Mere Shah Commission Opinion Cannot Sustain Reassessment: Allahabad HC

Mudra Exports Vs DCIT (Allahabad High Court)

Summary: The Allahabad High Court considered a writ petition filed by Mudra Exports challenging reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961 for Assessment Year 2011-12. The petitioner, a partnership firm engaged in export of Iron Ore, had filed its return on 30.09.2011 declaring a loss of Rs.15,830/-. The return was processed through summary assessment proceedings and no scrutiny assessment under Section 143(3) was made. A reassessment notice under Section 148 was subsequently issued on 27.10.2014.

The reasons supplied to the petitioner relied principally upon the third report of the Justice M.B. Shah Commission of Enquiry concerning illegal mining of Iron and manganese ores in Goa. The report referred to alleged large-scale under-invoicing of export prices. In relation to Mudra Exports, the report recorded an export of 36,854 WMT of Iron Ore on 06.04.2010, with an FOB value of Rs.58,21,08,893/- and an FOB rate of Rs.1,579.50 per WMT, and stated that the under-invoicing compared with the average sale FOB price for the same grade and period was 55%. The Assessing Authority consequently stated that the petitioner had indulged in gross under-invoicing amounting to 55%, or Rs.7,11,46,647/-, and that income had escaped assessment to that extent.

The petitioner objected to the reopening, contending that the Shah Commission Report merely suggested a possibility of under-invoicing and did not contain any evidence that the petitioner had actually received any amount over and above the invoice price. The petitioner specifically stated that it had exported 36,854 metric tonnes of Iron Ore at Rs.1,579.50 per metric tonne against a purchase price of Rs.1,228.10 per metric tonne and that there was no evidence of any additional consideration having been received.

The objections were rejected by order dated 22.07.2015. The Assessing Authority relied, among other things, upon the Supreme Court decision in ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., as well as several other decisions, to contend that processing of a return under Section 143(1) did not prevent reopening where the Assessing Officer had reason to believe that income had escaped assessment. The Assessing Authority also relied upon the Commission’s methodology and its comparison of export prices for the same grade and period.

Before the High Court, the petitioner submitted that there was no tangible material giving rise to a reason to believe that income had escaped assessment. It was argued that the Commission had not discovered any material showing that the petitioner received consideration over and above the invoice price. The petitioner further contended that the Assessing Authority had made no independent inquiry or investigation and had simply assumed that the difference between the invoice price and the prevailing international price represented additional consideration received by the petitioner. Reliance was placed upon, among others, Sesa Sterlite Limited Vs. Assistant Commissioner of Income Tax and Others, (2019) 417 ITR 334 (Bombay), Sociedade de Famento Industrial Pvt. Ltd. Vs. Assistant Commissioner of Income Tax and Others, 2024 SCC Online Bom-200, Principal Commissioner of Income Tax Vs. Meenakshi Overseas Pvt. Ltd., (2017) 395 ITR 677 (Delhi), and Assistant Commissioner of Income Tax Vs. Dhariya Construction Co., (2010) 328 ITR 515 (SC).

The Revenue submitted that the invoice price and the fact that it was 55% below the prevailing international price were undisputed. According to the Revenue, the under-valuation was therefore established and constituted sufficient reason to believe that income had escaped assessment. Reliance was placed upon CIT, Gujarat Vs. A. Raman and Co., (1968) 67 ITR 11 (SC), and Kalyanji Mavji and Company Vs. CIT, (1976) 102 ITR 287 (SC).

The Court observed that the reassessment proceedings arose under the unamended law applicable up to 31.03.2021. Under that law, reassessment could be initiated only upon a valid “reason to believe” recorded by the Assessing Authority. Even where there had been no scrutiny assessment, such reasons had to be recorded in writing before issuance of notice under Section 148. The Court referred to S Ganga Saran and Sons (P) Ltd. Vs. ITO, (1981) 3 SCC 143, and held that the belief must be based upon reasons which are relevant and material. It also referred to the Allahabad High Court decision in Indra Prastha Chemicals Ltd. Vs. CIT, (2004) 271 ITR 113, which recognised that the reasons must have a rational connection or relevant bearing upon formation of the belief.

The Court further considered ITO Vs. Lakhmani Mewal Das, (1976) 3 SCC 757, and reiterated the distinction between “reason to believe” and “reason to suspect”. The material relied upon must have a rational connection or direct nexus with the formation of the belief that income had escaped assessment.

Applying those principles, the Court found that the Assessing Authority had not brought on record any material indicating that the petitioner had actually received sale consideration over and above the invoice price. The fact that the invoice price was lower than the international price could not, by itself, establish that the petitioner had earned additional income on accrual basis, because the petitioner had no legal right to receive a higher amount merely because the international price was higher.

The Court found that the Shah Commission Report, to the extent relied upon by the Assessing Authority, only admitted of a possibility of higher realisations. That possibility was founded on comparison between the invoice price and the prevailing international price and not on any material discovered by the Commission demonstrating that exporters, including the petitioner, had actually realised higher amounts. The Court therefore characterised the presumption as conjectural and based on suspicion rather than tangible evidence.

The Court also considered Dhariya Construction Company, where the Supreme Court held that an expert’s opinion, by itself, does not constitute information sufficient for reopening an assessment and that the Assessing Officer must apply his own mind to the information and form the requisite belief.

Ultimately, the High Court held that the vital fact of the actual price realised by the petitioner was within the domain of the Assessing Authority and that no material had been brought before that authority to establish receipt of consideration above the invoice price. In the absence of such tangible or relevant material, there was no occasion to form the requisite “reason” for believing that income had escaped assessment. What existed was only a subjective belief unsupported by objective or tangible material.

The Court noted that in similar facts the Bombay High Court had also quashed reassessment proceedings in Sesa Sterlite Limited and Sociedade de Famento Industrial Pvt. Ltd., and agreed with that view. It consequently held that the reassessment proceedings initiated against Mudra Exports for Assessment Year 2011-12 were wholly without jurisdiction. The writ petition was allowed, the reassessment proceedings were quashed, and no order as to costs was made.

Cases Discussed

• Chandi Ram Vs. ITO, (1996) 87 Taxman 418 (Raj.) — cited by the Assessing Authority while considering whether reopening could be undertaken where income had escaped assessment.
• ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., (2007) 291 ITR 500 (SC) — cited by the Assessing Authority concerning the conditions for issuance of notice under Section 148 and the effect of processing under Section 143(1).
• Mahanagar Telephone Nigam Ltd. Vs. Chairman, CBDT, 246 ITR 273 (Delhi) — cited by the Assessing Authority regarding reopening where there had been no scrutiny assessment.
• Pradeep Kumar Har Saran Lal Vs. Assessing Officer, 229 ITR 46 (Allahabad) — cited by the Assessing Authority concerning reassessment proceedings.
• Jorawar Singh Baid Vs. ACIT, 198 ITR 47 — cited by the Assessing Authority concerning reassessment.
• Punjab Tractors Ltd. Vs. DCIT, 254 ITR 242 (P&H) — cited by the Assessing Authority concerning reopening where the return had not been subjected to scrutiny.
• Shri Krishna Mahal Vs. ACIT, 250 ITR 333 (Mad.) — cited by the Assessing Authority concerning reopening proceedings.
• Kailash Auto Finance Ltd. Vs. ACIT, 32 SOT 80 (ITAT Lucknow) — cited by the Assessing Authority concerning reassessment.
• Shri Krishna Pvt. Ltd. Vs. CIT, 221 ITR 538 (SC) — cited by the Assessing Authority concerning the requirement to establish the final outcome of reassessment at the reopening stage.
• Sesa Sterlite Limited Vs. Assistant Commissioner of Income Tax and Others, (2019) 417 ITR 334 (Bombay) — relied upon by the petitioner concerning reassessment based on material considered insufficient to establish escapement of income and followed by the Allahabad High Court in its reasoning.
• Sociedade de Famento Industrial Pvt. Ltd. Vs. Assistant Commissioner of Income Tax and Others, 2024 SCC Online Bom-200 — relied upon by the petitioner and referred to by the Court as a decision in which reassessment proceedings were quashed in similar facts.
• Principal Commissioner of Income Tax Vs. Meenakshi Overseas Pvt. Ltd., (2017) 395 ITR 677 (Delhi) — relied upon by the petitioner concerning independent application of mind by the Assessing Authority to material relied upon for reassessment.
• Assistant Commissioner of Income Tax Vs. Dhariya Construction Co., (2010) 328 ITR 515 (SC) — relied upon by the petitioner and considered by the Court on the proposition that an expert opinion by itself does not constitute information sufficient to reopen an assessment without independent application of mind.
• CIT, Gujarat Vs. A. Raman and Co., (1968) 67 ITR 11 (SC) — relied upon by the Revenue in support of the reassessment proceedings.
• Kalyanji Mavji and Company Vs. CIT, (1976) 102 ITR 287 (SC) — relied upon by the Revenue in support of reopening.
• S Ganga Saran and Sons (P) Ltd. Vs. ITO, (1981) 3 SCC 143 — considered on the meaning and requirements of “reason to believe”.
• Indra Prastha Chemicals Ltd. Vs. CIT, (2004) 271 ITR 113 — applied concerning rational connection and relevant bearing between material and formation of belief.
• ITO Vs. Lakhmani Mewal Das, (1976) 3 SCC 757 — considered on the requirement of a rational connection or live link and the distinction between “reason to believe” and “reason to suspect”.
• Indian and Eastern Newspaper Society Vs. CIT, (1979) 4 SCC 248 — considered concerning the nature of information and the requirement that the Assessing Officer independently evaluate material relied upon for reassessment.
• S. Narayanappa Vs. CIT, [1967] 63 ITR 219 (SC) — referred to in the quoted passage from Indra Prastha Chemicals concerning the nature of “reason to believe”.
• Kantamani Venkata Narayana and Sons Vs. First Additional ITO, [1967] 63 ITR 638 (SC) — referred to in the quoted passage from Indra Prastha Chemicals concerning reassessment jurisdiction.
• Madhya Pradesh Industries Ltd. Vs. ITO, [1970] 77 ITR 268 (SC) — referred to in the quoted passage from Indra Prastha Chemicals.
• Sowdagar Ahmed Khan Vs. ITO, [1968] 70 ITR 79 (SC) — referred to in the quoted passage from Indra Prastha Chemicals.
• ITO Vs. Nawab Mir Barkat Ali Khan Bahadur, [1974] 97 ITR 239 (SC) — referred to in the quoted passage from Indra Prastha Chemicals.
• CST Vs. Bhagwan Industries (P.) Ltd., [1973] 31 STC 293 (SC) — referred to in the quoted passage from Indra Prastha Chemicals.
• State of Punjab Vs. Balbir Singh, (1994) 3 SCC 299 — referred to in the quoted passage from Indra Prastha Chemicals.
• Johri Lal (HUF) Vs. CIT, [1973] 88 ITR 439 (SC) — referred to in the quoted passage from Indra Prastha Chemicals concerning the mandatory nature of formation of the required belief.
• Sheo Nath Singh Vs. AAC of IT, [1971] 82 ITR 147 (SC) — referred to in the quoted passage from Indra Prastha Chemicals concerning the requirement of reasonable grounds for “reason to believe”.

FULL TEXT OF THE JUDGMENT/ORDER OF ALLAHABAD HIGH COURT

1. Heard Shri Prakash Kumar along with Shri Rupinder Kumar Agarwal and Shri Rishi Raj Kapoor, learned counsel for the petitioner and Shri Manu Ghildyal, learned counsel for the Revenue.

2. The present petition has been filed to assail re-assessment proceedings initiated against the petitioner under Section 148 of the Income Tax Act, 1961 (hereinafter to as the Act) for A.Y 2011-12, vide re-assessment notice dated 27.10.2014. During the assessment year in question the petitioner partnership firm was engaged in export of Iron Ore. For A.Y 2011-12 the petitioner filed its return of income on 30.09.2011 declaring loss Rs.15,830/-. Summary assessment proceedings were concluded thereupon. No scrutiny assessment was made under Section 143(3) of the Act. Later, the petitioner has been served with the impugned re-assessment notice dated 27.10.2014. In response thereto the petitioner filed its reply on 31.10.2014 and prayed to be supplied ‘reasons to believe’ to initiate the re-assessment proceedings. Those were supplied vide letter dated 26.11.2014. They read as below:-

“The third report on illegal mining of Iron and manganese ores in the State of Goa by the honourable Justice M.B. Shah commission of enquiry was submitted in October, 2013. Justice Shah commission conducted thorough factual enquiry as per the given mandate and among other findings has also found out that there has been large-scale under invoicing of the export price in the State of Goa. The findings of the commission is mentioned on page 52 of the above-mentioned report are quoted below-

“it appears that under invoicing of the export price in the State of Goa is apparent. The export price fixed by some companies are beyond imagination, when compared with the cost of production (rupees 250/- per metric ton) royalty, cost of transportation, loading and unloading charges, Port handling charges, export duty, charges of sampling and analyses, rents of the plots at Stocking yards (various stages), etc, the prudent exporter can’t afford such low prices.

On page 238 of this report the assessee M/s Mudra Exports, Ghaziabad, U.P. is mentioned and percentage of under invoicing as compared to average sale FOB price for same grade and period-

From the above findings of the Justice Shah enquiry commission, it is obvious that the assessee firm has Indulged in gross under invoicing of the export amounting to 55% or Rs. 71146647/-in assessment year 2011-12. The findings of the Justice Shah enquiry commission are factual in nature and hence, there is reason to believe that income of the assessee firm has escaped assessment to the extent of 55 % of the real sale consideration.

3. Thereafter, the assessing authority issued to the petitioner compliance notice under Section 143(2) of the Act. At that stage, the petitioner filed its objections to the initiation of re-assessment proceedings, vide objections dated 09.01.2015. The petitioner specifically objected to absence of “tangible material” to give rise to any “reason to believe” with its assessing authority that income had escaped assessment at the hands of the petitioner, arising from export of Iron Ore made by it. Specifically, the petitioner asserted that the Justice M.B. Shah Commission (hereinafter referred to as the Commission) submitted its Report (hereinafter referred to as the Report) and only suggested possibility of under invoicing of Iron Ore extracted from mines and exported from the State of Goa. The conclusions of that Commission were nothing more than suspicion expressed by it.

4. On facts, the petitioner specifically stated, it exported 36854 Metric Tonnes of Iron Ore on 06.04.2010 at the rate of Rs.1579.50/- per Metric Tonne against purchase price of Rs.1228.10/- per Metric Tonne. In-so-far as there was no evidence of the petitioner having received any amount over and above the invoice amount, it was objected that the re-assessment proceedings had been proposed on imagined facts.

5. The above objections raised by the petitioner on 09.01.2015 were rejected by the order dated 22.07.2015. In that it has been observed as below:-

“From the outstation, it is clear that the notice U/s 148 has been issued as per law after recording reason to believe and following all the conditions raised by the law as discussed above. There is absolutely no bar that the case has to be taken in scrutiny U/s 143(2) and not U/s 148/147 as the assessment in both cases is completed U/s 143(3). The issue was judicially analyzed in Chandi Ram Vs. (ITO) (1996)/87 Taxman 418 (Raj)., the Court observed that,” ………..so far as the question as to whether the phraseology used in the repealed section and in the amended section is concerned, I am of the view that there was no vested right in an assessee not to pay the correct tax. The provisions of assessments are needed for determination of current liability of the tax in accordance of law which should be on the basis of correct income and if there is any escapement than the ITO has power to re-open the mater” The Sec. 147 to 152 as exist today have been discussed at the top of this letter and there is absolutely no contravention with the law in issuing the notice U/s 148.

To makes it further clear, the judgment of Hon’ble Supreme Court in ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., dated 23.05.2007 is being cited here. The Hon’ble Supreme Court, while deciding the appeal in favor of revenue has clearly established that the only consideration for issuance of notice U/s 148 is there that the Assessing Officer has reason to believe that income has escaped assessment. It confers jurisdiction to re-open the assessment. In case, the matter is falling within the ambit of the proviso of section 147, the conditions of reason to believe and income escaping assessment should be both satisfied. However, the impugned case does not fall in this category of proviso. To quote from the judgment. “The scope and effect of Sec. 147 as substituted w.e.f April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to substitution. Under the old provision of Sec, 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed and re-assessed. To confer jurisdiction U/s 147(a), two conditions were required to be satisfied, firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessarily for re-assessment for that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice U/s 148/147(a). But under the substituted section 147, the satisfaction of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment, it confers jurisdiction to re-open the assessment. It is however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Sec 147. The case at hand is covered by the main provision and not the proviso.”

In the instant case few facts should be mentioned here to establish that the A.O (undersigned) is well within the ambit of law in issuing notice U/s 148-

• • The ITR filed by the assessee was not subjected to Scrutiny Assessment U/s 143(3) rather it was only processed U/s 143(1) which allows only checking of tax calculation and arithmetic error etc.
  • The issue of export price was never examined. In fact no other issue pertaining to assessment year 2011-12 was examined because the case was not selected through Computer Aided Selection System (CASS) and hence, not subjected to scrutiny assessment.
  • This is the first time that the case of the assessee for A.Y. 2011-12 is proposed to be examined.
  • Mere processing of return U/s 143(1) does not mean that the ITR of the assessee has been accepted after examination.
  • As established by numerous judgments of Hon’ble Supreme Court and various Hon’ble High Courts, the non-examination of case U/s 143(3) does not inhibit, in anyway, the scope of re-opening the case by issuing notice U/s 148. The judgment cited are ACIT Vs. Rajesh Jhewari Stocks Broker Pvt. Ltd., (Supreme Court), Mahanagar Telephone Nigam Ltd. Vs. Chairman CBDT (Del 246 ITR 273). Further, Pradeep Kumar Har Saran Lal Vs. Assessing Officer, 229 ITR 46 (Allahabad), Jorawar Singh Baid Vs. ACIT 198 ITR 47 etc, Punjab Tractors Ltd., Vs. DCIT (P&H), 254 ITR 242 Shri. Krishna Mahal Vs. ACIT (MAD) 250 ITR 333, Kailash Auto Finance Ltd., Vs. ACIT (ITAT Lucknow) 32 SOT 80).
  • The Hon’ble Supreme Court and various Hon’ble High Courts have clarified that there should be existence of reason to re-open a case; however, the existence of reason has been distinguished from sufficiency of reason.
  • The Hon’ble Supreme Court has clarified in ACIT Vs. Rajesh Jhaweri Stock Brokers Pvt. Ltd., that intimation U/s 143(1)(a) is not an assessment.
  • It has been settled that at the time of re-opening, A.O is not required to establish the final outcome of the re-assessment proceedings as established by Hon’ble Supreme Court in the case of Shri Krishna Pvt. Ltd., V.s CIT (SC) 221 ITR 538.

Coming to the issue of non-sufficiency of findings of Justice Shah Commission as basis of reason for issuing the notice U/s 148. In this respect following facts are being brought to your notice:-

(i) The Justice Shah Commission was set up by the Government of India vide notification dated 22.10.2010 and was published in the Gazette of India. The Commission was constituted U/s 3 of the Commission of Inquiry Act, 1952.

(ii) As per Sec-5(5) for any proceeding before the Commission, the Commission shall have the power of Civil Court.

(iii) As per Sec-5(5) any proceeding before the Commission shall be deemed to be a judicial proceeding.

(iv) The Commission has reached the conclusion of under invoicing by using empirical method. The export data was analyzed by comparing the export of one Company with the others. The comparison is based on export of iron -ore of the same grade on the same date.

(v) In certain cases export of iron ore at different prices by the same Company to the different importers, on the same date and for the same grade were compared.

(vi) The example of Rs.250/ Metric ton cited by the assessee is merely an example of one extreme case and is not a general statement. As mentioned above the Commission reached the conclusion as mentioned on page-238 of the report by comparing the export prices of same grade of irons by different Companies.

(vii) The commission also calculated the under invoicing on the basis of difference of more than Rs.100 in Price.

(viii) The report of commission has given clear findings regarding under invoicing i.e. “Further 2352 consignments of iron- ore fines were exported during 2006 to 2011 by the various exporters. The computation of under invoicing has been carried out as discussed in this chapter and it is noted that in 1084 consignments there are under invoicing of 30% more from that base price. 46% of the total export consignments of fines were observed under invoicing. The list of such consignment is enclosed as annexure VI.”

(ix) The findings of the Commission has been mentioned at page-238 of the report and are being reproduced below. It is worth mentioning here that the commission has mentioned the FOB rate per WMT (in INR) and has still held the under invoicing to be at 55%-

(x) The Assessee has shown export at the rate of 39 US $ per metric ton however, in 2008 the assessee has himself made export at the rate of 101.40 US $ per metric ton. There is difference of more than 60 US$ per metric ton. If we compare this with the 55% under invoicing, as calculated by the Justice Shah Commission, it gives a figure of around 87 US $ per metric ton which is a conservative figure compare to export price of 13.02.2008 which the assessee has himself declared.

From above facts and discussion, the objections raised against the issuance of notice U/s 148 for A.Y. 2011-12 are being disposed off and it is stated that the 148 notice is good in law.”

6. At that stage, the present writ petition was filed. It was entertained and interim protection was granted. Pleadings have been exchanged and the matter has been heard.

7. Primary submission of learned counsel for the petitioner is, there is no “tangible material” as may ever give rise to a “reason to believe” with the petitioner’s assessing authority that any income had escaped assessment for the A.Y. 2011-12. The Report only contained an observation that the invoice dated 06.04.2016 issued by the petitioner for export of 36854 Metric Tonnes of Iron Ore was below the international price for that commodity (on that date) by 55 %. The scope of the Commission did not permit and in any case the Report did not explore any fact nor it brought out any fact discovery of receipt or any amount by petitioner-over and above the invoice price recorded in the invoice in question.

8. On its part, the assessing authority did not make any inquiry or investigation and in any case he has not brought on record any material nor he has recorded any “reason to believe” that petitioner had received any amount towards sale price over and above the invoice price noted above.

9. The assessing authority has in fact blindly assumed the Report itself to be evidence of escapement. He has proceeded on the premise- since the invoice price disclosed by the petitioner was allegedly 55 percent below the international price, that differential amount must have been received by the petitioner and further consequentially it has escaped assessment at the hands of the petitioner. Here, he would submit, there is neither such presumption available in law (either under the Act or any other law), nor there is any accepted business practice or accounting standard as may support that presumption drawn by the assessing authority. Thus, it is his submission, the “belief” entertained by the assessing authority as to escapement of income at the hands of petitioner for the Assessment Year 2011-12 is not supported by any “reason”. In fact, the “belief” alone exists without any “tangible material” as may have given rise to any “reason” to form such “belief”.

10. Then, it has been submitted, that the Report is only an opinion as to certain facts. It is not a definite adjudication of any dispute. Even then the report itself does not seek to reach a definite conclusion as to the fact that the petitioner had received any amount over and above the invoice amount, against Iron Ore exported by it. Rather, it assumes existence of such fact. Still, the assessing authority has sucummed to the suspicion raised by the Report and has conjecturally believed that in face of the conclusions recorded in the Report, income has escaped at the hands of the petitioner.

11. Learned counsel for the petitioner further submits that the assessing authority made no efforts to seek any information with respect to the matters reported by the Commission though such power was not only available but may have been necessarily exercised in terms of the Section 133(6) of the Act, before a fishing and roving inquiry may have been undertaken in the garb of the power to re-assess the petitioner. In support of his submissions, he has relied on a decision of the Bombay High Court in Sesa Sterlite Limited Vs. Assistant Commissioner of Income Tax and Others (2019) 417 ITR 334 (Bombay) and also Sociedade de Famento Industrial Pvt. Ltd. Vs. Assistant Commissioner of Income Tax and Others (2024) SCC Online Bom-200. Further reliance has been placed on a decision of the Delhi High Court in Principal Commissioner of Income Tax Vs. Meenakshi Overseas Pvt. Ltd (2017) 395 ITR 677 (Delhi), to submit that no re-assessment may arise except after independent application of mind offered by the assessing authority to the material that may be brought before him to allege escapement of income.

12. Further, reliance has been placed on a decision of the Supreme Court in Assistant Commissioner of Income Tax Vs. Dhariya Construction Co. (2010) 328 ITR 515 to assert that the expert report remains an opinion. Itself, it may not constitute the basis to reopen an assessment and that if any information is contained in such an opinion, the assessing authority would still have to apply his independent mind thereto to form his independent reason to believe as to escapement of income, before a re-assessment proceeding may be initiated.

13. On the other hand, learned counsel for the revenue would submit, in the present case the facts speak for themselves. The issuance of invoice and the invoice price noted in the “reasons to believe”, is undisputed to the assessee/ petitioner. It is also undisputed that the said price was 55 percent below the then prevailing international price. Therefore, undervaluation/ under invoicing was clearly established. Same conclusion has been reached by the Commission. In the undisputed facts reasons exist to support the belief that income has escaped assessment to the extent of under invoicing. He has relied on CIT Gujarat Vs. A. Raman and Co. (1968) 67 ITR 11 (SC) and Kalyanji Mavji and Company Vs. CIT (1976) 102 ITR 287 (SC).

14. Having heard learned counsel for the parties and having perused the record, in the first place it is undisputed between the parties that the present re-assessment proceeding has arisen under the unamended law i.e. the law that was in force upto 31.03.2021. Under the law as it then existed, no re-assessment proceedings could ever be initiated except against a valid “reason to believe” recorded by the assessing authority.

15. Second, even in a no assessment case, re-assessment could rise only after such “reason to believe” had been recorded in writing before issuance of notice under Section 148 of the Act. Thus, recording of “reasons to believe” in writing was a sine qua non for valid assumption of jurisdiction to re-assess an assesse.

16. As to what amounts to a “reason to believe,” the law has remained settled over long decades. In S Ganga Saran and Sons (P) Ltd. Vs. ITO (1981) 3 SCC 143, in the context of the then existing Section 147(a) of the Act, yet, in the context of initiation of reassessment proceedings upon recording of “reasons to believe”, it was established in law that those words were stronger than “is satisfied”; the “belief” must be based on “reasons” that are “relevant and material”. For ready reference, it was held as below:-

“6. It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under Section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under Section 147(a) are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income Tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.”

17. Then, a co-ordinate bench decision of this Court in Indra Prastha Chemicals Ltd. Vs. CIT (2004) 271 ITR 113, applied that law and held as below:-

“11. The expression “reason to believe” in section 147 does not mean purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceedings under section 147 is open to challenge in a court of law as held in S. Narayanappa v. CIT, [1967] 63 ITR 219 (SC); Kantamani Venkata Narayana and Sons v. First Additional ITO, [1967] 63 ITR 638 (SC); Madhya Pradesh Industries Ltd. v. ITO, [1970] 77 ITR 268 (SC); Sowdagar Ahmed Khan v. ITO, [1968] 70 ITR 79 (SC); ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (SC); ITO v. Nawab Mir Barkat Ali Khan Bahadur, [1974] 97 ITR 239 (SC); CST v. Bhagwan Industries (P.) Ltd.,[1973] 31 STC 293 (SC) and State of Punjab v. Balbir Singh, (1994) 3 SCC 299.

12. The formation of the required opinion and belief by the Assessing Officer is a condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under section 147. The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings as held by the apex court in the case of Johri Lal (HUF) v. CIT, [1973] 88 ITR 439 (SC) and Sheo Nath Singh v. AAC of IT, [1971] 82 ITR 147 (SC). The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and far fetched, which would warrant the formation of the belief relating to escapement of income of the assessee from assessment, as held by the hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to believe. In such a case, the notice issued by him would be liable to be struck down as invalid as held in the case of Ganga Saran and Sons P. Ltd. v. ITO, [1981] 130 ITR 1 (SC).

13. Thus, it is well settled that the “reason to believe” under section 147 must be held in good faith and should have a rational connection and relevant bearing on the formation of the belief and should not be extraneous or irrelevant. Further, this court in proceedings under article 226 of the Constitution of India can scrutinize the reasons recorded by the Assessing Officer for Initiating the proceedings under section 147/148 of the Act. The sufficiency of the material cannot be gone into but relevancy certainly be gone into.”

18. As to what may constitute material that may give rise to the ‘reasons to believe’ in ITO Vs. Lakhmani Meval Das, (1976) 3 SCC 757, the Supreme Court drew a clear line to prevent initiation of re-assessment proceedings on vague, distant, remote and far fetched information. There, it was held as below:-

“11. As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words “definite information” which were there in Section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in Section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

12. The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are “reason to believe” and not “reason to suspect”. The reopening of the assessment after the lapse of many years is a serious matter. The Act. no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter’s failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs.”

19. Again in Indian and Eastern Newspaper Society Vs. CIT (1979) 4 SCC 248, the Supreme Court had the occasion to consider whether opinion of an internal audit party of the Income Tax Department would constitute “information” for the purpose of initiation of re-assessment proceedings. Negating the submission advanced by the revenue in that regard, it was held:-

“8. But when “information” is regarded as meaning instruction or knowledge as to law the position is more complex. When we speak of “law”, we ordinarily speak of norms or guiding principles having legal effect and legal consequences. To possess legal significance for that purpose, it must be enacted or declared by competent authority. The legal sanction vivifying it imparts to it its force and validity and binding nature. Law may be statutory law or, what is popularly described as, judge-made law. In the former case, it proceeds from enactment having its source in competent legislative authority. Judge-made law emanates from a declaration or exposition of the content of a legal principle or the interpretation of a statute, and may in particular cases extend to a definition of the status of a party or the legal relationship between parties, the declaration being rendered by a competent judicial or quasi-judicial authority empowered to decide questions of law between contending parties. The declaration or exposition is ordinarily set forth in the judgment of a court or the order of a tribunal. Such declaration or exposition in itself bears the character of law. In every case, therefore, to be law it must be a creation by a formal source, either legislative or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law. The suggested interpretation of enacted legislation and the elaboration of legal principles in textbooks and journals do not enjoy the status of law. They are merely opinions and, at best, evidence in regard to the state of the law and in themselves possess no binding effect as law. The forensic submissions of professional lawyers and the seminal activities of legal academics enjoy no higher status. Perhaps the only exception is provided by the writings of publicists in international law, for in the law of nations the distinction between formal and material sources is difficult to maintain.

9. In that yiew, therefore, when Section 147(b) of the Income Tax Act is read as referring to “information” as to law, what is contemplated is information as to the law created by a formal source. It is law, we must remember, which because it issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of these matters which determine the assessee’s tax liability.

13. In the present case, an internal audit party of the Income Tax Depart- ment expressed the view that the receipts from the occupation of the conference hall and rooms did not attract Section 10 of the Act and that the assessment should have been made under Section 9. While Sections 9 and 10 can be described as law, the opinion of the audit party in regard to their application is not law. It is not a declaration by a body authorised to declare the law. That part alone of the note of an audit party which mentions the law which escaped the notice of the Income Tax Officer constitutes “information” within the meaning of Section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income Tax Officer. In every case, the Income Tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income Tax Officer.”

20. It is here that we have to test, if relevant/ tangible material exists and if valid “reason” has arisen on application of mind to such material, by the assessing authority as may have led to the formation of his belief that income had escaped assessment at the hands of the petitioner.

21. What the assessing authority was required to record were reasons qua his belief that income had escaped assessment. For initiation of reassessment proceedings, there must exist “tangible material” indicating some income had arisen either on accrual or actual/ cash basis and that it has escaped assessment. Merely because the invoices issued by the petitioner were below the international price, it could never be alleged that there was any income on accrual basis as the petitioner earned no legal right to receive any higher amount. Therefore, we have to examine if there exists any material indicating receipt of any income on actual/ cash basis, over and above the invoice price.

22. The entire opinion of the Commission and the recital made in the “reasons to believe” recorded by the petitioner as also reasons recorded by that authority while rejecting the objections raised by the petitioner are directed and confined solely to the observations made by the Commission. The Report is not before us in entirety. To the extent it has been relied by the assessing authority, it only admits of a possibility of higher realizations having been made. Even that possibility exists not on the strength of any material discovered by the commission of higher realizations made by exporters (including the petitioner) but on a presumptuous basis solely by comparing the invoice price with the prevailing international price. Hence, that presumption/ opinion howsoever considered is not based on any hard evidence (either oral or documentary) of any higher price realized. Rather, it is conjectural and in any case on suspicion.

23. In absence of any statutory principle and further in absence of any precedential law in that regard, the presumption drawn in the Report insofar as it has been relied by the assessing authority, cannot be acted upon. To that extent, the Report remains a pure subjective opinion and nothing more. Though other actions may have been taken in furtherance of that Report to ascertain the correct facts, those are not subject matter of these proceedings. In the context of the strict test of “reason to believe” prescribed under the Act, it would be dangerous and impermissible to read that purely subjective opinion of the Commission as a finding of any receipt more than the invoice price.

24. To that extent the decision of the Hon’ble Supreme Court in Dhariya Construction Company (supra) remains relevant. Though that Civil Appeal was dismissed by a short order, the reasoning contained therein is relevant. In paragraph 1 of that two paragraph order of the Hon’ble Supreme Court it was observed as below:-

“1. Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the District Valuation officer (DVO). The opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-Tax Act, 1961. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment.

2. Civil appeal is, accordingly, dismissed. No order as to costs.”

25. An opinion expressed by an expert howsoever, revered and respected remains only an opinion. In the context of the Report relied by learned counsel for the revenue, it was wholly subjective. The only fact that was considered and found in existence by the Commission was of the invoice price disclosed by the petitioner being lower than the prevailing international price of that commodity. No other fact was gone into or brought out in the Report to suggest that the invoice price was deliberately suppressed or that actual consideration received was more. The vital fact of value/ price realized by the petitioner against the invoice issued, was neither gone into nor any definite opinion was expressed thereto. In any case, no material was discovered by the Commission, as may support that “belief”.

26. That vital fact fell within the domain of the assessing authority. It is that fact alone which may have given rise to a reason to believe that income had escaped assessment at the hands of the petitioner. Since there is no material in that regard, we find that the present re-assessment proceedings have been initiated without any relevant material coming to the hands of the assessing authority to form any “reason to believe” as to escapement. Once the tangible/ relevant material itself is missing, there arose no occasion with the assessing authority to form any “reason”. In absence of material and reasons what arose was a simple subjective “belief” based on no objective/ tangible material or reason. It was in-actionable.

27. In exactly similar facts, the Bombay High Court has also quashed re-assessment proceedings, in Sesa Sterlite Limited (supra) and Sociedade de Famento Industrial Pvt. Ltd. (supra). We are in agreement with that view. For the reasons noted above, we find re-assessment proceedings initiated against the petitioner for the Assessment Year 2011-12 were wholly without jurisdiction. It also being beyond the pale of doubt- unless jurisdiction is first clearly established, the re-assessment- proceedings may not survive and an assessee may not be forced to participate in the same. The writ petition is allowed, the re-assessment proceedings are quashed. No order as to costs.