason to believe that an income of Rs.31,00,000/- chargeable to tax has escaped assessment. Hence the case is reopened under section 147 to bring to tax the amount of Rs.31,00,000/-. Issue notice under Section 148 of the Act. (Sham Singh) ACITR, PKL Circle, Panchkula.” Dated 16.12.2002 Re:(ii)

In so far as communication of reasons to the assessee is concerned, there is nothing in sub section (2) of Section 148 or in any other provision of the Act either by express or by implication that reasons so recorded are to be communicated to the assessee. It is keeping in view the principles of natural justice that by virtue of judicial pronouncements of the Hon'ble Supreme Court and High Courts, the reasons recorded under Section 148(2) of the Act are required to be communicated. This is to avoid any arbitrary action or abuse of the power by the assessing authority. The Apex Court in Canara Bank v. V.K. Awasthy, AIR 2005 SC 2090, while dealing with the principles of natural justice had noticed as under:- “8. Natural justice is another name for commonsense justice. Rules of natural justice are not codified canons. But they are principles ingrained into the conscience of man. Natural Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh justice is the administration of justice in a commonsense liberal way. Justice is based substantially on natural ideals and human values. The administration of justice is to be freed from the narrow and restricted considerations which are usually associated with a formulated law involving linguistic technicalities and grammatical niceties. It is the substance of justice which has to determine its form.

The expressions “natural justice'' and “legal justice'' do not present a water-tight classification. It is the substance of justice which is to be secured by both, and whenever legal justice fails to achieve this solemn purpose, natural justice is called in aid of legal justice. Natural justice relieves legal justice from unnecessary technicality, grammatical pedantry or logical prevarication. It supplies the omissions of a formulated law. As Lord Buckmaster said, no form or procedure should ever be permitted to exclude the presentation of a litigants' defence.

The adherence to principles of natural justice as recognized by all civilized States is of supreme importance when a quasi-judicial body embarks on determining disputes between the parties, or any administrative action involving civil consequences is in issue. These principles are well settled. The first and foremost principle is what is commonly known as audi alteram partem rule. It says that no one should be condemned unheard. Notice is the first limb of this principle. It must be precise and unambiguous. It should appraise the party determinatively the case he has to meet. Time given for the purpose should be adequate so as to enable him to make his representation. In the absence of a notice of the kind and such reasonable opportunity, the order passed becomes wholly vitiated. Thus, it is but essential that a party should be put on notice of the case before any adverse order is passed against him. This is one of the most important principles of natural justice. It is after all an approved rule of Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh fair play. The concept has gained significance and shades with time. When the historic document was made at Runnymede in 1215, the first statutory recognition of this principle found its way into the “Magna Carta''. The classic exposition of Sir Edward Coke of natural justice requires to “`vocate interrogate and adjudicate''. In the celebrated case of Cooper v. Wandsworth Board of Works, (1963) 143 ER 414, the principle was thus stated: "Even God did not pass a sentence upon Adam, before he was called upon to make his defence. “Adam'' says God, “where art thou has thou not eaten of the tree whereof I commanded thee that though should not eat''. Since then the principle has been chiselled, honed and refined, enriching its content. Judicial treatment has added light and luminosity to the concept, like polishing of a diamond.

Principles of natural justice are those rules which have been laid down by the Courts as being the minimum protection of the rights of the individual against the arbitrary procedure that may be adopted by a judicial, quasi-judicial and administrative authority while making an order affecting those rights. These rules are intended to prevent such authority from doing injustice.” Re:(iii)

Adverting to issue (iii), the statute again nowhere provides that whether it is before or after the filing of the return in pursuance to notice under Section 147/148 of the Act that the reasons recorded have to be communicated to the assessee. The requirement of supplying reasons for initiating proceedings under Sections 147/148 of the Act has been spelt out by the Hon'ble Apex Court in G.K.N.Driveshafts (India) Limited's case (supra) as under:- Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh “However, we clarify that when a notice under Section 148 of the Income Tax 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. 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. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.” Further, Allahabad High Court in K.M.Bansal's case (supra) determining the question as to at what stage, i.e., whether before the filing of the return or thereafter, the Assessing Officer is required to communicate the reasons recorded under Section 148(2) of the Act, had recorded as under:- “The above discussion yields the following propositions: Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh i) While the recording of reasons as contemplated by sub section (2) of section 148 is obligatory, the reasons so recorded need not be communicated to the assessee alongwith the notice under sub section (1) of section 148. It is also not open to the assessee to straightaway call upon the Assessing Officer to disclose or communicate reasons to him, as soon as he receives the notice under section 148(1). He must first file his return or a revised return, as the case may be, and if he raises a contention either that no reasons were recorded or that the reasons recorded are not relevant and germane, then the Assessing Officer has to communicate the reasons to him.”

From the above, it emerges that the Assessing Officer shall record reasons under Section 148(2) of the Act before making the assessment, reassessment or recomputation under Section 147. The reasons so recorded are required to be communicated to the assessee when demanded after the filing of the return in response to notice under Sections 147/148 of the Act. In case, the reasons recorded are not communicated within reasonable time after its demand, presumption would be there that no reasons exist on the record. Re:(iv) Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh

Taking up the last facet, once the reasons had been recorded, the assumption of jurisdiction by the Assessing Officer could not be held to be bad. The communication of reasons recorded under Section 148(2) of the Act is not a sine qua non for assumption of jurisdiction for initiating reassessment proceedings under Section 147/148 of the Act. The non compliance thereof is an irregularity and illegality which would not render the reassessment proceedings void ab initio.

Examining the factual matrix in the present case, the case of the assessee was reopened under Sections 147/148 of the Act by issuance of notice on 16.12.2002 which was served on 18.12.2002 requiring the assessee to file the return within 30 days of service. The assessee did not file the return within the specified time. The assessee filed the return in response to notice under Sections 147/148 of the Act on 31.10.2003. According to the revenue, no request was made by the assessee for supply of reasons after the filing of the return. This fact has, however, been controverted by learned counsel for the assessee. Thus, there appears to be serious dispute with regard to whether the assessee had addressed any communication to the Assessing Officer to supply the reasons recorded under Section 148(2) of the Act after the filing of the return on 31.10.2003. In the absence of any material to substantiate the plea of the assessee and more particularly as the revenue has produced the original record to justify that the reasons had been recorded under Section 148(2) of the Act, the non-supply of the reasons recorded to the assessee cannot be held to be fatal in the present facts and circumstances of the case. The Tribunal was, thus, not Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh right in quashing the re-assessment proceedings.

The learned counsel for the assessee argued that even if the reasons had been recorded but the same having not been communicated, the assessee has been prejudiced as ground to challenge issuance of reassessment notice could not be taken by the assessee. The reasons recorded under Section 148(2) of the Act have been reproduced above. In the facts and circumstances of the present case, it would be open to the assessee to raise objections regarding the legality and validity of the reasons and consequently assumption of jurisdiction for initiating proceedings under Sections 147/148 of the Act before the Tribunal.

In all fairness, reference is made to judgments relied upon by learned counsel for the assessee. In Sohan Lal Singhania, K.M.Bansal and Herbs (India) Pvt. Limited's cases (supra), the issue was whether the reasons recorded under Section 148 of the Act were to be communicated to the assessee or not. It was held that recording of reasons for reassessment were required to be conveyed to the assessee. In Baldev Singh Giani's case (supra), the issue before the Court was whether the reassessment proceedings could continue in the absence of any reasons having been recorded under section 148(2) of the Act. It was held that recording of reasons was mandatory and in the absence thereof, no proceedings under Sections 147/148 of the Act could continue. In Allana Cold Storage Limited's case (supra), wherein the reasons were not communicated to the assessee, the Bombay High Court after setting aside the assessment order had directed the Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh Assessing Officer to provide the reasons recorded for initiating proceedings under Section 147 of the Act and pass a speaking order on the objections filed by the assessee and to pass assessment order thereafter. Delhi High Court in Haryana Acrylic Manufacturing Co.'s cases (supra) was dealing with a case where reassessment proceedings were sought to be initiated after expiry of four years without there being any indication in the reasons recorded that there was failure on the part of the assessee to disclose fully and truly all material facts. It was on that basis that reassessment proceedings initiated under Sections 147/148 of the Act were held to be invalid. In none of these pronouncements, the initiation of the reassessment proceedings was held to be invalid for want of communication thereof.

In view of the above, the substantial questions of law are answered accordingly. While disposing of the appeal, we remit the matter to the Tribunal to determine the legality and validity of the reassessment proceedings in case objections are filed by the assessee and thereafter proceed to adjudicate the appeal in accordance with law.

The original record produced by learned counsel for the revenue be returned to him against proper receipt. (Ajay Kumar Mittal) Judge August 19, 2013 (Jaspal Singh) 'gs' Judge Singh Gurbax 2013.10.21 10:40 integrity of this document High Court Chandigarh