No Reopening on Borrowed Satisfaction when view was already taken by AO

Alliance Filaments Ltd Vs ACIT (Gujarat High Court)

A plain reading of the reasons recorded revels that the Assessing Officer has solely relied on the information received from the Investigation Wing- Surat. We are of the view that, the Assessing Officer has not applied his independent mind while recording the reasons that the income has escaped assessment. The original assessment record was with the Assessing Officer. The scrutiny assessment framed by the respondent has been challenged by the assessee company and the appeal is pending before the Appellate Tribunal. As the issue of alleged transaction of Rs. 7,50,055/- was earlier added by the then Assessing Officer under Section 68 of the Act at the original assessment stage, the same amount cannot be brought to tax once again in the reassessment proceedings. 15. It is not the case of the revenue that the transaction as reported by the Investigating Wing, Surat was distinct and has no relation with the earlier scrutiny assessment made  nder Section 143(3) of the Act. Thus, as such there was no tangible material in the hands of the Assessing Officer for reopening of the proceedings.

We are of the view that the Assessing Officer has acted mechanically based on the information received from the Investigating Wing, Surat for the purpose of reopening of the assessment and any independent satisfaction to the effect that the income chargeable to tax has escaped assessment is not reflected.

17. It is a settled principle of law that the respondent cannot justify by taking recourse to some material and information beyond the scope of the reasons recorded by the Assessing Officer prior to reopening. In the instant case, the respondent has traveled beyond the scope of reasons recorded in order to justify the action of reopening. It is pertinent to note that while disposing of the objections against the reopening, Assessing Officer has observed that it has credible information as received by the office pertaining to the transaction claimed as a part of turnover and same can be clearly made out from the copy of the reasons recorded provided by the office. After close scrutiny of the reasons recorded, the Assessing Officer did not have refer the facts that the transactions was part of the turnover. Therefore, we hold that the formation of belief entertained by the Assessing Officer seems to be vague and based on irrelevant material.

 In view of the discussion made hereinabove, we hold that the assumption of jurisdiction on the part of the Assessing Officer under Section 147 of the Act to reopen the assessment by issuing the impugned notice dated 28.03.2019 under Section 147 of the Act is without authority of law which renders the notice unsustainable.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. By this writ application under Article 226 of the Constitution of India, the writ applicant seeks to challenge the notice dated 28.03.2019 issued by the respondent under Section 148 of the Income Tax Act, 1961 (for short, ‘the Act, 1961’) seeking to reopen the writ applicant’s income tax assessment for the A.Y. 2012-2013.

2. The brief facts can be summarized as under:

2.1 The writ applicant is engaged in the business of manufacturing FDY/POY/Tectu. Yarn.. The writ applicant filed its return of income tax under Section 139 of the Act for the year under consideration on 27.9.2012 declaring total income at Rs. NIL. The case of the writ applicant for the year under consideration was selected for scrutiny assessment and various details were called for by the respondent and same were duly furnished by the writ applicant from time to time. The then Assessing Officer framed scrutiny assessment under Section 143(3) of the Act vide order dated 31.03.2015 made various additions including the addition of Rs.2,99,05,000/- under Section 68 of the Act in respect of share capital and share premium received by the writ applicant during the year under consideration, which included the sum of Rs.7,50,000/- received from the Shaileshkumar Naika. The writ applicant had challenged the assessment order before the Commissioner of Income Tax (Appeals), who vide order dated 07.03.2013 confirmed the addition made under Section 68 of the Act. The writ applicant has challenged the order passed by the Commissioner of Income Tax (Appeals) before the Income Tax Tribunal and same is pending.

2.2 During the pendency of the Appeal, the Assessing Officer has reopened the assessment under Section 147 of the Act by issuing impugned notice dated 28.03.2019 under Section 148 of the Act.

2.3 At the request of writ applicant, the reasons recorded have been provided. The relevant portion of reasons quoted as under:

Reasons recorded:

“Brief details of the Assessee: The assessee company filed its return of income on 27.09.2012 showing total income at Rs.Nil (claim ed current year to be carried forward loss of (-)Rs.12,21,20,709/-). The assessee company is engaged in the business of manufacturing of FDY/POY/Texturised Yarn. Thereafter, order u/s.143(3) r.w.s. 147 of the Act was passed on 18.12.2018 determining assessed carried forward loss of (-) Rs.8,98,89,759/-.

2. This office is in possession of a piece of information disseminated by Investigation Wing, Surat. An enquiry was carried by the Dy. Director of Income Tax (Inv.), Unit-2, Surat in the case of Shri Shailesh R. Naika concern connected to it, after information was received about the suspicious financial transaction entered into by them.

2.1. The DDIT(Inv.)-2, Surat has reported that an open inquiry was initiated with the prior approval of the Addl. DIT (Inv), Surat. Summons u/s 131 of the Income Tax Act, 1961 was issued to Shri Shaileshkumar Ramesh Naika. Shri Shaileshkumar Ramesh Naika has not responded to the summons u/s. 131 of the Act issued. Another Summons dated 13.02.2018 was issued to Shri Shaileshkumar Ramesh Naika and the address mentioned in the return of income i.e. at Shiv Mandir, Rustomwadi, Navsari. Again there was no response to the said Summons as well. In order to verify the facts and collect relevant information, Summons was issued to the Manager, Allahabad Bank and Axis Bank Ltd for submission of details in reference to Shri

Shaileshkumar Ramesh Naika. ….

……..

2.10 On perusal of the bank statement of account no. 50050442936 held with Allahabad Bank, it is seen that M/s. Alliance Filaments Ltd. is a beneficiary, who has made transaction with Shri Shaileshkumar R. Naika (an entry provider as established in the enquiry made by the DDIT (Inv. )­2, Surat). During the year under consideration, M/s. Alliance Filaments Ltd. had made. transaction amounting to Rs.7,50,055/- on 19.11.2011 with Shri Shaileshkumar R. Naika (an entry provider as established in the enquiry made by the DDIT (Inv.)-2, Surat), this transaction is thus, bogus in nature.

3. Report of the DDIT(Inv.), Unit-2 Surat have been perused. After perusal and having verified, the finding of the DDIT(Inv.), Unit-2, Surat is found to be in order that Shri Shaileshkumar R. Naika is an entry provider engaged in the business of providing accommodation entries to various entities.

4, After perusal of information provided by the DDIT(Inv.) Unit-2, Surat and material available on record, it is confirmed that the assessee company M/s. Alliance Filaments Ltd. has made bogus transaction with Shri Shaileshkumar R. Naika (an entry provider as established in the enquiry made by the DDIT(Inv.)-2 Surat) during the F.Y.2011-12 relevant to A.Y.2012-13. This transaction of Rs.7,50,055/- during the F.Y.2011-12 relevant A.Y.2012-13 is nothing but the attempt to take accommodation entries through transaction with the said tainted concerns and an attempt to reduce its tax liability.

5. In view of above facts and discussion made hereinabove, the undersigned has reason to believe and be satisfied that the transactions made by the assessee company M/s. Alliance Filaments Ltd. with Shri Shaileshkumar R. Naika (an entry provider as established in the enquiry made by the DDIT(Inv.)-2, Surat) during the F.Y.2011-12 relevant to A.Y.2012-13 are bogus in nature. By making bogus transaction amounting to Rs.7,50,055/- during the F.Y.2011-12 relevant A.Y.2012-13, the assessee company thereby attempt to reduce its resultant tax liability.

6. In view of above facts/material available on records and after analyzing the same I have reason to believe and am satisfied that income of the assessee to the extent of Rs.7,50.055/- has escaped assessment for A.Y.2012-13 within the meaning of section 147 of the I.T. Act.

7. In this case, return of income was filed for the year under consideration and assessment u/s 143(3) r.w.s. 147 of the Act was made on 18.12.2018. Since, 4 years from the end of the relevant year has expired in this case, the requirements to initiate proceeding u/s 147 of the Act are reason to believe that income for the year under consideration has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year consideration have been recorded above (refer paragraphs 1 to 6). I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment proceedings and have noted that the assessee has not fully and truly disclosed the following material facts necessary for his assessment for the year under consideration.

It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for his assessment for the year under consideration, thereby necessitating reopening u/s 147 of the Act.

It is true that the assessee has filed a copy of annual report and audited P&L account and balance sheet along with return of income where various information / material were disclosed However, the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced audited P&L account and balance sheet as mentioned above, the requisite material facts as noted above in the reasons for reopening was not as such disclosed and could not be discovered by the AO, accordingly attracting provisions of Explanation 1 of section 147 of the Act

It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the course of regular assessment /reassessment. This fact is corroborated from the contents of noticed issued by the AO u/s.143(2) proceedings. It is important to highlight here that material facts relevant for the assessment on the issue(s) under consideration were not filed during the course of assessment proceeding and the same may be embedded in annual report audited P&L A/c, balance sheet and books of account in such a manner that it would require due diligence by the AO to extract these information. For above stated reasons, it is not a case of change of opinion by the AO.

2.4 The writ applicant raised objections vide its communication dated 18.05.2019 and same came to be rejected by the respondent vide order dated 04.09.2019.

2.5 Aggrieved by the disposal of the objections by Assessing Officer, the writ applicant has come up before this Court by filing the present writ application.

3. We have heard Mr. Tushar Himani, the learned Senior Counsel assisted by Ms. Vaibhavi Parikh, the learned advocate  or the writ applicant and Ms. Kalpana Raval, the learned Standing Counsel appearing for the revenue.

4. Mr. Tushar Hemani, the learned Senior Counsel appearing for the writ applicant has raised the following contentions:

4.1 It was argued that the impugned notice as well as impugned order disposing of the objections are patently illegal, bad in law and without jurisdiction because the condition precedent for valid reopening under Section 147 of the Act is not satisfied.

4.2 It was pointed out that the impugned amount of Rs.7,50,000/- has already been added by the Assessing Officer at the original assessment stage, as the transaction with Mr. Naika were scrutinized at the original assessment stage and the sum of share capital and share premium received from Shaileshkumar Naika was added by the then Assessing Officer under Section 68 of the Act. Therefore, the condition precedent for resorting to reopening of the proceedings under Section 147 is not satisfied, as there was no escapement of any income chargeable to tax.

4.3 Referring to reasons recorded, learned senior counsel for the writ applicant submitted that the action of reopening is not permissible for carrying out roving and/or fishing inquiry or investigation without there being a specific finding as to escapement of income. In this regard, it was submitted that the assessee has disclosed the transaction of Rs.7,50,000/- made with Shaileshkumar Naika during the scrutiny assessment and the amount already considered by the then Assessing Officer, now for the inquiry or verification with regard to other transaction of Mr. Shaileshkumar Naika, the reopening is not permissible.

4.4 It was further contended that there was no failure on the part of the writ applicant as to full and true disclosure of the materials, since the amount of share capital and share premium received by the assessee including the sum received from Mr. Shaileshkumar Naika was added under Section 68 of the Act, while framing assessment under Section 143 of the Act, therefore, it demonstrate that all the necessary primary evidence having been disclosed at the time of scrutiny assessment, therefore, now the action of reopening is not justified in eye of law.

4.5 It was further pointed out that the Assessing Officer has mainly relied upon the information received from the office of DDIT (Investigation-2) for the purpose of reopening of the assessment and while recording the reasons, the Assessing Officer has not applied his mind independently so as to reach the conclusion that income has escaped assessment. Therefore, the reopening based on borrowed satisfaction is not tenable in eye of law.

4.6 It was further argued by learned Senior counsel that reopening of the assessment without any tangible material at the hands of Assessing Officer, he could not have proceeded to reopen the proceedings as the satisfaction arrived at by him based on information received from the Department.

5. In view of the above submission, Shri Tushar Himani, the learned Senior counsel prays that the writ application may be allowed.

6. Ms. Kalpana Raval, the learned Standing Counsel appearing for the revenue submitted that the authority is justified in reopening of the assessment as the basic requirement for initiation of proceedings under Section 147 of the Act, beyond the period of 4 years from the end of the relevant Assessment Year, is fulfilled in the present case. She further pointed out that the case of the assessee was reopened on account of the information received from Investigation Wing, Surat in the case of Shaileshkumar Naika and after verification of the information, the requisite full and true disclosure of all material evidence necessary for assessment has not been made by the assessee. Therefore, the action of reopening is justifiable. The assessing Officer has verified the case record and drawn his satisfaction that income to the tune of Rs.7,50,000/- has escaped assessment.

7. In view of the above contentions, learned counsel appearing for the revenue urged that the writ application may not be entertained.

8. We have carefully considered the rival contentions and also perused the materials on record.

9. It appears from the record that return of income for the year under consideration was filed on 27.9.2012 declaring total income of Rs. NIL. The case was selected for scrutiny assessment and after considering the necessary materials submitted by the assessee, the then Assessing Officer framed the assessment under Section 143 (3) of the Act and made various additions including Rs.2,99,05,000/- under Section 68 of the Act in respect of Share capital and share premium received by the writ applicant during the year under consideration, which included sum of Rs.7,50,000/-received from Mr. Shaileshkumar Naika. It is undisputed fact that the writ applicant had challenged the assessment order before the Commissioner of Income Tax (Appeals), who vide order dated 07.03.2017 confirmed the addition of Rs.2,99,05,000/- made under Section 68 of the Act and same was challenged by way of an Appeal before the Income Tax Appellate Tribunal, which is pending as on date. Admittedly, the disputed amount of Rs.7,50,055/- for which the notice issued was added by the then Assessing Officer under Section 68 of the Act. In other words, the underlying amount has already been added by the Assessing Officer at the original assessment stage.

10.  It is settled law that as per Section 147, if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of Sections 148 to 153 assess or reassess such income, which has escaped assessment. It is also settled that where the assessment under Sections 143 or 147 has been made for the relevant assessment year, no action shall be taken under Section 147 after the expiry of 4 years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reasons of the failure on the part of the assessee to make a return under Section 139 or to disclose the fully and truly all material facts necessary for his assessment for that assessment year.

11. Having regard to the materials on record and considering the facts of the present case, the issue that falls for our consideration whether the revenue is justified in reopening the assessment for the year under consideration.

12. We have carefully examined the reasons recorded for reopening of the assessment for the year under consideration. The reopening is sought to be initiated based on the information provided by the DDIT (Inv.) Surat. In the reasons recorded, more particularly the paras 4 and 5 respectively, the Assessing Officer has observed that the assessee company M/s. Alliance Filaments Ltd. had made bogus transaction of Rs.7,50,055/- on 19.11.2011 with Mr. Shaileshkumar Naika, who is an entry provider and the assessee company is one of the beneficiaries of the bogus transaction and income to the assessee to the tune of Rs.7,50,055/- has escaped assessment for the year 2012-13 within the meaning of Section 147 of the Act.

13. We take the notice of the fact that the case of the assessee was taken up for scrutiny and after a detailed inquiry the revenue had framed assessment under Section 143(3) of the Act vide order dated 31.03.2015 various additions were made including an addition of Rs. 2,99,05,000/- under Section 68 of the Act in respect of the share capital and share premium received by the assessee during the year under consideration which included the sum of Rs.7,50,000/- received from Shaileshkumar Naika.

14. A plain reading of the reasons recorded revels that the Assessing Officer has solely relied on the information received from the Investigation Wing- Surat. We are of the view that, the Assessing Officer has not applied his independent mind while recording the reasons that the income has escaped assessment. The original assessment record was with the Assessing Officer. The scrutiny assessment framed by the respondent has been challenged by the assessee company and the appeal is pending before the Appellate Tribunal. As the issue of alleged transaction of Rs. 7,50,055/- was earlier added by the then Assessing Officer under Section 68 of the Act at the original assessment stage, the same amount cannot be brought to tax once again in the reassessment proceedings.

15. It is not the case of the revenue that the transaction as reported by the Investigating Wing, Surat was distinct and has no relation with the earlier scrutiny assessment made under Section 143(3) of the Act. Thus, as such there was no tangible material in the hands of the Assessing Officer for reopening of the proceedings.

16. We are of the view that the Assessing Officer has acted mechanically based on the information received from the Investigating Wing, Surat for the purpose of reopening of the assessment and any independent satisfaction to the effect that the income chargeable to tax has escaped assessment is not reflected.

17. It is a settled principle of law that the respondent cannot justify by taking recourse to some material and information beyond the scope of the reasons recorded by the Assessing Officer prior to reopening. In the instant case, the respondent has traveled beyond the scope of reasons recorded in order to justify the action of reopening. It is pertinent to note that while disposing of the objections against the reopening, Assessing Officer has observed that it has credible information as received by the office pertaining to the transaction claimed as a part of turnover and same can be clearly made out from the copy of the reasons recorded provided by the office. After close scrutiny of the reasons recorded, the Assessing Officer did not have refer the facts that the transactions was part of the turnover. Therefore, we hold that the formation of belief entertained by the Assessing Officer seems to be vague and based on irrelevant material.

18. In view of the discussion made hereinabove, we hold that the assumption of jurisdiction on the part of the Assessing Officer under Section 147 of the Act to reopen the assessment by issuing the impugned notice dated 28.03.2019 under Section 147 of the Act is without authority of law which renders the notice unsustainable.

19. For the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned notice dated 28.03.2019 issued by the respondent under Section 148 of the Act is hereby quashed and set aside.