Assessment of earlier year cannot be reopened on the basis of persuasive finding in subsequent years

HIGH COURT OF ALLAHABAD

Commissioner of Income-tax

Versus

Kanodia & Sons

IT APPEAL NO. 365 OF 2009

DECEMBER 6, 2012

ORDER

1. The present appeal has been filed under Section 260-A of the Income Tax Act, 1961, hereinafter referred to as “the Act”, against the order dated 31.3.2005 passed by the Income Tax Appellate Tribunal, Lucknow Bench Lucknow. The Department has proposed the following substantial questions of law said to be arising out of the Tribunal’s order.:

“1.  Whether the Income Tax Appellate Tribunal was justified in law in dismissing the appeal filed by the department against the order of the CIT(A) in quashing the assessment for invalid reasons recorded by the Assessing Officer without appreciating the facts of the case?

 2.  Whether the Income Tax Appellate Tribunal was justified in law in dismissing the appeal of the department on technical ground without going to the merit of the case?”

2. Briefly stated the facts giving rise to the present appeal are as follows.

The appeal relates for the Assessment Year 1995-96. In the proceedings arising out of Sections 147 and 148 of the Act,. The respondent assessee derives income from running of a flour mill for production of Maida, Suji, Atta in the name and style of M/s. Kanodia Flour Mills at Dulhipur, Varanasi and has head office at Kanpur. For the Assessment Year 1995-96 the original return of income was filed on 31.10.1995 declaring total income of a sum of Rs. 7,73,880/- which was processed under Section 143(1)(a) of the Act, on 24.1.1996 resulting a refund of Rs. 45,361/- , which was rectified under Section 154 of the Act and further refund of Rs. 2216/- was allowed. While making assessment for the assessment year 1996-97, the Assessing Officer was of the view that loss in shares has been fraudulently claimed. During the assessment year in question also as there were bogus transactions and after recording the following reasons issued notice under Sections 147 and 148 of the Act., which are quoted below:

‘The facts of this year are similar to assessment year 1996-97 wherein addition of above Rs. 12 lakhs has been made on account of dealing in shares. The basis of addition has been discussed in detail in the body of the assessment order. In this year also loss of Rs. 14 lakhs has been claimed which is to be disallowed. Also the expenses in the head office account are to be examined since huge additions have been made in assessment year 1996-97.’

3. The assessee did not file any return. However, vide letter dated 25.11.1999 it was stated by the assessee that the original return of income was filed on 31.10.1995 and the same be treated as return filed in pursuance of notice under Section 148 of the Act also. Further a return was filed on 23.12.1999 declaring the total income of Rs. 7,73,880/-. In the reassessment proceedings the share transactions were examined and vide order dated 24.3.2000 the assessment was made on income at Rs. 23,59,390/- Feeling aggrieved the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) II, Kanpur, who vide order dated 23.6.2000 allowed the appeal but directed the Assessing Officer to take action under Section 148 of the Act against the assessee. The appeal preferred by the Revenue before the Tribunal has been dismissed by the impugned order.

4. We have heard Sri Ashok Kumar, learned Senior Standing Counsel for the Revenue and Sri S.K. Garg, learned counsel for the respondent-assessee.

5. Sri Ashok Kumar submitted that the CIT (Appeal), as also the Tribunal was not justified in setting aside the reassessment order and also in quashing the order for issuing notice under Section 148 on the ground that no proper reasons were recorded and on the reason recorded the proceedings under Section 148 could not have been initiated. He further submitted that in the assessment proceeding for the assessment year 1996-97 bogus share transactions were detected as the modus operendi was the same as in the previous assessment year also and therefore the proceedings for reassessment were validly initiated.

6. The submission of the learned counsel is wholly misconceived. In the order of Commissioner of Income Tax (Appeals), which is relevant for the assessment year 1996-97 has held as follows:

“Assessment order for the A.Y.1996-97 has been passed after thorough scrutiny and it was found that the appellant has purchased shares on much higher price than the market price and within two three days of the purchase, it has sold the same by incurring huge losses. Facts which have emerged from the assessment order for the A.Y.1995-96, are altogether different from those on the basis of which assessment has been reopened u/s 148. Even after detailed investigation, the A.O. has not been able to find out that the appellant has purchased or sold the shares within short span of time or that shares have been purchased at a rate higher than the market rate as has been found in the A.Y.1996-97. In fact in the order of the A.Y.1996-97 there is only vague reference of A.Y.1995-96 which is reproduced as under:-

No. CIT(A) II/195/Cir.1 (1)/2000-2001/-

‘It has been claimed that Sri G.P. Kanodia is looking after the transactions of shares on behalf of the firm even though there is no such arrangements in the partnership deed or at any other place in writing. During the course of examination of Sri Kanodia, it was revealed that he has a ticket of Kanpur Stock Exchange in his own name. Therefore, it is very surprising as to why was he doing business of shares on behalf of the firm and that too for incurring heavy losses. It appeared that whole of the exercise of transactions in shares has been manipulated by the assessee just to reduce the taxable income as the profit from the Flour Mills were at Rs. 37 Lakhs but returned income has only been shown at Rs. 882,000/-. From the records of the previous years, it appears that the assessee has done transactions of shares only in 1995-96 and 1996-97. No such transactions have been done in the earlier year or in AY 97-98. It is very interesting to note that the assessee had done these transactions of shares during the F.Y. 1994-95 and 95-96 when the share market was going in a very low phase. Notably, the assessee has not done any business in the period of boom in the share market, in the period of Harshad Mehta. Sri G.P. Kanodia has clearly accepted that he did not do any business in his own name because of uncertainty in the share market. Therefore, it is not clear as to why did he do it in the case of firm.’

7. I have, therefore, no hesitation in holding that reasons recorded by the A.O. are not honest reasons and there is nothing to show from these reasons that income has escaped assessment. Assessment has been primarily reopened with a view to make inquiries and conduct examination of various expenses debited to profit and loss account.”

7. The reasons have been recorded on the basis of which the Assessing authority has initiated proceedings under Section 147 of the Act. It had already been reproduced above. From a perusal of the reasons recorded by the Assessing Officer, we find that he had simply recorded the finding in the assessment order passed for the assessment year 1996-97 and a vague reference was made that similar was the position in respect of the assessment year in question. The assessment order was for the assessment year 1996-97 on which observation regarding the previous assessment year had been made, has also been reproduced above, while quoting the order passed by CIT appeal. From the perusal of the order it is absolutely clear that there is no reference to any transaction for the assessment year 1995-96. The Commissioner of Income Tax was, therefore, perfectly justified in holding that the reasons recorded by the Assessing Officer were not honest reason and there is nothing to show from this reason that income has escaped assessment and assessment has been primarily reopened with a view to make inquiries and conduct examination of various expenses debited to profit and loss account. This order has been affirmed by the Tribunal.

8. We are of the considered opinion that the order passed by the Commissioner Income Tax (Appeals) as upheld by the Tribunal does not suffer from any legal infirmity. The reasons recorded by the Assessing Officer do not show that they are relevant to reopen the assessment proceedings.

9. We do not find any legal infirmity in the impugned order passed by the Tribunal. The appeal fails and is dismissed.