Re-Opening of Assessment without Application of Mind is Invalid:

The Agra Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of M/s Deepraj Hospital (P.) Ltd. v. ITO held that the proceedings initiated under Section 147 of the Income Tax Act and the notice issued under Section 148 of the Income Tax Act are wrong, bad in law, arbitrary, without jurisdiction and against the facts and circumstances of the case. The appeal before the present court is directed on the ground that the action of the Assessing Officer (AO) who challenged the validity of initiation of proceedings under Section 147 and the consequent issue of notice. Further on the ground that the Commissioner of Income Tax (CIT) had wrongly, illegally and arbitrarily confirmed the addition made by the AO u/s 68 of the Income Tax Act treating the receipt of share application money to be unexplained cash investment. The assessee contended that he had obtained accommodation entries from Shri S Group as advance during the relevant financial year under consideration. Neither the AO ever provided with any documents nor confronted the assessee with any documents in possession of which it can be said to form a reason to believe by the AO that the assessee has taken accommodation entry from Shri S. Group. Furthermore, the assessee contended that the reason recorded on the ground of which the notice was issued is also wrong and bad in law as it is not the own belief of the AO but is solely based on the information received from CIT. The Ld. CIT(A) remanded the matter to the AO asking for a remand report. The CIT(A) further cut the issue to whether the material in possession of the AO was sufficient to form a reason to believe and hold in favor of the revenue declared that the report of the Investigation Wing, is a good material for the AO to form a reason of escapement of income and the AO is not required to investigate the veracity of the facts narrated in the same. The Hon’ble High Court held that where there is no independent application of mind by the AO to the tangible material which forms the basis of the reasons, the reasons are unsustainable. Furthermore, it remains undisputed in the present case that though the reasons recorded by the AO for belief of escapement of income contain reference to material forming the basis thereof, such material, despite written request by the assessee to the AO was never supplied by the AO to the assessee and hence the same is in contravention of the principles of natural justice.

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Income earned during a previous year is taxable in the Assessment Year, is this Rule compulsory ?

As a General Rule,
Income earned during a previous year is taxable in the Assessment Year.
Exceptions to General Rule:

Income earned during a previous year is taxable in the previous year itself in following cases:

Income of Non-resident shipping companies [Sec 172]

Transfer of assets with a view to avoid tax [Sec 175]

Income of a discontinued business [Sec 176]

Income of persons leaving India with no intention of returning to India [Sec 174]

Scenario: A person leaving India permanently
‘A’ leaves India permanently to US on 1-August-2010 after getting a H1 Visa.
You can invoke section 174. A is supposed to file two income-tax returns:
• Regular Assessment for the period of 1 April 2009 to 31 March 2010
• Another Assessment for the period of 1 April 2010 to 1 August 2010 based on actual or estimated basis and the same taxes as of the regular assessment for the period of 1 April 2009 to 31 March 2010 will be applicable on him.

Assessment of Association of Persons (AOP)/Body of Individuals (BOI) /Artificial Juridical Person (AJP) formed for a particular purpose likely to be dissolved in the same year of formation [Sec 174A]

Scenario: Body of Association formed and dissolved during the same year
If a Body of Association formed and for some reason it got dissolved during the same year, You can invoke section 174A
The assessment is to be done on the rate of taxes applicable in that assessment year only.

Procedure to responding communication received for proposed adjustment u/s 143(1)(a) of income Tax ?

Whenever notice is issued u/s 143(1)(a) of Income Tax Act, Department will give an opportunity to the taxpayers before making any adjustment to the returned income filed by him. The taxpayer will be given an opportunity through the “e-proceeding” to respond to the findings made by the department during the course of processing of the returns submitted. Taxpayer should respond to the each of the queries raised therein.

Step 1 : Visit the ‘e-Filing’ Portal http://incometaxindiaefiling.gov.in/

Step 2: Enter the valid ‘User ID’, ‘Password’ and ‘Date of Birth/Incorporation’ at e-Filing portal. Click ‘Login’

Step 3: Navigate to the ‘e-Proceeding’ tab -> Click ‘e-Assessment/Proceedings’

Step 4: Click on the proceeding name to view the proceeding details. By clicking the ‘Reference ID’, additional details will be displayed.

Step 5: Click ‘Submit’ button

Step 6: On clicking submit button, the following details of proposed additions wherever applicable in your case will be displayed.
1. Arithmetical error in the return – u/s 143(1)(a)(i)
2. Incorrect claim – u/s 143(1)(a)(ii)
3. Disallowance of loss claimed of earlier years, but return of those years was filed after due date – u/s 143(1)(a)(iii)
4. Disallowance of expenditure mentioned in the Audit report but not taken into account in computing the total income in the return – u/s 143(1)(a)(iv)
5. Disallowance of claims under section 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID and 80-IE, if return furnished after due date – u/s 143(1)(a)(v)
6. Addition of income appearing in Form 26AS or Form 16A, or Form 16 has not been included account in computing the total income in the return – u/s 143(1)(a)(v)

Step 7: following options are available in dropdown menu under response column
• Agree for addition
• Disagree to the addition
If you select “Agree for addition”, you will have to file revised return within 15 days of submission of response
If you select option “Disagree to the addition” you should provide justification for the disagreement after choosing any one of the following appropriate item in the dropdown menu available in the Reason column. You can also upload documentary evidence in support of your claim
• Income is not chargeable to tax or exempt
• DTAA income not taxable in India
• The TDS has been claimed on advance received. No income in the financial year
• Income/receipts offered in the previous years and TDS is claimed in financial year
• Construction business – Work-in-progress
• Interest income/net income is capitalised
• Income of the Trust/AOPis taxed in the hands of beneficiary/member. However, TDS is deducted on PAN of the Trust/AOP
• Allowance exempt claimed in return but not in form 16
• Deductions claimed in the return but not in Form 16
• Receipts considered under a different head in the return as against the section under which it is deducted
• Other

Step 8: After successful submission, success message along with the Transaction ID will be displayed on the screen
We would be glad to know your doubts or queries. please feel free to post your queries and comment below
In case you need our assistance in analysing and submitting the response in relation to notice received for “Communication of proposed adjustment u/s 143(1)(a) of Income Tax Act, 1961″, you may please email following details to team@simplifiedlaws.com. Our professional charges would be in the range of Rs. 3000/- to Rs. 5000/- plus tax,
• Communication received u/s 143(1)(a)
• Copy of income tax return filed
• Form 16/16A
• proof of additional deduction claimed in the return

Natural justice and Income tax assessment procedure

1 The principles of natural justice are enshrined in two hoary Latin maxims – nemo judex in causa sua and audi alteram partem. Translated literally, these maxims mean respectively that – (i) no one can be a judge in his own cause, and (ii) let the other side be heard. In other words, the first is to the effect that no Judge should have personal interest in a case before him, and the second that no one should be condemned unheard. Thus, not only the assessment order but each and every action taken by the AO in the course of assessment should stand the test of appeal on the grounds of impartiality and fairness. Negatively, these two rules may also be called rules against bias and arbitrariness.

2 The assessment proceedings are quasi judicial proceedings and therefore every action of the AO is tested on the touchstone of natural justice. It is all the more so because the assessment proceeding before the AO is not an adversarial proceeding where both the appellant and the respondent get a chance to have their say. The AO is a revenue tribunal and he is therefore investigator – cum – prosecutor -cum – inquiry officer, rolled into one. He owes his jurisdiction and his powers to the provisions of the Act. Every action of his must conform to the procedure laid down in the Act read with the Rules and the CBDT Circulars. Therefore, all his actions must pass the test of procedural fairness. The non-observance of principals of natural justice or the prescribed procedure is itself a prejudice to the assessee. Any act or a decision in the course of an assessment on any particular point which is adverse to the assessee must be made only after bringing that point duly to the notice of the assessee and hearing him on it. If it is not done, the courts may take an adverse view even if the decision is right. A large number of assessments where good investigation has been carried out go waste because the appellate authorities set aside or annul the assessment orders on `grounds of failure of natural justice’.

3 The principle of audi alteram partem has been well-recognised by the legislature and a large number of procedural provisions in the Act have expressly incorporated this principle. For example, Chapter XVI of the Act dealing with the procedure for assessment incorporates this principle in sub-section 3 of Section 142 which reads as :-

The assessee shall, except where the assessment is made under s.144, be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry under sub-section (2) (or any audit under sub-section (2A) and proposed to be utilised for the purposes of the assessment.”
Similarly Sections 144A, 154, 158, 163, 170, 171, 263 and 275 specifically provide for hearing. This list is not exhaustive but is merely illustrative. The courts have however held that even where the statute does not provide for hearing, the principles of natural justice demand that hearing should ordinarily be given unless it is implicitly or expressly excluded. However, ‘hearing’ means reasonable hearing and `fairness’ does not require plurality of hearings. The Supreme Court observed in the celebrated Kraipak case :

‘Rules of natural justice are to secure justice and to prevent miscarriage of justice. They supplement the law and do not supplant it.’

4 Prima facie indications of `fairness’ on the part of the AO are: i) adequate notice, ii) opportunity of hearing, and iii) speaking order. The assessment order must be a speaking order. A speaking order is one in which each and every point of controversy has been properly dealt with. The order itself bears evidence to ‘due application of mind’ on the part of the authority. Due application of mind has been judicially defined to mean that there is something in the order which shows that the point or the issue has been duly considered by the AO after taking into account the objections of the assessee.

Chargeability of share application money in whose hands ?

Share application money which is taxed as Undisclosed in the hands of a private company can also be taxed as undisclosed income in the hands of applicants by issuing notice u/s. 148?.

The broad scheme of the Act is to charge all income to tax but only in the hands of the same person.

So share application money received by Private Limited Company has to be taxed in whose hands? The Supreme Court in CIT v. Steller Investment Ltd. [251 ITR 263] has given answer by stating that even if it be assumed that the subscribers to the increased capital are not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income in the hands of the company.

Thereafter, the Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 CTR 195] has held that, if share application money is received by assessee – company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessment in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company.

However, from the facts, it is clear that it has been wrongly taxed in the hands of the company instead of in the hands of applicant shareholders. Therefore, Assessing Officer can tax undisclosed income in the hands of applicant shareholders by reopening the assessment as per law.

At this juncture, it is necessary to refer the judgement of the Supreme Court in ITO v. Ch. Atchaiah [218 ITR 239], wherein the Hon’ble Court has observed that “where a person is taxed wrongfully, he is no doubt entitled to be relieved in accordance with law but that is different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law”.

Conduct of Assessment Proceedings electronically in time-barring scrutiny cases

As a part of Government’s initiative towards E-governance, Income-tax Department has brought digital transformation of its business processes to a significant extent through the Income-Tax Business Application (ITBA) project which provides an integrated platform to conduct various tax¬ proceedings electronically through the ‘e-Proceeding’ facility available on it. As a digital platform for conduct of scrutiny assessment proceedings in an end to end manner is now available, CBDT has decided to utilize it in a widespread manner for conduct of proceedings in scrutiny cases. This Order covers various aspects of conducting scrutiny assessments electronically in cases which are getting barred by limitation during the financial year 2017-2018.

2. Assessment proceedings in following time-barring scrutiny cases, pending as on 1st October,2017 where hearing have not been completed, would be carried out through the ‘e-Proceeding‘ facility on ITBA-

(i) The time-barring scrutiny cases in seven metro cities namely Ahmedabad, Bengaluru, Chennai, Kolkata, Hyderabad, Delhi and Mumbai where assessment proceedings are already underway through the ‘e-mail based communication’ and where assessee is having ‘e-Filing’ account, proceedings in such cases shall be migrated to the ‘e¬ Proceeding’ module of Towards this end, intimation to this effect shall be issued to the concerned assessee by the Assessing Officer, electronically by 8th October, 2017,

(ii) In respect of pending time-barring ‘Limited Scrutiny‘ cases with Assessing Officers stationed at the place where headquarters of Principal Commissioners of Income-tax are located (excluding the cases falling in para above), an option is now available to the concerned assessees (having an ‘e-Filing’ account) to furnish their consent to the Income-tax Department for conduct of assessment proceedings through the ‘e¬ Proceeding’ facility of The format of communication for this purpose is enclosed at annexure–B. This communication shall be issued electronically by the Assessing Officers to the concerned assessees by 8th of October, 2017. The last date for submitting consent by the assessees through their ‘e-Filing’ account is 15th October, 2017. Once this option is exercised by the assesse within the stipulated time-frame all further proceedings in that case would be carried out through ‘e-Proceeding‘. In cases where department has issued letters seeking consent of the assessee, further manual proceedings shall be kept on hold till the assessee has given his response in the matter or till 15th October, whichever is earlier.

3. In time-barring scrutiny assessments under ‘e-Proceeding‘, the concerned assessees can voluntarily opt out from ‘e-Proceeding‘ at a subsequent stage under intimation to the Assessing Officer.

4. Proceedings in other time-barring scrutiny cases which are not covered under Para 2, cases under Para 2 where the concerned assesse has opted for manual proceedings at the initial stage or subsequently and all time-barring assessments under section 153A/153C of the Act, shall continue as per the existing Further, specific proceedings in course of all time-barring assessment cases abcaus.in such as proceeding before the Transfer Pricing Officer, before the Range Head under section 144A of the Act etc. shall also be conducted manually.

Source : CBDT’s Instruction No.8/2017 dt.29.9.2017

Salient features of E-Proceedings of Scrutiny

• As part of e-governance initiative to facilitate conduct of assessment proceedings electronically, Income-tax Department has launched ‘e-Proceeding’ facility. It is a simple way of communication between the Department and assessee, through electronic means, without the necessity to visit Income-tax Office for conduct of assessment proceedings. This taxpayer friendly measure would substantially reduce the compliance burden for the assessee.

• In assessment proceeding, `e-Proceeding’ would enable seamless flow of Letter(s)/Notice(s), Questionnaire(s), Order(s) etc. from Assessing Officer to the account of the concerned assessee in ‘e-Filing’ website. On receipt of Departmental communication, assessee would be able to submit the response along with attachments by uploading the same, on ‘e-Filing’ portal. The response submitted by the assessee would be viewed by the Assessing Officer electronically in Income Tax Business Application (ITBA) module. This would, besides saving precious time of the assessee, would also provide a 24X7 anytime/anywhere convenience to submit response to the Departmental queries in course of assessment proceedings.

• Assessee would retain complete information of all e-submissions made during the course of assessment proceedings through ‘E-Proceeding’ facility for reference & record purpose in his e-Filing portal account.

• This initiative is environment friendly as assessment proceedings would become paperless.

• Assessees who are not yet having an account on the `e-Filing’ website of the Income-tax Department, may get themselves registered by following simple instructions in the `e-Filing’ website

( Source : CBDT’s Instruction No.8/2017 dt.29.9.2017 )