ITAT Panaji Quashes Reopening Based on Survey Admission Without Tangible Material

Hotel New Niyaz Vs ACIT (ITAT Panaji)

The ITAT Panaji dealt with a common order concerning six stay applications and five appeals filed by M/s. Hotel New Niyaz for different assessment years. The assessee challenged the validity of proceedings under Sections 147/148 of the Income-tax Act, 1961 through additional grounds. The Revenue objected that these grounds were raised belatedly. The Tribunal rejected the objection, relying on the Special Bench decision in All Cargo Global Logistics Ltd. vs. DCIT [2012] 137 ITD 287 [Mum.] [SB] and the Supreme Court decision in National Thermal Power Co. Ltd. vs. CIT [1998] 229 ITR 383 [SC], holding that a pure legal question could be entertained where the relevant facts were already on record.

The reassessment proceedings arose from a survey conducted at Hotel New Niyaz, Belagavi on 18.07.2017. During the survey, mobile phones and a laptop were inspected, and emails and images containing daily sales-register information were recovered. According to the recorded reasons, comparison of the Daily Sales Register information with accounting entries in the Tally programme revealed suppression of sales by around 30% each day. Shri Lilesh Sabnis, responsible for the accounts section, stated that approximately 70% of daily cash sales were deposited in the bank and accounted for in the books, while the remaining cash was not accounted for. He stated that the practice was undertaken on the directions of the partners.

The recorded reasons further stated that the assessee and its branches/franchisees used IDS Software for billing and accounting. According to the statement recorded during the survey, the software permitted deletion and manipulation of bill entries, with corresponding amounts not appearing in the Daily Sales Report and consequently not being recorded in the Tally sales register.

Shri Niyazhusain Soudagar, in his statement under Section 131, accepted that bills were deleted from the IDS software daily, resulting in sales suppression, and stated that 30% of total sales had not been considered in the firm’s books. He offered additional income of Rs.24,23,30,111/- for A.Ys. 2011-12 to 2018-19 up to 17.07.2017. The recorded reasons contained a year-wise calculation, including a concealed amount of Rs.1,70,05,433/- against turnover of Rs.5,66,84,776/- for A.Y. 2011-12. It was therefore recorded that Rs.1,70,05,433/- had escaped assessment for A.Y. 2011-12 under Section 147.

The Tribunal, however, did not find merit in the Revenue’s attempt to extrapolate the assessee’s sales figures for all the assessment years from statements or admissions made during the survey. It referred to CBDT circulars dated 10.03.2023 and 18.12.2014 and held that such admissions or confessions during search or survey could not, in the circumstances considered by the Tribunal, support reopening in the absence of supportive corroborative material found or seized.

The Tribunal concluded that the reopening and reassessment proceedings were not based on tangible material forming the reasons to believe that taxable income had escaped assessment. It relied on the jurisdictional High Court’s decision in Balkrishna Hiralal Wani vs. ITO [2010] 321 ITR 519 (Bom.). The Tribunal reproduced the High Court’s discussion concerning Section 147, including that the existence of a reason to believe is a condition precedent to exercising the reopening power and that the reasons must be recorded in writing. The High Court discussion also referred to Commissioner of Income Tax V/s. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) concerning the requirement of tangible material and the need for a link between the recorded reasons and formation of the belief.

Following these principles, the ITAT held that the reopening and reassessment proceedings forming the subject matter of ITA Nos. 18 to 22/PAN./2022 were liable to be quashed. The corresponding stay applications, S.A. Nos. 1 to 5/PAN./2022, were dismissed as infructuous.

The Tribunal separately considered S.A. No. 7/PAN./2022 for A.Y. 2017-18. The assessee’s counsel stated that the application was not being pressed, and the Tribunal dismissed it as not pressed. Other pleadings on the merits were treated as academic.

Accordingly, the five appeals, ITA Nos. 18 to 22/PAN./2022, were allowed, the corresponding stay applications were dismissed as infructuous, and S.A. No. 7/PAN./2022 was dismissed as not pressed. The common order was pronounced in the open Court on 19.02.2024.

Cases Discussed

• All Cargo Global Logistics Ltd. vs. DCIT (ITAT Mumbai Special Bench), [2012] 137 ITD 287 [Mum.] [SB]
• Balkrishna Hiralal Wani vs. ITO (Bombay High Court), [2010] 321 ITR 519 (Bom.)
• Commissioner of Income Tax V/s. Kelvinator of India Ltd. (Supreme Court), [2010] 320 ITR 561 (SC)
• National Thermal Power Co. Ltd. vs. CIT (Supreme Court), [1998] 229 ITR 383 [SC]

FULL TEXT OF THE ORDER OF ITAT PANAJI

The instant batch of six stay applications and five appeals, pertains to a single assessee herein viz., M/s. Hotel New Niyaz, All other relevant details thereof stand duly tabulated hereinabove.

Heard both the parties. Case files perused.

2. It emerges during the course of hearing that the assessee challenges validity of the impugned sec.148/147 proceedings itself in all these assessment years by way of raising an additional ground in each of them.

3. The Revenue on the other hand raises a very strong technical objection that the assessees’ foregoing additional ground(s) deserves to be rejected since raised at this belated stage. We find no merit in light of this tribunal’s Special Bench decision in All Cargo Global Logistics Ltd. vs. DCIT [2012] 137 ITD 287 [Mum.] [SB]; after considering National Thermal Power Co. Ltd. vs. CIT [1998] 229 ITR 383 [SC], holding that we can very well entertain such a pure legal question for determining the correct tax liability of an assessee provided all the relevant facts are already on record.

4. We now we comes to the foregoing clinching issue of validity of all these reopening(s)/re-assessment(s) itself. There is hardly any dispute between the parties that the Assessing Officer herein had recorded his following identical reopening reasons that the assessee’s taxable income liable to be assessed had escaped assessment as under :

Name of the Assessee: Hotel New Niyaz
4697/B, Opp. Market Police Station,
P.B. Road, Belagavi.

Assessment Year: 2011-12

Reasons for re-opening of assessment

The assessee Hotel New Niyaz has filed his return of income for the above AY 2011-12 on 19.09.2011 declaring a total income of Rs.19,30,251/-.

A survey u/s 133A of the I.T. Act 1961 was conducted in the case of Hotel New Niyaz, Belagavi on 18.07.2017. During the course of Survey, mobile phones of Shri Niyazhusain Soudagar and Shri Irshad Soudagar and laptop of Shri Lilesh Sabnis, Administrative Head at M/s. Hotel New Niyaz were inspected. E-mails and images containing details of actual daily sales registers at the restaurant (sent by administrative office to the partners at the end of each day) were recovered.

On verification of the books of account, there were huge variations found in the sales figures actually registered at the hotel and the figures considered for accounting. The figures found as Daily Sales Register (DSR files) in the e-mails and images were then compared with the accounting entries made on Tally Program. It was found that sales to the tune of around 30% were being suppressed every day.

When confronted, Shri Lilesh Sabnis, in-charge of the accounts section and person responsible/answerable stated that the amount deposited to the bank everyday was around 70% of total cash sales and the same was accounted as sales in the books of account. This was being done on the directions of the partners Shri Niyazhussain Soudagar and Shri Irshad Soudagar. The remaining cash was not accounted and most of it was being kept either at homes of the partners or in the custody of close associates who had been handling their business cash for the past many years.

Shri Lilesh Sabnis further stated that the Assessee firm and the branches/franchisees of ‘Niyaaz’ use a software system for billing and accounting, interconnected and controlled by a server which is located at the main branch; provided by a Bangalore based company named IDS Software. The IDS software provided for manipulation and deletion of bill entries from the database of the software. The amounts against these deleted bill entries would also be deleted and would not reflect in the Daily Sales Report (DSR) on basis of which, entries were taken into account and recorded in the Sales Register of Tally Accounting Program.

Due to this, the quantum of sales after such deletion process reduced drastically, portraying the sales to be much lesser than the actual sale proceeds.

When confronted, Shri Niyazhusain Soudagar in his statement u/s.131 agreed to the fact that there was deletion of bills from the IDS software everyday resulting in sale suppression and accepted that 30% of the total sales had not been considered in the books of account of the firm and offered an additional income of Rs.24,23,30,111/- for the AYs 2011-12 to 2018-19 (up to 17.07.2017), i.e. 30% of reported turnover.

Detailed break-up of additional income declared by Shri Niyazhussain Soudagar

Further, Shri Niyazhusain Soudagar in his statement clarified that the direct and indirect expenses for the AYs 2011-12 to 2018-19 have duly been accounted for in the books of M/s. Hotel New Niyaz in those respective years.

Thus, from the above facts I have reason to believe that income of the assessee of Rs.1,70,05,433/- has escaped assessment within the meaning of Section 147 of the I.T. Act, 1961 for AY 2011-12.

6. We do not find any merit in the Revenue’s instant arguments seeking to extrapolate the assessee’s sales figures of all assessment years based on his statement(s)/admission made during the course of survey on 18.08.2017 thereby extrapolating his sales figures in all these assessment years 2011-12 to 2016-17. We wish to quote the CBDT’s landmark twin circulars dated 10.03.2023 and 18.12.2014 that such admissions/confessions during the course of a search or survey, as the case may be, hardly carry any significance in absence of the supportive corroborative material found or seized therein. We accordingly conclude in light of the settled proposition that such reopening(s)/re-assessment(s) not based on any “tangible” material forming reasons to believe that an assessee’s taxable income has escaped assessment, is not sustainable in law. Hon’ble jurisdictional high court in [2010] 321 ITR 519 (Bom.) Balkrishna Hiralal Wani vs. ITO also reiterates the very principle as under :

9. “On behalf of the Revenue, it has been submitted that an assessment has not been carried out in the present case and the exercise of power by the issuance of a notice under section 148 is within a period of four years. It has been urged that at this stage, material which has been produced before the Court was not produced before the Assessing Officer and consequently, interference under Article 226 of the Constitution of India was not warranted since it would be for the Assessing Officer to determine as to whether income has, as a matter of fact, escaped assessment. However, during the course of submissions, counsel appearing on behalf of the Revenue submitted that while recording his reasons, the Assessing Officer had erroneously referred to clause 35 of the Deed of partnership, which would have no application to the retirement of a partner upon attaining the age of superannuation. Moreover, it is also fairly stated that the Assessing Officer seeks to set up the case that the amount received is taxable under section 28(iv) of the Act.

10. Section 147 empowers the Assessing Officer to assess or reassess income, which he has reason to believe has escaped assessment for the assessment year. The existence of a reason to believe is the condition precedent to the exercise of power and the reasons must be recorded in writing. The proviso to section 147 imposes an additional condition in a situation where action is sought to be taken after the expiry of four years from the end of the relevant assessment year and that condition is that the income chargeable to tax must have escaped assessment for such assessment year by reason of the failure on the part of the assessee inter alia to disclose fully and truly all material facts necessary for the assessment for that assessment year. In the present case, admittedly, the notice under Section 148 has been issued within a period of four years of the expiry of relevant assessment year. Therefore, the condition which is imposed by the proviso to section 147 has no application. The only question in such a case is as to whether the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment. Another facet of the matter which must be taken into consideration is that in the present case, an assessment order has not been passed under section 143(3), a circumstance which has been emphasised by counsel for the Revenue. The case is, therefore, at the stage of an intimation under section 143(1). After 1st April, 1989 the power to reopen an assessment has been widened as compared to the position as it stood prior to that date. But it is settled law that Section 147 has to be given a schematic interpretation to ensure against an arbitrary exercise of power. The manner in which the provisions of section 147 should be construed is clarified in the judgment of the Supreme Court in Commissioner of Income Tax V/ s. Kelvinator of India Ltd.1 The Supreme Court held as follows:-

…post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. But reassessment has to be based on fulfilment of certain pre-conditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief. “

11. In the present case, while recording his reasons for the formation of belief that income has escaped assessment, the Assessing 1 [2010] 320 ITR 561 (SC) Officer placed reliance on clause 35 of the Deed of partnership. Clause 35 states that a partner who is retiring voluntarily or has been required to withdraw from the firm under clause 41 shall not, so long as the continuing or surviving partners or any of them shall carry on the business, solicit the clients of the firm for a period of three years. The inference which the Assessing Officer draws from clause 35 is that “the amount paid by the firm to the retiring partner is on account of the retiring partner’s renunciation of the right to have free trade and profession envisaged in the Constitution of India for three years”. Ex-facie, a reading of the clause as it stands shows that the inference is without any logical foundation. What clause 35 postulates is that a partner who is retiring voluntarily or who has been required to withdraw from the firm under clause 41 will not solicit the clients of the firm for a period of three years, if the remaining partners carry on the business. A partner, in other words, does not renounce his right to carry on the profession. But more importantly, clause 35 has no application whatsoever to a situation where a partner has retired mandatorily upon attaining the age of superannuation of seventy years. In so far as the assessee is concerned, the age of superannuation was seventy years. During the course of the submissions, as noted earlier, counsel appearing for the Revenue stated that there was an error on the part of the Assessing Officer in referring to clause 35 of the Deed of partnership. Once this is the position, and we have no doubt that the concession which has been made by learned counsel is in accord with a plain reading of the Deed of partnership, the basis and foundation for the formation of the belief that income has escaped assessment ceases to exist. Principally it was on the basis of clause 35 that the Assessing officer formed a reason to believe that income had escaped the assessment.

12. Counsel for the Revenue submitted that while disposing of the objections of the assessee, the Assessing Officer purported to rely on the provisions of Section 28(iv) under which, according to him, the amount received by the petitioner was taxable. In so far as this Court is concerned, a Division Bench of the Court in Mahindra and Mahindra Ltd. V/ s. Commissioner of Income Tax2 held that income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefits in cash or money. This Court followed the decision of Gujarat High Court in CIT v. Alchemic Pvt. Ltd.3 Therefore, considered from all perspectives, the reasons which have been disclosed by the Assessing Officer, can by no stretch of logic lead a prudent person to form a reason to believe that income has escaped assessment. For the purpose of determining the validity of the challenge to the notice under section 148, the Court would have to refer to the reasons recorded by the Assessing Officer and to those reasons alone.”

7. We draw strong support from their lordships’ foregoing reasons to quash all these reopening(s)/re-assessment(s) forming subject matter of adjudication in assessee’s five appeals ITA.Nos.18 to 22/PAN./2022. The same stand accepted in very terms. and that the stay applications S.A.Nos.1 to 5/PAN./2022 therein are rejected since rendered infructuous.

8. Coming to the assessee’s S.A.No.7/PAN./2022 for assessment year 2017-2018, learned counsel stated very fairly that he is not pressing for the same. The same is dismissed as not pressed.

All other pleadings on merits in these cases stand rendered academic.

9. To sum-up, these assessee’s five appeals ITA.Nos.18 to 22/PAN./2022 are allowed. The corresponding stay applications S.A.Nos.1 to 5/PAN./2022 are dismissed as rendered infructuous. And it’s last S.A.No.7/PAN./2022 is dismissed as not pressed in foregoing terms. A copy of this common order be placed in the respective case files.

Order pronounced in the open Court on 19.02.2024.