By TIOL News Service

AHMEDABAD, MAY 17, 2018: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether mere abandonment of previous reopening notice, will not be construed as its withdrawal, and hence the fresh notice issued under such circumstances will be rendered invalid. YES IS THE VERDICT.

Facts of the case:

The assessee company, engaged in share broking, had filed its return showing income of Rs. 33,31,55,229/- and the assessment was finalized u/s 143(3) determining income of Rs. 33,31,80,070/-. Subsequently, an information was received in respect of fictitious losses created by some brokers by misusing the client code modifications facility in F & O segment on NSE during March 2010. The assessee was reported to be one of the beneficiaries of such fictitious losses, which was utilized by assessee by adjusting them against the profits in the A.Y 2010-11 which had resulted in suppression of taxable income to the tune of Rs. 5,73,65,135/-. This led to commencement of reopening and issuance of notice u/s 148. When this notice was put to challenge by filing Special Civil Application on the ground of unsatisfactory recording of reasons, the Department was directed by the High Court to withdraw the previous notice of reopening and issue a fresh one. The Department agreed for the same and issued fresh notice, and thus requested that the fresh notice be treated as continuation of the old notice and therefore be considered as having been issued within four years. Such a request was however rejected by this Court by observing that when the AO had consciously withdrawn the notice of reopening even without the permission to treat the fresh notice as continuation of the original and therefore having been issued within a period of four years from the end of the relevant assessment year, he could not resile from such a decision. Again, fresh notice of reopening was issued after recording fresh reasons. The assessee raised objections to the reopening notice, which were however rejected.

High Court held that,

++ it is seen that in the previous notice, the reasons recorded merely stated that the information was received by the office in response to fictitious losses created by some broker by misusing client code modifications facility. The assessee was reported to be one of the beneficiaries of misuse of such facility. Such fictitious losses had been adjusted by the assessee against the profits of other years. Thus, it could be argued that the AO had merely proceeded on the information received by him. His approach was therefore possible of being faulted as having acted on bare information without his own application of mind and thus relying on borrowed satisfaction. In the fresh reasons, he gave some background facts which, to be honest, were highly jumbled up. He referred to the past litigation and recorded that the High Court had directed recording of fresh reasons. This obviously was a clear error. In any case, the order of the High Court which is reproduced in this judgement nowhere records any such direction. However, this by itself would not be fatal to the cost of the Revenue. The background facts are clearly severable from the reasons which succeed which formed the core of the recorded reasons by the AO. Thus, the reasons summarized the information available with the AO principally suggesting that there was systematic misuse of the client code modification facility with a view to buy losses to be offset against the profit of the year. The AO formed a belief that the assessee had claimed fictitious losses of Rs. 5.69 crores through this process. Clearly, the AO having recorded his reasons which were based on information supplied to him, this is not a case where the AO had mechanically proceeded on the basis of the borrowed satisfaction. At this stage, when the Court is examining the validity of notice of reopening, the Court would only prima facie consider the reasons recorded by the AO. It is not necessary for the AO to demonstrate beyond doubt that invariably and unfailingly, additions will be made in the hands of assessee;

++ coming to the question of unauthorized transfer of jurisdiction, it is noticed that there is no formal challenge to such transfer. Since there is no formal challenge to the transfer of the assessment, the Department cannot be faulted for not making any further factual averments in this regard. Nevertheless, the original files which show that the question of transfer of assessment emanated from the Office of the Director General of Income Tax (Investigation) as can be seen from a letter written to the Principal Director of Income-tax (Inv), Ahmedabad. Thus, the Pr CIT, Rajkot, granted approval for transfer of the case of assessee. Since the transfer of the jurisdiction was within the same city, there was no requirement of hearing the assessee. Regarding the contention of invalid sanction, the assessee has not made any further elaboration. As, in the proposal placed before the Joint CIT for his comments, he in his own handwriting, had commented as "fit case for reopening u/s 147". Thus, there was clear application of mind on part of the sanctioning authority who had, after perusing the reasons recorded by AO and other materials, granted necessary sanction. Despite such observations and conclusions, the question is, should the reassessment process be allowed to continue. Answer to this question would depend on the question of validity of the fresh notice, without withdrawing the previous notice. In this regard, it is seen that till the disposal of the petition, the previous notice was not yet withdrawn. It was only conveyed to the Court that the same would be withdrawn. Even when the Revenue filed a review petition, clearly there was no formal order passed withdrawing the notice. By the time the High Court disposed of the writ petition, four years had lapsed from the end of the relevant assessment year. Any fresh notice therefore would be beyond a period of four years. The Revenue desired that in view of the special events, the fresh notice may be treated as an extension of the original notice and deemed to have been issued within four years from the end of the relevant assessment year. The Court while rejecting such a prayer did make a passing remark that the AO had consciously withdrawn the notice of reopening. Fact of the matter is there is no formal withdrawal of notice till date;

++ it is to be noted that there can be only one process of assessment or reassessment. Pending any such assessment or reassessment, there cannot be a notice of reopening. The Courts have held that there cannot be reopening of assessment which is not yet complete. It is seen that this Court in the case of Aditya Medisales Ltd, had observed that: "....There cannot be two parallel assessments based on two notices. As long as first assessment is not completed, question of reassessment would not arise. Once a notice is issued u/s 148, it triggers initiation of proceedings for assessment or reassessment of income which may have escaped assessment earlier. During such assessment, any income which may come to the notice of AO may also be brought to tax. Till this assessment is not completed, it would not be possible for him to form a belief that income chargeable to tax had escaped assessment. Until the assessment, be it original or reopened, is pending before the AO, the question of issuing notice for reopening would not arise...." When therefore in the present case, the first notice of reopening of assessment was not withdrawn, there was no scope, nor permissible in law to issue fresh notice of reopening. Counsel for the Revenue, however, vehemently contended that such withdrawal of notice of reopening must be deduced from facts and attendant circumstances. His contention was that the Revenue had, all along, intended to withdraw the notice and the fact, that such notice was abandoned, was sufficient to establish withdrawal thereof. We, however, hold a slightly different belief. A notice of reopening which is once issued would remain in operation unless it is specifically withdrawn, quashed or gets time barred. By mere intention to abandon the proceedings arising out of the notice, the AO cannot bring about the desired result of withdrawing the notice. The material on record would clearly demonstrate that the AO in the present case did not travel beyond expressing his clear intention to withdraw the notice. The law does not recognize two parallel assessments. In absence of withdrawal of the first notice of reassessment, the proceedings would survive making the subsequent notice of reopening invalid.

(See 2018-TIOL-926-HC-AHM-IT)