Facts of the Case

The assessee, Safetag International India Pvt. Ltd., was engaged in the export of readymade garments to Russia. Information was received by the Assessing Officer (AO) from the Directorate of Revenue Intelligence (DRI) alleging that the assessee, in association with M/s Sam Aviation Pvt. Ltd., had been involved in fraudulent exports, money laundering activities, and wrongful availing of export benefits.

Based on the information received from the DRI, the Assessing Officer reopened the assessments for Assessment Years 1996-97 and 1997-98 by issuing notices under Section 148 of the Income Tax Act. Subsequently, reassessment proceedings were undertaken, and reassessment orders were passed under Section 144 of the Act.

The AO added 20% of the sale proceeds as income, withdrew the deduction claimed under Section 80HHC, and reassessed the income accordingly.

The assessee challenged the reassessment proceedings before the Commissioner of Income Tax (Appeals) [CIT(A)] and thereafter before the Income Tax Appellate Tribunal (ITAT).

The Tribunal, instead of deciding the matter on merits, remanded the case to the Assessing Officer directing him to provide the assessee with the recorded “reasons to believe” and thereafter proceed in accordance with the law laid down by the Supreme Court in GKN Driveshafts (India) Ltd. vs. ITO.

Aggrieved by this direction, the Revenue filed appeals before the Delhi High Court.

Issues Involved

  1. Whether the Income Tax Appellate Tribunal was justified in setting aside the reassessment orders and remanding the matter to the Assessing Officer solely for supplying the recorded reasons to believe?
  2. Whether an assessee who did not seek reasons recorded under Section 148 during reassessment proceedings could later claim a fresh opportunity before the Tribunal?
  3. Whether the Tribunal was correct in directing the Assessing Officer to follow the procedure prescribed in GKN Driveshafts (India) Ltd. vs. ITO at the appellate stage?

Petitioner’s Arguments

  • The Revenue contended that there is no legal obligation upon the Assessing Officer to suo motu furnish the reasons recorded for reopening of assessment.
  • It was argued that under the law laid down in GKN Driveshafts (India) Ltd. vs. ITO, the assessee must first seek the reasons recorded and then raise objections.
  • The assessee had actively participated in the reassessment proceedings without demanding the recorded reasons or raising objections thereto.
  • Once reassessment orders had been passed and upheld by the CIT(A), the Tribunal could not restore the matter to the Assessing Officer merely to provide another opportunity to the assessee.
  • The Tribunal exceeded its jurisdiction by granting a procedural opportunity that the assessee had failed to exercise at the appropriate stage.

Respondent’s Arguments

  • The assessee submitted that it was unaware of its right to obtain the recorded reasons for reopening and therefore did not request the same during reassessment proceedings.
  • It was argued that without access to the reasons recorded by the Assessing Officer, the assessee was deprived of an effective opportunity to challenge the validity of reassessment proceedings.
  • The assessee supported the Tribunal’s direction requiring compliance with the procedure prescribed by the Supreme Court in GKN Driveshafts (India) Ltd. vs. ITO.
  • It was further submitted that at least during appellate proceedings, the reasons recorded should have been supplied to enable an effective challenge to the reopening.

Court Findings

The Delhi High Court held in favour of the Revenue and against the assessee.

The Court observed that:

  • The law does not require the Assessing Officer to automatically provide the recorded reasons to believe to the assessee.
  • The obligation to furnish reasons arises only when the assessee requests them.
  • After obtaining the reasons, the assessee may file objections, which must then be disposed of by a speaking order.
  • In the present case, the assessee never sought the recorded reasons during reassessment proceedings and instead participated in those proceedings.
  • The assessee thereafter challenged the reassessment before the CIT(A), which was the legally available remedy.
  • The Tribunal could not grant a fresh opportunity at such a belated stage by remanding the matter to the Assessing Officer.
  • The Tribunal’s approach was held to be legally unsustainable and contrary to settled principles of law.

Accordingly, the High Court set aside the order of the Income Tax Appellate Tribunal.

However, the Court also noted that the assessee should be supplied with the recorded reasons to believe for effectively challenging the validity of reopening before the CIT(A).

Therefore, while setting aside the Tribunal’s order, the Court directed:

  • The Revenue shall provide the recorded reasons to believe to the assessee within four weeks.
  • The matter shall stand remitted to the CIT(A) only for adjudicating the validity of reassessment proceedings after considering the assessee’s submissions based on the supplied reasons.

Important Clarification

The judgment clarifies an important procedural aspect relating to reassessment proceedings:

  • The Assessing Officer is not required to suo motu furnish reasons recorded under Section 148.
  • It is the responsibility of the assessee to seek such reasons.
  • Failure of the assessee to seek reasons at the reassessment stage cannot subsequently become a ground for obtaining a fresh opportunity through remand by the Tribunal.
  • Nevertheless, appellate authorities must ensure that the assessee receives a fair opportunity to challenge the reopening based on the recorded reasons when the issue of jurisdiction is under consideration.

Sections Involved

  • Section 147 – Income Escaping Assessment
  • Section 148 – Issue of Notice for Reassessment
  • Section 143(3) – Assessment
  • Section 144 – Best Judgment Assessment
  • Section 80HHC – Deduction in Respect of Export Profits
  • Section 142(1) – Inquiry before Assessment
  • Principles laid down in GKN Driveshafts (India) Ltd. vs. ITO (259 ITR 19)

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:680-DB/AKS03022011ITA3552010.pdf 

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