INCOME TAX ACT, 1961

Section 147

Reassessment - Validity - Non-application of mind by AO while recording reason to believe as to tax escapement -

Assessee was a minor. AO on the basis of receipt of certain information reopened assessment by issuing notice under section 148. In response to the notice, assessee submitted that she was minor during assessment year and it was requested to drop the reassessment proceedings initiated against her. Also, no return of income was filed by assessee in response to notice under section 148. Thereafter, notices were issued under section 142(1) and replies were submitted by assessee. However, not accepting the replies submitted by assessee, commission income of Rs. 21,60,840 was brought to tax in the hands of the assessee. Besides, interest income of Rs. 14,446 was also brought to tax and assessment was completed at Rs. 21,75,290 vide order dated 18-12-2017 passed under section 144 read with section 147. Assessee challenged this on the ground that nature of income which was brought to tax was commission income which requires the person to work as an agent of the principal for which existence of an agency contract was a pre-requisite. The assessee being a minor was not eligible to enter into any kind of agreement in view of section 11 of Indian Contract Act, 1872. Mere deduction of TDS did not imply that certain services were provided by the minor assessee and reasons for reopening were recorded on incorrect assumption of facts and law, and without application of mind by AO. Held: The assessee, being a minor, AO had to arrive at a prima facie finding while recording the reasons as to how the receipts could be brought to tax in her own hands instead of either of her parents. AO could not ignore the existence of the said provisions in terms of section 64(1A) read with proviso thereto as provided in the statue and having not considered the said provisions, it showed non-application of mind by AO to the information in his possession and the legal provisions as the matter was not restricted to arriving at the reasonable belief that income had escaped assessment, rather the matter was whether income had escapement assessment in the hands of assessee to whom it had accrued/arisen/received and could lawfully be brought to tax in her hands. Applicability of section 64(1A) or the exclusion as so provided in the proviso to said provisions had to be examined atleast prima facie at the time of recording of reasons itself and not subsequent during the course of reassessment proceedings. Further, reasons so recorded were sent for recommendation to the Addl. CIT, Range 6, Jaipur and then to the approving authority, the Pr.CIT, Jaipur and these two authorities have also recommended and approved the reasons so recorded by AO without considering the fact that AO while recording the reasons that income had escaped in the hands of the minor, had not considered the impact and applicability of provisions of section 64(1A). In light of entirety of facts and circumstances of the case assumption of jurisdiction and initiation of proceedings under section 147 were vitiated and, therefore, reassessment was quashed.

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