Validity of Reassessment if no conclusive proof as to escapement of income at the stage of notice

Short Overview : At the stage of issue of notice under section 148, the only question to be seen is whether there was relevant material, on the basis of which a reasonable person could have formed requisite belief. Whether material would conclusively prove escapement of income is not the concern at the stage of issuance of notice under section 148. It was so because formation of belief is within realm of subjective satisfaction of AO, therefore, notice issued under section 148 was sustained.

AO formed reasons to believe that certain income had escaped assessment and so issued notice under section 148. Assessee challenged validity thereof on the ground that there was no material to conclusively prove that income had escaped assessment.

it is held that At the stage of issue of notice under section 148, the only question to be seen is whether there was relevant material, on the basis of which a reasonable person could have formed  requisite belief. Whether material would conclusively prove escapement of income is not the concern at the stage of issuance of notice under section 148. It was so because formation of belief is within realm of subjective satisfaction of AO, therefore, notice issued under section 148 was sustained.

Decision: Against the assessee.

Relied: Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) : 2007 TaxPub(DT) 1257 (SC).

 

IN THE ITAT, CHANDIGARH BENCH

DIVA SINGH, J.M.

Dilpreet Singh v. ITO

ITA No. 301/CHD/2017

1 April, 2019

Assessee by: None

Revenue by: Chanderkanta, Sr. Departmental Representative

The present appeal has been filed by the assessee assailing the correctness of the Order, dt. 5-12-2016 of Commissioner (Appeals)-2, Chandigarh pertaining to 2009-10 assessment year on the following grounds :–

1. That the order of the learned Commissioner (Appeals)–2, Chandigarh is defective both in law and facts of the case.

2. That the learned Commissioner (Appeals)–2, Chandigarh is unjustified in upholding the re-assessment framed under section 147 read with section 148 of the Income Tax Act, 1961 by the learned assessing officer which is bad in law as the reasons recorded were on the basis of incomplete version of notification without any proof and proper satisfaction.

3. That the learned Commissioner (Appeals)–2, Chandigarh is unjustified in upholding the order of the learned assessing officer regarding addition of Rs. 24,64,857 under the head Long Term Capital Gains as the agricultural land sold by the appellant is not a capital asset under section 2(14) of the Income Tax Act, 1961 being beyond the notified limits. This addition is uncalled for and deserves to be deleted.

4. That the learned Commissioner (Appeals)–2, Chandigarh is unjustified in upholding the order of the learned assessing officer regarding addition of Rs. 24,64,857 under the head Long Term Capital Gains as the learned assessing officer has applied his own fair market value of the land as on 1-4-1981 instead of the value taken by the appellant on the basis of valuation report certified by a Government Approved Qualified Valuer. This addition is uncalled for and deserves to be deleted.

5. That any other ground may kindly be allowed to be taken at the time of appeal with due permission.

2. At the time of hearing, no one was present on behalf of the assessee. The appeal was passed over. In the second round also, no one was present. Accordingly, considering the peculiar facts and circumstances on record after hearing the learned Sr. Departmental Representative it was deemed appropriate to proceed with the present appeal ex parte qua the assessee appellant on merits.

3. The record shows that the appeal of the assessee was dismissed earlier in limine on 28-3-2017 by Order, dt. 5-4-2017. The assessee, thereafter filed M.A./78/CHD/2017wherein the assessee pleaded learned Authrorised Representative’s medical reasons as an inability to be present on the specific date. Considering the facts, the order was recalled by an Order, dt. 25-10-2017. Thereafter, though the appeal come up for hearing on various dates, however on the requests for time moved by the assessee, it was adjourned. In the circumstances it was deemed appropriate to proceed with the present appeal ex parte qua the assessee on merits as grant of any further time considering the facts of the case may not serve any purpose. Accordingly, in the interests of substantial justice, it is deemed appropriate to address the issues raised in the present appeal after hearing the learned Sr. Departmental Representative.

4. Ground No. 1 raised by the assessee in the present appeal is general in nature in as much as the issues raised therein are elaborated vide ground Nos. 2 to 4 and thus, the first ground requires no specific adjudication.

5. Addressing the issues raised in the second ground, it is seen that the assessee challenged the re-opening of the assessment before the Commissioner (Appeals). The challenge was rejected on the following reasons :–

5.1 As the omission of this ground from the form of appeal was not willful, this ground of appeal is admitted for adjudication as per the provisions of section 250(5) of the Act. The assessing Officer formed his reasons to believe that some income had escaped assessment and so issued notice under section 148 of the Act. It has been held by Hon’ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC) : 2007 TaxPub(DT) 1257 (SC) that at the stage of issue of notice under section 148, the only question to be seen is whether there was relevant material, on the basis of which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at the stage of issue of notice under section 148. It is so because the formation of belief is within the realm of the subjective satisfaction of the assessing officer. In view of the judgment of Hon’ble Supreme Court (supra) and by respectfully owing the same, the action of the assessing officer of re-opening the assessment is held. This additional ground of appeal taken by the appellant is dismissed.

6. Aggrieved the assessee is in appeal. However, in the absence of any material on record by way of submissions etc. or for that matter any representation on behalf of the assessee despite opportunity the challenge fails. As noticed, considering the submissions of the Revenue, and on a consideration of the material available on record, I find no good reason available on record which would justify an interference in the conclusion arrived at. Being satisfied with the same on the facts as they stand Ground No. 2 raised by the assessee is dismissed.

7. On a perusal of the facts relatable to the issues raised in ground No. 3 and 4 by the assessee, it is seen that the assessee is found to have sold land at village Ballomajra, Mohali during the relevant assessment year alongwith others. Based on the information made available to the assessing officer (AO) that capital gains on the sale of these lands has escaped assessment, the assessing officer initiated re-assessment proceedings by issue of notice under section 148 of the Act. Considering the computation of income filed on behalf of the assessee during the assessment proceedings, the assessing officer noticed that the assessee has declared capital gains at ‘nil’ after claiming deduction under section 54F. The assessing officer required the assessee to justify its claim by requiring the assessee to provide the details of computation of capital gains.

7.1 The details filed were considered to be not acceptable. The assessing officer observed that the land sold was situated within one kilometer of Mohali Kharar road and it was a capital asset within the meaning of section 2(14) of the Act for the purpose of section 45. Further considering the Valuation Report relied upon by the assessee, he noted that the assessee had computed capital gains by adopting the indexed cost of land. The assessing officer observed that the valuer had taken the fair market value of the land as on 1-4-1981 with the remarks that “pursuant to the request from Mr. Gulzar Singh and Sh. Dilpreet Singh, resident of vill. Ballomajra Tehsil and Distt. Mohali inspect the site on 26-3-2010. Based on the physical inspection and the particular provided by, detailed valuation report to assess the value on 1-4-1981, the report is furnished below.” assessing officer rejected the valuation report of the valuer as the same was held to be not reliable because it was found to have been based merely on the opinion of the valuer and not substantiated with any documentary/evidence. It was further observed by the assessing officer that the assessee has not filed even a single case of sale effected through Registry to support his claim. The assessing officer, accordingly, obtained copies of sale deeds of five cases from the office of Registrar, Ropar and taking the average @ Rs. 279.43 per marla computed the long term capital gain and after allowing benefit under section 54F to the assessee which resulted in the addition of Rs. 24,64,857 as long term capital gains.

8. In appeal before the First Appellate Authority, the assessee assailed the action stating that the ancestral land had been acquired before 1981 and the cost of acquisition had been computed on the basis of Fair Market Value as on 1-4-1981 as assessed by the Government approved valuer. The action of the assessing officer in relying upon the sale instances were assailed on the reasoning that the value of every property varies and is dependent on various factors. Reliance was placed upon report of the valuer which so as to argue that the assessee’s land was not situated on a prime location on the national highway. The AO’s arbitrary estimation was assailed on various other grounds including the ground that the assessing officer was not a technical person.

8.1 These submissions did not find favour with the Commissioner (Appeals) who held that; “the cases relied upon by the appellant are distinguishable from the facts in the case of the assessee as in this case assessing officer has not substituted the valuation report by his own subjective estimation but based on factual information obtained from revenue authority. Therefore, fair market value adopted by the assessing officer is upheld. Ground of Appeal No. 2 is dismissed.”

8.2. The assessee’s submission that the land being situated in a rural area beyond the municipal limits was not a capital area, also did not find favour with the Commissioner (Appeals). The assessee supported its case by relying upon Report of a Patwari. The evidence filed was considered to be vague and infact discarded relying upon the valuer’s report filed by the assessee at the assessment stage. The assessing officer had rejected the very same Report as being based on personal opinions instead of evidences.

9. The learned Sr. Departmental Representative relied on the consistent orders of the tax authority. However, she was unable to address on query why the matter was not referred to the DVO if the Registered Valuer’s Report was to be discarded by the assessing officer and relied upon by the Commissioner (Appeals) to discard the further supporting evidences of the assessee namely Report of a Patwari.

10. I have heard the submissions. On a consideration of the facts on record and the submissions on behalf of the Revenue I find that the decision making process followed by the learned Commissioner (Appeals) is patently incorrect. The learned Commissioner (Appeals) holding that the Report of the Patwari relied upon was vague should have then called forth for a Specific Report from the Land Revenue Authorities confronted the same to the assessee and decided the issue. The decision to reject the Patwari’s Report relying on the Valuer’s Report which any way stood discarded by the assessing officer on the grounds that it was based on mere opinions instead of evidences makes the decision making procedure questionable and unfair. The approach of ‘heads’ you loose and ‘tails’ you loose cannot be given a legal sanction. If the evidence relied upon by an assessee was vague, not relevant, sufficient or complete, the learned Commissioner (Appeals) ought to have exercised his powers under sub section (4) of section 250 of the Income Tax Act, 1961 to call for necessary evidences exercising the powers vested in his authority vide sub-rule (4) of rule 46A of the Income Tax Rules, 1962 in order to enable himself to adjudicate upon the issue. The first Appellate Authority under the Act and the Rules had ample powers to call for the Report from the Land Revenue Authorities and also direct the assessing officer to place a Remand Report on record after obtaining the DVO’s Report. It is well settled that if the version of the assessee relying on the Approved Valuer’s Report was to be discarded, then the tax authorities necessarily need to refer the matter to the DVO. Similarly even on the issue of location of the specific property, the law is well settled that it is the word of the Land Revenue Authorities which is the last word. As noted in Order, dt. 19-3-2019 in ITA No. 340/CHD/2017—Shri Iqbal Singhit, “The State expects the tax administrators to act fairly and competently in the performance of their fundamental and onerous duty to collect taxes on its behalf. However, it is well settled and non negotiable that the taxes so to be collected need to satisfy the touchstones of “just” and “due” taxes. The word “just” presupposes “fairness” in the actions of the tax administrators who are acting for and on behalf of the Government of India. The mind set needs to be re-oriented to consciously acknowledge that the duty and power to collect taxes is not being exercised on behalf of an alien foreign power in a colonial state who may have needed to fill its coffers by subjecting its colonies to the arbitrary actions. The power is exercised on behalf of the State and pre-supposes that it is exercised responsibly and fairly.” Similarly it has also been observed in the aforesaid decision that; “In today’s digital world, tax compliances necessarily have increased, with Banks, Land Revenue Authorities being integrated with tax authorities. However, the benefit of actual and complete knowledge of financial nuances and Taxing Statutes coupled with computer literacy has remained restricted to a large extent only to a few experts. The tax authorities constitute some of these few elites who have been equipped by the State by providing training and courses in order to hone the skill and competence with the use of cutting edge technology. I am of the view that the rash attitude of adopting the dangerous policy and philosophy of “us against them” in a free nation is to be strongly repelled and crushed. The ignorance and helplessness of the masses who are required to address the values of their inherited property, sales etc. of agricultural lands etc. before the tax authorities glaringly stand out as every day examples of some failure and malaise. The tax administration is not expected to collect taxes based on the ignorance’s of the assessee but is expected to ensure that in the discharge of their duties and responsibilities, the citizens on behalf of whom the tax administration functions are advised, counseled and guided towards tax compliances.

10.1 At this stage, it would not be out of context to refer to the CBDT Circular No. 14 (XL-35), dt. 11-4-1955 which set out the road map addressing the role of the officers of the Department. The following extract is reproduced from the said Circular hereunder for the sake of completeness :–

“CBDT Circular No. 14 (XL-35), dt. 11-4-1955–Department must not take advantage of ignorance of assessee to collect more tax than what is legitimately due

1 x x x x

2 x x x x

3. Officers of the Department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the Department for it would inspire confidence in him that he may be sure of getting a square deal from the Department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :–

(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;

(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.”

10.2 On a reading of the above, the Executive intent evident by the Board’s Circular, unambiguously makes it clear that the tax authorities are not expected to encash for the State Exchequer the ignorance of the assessee. The Circulars are binding on the tax authorities is well settled. This aspect has very recently been noticed by the Hon’ble Madras High Court in W.P. No. 3849 of 2019 and W.M.P. No. 4278 of 2019 Mrs. Kannammal v. ITO dated 13-2-2019. The Court noticing that the assessee while moving a Stay Application relying on the said Circulars as noticed by the Hon’ble Apex Court in the case of CIT v. Mahindra Mills (2000) 243 ITR 56 (SC) : 2000 TaxPub(DT) 1304 (SC) observes that in the Stay Application the assessee may not have specifically invoked the three parameters for the grant of stay, it is incumbent upon the assessing officer to examine the existence of a prima facie case as well as call upon the assessee to demonstrate financial stringency, if any and arrive at the balance of convenience in the matter.

The relevant extract from the decision is extracted hereunder for the sake of completeness:–

“Of course the petition seeking stay filed by the petitioner is itself cryptic. However, as noted/by the Supreme Court in the case of CIT v. Mahindra Mills, (2008) 296 ITR 85 (Mad) : 2008 TaxPub(DT) 575 (Mad-HC) in the context of grant of depreciation, the Circular of the Central Board of Revenue (No. 14 (SL- 35) of 1955, dt. 11-4-1955) requires the officers of the department ‘to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs………….Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed by law, officers should draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other…………’ Thus, notwithstanding that the assessee may not have specifically invoked the three parameters for the grant of stay, it is incumbent upon the assessing officer to examine the existence of a prima facie case as well as call upon the assessee to demonstrate financial stringency, if any and arrive at the balance of convenience in the matter.”

10.3 The Court further goes on to hold in the batch of Appeal Nos. W.P. Nos. 30094, 30098, 30104 & 30110 of 2018 and WMP Nos. 35104, 35110, 35114, 35120, 35121, 35126 and 35128 of 2018 in Jayanthi Seeman v. (i) Principal Commissioner, Chennai (ii) the ITO Non Corp. Ward 1(2), Chennai observed considering the mandate of Circular of the Central Board of Revenue (No. 14 (SL-35) of 1955, dt. 11-4-1955 that it is expected that the officers of the department ‘to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs. …. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessees on whom it is imposed.

10.4 Considering the decisions and the Circular as recently considered by the Hon’ble Madras High Court there can be in no doubt that the assessee cannot be made to pay more tax than is legitimately due from him. The Hon’ble Apex Court in CIT v. Mahendra Mills had taken note of the relevant provisions then applicable to the claim of depreciation and held that the officer is required to do no more then to advise the assessee. The relevant extract is reproduced hereunder for the sake of completeness :–

“Income Tax Officer in such a case is required to compute the income without allowing depreciation allowance. Circular of the Board dated 11-4-1955 is of no help to the Revenue. It imposes merely a duty on the officers of the department to assist the tax-payers in every reasonable way, particularly, in the matter of claiming and securing relief. The Officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. Provision for claim of depreciation is certainly for the benefit of the assessee. If it does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather Income Tax Officer should advise him not to claim depreciation if that course is beneficial to the assessee. That would be in our view the spirit of the circular dated 11-4-1955.”

10.5. Though certain extracts from Order, dt. 15-3-2019 in ITA 340/CHD/2017 in the case of Shri Iqbal Singh v. ITO, Mohali have already been quoted, however it would be appropriate to also extract the following paras from the order :–

“8.1 It would also be appropriate to refer to some relevant facts noticed in the exercise of decision making powers exercised by the learned Commissioner (Appeals). It is seen that admittedly fresh evidence by way of a Valuation Report was filed before the Commissioner (Appeals) without a proper application. I do not find any reason on record as to why the said authority failed to responsibly advise the tax payer to come by way of a proper application. All assessees do not necessarily have the benefit of expert legal advice but all tax administrators, it is presumed, have been sufficiently equipped by the State to ensure that the powers exercised on its behalf are responsibly exercised. The State expects the tax administrators to act fairly and competently in the performance of their fundamental and onerous duty to collect taxes on its behalf. However, it is well settled and non negotiable that the taxes so to be collected need to satisfy the touchstones of “just” and “due” taxes. The word “just” presupposes “fairness” in the actions of the tax administrators who are acting for and on behalf of the Government of India. The mind set needs to be re-oriented to consciously acknowledge that the duty and power to collect taxes is not being exercised on behalf of an alien foreign power in a colonial state who may have needed to fill its coffers by subjecting its colonies to the arbitrary actions. The power is exercised on behalf of the State and pre-supposes that it is exercised responsibly and fairly.

8.2 In today’s digital world, tax compliances necessarily have increased, with Banks, Land Revenue Authorities being integrated with tax authorities. However, the benefit of actual and complete knowledge of financial nuances and Taxing Statutes coupled with computer literacy has remained restricted to a large extent only to a few experts. The tax authorities constitute some of these few elites who have been equipped by the State by providing training and courses in order to hone the skill and competence with the use of cutting edge technology. I am of the view that the rash attitude of adopting the dangerous policy and philosophy of “us against them” in a free nation is to be strongly repelled and crushed. The ignorance and helplessness of the masses who are required to address the values of their inherited property, sales etc. of agricultural lands etc. before the tax authorities glaringly stand out as every day examples of some failure and malaise. The tax administration is not expected to collect taxes based on the ignorances of the assessee but is expected to ensure that in the discharge of their duties and responsibilities, the citizens on behalf of whom the tax administration functions are advised, counseled and guided towards tax compliances.

8.3 In the facts of the present case, the evidence of exact location of the land and the value thereof based on a Valuation Report admittedly was relevant and crucial for deciding the issue and knowing its relevance, the assessee ideally should have been advised to come by way of a proper application. The fact that the assessee was a farmer agriculturist and thus, may not have had the benefit of a proper legal advice at the assessment stage cannot be ruled out. In a fair exercise of power, the said opportunity should have been given by the learned Commissioner (Appeals). In the eventuality the value based on the Valuation Report was to be upset, the matter should have been referred to the DVO and not arbitrarily decided.

8.4 Accordingly, in view of the detailed reasons given hereinabove, the evidence is directed to be admitted and in case it is found to be insufficient or incomplete, the learned Commissioner (Appeals), it is directed shall call for further evidences if so deemed necessary and confront these to the assessee before passing an order in accordance with law..”

11. Accordingly, considering the circumstances and not commenting either on the correctness or the completeness of the evidences relied upon on behalf of the assessee before the Commissioner (Appeals), it is directed that in case the evidence filed is not reliable, sufficient or complete, the assessing officer shall call for the DVO’s Report and necessary evidences from the Land Revenue Authorities, confront the report to the assessee and pass an order after hearing the assessee in accordance with law. In view thereof, the impugned order is set aside back to the file of the assessing officer with a direction to pass a speaking order in accordance with law. The assessee in its own interests is directed to participate fully and fairly before the assessing officer. Said order was pronounced in the Open Court at the time of hearing itself.

12. In the result, appeal of the assessee is allowed for statistical purposes.