Case Law Details
Tirupati Construction Company Vs ITO (Rajasthan High Court)
The Rajasthan High Court’s decision in the case of Tirupati Construction Company vs Income Tax Officer (ITO) is a significant judgment that delves into the complexities of reopening assessments under the Income Tax Act, 1961. The court’s ruling provides clarity on the applicability of Sections 148 and 153C, particularly in cases involving incriminating material found during search operations. This article offers a comprehensive analysis of the judgment, its implications, and the legal principles that underpin it.
Case Background
The petitioner, Tirupati Construction Company, is a partnership firm that filed its income tax return for the Assessment Year 2016-17 on October 14, 2016, declaring a total income of Rs. 12,690. The return was processed under Section 143(1) of the Income Tax Act, 1961. Subsequently, on March 31, 2022, the ITO issued a notice under Section 148, seeking to reopen the assessment on the grounds that income chargeable to tax amounting to Rs. 20,70,639 had escaped assessment.
Legal Contention
The petitioner challenged the reopening of the assessment, arguing that the information forming the basis for the notice was obtained during a search conducted at the premises of another assessee. Therefore, the petitioner contended that the appropriate course of action would have been to invoke Section 153C, which deals with assessments in cases where documents or assets seized during a search belong to a third party, rather than Section 148, which deals with reassessment.
Respondent’s Argument
The respondents maintained that the assessment was reopened based on pre-search and post-search investigations, not solely on the material seized during the search. They argued that the provisions of Section 148A, introduced by the Finance Act, 2021, were applicable, allowing the issuance of notice under Section 148 based on the new procedural requirements.
Court’s Findings
- Basis of Reopening: The court examined whether the basis for reopening the assessment was the incriminating material collected during the search or independent investigations. It concluded that the reopening was fundamentally based on the material found during the search at the premises of another assessee, aligning with the petitioner’s argument.
- Applicability of Sections 153C and 148: The court reiterated the legal principle that when the basis for reassessment is material found during a search, the proper procedure is under Section 153C, not Section 148. This position is supported by precedents, including the Supreme Court’s ruling in Principal Commissioner of Income-Tax vs Abhisar Buildwell P. Ltd. and the Rajasthan High Court’s decision in Shyam Sunder Khandelwal vs Assistant Commissioner of Income Tax.
- Limitation Period: The court noted that the search was conducted in 2016, and the reopening proceedings under Section 153C should have been initiated within the prescribed period of limitation. Since this was not done, and given that the material basis for reopening remained the same, the attempt to invoke Section 148 was deemed impermissible.
Conclusion
The Rajasthan High Court quashed the reassessment orders issued under Section 148A(d), underscoring the importance of adhering to the appropriate procedural routes as stipulated in the Income Tax Act, 1961. The judgment reinforces that the reopening of assessments based on search materials must follow the provisions of Section 153C, ensuring that procedural safeguards and statutory limitations are respected.
FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT
1. Since the issue involved in these writ petitions is identical, therefore, both the writ petitions are being decided by this common order. However, for convenience, facts mentioned in Writ Petition No. 17651/2022 are being taken into consideration.
2. The Petitioner-assessee is a partnership firm. It filed its return of income for Assessment Year 2016-17 on 14.10.2016 declaring total income of Rs. 12,690/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act of 1961’). According to the petitioner, along with income tax return, copies of the audited balance sheet, profit and loss account were also submitted.
3. Respondent No. 1 issued a notice under Section 148 of the Act of 1961 on 31.03.2022 seeking to reopen the assessment. In compliance of the decision of the Hon’ble Supreme Court in the case of Union of India Vs. Ashish Agarwal, 2022 SCC OnLine 543 and instruction issued by the Central Board of Direct Taxes on 11.05.2022, notice under Section 148 was followed by notice under Section 148A(b) of the Act of 1961 on 02.06.2022. This notice shared with the petitioner-assessee certain information alleging that income chargeable to tax to the extent of Rs. 20,70,639/- has escaped assessment within the meaning of the provisions of Section 147 of the Act of 1961 for the Assessment Year 2016-17.
4. The petitioner, in response, submitted a reply-cum-objection on 13.06.2022. The respondent-authority, however, was not satisfied with the reply, particularly the objection with regard to maintainability of proceedings drawn under Section 148A of the Act of 1961 and proceeded to pass impugned order on 27.07.2022 under Section 148A(d) of the Act of 1961. Similar order was also passed in the proceedings relating to Assessment Year 2017-18. The aforesaid orders are under challenge in these petitions.
5. Though number of grounds have been urged by the petitioner in these petitions, learned counsel for the petitioner has confined his argument by submitting that since the entire information, which has been made the basis for reopening the assessment, was part of the documents and material collected during search conducted in the premises of another assessee, the legally permissible course of action was to invoke Section 153C of the Act of 1961 and not Section 148 of the Act of 1961. His submission is that the search was conducted long back and prior to 31.03.2021, but proceedings were not initiated within the period of limitation prescribed under Section 153B of the Act of 1961. Therefore, in order to overcome the said statutory bar, it is being wrongly projected as if the present are the cases of reopening of assessment on the basis of information received before and after the search, which is factually incorrect. He would also highlight that if notice under Section 148A(b) of the Act of 1961 and the final order passed under Section 148A(d) of the Act of 1961 is perused, it would be apparently clear that the basis for reopening the assessment is the information collected from the documents which were seized during search conducted in the premises of another assessee. Therefore, invocation of powers under Section 148A of the Act of 1961 is against the provisions of law. Learned counsel would further submit that present cases are covered under Section 153C of the Act of 1961 and assessment ultimately has to be done under Section 153A of the Act of 1961, but bar under Section 153B of the Act of 1961 would be applicable and for that reason, even on the day when the notice under Section 148A(b) of the Act of 1961 was issued, i.e., on 31.03.2021-01.04.2021, assessment under Section 153C read with Section 153A of the Act of 1961 was barred in view of the period of limitation prescribed under Section 153B of the Act of 1961. Therefore, even the proceedings could not be drawn under Section 153C of the Act of 1961.
6. Per contra, learned counsel for the respondents would submit that the entire case of the petitioner is based on incorrect factual premise that the assessment is sought to be reopened on the basis of incriminating material and information collected from the documents, records, papers which were seized during search in the premises of another assessee. Learned counsel would further submit that true it is that a search was carried in the premises of another assess, as the notice and final order clearly speak out, the basis for reopening is not the material and information collected during the course of search, but it is pre and post search investigation carried out by the respondent-authority. Therefore, present are not the cases where Section 153C of the Act of 1961 would be attracted, but present are the cases where the provisions of Section 148A of the Act of 1961 would be applicable. Though, notice under Section 148 of the Act of 1961 was signed on 31.03.20212, but it could not be issued and was thereafter issued only on 01.04.2021. Therefore, in view of the decision of the Hon’ble Supreme Court in the case of Union of India Vs. Ashish Agarwal (supra), notice under Section 148 of the Act of 1961 has been treated as notice under Section 148A of the Act of 1961 and thus, detailed and speaking orders have been passed by the assessing authority. Therefore, no case for interference is made out.
7. The issue which arises for consideration in the present cases is whether the basis for reopening the assessment was the information and material collected during the search conducted in the premises of another assessee or the same was based on any information and material collected after the search.
The second issue arising for consideration is whether in a case where material/information is collected during search and is made a basis for reopening the assessment, the assessing officer can invoke the provisions of Section 148A and Section 148 of the Act of 1961 or the legally permissible course would be to invoke the provisions contained in Section 153C read with Section 153A of the Act of 1961.
8. Learned counsel for both the parties, on the legal issue that where basis for reopening the assessment is information/material collected during search, would not dispute that in such a case, reassessment has to be done only by taking recourse to the provisions contained in Section 153C read with Section 153A of the Act of 1961 and not under Section 148A/Section 148 of the Act of 1961. The legal position in this regard is well settled in view of the decision of the Hon’ble Supreme Court in the case of Principal Commissioner of Income-Tax Vs. Abhisar Buildwell P. Ltd. [2023] 454 ITR 212 (SC) and decision dated 19.03.2024 rendered by Division Bench of this Court at Jaipur Bench in the case of Shyam Sunder Khandelwal Vs. Assistant Commissioner of Income Tax (D. B. Civil Writ Petition No. 18363/2019 and other connected writ petitions).
9. We shall now examine whether the basis for reopening the assessment in the present cases is any incriminating material and information found before or after the search or present are the cases where the incriminating material and information was found during search proceedings.
10. Notice under Section 148 of the Act of 1961 issued earlier on 31.03.2021 did not disclose except that the assessing officer has reasons to believe that the income chargeable to tax for the Assessment Year 2016-17 had escaped assessment within the meaning of Section 147 of the Act of 1961. However, in view of the decision of the Hon’ble Supreme Court in the case of Union of India Vs. Ashish Agarwal (supra), powers under Section 148A(b) of the Act of 1961 were invoked by issuing a notice under that provision on 02.06.2022. In that notice, it was stated that the office has information pertaining to the assessee which suggests that income chargeable to tax for the Assessment Year 2016-17 has escaped assessment within the meaning of the provisions of Section 147 of the Act of 1961. The details of the relevant information and material relied upon for initiating reassessment proceedings were enclosed along with the notice as Annexure-A. A perusal of Annexure-A appended to the notice disclosed the incriminating information and material as below:
“2. As per information received from the ACIT(Central)-2(1), Ahemdabad vide his letter dated 08.02.2019, a search action u/s 132 of the I. T. Act, 1961, was carried out on 21.10.2016 on DRA Group of Ahmedabad. Shri Dinesh Chandra R. Agrawal of DRA Group runs the business in the name of “Dinesh Chandra R Agrawal Infracon Pvt. Ltd.” which is a company in Ahmedabad, providing Engineering Procurement Construction (EPC) services in different sectors across Gujarat. During pre and post search inquiries, it was gathered that the DRA group having Flagship Company Dinesh Chandra R Agrawal Infracon Pvt. Ltd. has generated unaccounted money by way of booking bogus sub contractors expenses. Further, during post search investigation, it was also observed that Dinesh Chandra R Agrawal Infracon Pvt. Ltd. has booked bogus purchase expenses for materials.
3. It is found by the Investigation Wing that the group is involved in tax evasion by way of booking bogus expenses and by inflating expenses to reduce its taxable income through bogus sub-contractor expenses shown in the name of various dummy entities.
A detailed analysis was carried out by the investigating wing involving analysis of ROI and turnover vis-a-vis payments made to the subcontractors by Dinesh chandra R Agrawal Infracon Pvt. Ltd. as well as status of summons issued to sub contractors which was submitted with appraisal report as Annexure-DRA-3(A).”
11. Having disclosed the aforesaid information as contained in Annexure-A appended to the notice clearly shows that incriminating material and information was found during the search proceedings and not beyond that.
Further, in order to assume jurisdiction under Section 148A of the Act of 1961, the aforesaid information was made a basis to draw inferences which were described as pre search and post search investigation which would be clear from following recitals made in Annexure-A appended to the notice:
“Accordingly, after pre-search and post search investigation w. r. t. such sub contractors following points regarding such subcontractors were emerged.
1. In pre search investigations, it was found by the Investigation Wing that many of these entities either do not exist at the given address or do not have the infrastructure to provide service on such a large scale for the infrastructure projects undertaken by Dinesh Chandra R Agarwal Infracon Pvt. Ltd.
(b) There is a huge discrepancy in the payments made to these subcontractors by Dinesh Chandra R Agrawal Infracon Pvt. Ltd. in various financial years and their ROI turnover of their respective assessment years
(c) Many of the subcontractors have not filed returns even though they have received huge payments from Dinesh Chandra R Agrawal Infracon Pvt. Ltd.”
12. In the reply filed by the petitioner-assessee, serious objection to maintainability of the proceedings was raised mainly on the ground that the entire basis for reassessment was incriminating material and information collected during search in the premises of another assessee and nothing more, therefore, no proceedings for reassessment could be drawn under Section 148A of the Act of 1961.
13. In the impugned order dated 27.07.2022 passed in exercise of powers under Section 148A(d) of the Act of 1961, it has been assumed that the incriminating material and information collected during search followed by collection of details which were intrinsically related to such material and information would confer jurisdiction under Section 148 of the Act of 1961. This is clear from the following findings which were recorded while dealing with the objection raised by the petitioner-assessee:
“5.3 It is correct that one of the ground of the petition was challenging the notice u/s 148 that the case of the assessee should be governed as per section 153C. In this regard it is submitted that at present the case of the assessee does not attain finality on this ground. The next date of hearing in this case is 10/08/2022. Therefore, the show cause notice issued on 02/06/2022 was as per law. Further, in this case, no documents related to assessee was found in search action. From pre and post search investigation, it was established that assessee is one beneficiary of bogus entries and therefore, information was passed on to the ITO, Ward-1, Chittorgarh to take necessary remedial action. Thus, case is covered for action u/s 148 for reassessment of escaped income. Thus, assessee’s objection that case is covered u/s 153C and not in 148 of the Act, is not acceptable.”
14. In view of above, it is clear that the entire basis for reopening the assessment is nothing but the material and information collected during search conducted in the premises of another assessee. Collection of details relating to search would not mean collection of new incriminating material and information, independent of the incriminating material and information collected during search proceedings.
15. Learned counsel for the petitioner is correct in submitting that in fact, search was carried out in the year 2016 and the respondents had the authority to reopen the assessment by invoking the powers under Section 153C of the Act of 1961 and draw reassessment proceedings under Section 153A of the Act of 1961. That was not done within the period of limitation prescribed under Section 153B of the Act of 1961. The respondent-authority was fully aware of the fact that proceedings under Section 153C of the Act of 1961 would be barred by limitation, therefore, recourse was taken to the provisions contained in Section 148 and Section 148A of the Act of 1961 which has no application in the present cases.
16. Learned counsel for the revenue does not dispute the legal position that where the basis for reassessment is incriminating material and information collected during search, the only legally permissible course of action is the one provided under Section 153C of the Act of 1961 and not under Section 148 of the Act of 1961. Admittedly, present are not the cases where search was carried out after 01.04.2021, i.e., after coming into force the Finance Act, 2021. Present are the cases of search of prior period.
17. In view of above considerations, impugned orders passed on 27.07.2022 in both the cases cannot be sustained in law and the same are, accordingly, quashed and set aside.
18. Writ petitions are allowed.
19. Office is directed to place a copy of this order on record of connected Writ Petition No. 17523/2022.
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