Facts of the Case

The petitioner (assessee) filed his return for AY 2004–05 declaring substantial income including long-term capital gains arising from sale of mutual funds and shares.

The Assessing Officer issued a reassessment notice dated 25.05.2007 under Sections 147/148 alleging:

  • Artificial capital loss from sale of shares of Parsec Technologies Ltd. to the petitioner’s father
  • Excessive short-term capital loss on mutual funds
  • Allegation that transactions were structured to evade tax

The petitioner challenged the reassessment notice on the ground that “reasons to believe” were not recorded prior to issuance of notice, which is mandatory under Section 148(2).

Issues Involved

  1. Whether reassessment notice under Section 148 is valid without prior recording of “reasons to believe”?
  2. Whether alleged reasons were ante-dated and recorded after issuance of notice?
  3. Whether such procedural lapse renders reassessment proceedings invalid?

Petitioner’s Arguments

  • Reasons were supplied after 18 months delay, indicating they were not recorded at the time of issuing notice.
  • Key facts mentioned in reasons (e.g., share transfer details) were not available with AO at the time of issuing notice.
  • Reasons were ante-dated and manipulated to justify reassessment.
  • Mandatory requirement under Section 148(2) was violated.
  • Relied on Haryana Acrylic Manufacturing Co. v. CIT (2009) 308 ITR 38.

Respondent’s Arguments

  • AO had sufficient material to form belief that income escaped assessment.
  • Proceedings were initiated within limitation period (4 years).
  • Original return was processed under Section 143(1), not scrutinized.
  • Transactions were suspicious and required reassessment.

Court’s Findings / Order

The Delhi High Court held:

  • Examination of records revealed that reasons were not recorded on 28.05.2007 (before issuing notice) but were recorded later.
  • Documentary evidence (including refund orders dated after the alleged recording date) clearly proved post-facto recording of reasons.
  • This violated mandatory requirement under Section 148(2).
  • The Court observed manipulation and ante-dating of records by revenue authorities.

Final Order

  • Reassessment notice under Sections 147/148 quashed
  • All consequential proceedings set aside
  • Direction issued for departmental inquiry against concerned officials

Important Clarifications

  • Recording of “reasons to believe” before issuance of notice is mandatory
  • Any post-facto justification is invalid in law
  • Courts can examine original records to detect manipulation
  • Procedural safeguards in reassessment are strictly enforced

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:5135-DB/SRB16082018CW89072008.pdf

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