To avoid reassessments on flimsy grounds, the Supreme Court's view on the need for a speaking order should be widely circulated among the officers of the Department.
Principles of natural justice form the basis for all actions of the income-tax officer (ITO). The statute swears by the motto audi alteram partem (hear both sides). When the assessing officer (AO) deviates from this principle, the very jurisdictional base can be questioned by way of a writ petition in the High Court. In innumerable cases, reassessment notices are issued without specifying the reason for reopening the assessment. Reasons are given along with the assessment order.
The Supreme Court considered this matter in GKN Driveshafts India Ltd vs ITO (259 ITR) and observed that when a notice for reassessment is issued, the proper course of action for the taxpayer is to file a return and, if he so desires, seek reasons for issue of the notice.
The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the taxpayer is entitled to file objections to the issuance of notice and the AO is bound to dispose of the same by passing a speaking order. If this procedure is not followed, the taxpayer can challenge the assessment order. Courts often allow such writ petitions with a direction to the AO to pass a speaking order.
Ms Kamalesh Sharma was served with a notice for reassessment. She sought reasons for such reopening. She filed objections and also requested for a speaking order on the objections. This was on the basis of the Supreme Court ruling in the GKN case.
In the Kamalesh Sharma case, notwithstanding the clear language of the Supreme Court, the AO did not pass any speaking order but straightaway passed an assessment order and simultaneously rejected the contentions raised by the lady. She, therefore, approached the Delhi High Court with a writ petition. The court was unhappy with the AO for not complying with the directions of the Supreme Court.
It observed: "We cannot appreciate how, in spite of the clear language used by the Supreme Court as well as this court, the assessing officer did not comply with the requirement of law. Learned counsel for the respondent submits that the objections touched upon the merits of the controversy and the failure of the AO to deal with the objections before passing the assessment order was only a technical error. We are mentioning this only to reject this argument in view of the clear language of the Supreme Court. The assessing officer cannot try to hide behind niceties, which are not even legal."
The Delhi High Court set aside the assessment order and directed the AO to deal with the objections within eight weeks. The AO was directed to pass a speaking order. It concluded: "For not following the law laid down by the SC and stressed by this court, we impose costs upon the respondent of a sum of Rs 3,500 to be paid to the petitioner (287 ITR 337)."
Key issues emerge
Certain important issues arise for consideration with regard to the court's observations on the reassessment notices. While the Supreme Court spells out the need for a speaking order, the statute does not. What happens if the speaking order rejects the objections?
Can there be an appeal against the detailed order given by the AO rejecting the objections of the taxpayer? Such an appeal may not lie because under the Code of Civil Procedure (CPC), appeals may not be entertained against interlocutory orders.
Does the Supreme Court ruling alter this position established by the CPC? If, however, no appeal lies, the only remedy may be by way of a writ petition again. It is upon the issue of a valid notice that the AO can assume jurisdiction of the case. The Supreme Court has conferred a valuable right on the taxpayer who can now insist upon a speaking order even before completion of the assessment.
It is possible that the taxpayer may be spared the ordeal of a huge demand being raised by a regular reassessment order if the AO accepts the objections and drops the proceedings. The procedure laid down by the Supreme Court and insisted upon by the Delhi High Court may benefit the Revenue also to pass a well-considered assessment order which will stand scrutiny at the level of the first appeal.
It is necessary that the Supreme Court's view on the need for a speaking order with regard to objections to jurisdiction under Sections 147 and 148 of the Income-Tax Act, 1961 is widely circulated among the officers of the Department so that reassessments on flimsy grounds may be avoided and the taxpayer spared of unnecessary harassment.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)