Here’s why the Madras HC has quashed IT proceedings against the Chidambarams

The Madras High Court recently quashed Income Tax proceedings sought to be re-opened against P Chidambaram, Nalini Chidambaram, Karti Chidambaram and his wife, Srinidhi Rangarajan for transactions dating back to the assessment year 2009-2010..Justice TS Sivagnanam of the High Court held that the re-assessment proceedings were unjustified on three primary grounds..Facts.The IT department had sought to initiate re-assessment proceedings in relation to certain transactions on a coffee estate owned by the Chidambaram family. The said transactions related to growing, pulping and drying of coffee. The proceeds of raw coffee sold thus, the petitioners submitted, was exempted from tax under Section 10 (1) of the Income Tax Act as agricultural income..Although the same was accordingly exempted in the year 2009-2010, the IT Department issued a notice in March 2016 under Section 148 of the IT Act, with a view to commence re-assessment proceedings..This was done on the ground that the said transactions had escaped assessment owing to the petitioner’s failure to disclose material particulars. The government had contended that cured coffee had been sold, in which case 25% of the sale receipts were eligible for being recovered as tax..In response to an objection made in May 2016, the IT Department had sent a written rebuttal in August 2016, calling upon the petitioners to give additional submissions to support the objections. Following this, another detailed representation was made by the Chidambarams in September 2016. However, without further opportunity for personal hearing, the IT department proceeded to issue an order for re-assessment in December 2016..The notice and order to reassess the said transactions were thereafter challenged before the High Court under Article 226..Change of Opinion amounts to abuse of power by the Assessing Officer.Referring to various judgments, the Court noted that a mere change of opinion regarding the taxing of a particular transaction does not by itself justify such re-assessment measures. Placing reliance on the case of Commissioner of Income Tax, Delhi v Kelvinator of India Limited, it was noted that this concept of change of opinion should be treated as an in-built test to check abuse of power by the Assessing Officer..If there was material information warranting the reconsideration of transactions, then the assessing officer may be within his powers to reassess the transactions. In this regard, precedent dictated that an assessing officer only has the power to reassess, not review..The power to reopen IT proceedings is thus available to the assessing officer only if there is tangible material to come to the conclusion that there is an escapement of income from assessment..In this context, it was noted that for the impugned proceedings to be justified, both of the following conditions have to be satisfied:.“(1) the assessing officer must have reason to believe that income chargeable to tax has escaped assessment, and.(2) such income has escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly material facts necessary for assessment for the year.”.The state failed to prove their case on both counts. Hence, the impugned proceedings were grounded on a mere change of opinion and therefore unjustified..Absence of Speaking Orders.In the case of GKN Drive Shafts (India) Limited v Income Tax Officer, the Supreme Court had laid down that speaking orders have to be passed to dispose of objections which are made to the initiation of tax proceedings. In the instant case, however, the IT Department only sent out a written rebuttal in August 2016..The state had contended that its rebuttal made in August 2016 effectively complied with the said directive. The Court disagreed, noting that the assessing officer did not attach any finality to the said representation. Rather, by this direction, the state had directed the Chidambarams to make additional submissions, if any..The Court held,.“The rebuttal dated 30.08.2016 cannot taken as an order required to be passed on the objections given by the petitioner for reopening the assessment and the manner in which the impugned assessment order has been passed is wholly illegal and the entire proceedings are flawed.”.Discrimination against the Chidambarams.The Court was informed that the Chidambarams had been singled out in having tax reassessment proceedings initiated against them. RTI applications filed confirmed that similar proceedings had not been initiated against any other similarly placed person. There was no satisfactory reason furnished for the same. Therefore,.“The above facts would clearly establish that the reopening proceedings are clearly discriminatory.”.On these grounds, the Court finally held,.“For all the above reasons, the impugned proceedings, namely, the notice for reopening and the consequential assessment orders are held to be illegal, unsustainable and a clear case of change of opinion.”.Read copy of Order below..Image taken from here.