Laxmikant Vinod Lath Vs ITO (Bombay High Court)
Summary: The Bombay High Court, in Laxmikant Vinod Lath v. Income Tax Officer, Ward 17(2)(2), Mumbai and Others, Writ Petition No. 111 of 2020, decided on 10 January 2022 for Assessment Year 2012-13, quashed a reassessment notice dated 31 March 2019 issued under Section 148 of the Income-tax Act, 1961, along with the order rejecting the assessee’s objections to reopening. The principal issue was whether the existence of high-value banking transactions, information received from the Investigation Wing and entries appearing in Form 26AS were sufficient to establish a reason to believe that income chargeable to tax had escaped assessment. The Court held that mere deposits into a bank account, without a demonstrable connection to undisclosed income, could not justify reopening an assessment already completed under Section 143(3).
The assessee had filed a return of income for Assessment Year 2012-13 declaring total income of ₹6,09,900. The return was initially processed under Section 143(1), and a regular scrutiny assessment was subsequently completed under Section 143(3). Thereafter, the Assessing Officer received information concerning transactions in an ICICI Bank account maintained at the Dombivali branch. According to the recorded reasons, credits aggregating ₹7.44 crore and corresponding debits of ₹7.44 crore had occurred during the relevant period. The Assessing Officer stated that the purpose for which such substantial amounts had been deployed was not known and formed a belief that income to the extent of ₹7.44 crore had escaped assessment.
The recorded reasons additionally referred to Form 26AS, which reflected interest income of approximately ₹1.40 crore from Eske Tex India Private Limited and receipts of approximately ₹12.70 lakh from Sunil Industries. The Assessing Officer alleged that these entries were inconsistent with the assessee’s declared income and financial profile. The High Court, however, observed that the Assessing Officer had ultimately confined the alleged escaped income to the ₹7.44 crore appearing as both bank credits and debits. The other receipts referred to in the reasons had not independently been quantified as escaped income in the final computation of the proposed reassessment.
Examining the bank transactions and the financial statements, the High Court questioned how the entire ₹7.44 crore could be treated as income when an equivalent amount had admittedly been debited from the account. The Court noted that the assessee’s balance sheet recorded liabilities of ₹8,50,90,155 and ₹3,50,40,164 in the names of Ashok Mahansaria and Yogesh Mahansaria respectively. The funds were connected with investments in Eske Tex India Private Limited. The assessee had received interest of ₹1,41,18,920 and incurred interest expenditure of ₹1,43,43,518. These figures were not fresh discoveries made during reassessment proceedings but formed part of the financial records available to the department during the original assessment.
The Court further observed that the computation of income disclosed interest receipts of ₹1,41,18,920 and interest payments of ₹1,43,43,518, with the interest-payment claim restricted in the computation to ₹1,42,05,185. Corresponding figures were also reflected in the capital account. The Assessing Officer’s reopening reasons mentioned the interest received but omitted the interest paid, thereby presenting an incomplete picture of the transactions. In the Court’s view, the materials had already been disclosed before completion of the scrutiny assessment and could not support the initiation of reassessment merely because the Investigation Wing had subsequently supplied information concerning allegedly suspicious transactions.
The High Court emphasized that receipt of information from the Investigation Wing does not, by itself, confer jurisdiction to reopen an assessment. The Assessing Officer must independently establish a rational connection between the information received and a belief that taxable income has escaped assessment. Similarly, a substantial deposit through banking channels is not automatically taxable income. The reasons recorded must demonstrate more than the existence of large transactions or a general suspicion regarding the assessee’s financial activities. The Court concluded that the reopening notice had been issued on the basis of Investigation Wing information without establishing the required nexus and amounted to an impermissible change of opinion. This conclusion is consistent with the general principle explained in CIT v. Kelvinator of India Ltd., although that decision was not expressly cited in the original order.
Accordingly, the Bombay High Court allowed the writ petition and granted the relief sought in prayer clause (a), quashing the Section 148 notice dated 31 March 2019 and the impugned order rejecting the objections to reopening. The operative prayer referred to an order dated 15 November 2019, whereas the opening paragraph recorded the date as 25 November 2019. Both dates appear in the original judgment and have been preserved in the full-text reproduction. The decision establishes that unexplained-looking banking activity must be supported by legally sufficient reasons demonstrating escapement of income before reassessment jurisdiction can be invoked.
FULL TEXT OF THE JUDGMENT OF BOMBAY HIGH COURT
1. The Petitioner unhappy with the notice dated 31st March, 2019 issued under section 148 of the Income Tax Act, 1961 and Petitioner’s objection to the reopening being rejected vide order dated 25th November, 2019 has approached this Court by way of this Petition.
2. Petitioner is praying for quashing of this notice dated 31st March, 2019 and the order dated 15th November, 2019.
3. Though time was granted on 17th December, 2019 to Respondents for filing reply if necessary, no reply has been filed till date.
4. Petitioner has received notice dated 31st March, 2019 under section 148 of the Act for A.Y. 2012-2013. The reasons for reopening of the assessment are :
(a) Petitioner had filed return of income for A.Y. 2012-2013 declaring total income of Rs. 6,09,900/- which was processed under section 143(1) and later under section 143(3) of the Act. According to the Jurisdictional Assessing Officer(JAO) Petitioner was maintaining bank account with ICICI Bank, Dombivali Branch. In the said account, there are large valued non-cash transactions between 5th March, 2011 to 12th November, 2011. There was credit transaction of Rs. 744 lacs and debit transaction also of Rs. 744 lacs. In the reasons it is mentioned that the purpose of deployment of such large fund is not known.
(b) From the perusal of Form 26AS for A.Y. 2012-2013 Petitioner has received Rs.1.4 Crores of interest income from M/s. Eske Tex India Private Limited but this has not been disclosed in his return of income. Petitioner is also alleged to have received income of approximately Rs.12.7 lacs on which TDS is deducted under section 94C by M/s. Sunil Industries. But Petitioner has shown other income to the tune of Rs. 15,22,063/-. These transactions do not match with the profile of Petitioner.
(c) For the month of March, 2011 certain payments have been received amounting to Rs. 1,70,000/- which was used to make certain payments to schools. We are ignoring this figure because it does not pertain to the assessment year in question but relates to A.Y. 2011-2012.
(d) According to Respondent No. 1, therefore he has reasons to believe that income chargeable to the tune of Rs. 744 lacs has escaped assessment within the meaning of section 147 of the Act.
5. Though in the reasons, it is alleged that Petitioner had received Rs. 1.4 Crores interest income of Rs. 12.7 lacs on which TDS is deducted etc., those are not amounts which are stated to have escaped assessment. This is because in paragraph 7 of the reasons, the JAO has restricted the income chargeable to tax that has escaped assessment to Rs. 744 lacs. This is the figure for which there has been credit transaction and debit transaction during the assessment year.
6. First and foremost, we have to note that where there has been credit of Rs. 744 lacs and admittedly debit of Rs. 744 lacs, how can there be any income at all and that too which has escaped assessment. The entire amount received has been paid out. Moreover, in the balance-sheet annexed to the Petition there are names of Ashok Mahansaria and Yogesh Mahansaria against whom liability in the sum of Rs. 8,50,90,155/- and Rs. 3,50,40,164/- respectively, has been recorded. It is this amount of investment which was gone to M/s. Eske Tex India Private Limited. Petitioner received interest of Rs. 1,41,18,920/- and has also paid interest of Rs. 1,43,43,518/-.
7. In the reasons for reopening though there is a mention of Rs. 1.4 Crores credit of interest income from M/s. Eske Tex (I) Pvt. Ltd, the reason is silent about the payment of interest of Rs. 1,43,43,518/-. In the computation of income, Petitioner has disclosed interest received of Rs. 1,41,18,920/- and payment of Rs. 1,43,43,518/- restricted to Rs. 1,42,05,185/-. Even in the capital account there is disclosure of interest receipt of Rs. 1,41,18,920/- and interest payment of Rs. 1,43,43,518/-. Therefore these details have been made available before the assessment was completed under section 143(3) of the Act. Just because some information has been received from the Investigation Wing, does not entitle Respondents to reopen assessment based on change of opinion. Merely, deposit of money into the bank account by way of cheque itself is not a ground for escapement of income. Mere high value deposit in the bank account cannot be a reason for reopening under section 148 of the Act. The reasons as made available to Petitioner merely indicates information received from Investigation Wing about a particular entity entering into suspicious transaction. That material is not further linked to the conclusion that Petitioner has indulged in any activity which can give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped assessment. It does appear that the Assessing Officer has merely issued a reopening notice on the basis of intimation received from the Investigation Wing and consequent to change of opinion.
8. In the circumstances, we allow the Petition in terms of prayer clause (a) which reads as under:
“(a) That this Court may be pleased to issue a writ of certiorari or any other writ, order or direction under Articles 226 and 227 of the Constitution of India calling for the records of the case leading to the issue of the impugned notice and passing of the impugned order and after going through the same, and examining the question of legality thereof, quash, cancel and set aside the impugned notice (Exhibit C) dated 31st March, 2019 and the impugned notice (Exhibit C) dated 31st March, 2019 and the impugned order (Exhibit H) dated 15th November, 2019.”
9. Petition disposed accordingly.
