Clarifying Tax Assessments: Bombay HC’s Analysis of Marriage Expenses & Income Disclosure

Introduction

In the case of Popatlal Umedalji Jain v. Income Tax Officer[i], the petitioner filed a writ of mandamus (‘writ’) under a. 226 of the Constitution of India, 1949 (‘Constitution’) before the High Court of Bombay (‘HC’) seeking to quash a show cause notice (‘SCN’) and a subsequent order under s. 148A of the Income-tax Act, 1961 (‘IT Act’). The HC, in its deliberation, highlighted the discretionary power accorded by s. 148A of the IT Act to the assessing officer (‘AO’) and directed adherence to due procedural norms, ensuring that the petitioner is provided with a fair opportunity to contest the SCN, in accordance with the law laid down by the Hon’ble Supreme Court (‘SC’).

Facts

• The petitioner, an assessee, regularly filed income tax returns and disclosed all sources of income, including earnings from ‘Mansukh Sarees’ and property for the assessment year 2019-2020.

• A SCN was issued to the petitioner alleging undisclosed expenses related to the marriage of the petitioner’s daughter, prompting a response from the petitioner. Despite providing a detailed explanation in response to the SCN wherein it was asserted that all expenses related to his daughter’s marriage were duly accounted for, the petitioner was not granted a personal hearing before the passing of the order.

• The petitioner contended that the SCN and the subsequent order were illegal as they were issued without providing an opportunity for the petitioner for a personal hearing. Accordingly, the petitioner invoked a. 226 of the Constitution for quashing the SCN and subsequent order under s. 148A of the IT Act.

• The respondent argued that the order under s. 148A(d) of the IT Act was justified and passed after finding the petitioner’s explanations unsatisfactory, maintaining that all due process requirements were met.

Held

• The HC allowed the petition, directing that the petitioner be provided a fair opportunity to contest the SCN, in accordance with s. 148A of the IT Act. It was clarified that all contentions of the parties would remain open for examination during the hearing process.

• It was further emphasised that s. 148A(a) of the IT Act grants discretion to the AO regarding the conduct of an inquiry before issuing the SCN under s. 148A, which should be aligned with the principles of natural justice and due legal procedure. While noting certain discrepancies in the investigation, including alleged high-risk transactions and marriage expenses, the HC concluded that the petitioner deserved a reasonable opportunity to present its case in view of the submissions made by him that included income details and bank statements.

Our Analysis

The HC emphasised the discretionary nature of s. 148A of the IT Act, which permits the AO to conduct an inquiry ‘if required’. This aspect highlights the flexibility inherent in the tax assessment process, a crucial element in cases like the petitioners’, where despite the transparent disclosure of marriage expenses in the 2019-2020 returns, allegations of tax evasion were raised by the revenue authority under a specified category.

Further, the HC’s directive resonates with principles established in the Supreme Court’s ruling in Anshul Jain v. Principal Commissioner of Income Tax and Anr[ii]. This correlation highlights the judiciary’s commitment to procedural fairness, ensuring that the petitioner is provided a reasonable opportunity to contest the s. 148 SCN. Such a judicial approach reflects a broader commitment to upholding principles of natural justice and due process within tax proceedings. This judgment also brings out the need for thorough investigations and substantiated claims by tax authorities before issuing SCNs or passing orders thereafter alleging income escapement.

End Notes

[i] 2024 SCC OnLine Bom 424

[ii] 2022 SCC OnLine SC 1756

Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.