Income Tax

Income Tax Reassessment Notice Quashed: Chhattisgarh HC

A single judge bench of the Chhattisgarh High Court headed by Justice Parth Prateem Sahu quashed the Income Tax Reassessment Notice which was issued to the assessee after a period of 4 years without stating valid reasons and not being in compliance with the relevant statutory provisions.       

What is a tax reassessment notice? 

The provision related to reassessment notice or tax reassessment notice is found under section 148 of the Income Tax Act, 1961^[1]. The provision states that a notice will be issued in cases where the income has been found to have escaped re-computation or assessment. The assigned Assessing Office shall intimate the assessee in question by sending him a notice asking from the assessee the following information:

• Income Tax Returns (ITRs)
• The income returns of any person other than the assessee himself deemed assessable as per the provisions of this Act during the year to the assessment year.   

The assessee is then required to produce the details of his ITRs within 30 days according to the duration specified by the Assessing Officer in the notice given.

Facts of the Case 

The assessee/ petitioner is a small private limited company which is in the business of manufacturing and selling of re-rolled products and M.S. ingots. A total of 25,000 shares were issued at a face value of Rupees 100 per share by the petitioner’s company, in the assessment year of 2014-15, in the names of Amarnath Agarwal and St.Ramadevi Agarwal.

The sale of such shares was disclosed by the petitioner in the returns filed with the Income Tax Department. The Income Tax department served a notice on the petitioner under section 142(1) of the Income Tax Act, 1961. In response to the notice, the petitioner submitted the entire details as required to be submitted. The petitioners explained that due to the heavy losses suffered by the steel industry and consequent lack of buyers in the market, the petitioner was facing paucity of funds which led the petitioner to issue shares at the face value.

Taking into consideration the response filed by the petitioner in response to the notice, a final assessment order was passed under section 143(3) was passed.

Submissions of the Petitioner

The petitioner argued that the notice under section 148 of the Income Tax Act was issued to the petitioner after a period of 4 years. The petitioner further said that he had previously made all the required disclosures related to the transaction in question, explained the authorities the reason for the transfer of shares on face value which were then accepted by the Assessing Officer. The petitioner on this basis contended that there was no ground available with the respondents to issue a notice under section 148 of the Income Tax Act and that there was no failure on part of petitioner in making the required disclosures.

The petitioner also challenged the sustainability of the notice under section 148 because the reason assigned for the issuance of notice was transfer of shares which attracts the provisions of section 56(2)(vii)(c)(ii) of the Income Tax Act.

Section 56, the petitioner argued, talks about the income from other sources and section 56 (vii) talks about the income received by an individual or a Hindu Undivided Family in any previous year. Based on this provision, the petitioner argued that the scope of the provision is restricted to the “individual and Hindu undivided family” only and as a result the notice issued to the petitioner must be quashed because there exists no valid ground for the notice under section 148 to be issued against the petitioner who is a company.    

Submissions of the Respondents

The respondents on the other hand argued that the a notice under section 148 of the Income Tax Act had been issued after following due procedure of law laid down under the Income Tax Act and grounds and reasons for issuing the notice were clearly laid down in the notice.

Observations of the court   

The honourable Chhattisgarh High Court held that before issuing the tax reassessment notice under section 148 of the Income Tax Act, a tangible material and mandatory compliance of section 147 of the Income Tax Act needs to be done. The court observed that the proceedings of reassessment were initiated against the petitioner after a period of 4 years from the time of submission of returns by the petitioner.

The court also observed that the first proviso to section 147 of the Income Tax Act provides that in order to initiate reassessment proceedings after a lapse of four years, the Assessing Officer needs to first record his conclusion that there was a failure on part of the assessee in not making proper disclosures relating to all the necessary material facts which were required for assessment in that particular assessment year and the court found that such lack of disclosures did not appear after reading the reasons from the notice issued to the petitioner.   

Decision of the court quashing the tax reassessment notice 

The court found that there was no ground or reason available with the respondents to issue a reassessment notice u/s 148 of the Income Tax Act. Hence, the court proceeded to quash the said reassessment notice in favour of the petitioner.     

Read Our Article: Assessment and Reassessment Notice under Section 148 of Income Tax Act