Feng Shui Realtors Pvt. Ltd. Vs ITO (Bombay High Court)
Summary: The Bombay High Court allowed the writ petition of Feng Shui Realtors Pvt. Ltd. and quashed the reassessment proceedings for AY 2015-16 after finding total non-application of mind by the Assessing Officer, Range Head and PCIT. The assessee had originally filed its return declaring income of Rs.12,74,850/- and a scrutiny assessment under Section 143(3) had been completed. Despite this, the reasons recorded for reopening expressly stated that no regular assessment under Section 143(3) had been made. The High Court held that this fundamental error demonstrated that the AO had not examined the assessment records; the Range Head’s statement that he had gone through the records was also incorrect, and the PCIT’s approval under Section 151 suffered from non-application of mind.
The reopening was based on information arising from a DG GST investigation into M/s. Meher and M/s. Nyles Sales Agencies Pvt. Ltd. The recorded reasons stated that Feng Shui Realtors was a beneficiary entity that had transactions of Rs.3,39,00,000/- with Nyles. However, the High Court found that the assessee had actually taken a loan of Rs.3,39,00,000/- from Nyles; it had not made payment to Nyles or supplied goods to it. The loan had also been disclosed in the annexure to Form No.3CD and in the balance sheet as an unsecured loan, together with Nyles’ PAN.
Following South Yarra Holdings v. Income Tax Officer, the High Court held that on receiving information suggesting escapement of income, the least expected of the AO was to examine that information in the context of the assessee’s own facts and records and independently satisfy himself whether it prima facie led to a reasonable belief that income had escaped assessment. Instead, the AO had acted on the satisfaction arising from the DG GST information without undertaking the required examination. The Court further noted that the reopening notice had been issued beyond four years from the end of the relevant assessment year in a case where assessment under Section 143(3) had already been completed.
The Court held that the proceedings were also hit by the proviso to Section 147 because there was no failure by the assessee to truly and fully disclose material facts necessary for assessment. Referring to Crompton Greaves Ltd. v. Assistant Commissioner of Income Tax, it observed that there was no allegation in the recorded reasons of such failure and nothing cogent or clear from which such failure could be culled out. Rejecting the Revenue’s preliminary objection based on availability of an alternative remedy, the Court treated the matter as a gross case reflecting total non-application of mind and exercised its jurisdiction under Article 226. The Section 148 notice, order disposing of objections, reassessment order, demand notice and penalty show-cause notice were consequently quashed and set aside.
Cases Discussed
- German Remedies Ltd. v. Deputy Commissioner of Income Tax, 2006 (152) Taxman 269 (Bombay High Court) — Followed for the principle that while granting approval for reopening, the Commissioner must examine whether there was failure by the assessee to disclose fully and truly material facts and whether reopening was being invoked beyond four years; failure to consider these aspects rendered the approval vulnerable for non-application of mind.
- South Yarra Holdings v. Income Tax Officer, 16(1)(1)(4), Mumbai, 2019 (104) taxmann.com 216 (Bombay High Court) — Followed for the requirement that the AO must independently examine information received in the context of the assessee’s facts before forming a reasonable belief of escapement of income.
- Crompton Greaves Ltd. v. Assistant Commissioner of Income Tax, Circle 6(2) & Ors., 2014 SCC OnLine Bom. 2285 (Bombay High Court) — Applied on reopening beyond four years where the recorded reasons did not allege failure by the assessee to disclose truly and fully all material facts necessary for assessment.
FULL TEXT OF THE BOMBAY HIGH COURT JUDGMENT
1. Petitioner is engaged in business of real estate and trading of steel items. For the year under consideration, i.e., Assessment Year 2015-16, Petitioner filed its return of income (“ROI”) on 30th September 2015 declaring total income at Rs.12,74,850/-. A scrutiny assessment was initiated under Section 143(2) of the Income Tax Act, 1961 (“the Act”) and notices under Sectin 143(1) of the Act were issued from time to time calling for various details during the course of such assessment proceedings. Petitioner also responded and provided all documents and details sought. Subsequently, an assessment order dated 29th December 2017 under Section 143(3) of the Act came to be passed.
2. Petitioner, thereafter, received a notice dated 31st March 2021 under section 148 of the Act stating that the officer had reasons to believe that Petitioner’s income chargeable to tax for AY 2015-16 has escaped assessment within the meaning of Section 147 of the Act. After Petitioner filed its ROI once again in response to the notice, Petitioner was made available the reasons for reopening together with approval under Section 151 of the Act. As we will explain later, both reasons and the approval would indicate total non-application of mind by the Assessing Officer (“AO”), the Range Head, who recommended that a notice under Section 148 of the Act be issued and the Principal Commissioner of Income Tax (“PCIT”) who expressed satisfaction that it was a fit case to issue notice under Section 148 of the Act. Petitioner filed its objections vide its Chartered Account’s letter dated 8th February 2022 which came to be rejected by an order dated 24th February 2022. Both the notice dated 23rd March 2021 and the order dated 24th February 2022 are impugned in this Petition. Subsequently, a reassessment order on the reopening notice dated 23rd March 2022 has been passed which is also impugned in the petition.
3. The preliminary objection that Mr. Suresh Kumar raised was in view of the reassessment order dated 23rd March 2022, Petitioner should be directed to exhaust the alternative remedy available than this Court interfering in its jurisdiction under Article 226 of the Constitution of India. We are inclined to reject this objection because this is one of those gross cases which reflects total non-application of mind. Moreover, on 25th July 2022 time was sought to file a reply and the matter was stood over to 5th September 2022. Ad-interim relief in terms of prayer clause (d) was also granted. On 5th September 2022, an additional eight weeks time to file reply and the ad-interim relief was extended till 18th November 2022. On 14th November 2022, further six weeks time to file reply was granted and the ad-interim relief was extended. Even today, no reply has been filed which prompted us to exercise our jurisdiction under Article 226 of the Constitution of India.
4. The reasons recorded for reopening reads as under:
“REASONS FOR REOPENING
1. Brief details of the assessee:
The assessee M/s. Feng Shui Realtors Pvt. Ltd. PAN AACCF0408Q is a company having address at 101, Hari Darshan Building, B wing, Bhogilal Fadia Road, Kandivali West. Mumbal-57. The assessee has filed its return of income for A.Y. 2015-16 on 30.09.2015 declaring total income of Rs. 12,74,850/-
1. Brief Details of Information Collected/received by the AO:
The information was received through insight that, an investigation into M/s. Meher [GSTIN 27AAICM6297J2ZR] and M/s. M/s. Nyles Sales Agencies Pvt. Ltd. [GSTIN 27AAECN7308P2ZW] was initiated by DG GST, Mumbai on both these entities in the month of September 2019. During the course of the search conducted at their registered premises, it was found that both the entities are operating out of a single premise, and do not have any assets, inventories, staff, etc. required to conduct any genuine business operation. The entire sales & purchases of both these companies appear to be fraudulent & bogus. During the course of the investigation, the statement of Sh. Ramsingh Raiji, the Director of both the companies was recorded; wherein he admitted that these were shell companies. Sh. Ramsingh Raiji was arrested by this office and remanded to judicial custody of 60 days. Subsequent to the grant of bail by the Hon’ble Court, he has withdrawn his earlier statement. However, he has been unable to provide any documentary evidence to establish the genuineness of the supplies & purchases by his companies. From the investigation conducted till date, it appears that both these companies are bogus. The ITC availed by the recipients of their supplies has been established to be bogus, and in some cases has been reversed by the said recipients.
During the post search enquiries on analysis of available bank account statements (SBI A/C 34727814821 & YES BANK 16483800001022) of M/s. Nyles Sales Agencies Pvt. Ltd. (from AY 2015-16 to AY 2017-18) it has been noticed that amounts were debited in the bank accounts immediately after credit entries. This peculiar pattern noticed in the bank accounts of M/s. Nyles Sales Agencies Pvt. Ltd. Further strengthen the finding that M/s. Nyles Sales Agencies Pvt. Ltd. have been working as a conduit in siphoning of funds from infrastructure projects and other business activities. It has also been noticed in searches conducted on different infrastructure entities by Delhi Investigation directorate that beneficiaries involved in such web of financial transactions use conduits like M/s. Nyles Sales Agencies Pvt. Ltd. to route the funds to get cash back in lieu of bank transfers or to book bogus expenses in their books of accounts.
The assessee company M/s. Feng Shui Realtors Pvt. Ltd. is one of the beneficiary entities who made transactions of Rs. 3,39,00,000/- with. M/s. Nyles Sales Agencies Pvt. Ltd.
I have reason to believe that income chargeable to tax exceeding above 1 lakh has escaped assessment within the meaning of section 147 of the IT Act 1961.
In view of the “Taxation and other laws (Relaxation of certain provisions) ordinance 2020 and notification no. 35/2020 dated 24.06.2020, the applicability of provisions of sub-section (1) of section 151 of I. T. Act, 1961 stands extended from 31.03.2020 to 31.03.2021.
In this case since ROI was filed for relevant AY 2015-16 and No regular assessment u/s 143(3) was made, the provision of clause(b) of Explanation 2 to section 147 are applicable and the assessment year under consideration is deemed to be a case where income chargeable tax has escaped assessment is more than four years have elapsed from the end of assessment year under consideration. Hence, necessary sanction to issue notice u/s 148 is sought as per the provision of section 151(1) of the Income Tax Act, 1961.”
5. Mr. Gandhi submitted that the reasons for reopening and the approval granted under Section 151 of the Act show total non-application of mind. In the reasons recorded, it is stated that no regular assessment under Section 143(3) of the Act was made whereas, in fact, there is an assessment order dated 28th December 2017. In the proposal for approval, the AO says reason to believe as per annexure. The Range Head, Ashok Bapu Koli states, “I have gone through the records, material facts and reasons recorded by the AO. I am satisfied that it is a fit case for issue of notice under Section 148 of the IT Act”. If this person had actually gone through the records, he would have found that there was an assessment order dated 28th December 2017. Therefore, in our view, he has made an incorrect statement while recommending approval that he has gone through the records. In fact, even the AO Bency Mathew also has not gone through the records because if he had only gone through he would not have noted in the reasons for reopening that no regular assessment under Section 143(3) of the Act was made. Coming to the approval given by Mr. Anil Kumar, PCIT, he says, “In view of reasons recorded, I am satisfied that it is a fit case to issue notice under Section 148”. Though on first blush we thought of giving him the benefit of doubt because he has relied on the reasons recorded which incorrectly records that no regular assessment under Section 143(3) of the Act has been made, as held by a Division Bench of this Court in German Remedies Ltd. v. Deputy Commissioner of Income Tax1 while granting approval, it was obligatory on his part to verify whether there was any failure on the part of Assessee to disclose full and true relevant facts. It was also obligatory on the part of the Commissioner to consider whether or not power to reopen is being invoked within a period of four years from the end of the assessment year to which they relate. None of these aspects have been considered by him which is sufficient to justify the contention raised by Petitioner that the approval granted suffers from non-application of mind. Paragraph 24 of German Remedies Ltd. (supra) reads as under:
“24 It is not in dispute that the Assessing Officer on 15-9-2003 had himself carried file to the Commissioner of Income-tax and on the very same day, rather same moment in the presence of the Assessing Officer, the Commissioner of Income-tax granted approval. As a matter of fact, while granting approval it was obligatory on his part to verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year. It was also obligatory on the part of the Commissioner to consider whether or not power to reopen is being invoked within a period of 4 years from the end of the assessment year to which they relate. None of these aspects have been considered by him which is sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind. In the above view of the matter, the impugned notices and consequently the order justifying reasons recorded are unsustainable. The same are liable to be quashed and set aside.”
6. Further, the entire basis on which the AO has formed a belief that income chargeable to tax has escaped assessment is that an investigation was initiated by Directorate General of Goods and Services Tax (“DG GST”), Mumbai on M/s. Meher and M/s. Nyles Sales Agencies Pvt. Ltd. (“Nyles”) in the month of September 2019. During the course of investigation it was found both these entities did not have any assets or inventories or were indulging in sales and purchases that appeared to be fraudulent and bogus. Reasons state that on analysis of available bank statements of Nyles it has been noticed that amounts were debited in the bank accounts immediately after credit entries. Assessee company was one of the beneficiary entities who made transaction of Rs.3,39,00,000/- with Nyles.
7. The fact is Assessee did have financial transactions with Nyles for Rs.3,39,00,000/-, but Assessee had taken a loan of Rs.3,39,00,000/- from Nyles and not made any payment to Nyles or supplied any goods to Nyles. In the order disposing objections, the AO simply says that Assessee had made transaction with Nyles and that was enough to issue the notice for reassessment. As held by this Court in South Yarra Holdings v. Income Tax Officer, 16(1)(1)(4), Mumbai,2 the least that was expected of the AO is, on receipt of information, examine the same in the context of the facts of this case and satisfy himself whether the information received does prima facie lead to a reasonable belief that income chargeable to tax has escaped assessment. If the AO had only bothered to examine the records, he would have certainly found that in the annexure to the Form No.3CD filed under Rule 6G(2)-statement of particulars required to be furnished under Section 44AB of the Act, Petitioner has disclosed that it had taken from Nyles an amount of Rs.3,39,00,000/- as loan. Even the PAN number of Nyles is recorded. Even the balance sheet as on 31st March 2015 indicates under the head ‘Long Term Borrowings-Unsecured Loans Rs.3,39,00,000/-’ against Nyles. Therefore, it clearly shows that the AO has acted on the satisfaction of the DG GST, Mumbai that income chargeable to tax has escaped assessment. It must also be borne in mind that a notice has been issued more than four years after the expiry of relevant assessment year and this was a case where assessment under Section 143(3) of the Act has been completed. Therefore, the AO was obliged to examine the information received in the context of the facts on record. If such an exercise were to be done, it is likely that the AO would have come to the conclusion that there was no failure to disclose truly and fully all material facts necessary for assessment. The entire proceedings in this case would also be hit by proviso to Section 147 of the Act which bars any reopening after the expiry of four years where assessment under Section 143(3) of the Act has been completed unless there was failure to truly and fully disclose material facts. It will be useful to reproduce paragraph 8 of South Yarra Holdings (supra) which reads as under:
“8. From the reasons, it is evident that the impugned notice has been issued on the basis of information received from the Deputy Collector Income Tax (Investigation) alleging that M/s Nivyah Infrastructure & Telecom Services Ltd is a penny stock listed on the Bombay Stock Exchange and that the petitioner had dealt with the same leading to escapement of income. On receipt of information, the least that is expected of the Assessing Officer is to examine the same in the context of the facts of this case and satisfy himself whether the information received does prima facie lead to a reasonable belief that income chargeable to tax has escaped assessment. In this case, the reasons indicate that the Assessing Officer has not carried out such exercise and accepted the report of the Deputy Collector of Income Tax (Investigation) Mumbai to conclude that the petitioner had dealt with Nivyah Infrastructure and Telecom Services Ltd during the previous year relevant to the assessment year 2011-12. Admittedly, there was no company by name “M/s Nivyah Infrastructure & Telecom Services Ltd” in existence during that year for consideration. This clearly shows that the Assessing Officer acted on the satisfaction of the Deputy Collector of Income Tax (Investigation) that income chargeable to tax has escaped assessment. It must also be borne in mind that the impugned notice is issued beyond the period of four years from the end of the relevant assessment year in a case, where the assessment was completed under section 143 (3) of the Act. Therefore, the Assessing Officer would have to examine the information received in the context of the facts on record. If such an exercise were to be done, it is likely that the Assessing Officer would have come to the conclusion that there was no failure to disclose truly and fully all material facts necessary for assessment. Thus, hit by the proviso to section 147 of the Act. However, the Assessing Officer has not applied his mind to the information received in the context of the facts on record. The impugned notice is bad-in-law, as it has not been issued by the Assessing Officer on his satisfaction that there is reason to believe, that income chargeable to tax has escaped assessment.”
8. In fact, as held by this Court in Crompton Greaves Ltd. v. Assistant Commissioner of Income Tax, Circle 6(2) & Ors.,3 where there is no allegation in the reasons recorded that there was any failure on the part of Petitioner to truly and fully disclose all material facts necessary for its assessment for the relevant assessment year, on that ground alone the notice should be quashed and set aside. Though Crompton Greaves Ltd. (supra), holds that if the factum of failure to disclose can be culled down from the reasons in support of the notice seeking to reopen assessment, that will certainly not be fatal to the assumption of jurisdiction under Sections 147 and 148 of the Act, the reasons, in our view, does not indicate anything cogent or clear that in fact there was failure on the part of Assessee to disclose truly and fully all material facts necessary for its assessment.
9. For the reasons noted above, the impugned notice is bad in law as it has not been issued by the AO on his satisfaction that there is reason to believe that income chargeable to tax has escaped assessment. Further, there has been total non-application of mind by the AO, the Range Head and the PCIT.
10. In the circumstances, petition is allowed in terms of prayer clause (a) which reads as under:
“(a) that this Hon’ble Court may be pleased to issue a Writ of Certiorari or a Writ in the nature of Certiorari or any other appropriate Writ, Order or direction, calling for the records of the Petitioner’s case and after going into the legality and propriety thereof, to quash and set aside the said notice dated 31.03.2021 (“Exhibit D”), order disposing objections dated 24.02.2022 (“Exhibit H”), the impugned assessment order dated 23.03.2022 (Exhibit K1) and the impugned notice of demand dated 23.03.2022 (Exhibit K2) as well as the impugned show-cause notice for levy of penalty dated 23.03.2022 (“Exhibit K3”).”
1 2006 (152) Taxman 269 (Bom.).
2 2019 (104) taxmann.com 216 (Bombay).
3 2014 SCC OnLine Bom. 2285.
