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Arvind Mills Ltd. v. Assistant Commissioner Of Wealth-Tax (No. 2)
Factual and Procedural Background
The petition under Article 226 challenges a notice dated 26 March 2002 issued under Section 17 of the Wealth-tax Act, 1957 ("the Act") for assessment year 1997-98 and a reassessment order dated 9 February 2004 passed under Section 17 read with Section 16(3) of the Act. The petitioner, a limited company, filed a return disclosing net wealth and deducted debt claimed to arise from acquisition of assets financed by a cash credit facility. An order under Section 16(3) was passed by the assessing officer (AO) on 8 March 2000 after scrutiny of the return.
Subsequent events include audit queries from an A.G. Audit party (query dated 26 November 2001), communications between the respondent and the audit party, and multiple calls for explanations and information from the petitioner. The impugned Section 17 notice was issued on 26 March 2002 and served on 1 April 2002. The petitioner repeatedly requested reasons for reopening (letters of 1 and 9 April 2002 and later dates) and supplied explanations and documents. The reasons for reopening were ultimately communicated by the respondent by letter dated 28 January 2004. The petitioner filed preliminary objections on 3 February 2004. On the same day the AO issued a final show-cause notice and called the petitioner to attend before 9 February 2004; the reassessment order was framed on 9 February 2004 on the stated ground that no one attended and limitation (31 March 2004) was approaching.
The petitioner previously had filed Special Civil Application No. 2736 of 2004 (challenging the notice); this Court by order dated 3 March 2004 had directed the AO to dispose of the petitioner's objections by passing a speaking order as per the Supreme Court decision in GKN Driveshaft. Despite those directions and the petitioner's rectification application, the AO did not withdraw or separately adjudicate the preliminary objections and proceeded with the reassessment order. The present writ petition seeks quashing of the notice and the reassessment order.
Legal Issues Presented
- Whether the notice under Section 17 of the Wealth-tax Act, 1957 (dated 26 March 2002) and the consequent reassessment order dated 9 February 2004 are valid and within jurisdiction.
- Whether, after reasons for reopening are furnished, the assessee is entitled to file preliminary objections and the AO is bound (under the authority of GKN Driveshaft) to dispose of those objections by passing a separate speaking order before proceeding with reassessment.
- Whether the reassessment order can be sustained where the AO either did not pass a separate speaking order on preliminary objections or claims the objections were disposed of within the reassessment order itself.
Arguments of the Parties
Petitioner's Arguments
- The notice under Section 17 and the reassessment order dated 9 February 2004 are bad in law and should be quashed.
- The Section 17 notice was issued without jurisdiction and reassessment was initiated at the behest of the A.G. Audit party.
- The AO ignored the Supreme Court's decision in GKN Driveshaft and this Court's order dated 3 March 2004 in Special Civil Application No. 2736 of 2004, which directed disposal of preliminary objections by a speaking order.
- The petitioner repeatedly requested reasons for reopening and, upon receipt, filed preliminary objections which were not disposed of by a separate speaking order before reassessment.
Respondent's Arguments
- The notice and reassessment were issued and passed in accordance with law and without external pressure; the reassessment was not based on any audit objection as the reasons did not state such basis.
- The AO addressed the petitioner's objections and dealt with them in the reassessment order itself; there is "no statutory requirement that the speaking order on the objections should be passed separately and cannot be a part of the reassessment order."
- The respondent asserted a bona fide belief that, in absence of a specific statutory provision in the Wealth-tax Act, a separate speaking order was not necessary, and that objections were disposed of within the reassessment order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| GKN Driveshaft (India) Ltd v. ITO and Ors (cited as (2003) 259 ITR 19 (SC) and elsewhere as (2003) 269 ITR 19 (SC)) | The AO must furnish reasons for issuance of a reassessment notice within a reasonable time; on receipt of reasons the noticee is entitled to file objections and the AO is bound to dispose of those objections by passing a speaking order before proceeding with the assessment. | The Court applied GKN as a binding directive: because the petitioner received reasons and then filed preliminary objections, the AO was required to pass a speaking order deciding those objections before undertaking reassessment. The Court found the AO failed to comply and quashed the reassessment order on that basis. |
| Garden Finance Ltd. v. Asstt. CIT (2004) 268 ITR 48 (Guj) | Interprets and applies the effect of GKN, explaining that the assessee must first raise preliminary objections before the AO who must decide them by a speaking order; if adverse, the assessee may challenge that order by writ petition. | The Court relied on the majority view in Garden Finance to underline that GKN requires a two-stage challenge process and that the AO must pass a speaking order on preliminary objections before reassessment proceeds. |
| Calcutta Discount Co. Ltd. (1961) 41 ITR 191 (SC) | Historic principle relating to reassessment procedure (referenced to indicate long-standing jurisprudence regarding reassessment and procedural safeguards). | The Court noted that GKN did not whittle down the principle in Calcutta Discount Co. Ltd. but required preliminary objections to be dealt with by the AO first; this contextualizes GKN's procedural requirement. |
| Adani Exports v. Dy. CIT (1999) 240 ITR 224 (Guj) | Local High Court decision relied upon by the petitioner to argue that proceedings initiated at the behest of audit authorities should be dropped. | The petitioner cited Adani Exports when requesting that proceedings be dropped; the opinion records this reliance, although the Court's order turns on failure to pass a speaking order rather than on this precedent alone. |
Court's Reasoning and Analysis
The Court proceeded by identifying and applying the legal principle established by the Supreme Court in GKN Driveshaft: after a reassessment notice issues the assessee may seek reasons; on receipt of reasons the assessee can file preliminary objections and the AO must decide those objections by passing a speaking order before proceeding with reassessment.
Applying that principle to the facts, the Court noted:
- The petitioner had demanded reasons for the Section 17 notice and only received them by letter dated 28 January 2004.
- On 3 February 2004 the petitioner raised preliminary objections. The AO, without first disposing of those objections by a separate speaking order, proceeded to pass the reassessment order dated 9 February 2004 on the merits, allegedly because no one attended on the date fixed and limitation was approaching.
- The respondent contended in affidavit and oral submissions that the objections had been disposed of within the reassessment order itself and that there was no statutory provision in the Wealth-tax Act requiring a separate speaking order; the respondent also invoked a bona fide belief in this position.
- The Court examined the reassessment order and found that although it reproduced the reasons and certain material, it did not contain a single sentence constituting a speaking order deciding the petitioner's preliminary objections. The extracted paragraph (para 6) showed only a statement that the petitioner had "objected" and then the AO moved to discuss the merits. Thus the AO's affidavit assertion that objections had been disposed of in the reassessment order was not borne out by the document.
- The Court further noted that an earlier order of this Court dated 3 March 2004 (in SCA No. 2736 of 2004) had directed the AO to dispose of the petitioner's objections by a speaking order and that order was served on the respondent on 4 March 2004. The reassessment order had been served on the petitioner on 5 March 2004 and the petitioner sought rectification; the AO did not withdraw the reassessment order or otherwise comply.
- Given the binding nature of GKN and the Court's own earlier directions, the AO's failure to pass a speaking order before reassessment rendered the reassessment order invalid. Even if the respondent's bona fide belief about the absence of statutory provision were accepted, the reassessment order itself failed to deal with the objections as required.
On this analysis the Court confined its decision to the procedural defect (failure to pass a speaking order) and explicitly did not adjudicate the merits of the underlying wealth assessment controversy.
Holding and Implications
Holding: The Court QUASHED AND SET ASIDE the impugned reassessment order dated 9 February 2004 passed under Section 17 read with Section 16(3) of the Wealth-tax Act, 1957, on the limited ground that the AO failed to dispose of the petitioner's preliminary objections by passing a speaking order as required by GKN Driveshaft and the Court's earlier order in Special Civil Application No. 2736 of 2004.
The respondent was directed to comply with the directions contained in this Court's order dated 3 March 2004 (particularly para Nos. 4 and 5 reproduced in the opinion) and to pass a speaking order deciding the preliminary objections before undertaking any reassessment. The Court made the rule absolute and awarded costs of Rs. 2,500 to the petitioner.
Implications: The direct effect is that the reassessment order is set aside and the AO must first decide preliminary objections by a speaking order before any reassessment. The Court expressly clarified that it has not considered the merits of the underlying wealth assessment; the decision rests on procedural non-compliance with the speaking-order requirement and does not announce a new substantive tax principle beyond application of the GKN line of authority and the Court's prior directions.
1. Rule. Mr. Tanvish U. Bhatt, waives service of rule on behalf of the respondent.
In the facts and circumstances of the case, the petition is taken up for. final disposal today.
2. This petition filed under Article 226 of the Constitution challenges notice under Section 17 of the WT Act, 1957 (hereinafter referred to as "the Act"), dt. 26th March, 2002, for asst. yr. 1997-98 and reassessment order dt. 9th Feb., 2004, passed under Section 17 r/w Section 16(3) of the Act for asst. yr. 1997-98.
3. The petitioner, a limited company, filed its return of net wealth for the assessment year under consideration disclosing net wealth at Rs. 29,53,100 after deducting debt which according to the petitioner had arisen as the amount was paid for acquisition of assets out of cash credit facility enjoyed by the petitioner. After scrutiny of the said return on dates mentioned in the petition, the respondent AO passed an order under Section 16(3) of the Act on 8th March, 2000. It is averred in the petition that due to a query raised on 26th Nov., 2001, by A.G. Audit party, the respondent as well as Jt. CWT, Special Range-1, Ahmedabad, called for an explanation from the petitioner and the petitioner submitted an explanation. On 19th Feb., 2002, the respondent once again called for further details which were duly supplied. However, on 26th March, 2002, the impugned notice under Section 17 of the Act came to be issued and the same was served on the petitioner on 1st April, 2002.
3.1 The petitioner raised various objections in law as well as on facts vide letters dt. 1st April, 2002, and 9th April, 2002, requesting the respondent to drop the proceedings as the same were without jurisdiction. In the alternative, it was submitted that the reasons recorded by the respondent may be supplied to the petitioner.
3.2 It appears that the respondent simultaneously was corresponding with A.G. Audit party in relation to the audit objection and vide letter of 3rd Feb., 2003, the petitioner supplied further details to the respondent to furnish to the audit party. As the audit party did not accept the explanation tendered by the respondent, the respondent was compelled to issue notice under Section 16(2) on 11th Feb., 2003, and in response thereto, the petitioner sought a copy of the reasons recorded in view of the decision of the Supreme Court in the case of GKN Driveshaft (India) Ltd v. ITO and Ors. (2003) 259 ITR 19 (SC). The petitioner once again wrote on 17th Feb., 2003, contending that the reassessment had been initiated at the behest of the A.G. Audit party and in light of the decision of jurisdictional High Court in the case of Adani Exports v. Dy. CIT (1999) 240 ITR 224 (Guj) it was submitted that the proceedings be dropped. Once again a request was made to supply reasons on 27th Jan., 2004, and accordingly by letter dt. 28th Jan., 2004, the respondent communicated the reasons which have been reproduced in para No. 3 of the impugned assessment order dt. 9th Feb., 2004.
3.3 In the meantime, the respondent had already issued a notice under Section 16(2) of the Act, dt. 22nd Jan., 2004, calling for certain information detailed therein on merits of the controversy. After receipt of letter dt. 28th Jan., 2004, communicating the reasons recorded for initiation of proceedings for reassessment, the petitioner raised objections on 3rd Feb., 2004. On the same day, i.e., on 3rd Feb., 2004, the respondent issued a final show-cause notice which was served on the petitioner on 5th Feb., 2004. In the said letter of 3rd Feb., 2004, the petitioner was called upon to attend the office of the respondent on or before 9th Feb., 2004, at 11.00 A.M. The respondent has recorded in the impugned assessment order dt. 9th Feb., 2004, that nobody attended on the said day, namely, 9th Feb., 2004, and as the assessment was getting barred by limitation on 31st March, 2004, the assessment order was framed.
3.4 The petition has been filed in the backdrop of the aforesaid factual scenario.
4. Mr. S.N. Soparkar, learned senior advocate appearing with Mr. Hemani on behalf of the petitioner, submitted that the impugned notice and the consequential impugned reassessment order are bad in law and are required to be quashed and set aside. It was submitted that the notice issued under Section 17 of the Act is without jurisdiction. The reassessment order dt. 9th Feb., 2004, is also bad in law not only as a consequence of such notice which is without jurisdiction but also for the reason that the same is passed ignoring the order of the apex Court in the case of GKN Driveshaft (supra) as well as the order of this Court dt. 3rd March, 2004, made in Special Civil Application No. 2736 of 2004. It was submitted that the petitioner had challenged the impugned notice by a writ petition being Special Civil Application No. 2736 of 2004 which came to be rejected in light of the directions issued by this Court in its order dt. 3rd March, 2004. That the respondent had failed to take into consideration the directions issued by this Court and even on this count the impugned notice and the reassessment order were required to be held to be without jurisdiction.
5. Mr. Tanvish U. Bhatt, learned standing counsel appearing on behalf of the respondent, submitted that the respondent had stated on affidavit being affidavit-in-reply dt. 30th June, 2004, that the notice issued to the petitioner was in accordance with law and was obviously not under any fear or pressure from any higher authorities. It was further submitted that the reopening was not based on any audit objection as the AO had not recorded in the reasons that the action was in pursuance of any audit objection. Inviting attention to para No. 9 of the reply-affidavit, it was submitted by Mr. Bhatt that the impugned order was passed after duly addressing the objections of the petitioner and in consonance with the decision of the Hon'ble Supreme Court in the case of GKN Driveshaft Ltd. (supra) and further that the preliminary objections of the petitioner had been disposed of in the reassessment order itself. That the impugned order had been passed in accordance with law and following due procedure as directed by the Hon'ble Court and the same was legal and respondent states
"there is no statutory requirement that the speaking order on the objections should be passed separately and cannot be a part of the reassessment order".
6. After hearing both the sides, the Court had called upon Mr. Bhatt to explain in what circumstances the impugned order came to be made without first disposing of the preliminary objections raised by the petitioner by passing a speaking order as required by the order of the apex Court in the GKN case (supra) as well as directions given by this Court in its order dt. 3rd March, 2004 in Special Civil Application No. 2736 of 2004 (supra). In response, Mr. Bhatt has placed on record communication dt. 18th Aug., 2004, addressed to him by the Asstt. CIT, Circle-1, Ahmedabad wherein it is stated that the clarifications sought for by the learned standing counsel had been duly communicated to the respondent and thereafter an extract from letter dt. 16th Aug., 2004, of the respondent addressed to the Asstt. CIT, Circle-1, Ahmedabad, has been reproduced. It is stated by the respondent that in absence of any section in the Act, under which an order on objections to the reassessment could be passed, it was addressed in the reassessment order itself and that has been done under bona fide belief.
7. In the case of GKN Driveshaft (supra), the Hon'ble Supreme Court has laid down an elaborate procedure as to the manner of dealing with objections raised against a notice under Section 148 of the IT Act, 1961, in the following words :
"However, we clarify that when a notice under section 148 of the it act is issued, the proper course of action for the notice is to file a return and if he so desires, to seek reasons for issuing notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order. In the instance case, as the reasons have been disclosed in these proceedings, the AO has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years."
8. In a subsequent decision in the case of Garden Finance Ltd. v. Asstt. CIT (2004) 268 ITR 48 (Guj). the effect of Supreme Court decision in the case of GKN Driveshaft (supra) came up for consideration and by a majority opinion it has been thus laid down by this Court through one of us (Hon'ble Mr. Justice M.S. Shah) :
"What the Supreme Court has now done in the GKN Driveshaft (India) Ltd. v. ITO and Ors. (2003) 269 ITR 19 (SC) is not to whittle down the principle laid down by the Constitution Bench of the apex Court in Calcutta Discount Co. Ltd. case (1961) 41 ITR 191 (SC) but to require the assessee first to lodge preliminary objection before the AO who is bound to decide the preliminary objections to issuance of the reassessment notice by passing a speaking order and, therefore, if such order on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the reassessment proceedings which would have entailed the liability to pay tax and interest on reassessment and also to go through the gamut of appeal, the second appeal before Tribunal and then reference/tax appeal to the High Court.
Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the AO for objecting to the reassessment notice under Section 148 has been considerably softened by the apex Court in GKN case (supra) in the year 2003. In my view, therefore, the GKN case (supra) does not run counter to the Calcutta Discount Co. Ltd. (supra) but it merely provides for challenge to the reassessment notices in two stages, that is,
(i) raising preliminary objections before the AO and in case of failure before the AO,
(ii) challenging the speaking order of the AO under Section 148 of the Act."
9. The position in law is thus well settled. After a notice for reassessment has been issued, an assessee is required to file the return and seek reasons for issuance of such notice. The AO is then bound to supply the reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file preliminary objections to issuance of notice and the AO is under a mandate to dispose of such preliminary objections by passing a speaking order, before proceeding with the assessment in respect of the assessment year for which such notice has been issued.
10. Therefore, the stand of the respondents will have to be tested on application of the aforesaid legal principles. It is apparent from the facts which have come on record that the assessee had been demanding reasons in relation to notice under Section 17 of the Act dt. 26th March, 2002, but the same came to be supplied to the petitioner only by letter dt. 28th Jan., 2004. Immediately thereupon, the petitioner raised preliminary objections vide communication dt. 3rd Feb., 2004. However, without dealing with and disposing of the said objections by passing a speaking order, the respondent proceeded to pass the impugned reassessment order on merits of the controversy. Once the apex Court had stated that the AO was bound to dispose of the objections by passing a speaking order, it was not open to the respondent to contend that, in absence of any provision, the respondent could not have passed a speaking order. Accordingly, on this limited count, the impugned reassessment order dt. 9th Feb., 2004, is required to be quashed and set aside.
11. However, even if the stand of the respondent that he was under a bona fide belief that in absence of a statutory provision he could not pass any such order and hence the respondent did not pass a separate speaking order disposing of the preliminary objections is accepted at its face value, as can be seen from the impugned reassessment order dt. 9th Feb., 2004, even While passing the reassessment order the respondent has failed to deal with the preliminary objections raised by the petitioner.
12. In the impugned reassessment order, para No. 3 reproduces the reasons recorded and communicated to the petitioner by letter dt. 28th Jan., 2004. Para No. .4 reproduces a portion of the computation which accompanied the return of wealth and formed part of the statement of wealth filed on 24th April, 2002. Para No. 5 reproduces notice dt. 22nd Jan., 2004, issued under Section 16 of the Act.
Thereafter, in para No. 6, this is what is stated by the respondent :
"Then in her letter dt. 3rd Feb., 2004, Mr. Aparna Parelkar again objected the initiation of wealth escaping assessment proceeding. It is important to mention here that the assessee has been provided the reasons for reopening the case, still instead of complying the notices by properly attending the office of the undersigned, the assessee filed its submissions in the tapal and only objected the same. However, in response to the questionnaire dt. 22nd Jan., 2004, the following submission was made along with the objection in a letter dt. 3rd Feb., 2004....."
Subsequent paragraphs deal with the merits of the controversy and it is not possible to find a single sentence wherein it can be said that the respondent has passed a speaking order dealing with the preliminary objections raised by the petitioner. As can be seen from the aforesaid extracted portion of para No. 6, the respondent merely states that in letter dt. 3rd Feb., 2004, filed on behalf of the petitioner, the petitioner has merely objected to the reassessment proceedings and, thereafter, proceeds to discuss the merits of the dispute by reproducing the portion of petitioner's submissions which commences with the phrase, 'without prejudice'.
In the circumstances, the averment in the affidavit-in-reply that
"the preliminary objections of the petitioner have been disposed of in the reassessment order itself"is not borne out from the facts and a bare reading of the impugned reassessment order.
13. There is one more aspect of the matter. The order dt. 3rd March, 2004, made by this Court in the earlier petition filed by the present petitioner namely, Special Civil Application No. 2736 of 2004 (supra) directed the respondent to dispose of the objections filed by the petitioner by passing a speaking order as per the aforesaid decision of the Hon'ble Supreme Court. It is further laid down in the said order that it is only after the AO passes a speaking order deciding the petitioner's preliminary objections against the notice for reassessment that any cause of action would arise for the petitioner. This order was served on the respondent on 4th March, 2004, and immediately on 5th March, 2004, the petitioner was served with a copy of the impugned reassessment order dt. 9th Feb., 2004. The petitioner thereupon preferred a rectification application under Section 35 of the Act requesting the respondent to withdraw the impugned reassessment order dt. 9th Feb., 2004, but, as averred in the petition, till the date of filing of the petition, the respondent has neither called the petitioner for hearing on the application dt. 10th March, 2004, nor withdrawn the impugned reassessment order. In the affidavit-in-reply, the aforesaid averments are dealt with only by reiterating that the objections have been disposed of in the reassessment order itself. The aforesaid conduct of the respondent along with the facts stated hereinbefore clearly points out that the stand of the respondent appears to be that, once a notice for reassessment has been made, the respondent is bound to frame an order of reassessment regardless of the fact as to whether such an order can be supported or not, in law or on facts.
14. In the result, the impugned reassessment order dt. 9th Feb., 2004, made under Section 17 r/w Section 16(3) of the Act is hereby quashed and set aside. The respondent is directed to abide by the directions issued by this Court in its order dt. 3rd March, 2004, in Special Civil Application No. 2736 of 2004 (supra), more particularly, para Nos. 4 and 5 which are reproduced hereunder for the sake of convenience.
"4. The above principle laid down in respect of the notice for reassessment under the IT Act would apply with full force to the notice for reassessment under section 17 of the wt act as well. The petitioner company had already filed its return in response to the impugned notice and requested for furnishing reasons, which request has been acceded to only very recently and the petitioner has thereafter submitted its objections on 19th Feb., 2004. The AO is, therefore, now required to dispose of the objections by passing a speaking order as per the aforesaid decision of the Hon'ble Supreme Court.
5. The AO is accordingly required to decide the preliminary objections lodged by the petitioner to the notice for reassessment and pass a speaking order. Until such speaking order is passed, obviously the AO cannot undertake reassessment. Hence, it is only after the AO passes a speaking order deciding the notice for reassessment that any cause of action would arise for the petitioner."
15. In the result, the petition is allowed to the aforesaid extent. In the view that is taken, it is necessary to clarify that the merits of the controversy have not been taken into consideration.
Rule made absolute.
The respondent shall pay the costs to the petitioner quantified at Rs. 2,500 only.
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