Section 147 : Reassessment-After the expiry of four years-Shah Commission’s report- Cash credit -Under-invoicing -Merely on basis of Shah Commission’s Report opining that there was under-invoicing of export price by iron-ore miners and exporters, reassessment could not be initiated when there was nothing to indicate that any particular income had accrued to anyone as a result of price difference-Notice based on report of commission is held to be not valid. [S. 28(1) , 68 ,148] The petition was carrying on business of mining and export of iron ore. After scrutiny, assessment order under section 143(3) was passed. Reassessment proceedings were initiated after the expiry of four years on basis of information of Shah Commission Report that there was under invoicing of export by exporters of iron ore, Assessing Officer initiated reassessment. The reasons for reopening the assessment was as under-
(i) There was under invoicing of exports by the assessee,
(ii) alternatively , mining activity being illegal ,income arising from it ought to be assessed as inform other sources and
(iii) escapement of income from assessment was on account of failure on the part of the assessee to disclose wholly and truly all material facts necessary for the assessment.
On writ allowing the petition the Court held that since under-invoicing was nothing but a matter of expression of opinion by Commission, Assessing Officer could not follow same as primary for reopening assessment. As Assessing Officer had not applied his mind to this aspect of matter, reassessment order was to be quashed as there was nothing to indicate that any particular income has accrued to anyone as a result of such difference in prices. As regards the allegation of illegality the Court held that when the income from the activity of mining and export ore arose also when it was assessed to tax there was nothing to suggest that the activity was illegal. Accordingly the notice of reassessment was held to be invalid. Ratio in Raymond Woollen Mills Ltd. v. ITO (1996) 236 ITR 34 (SC) is distinguished. (AY. 2008-09).
FULL TEXT OF THE HIGH COURT JUDGMENT
This group of petitions challenges orders of reopening of assessments in case of each of the petitioners by issuance of notices under Section 148 of the Income Tax Act, 1.961 (‘Act’).
2. The Assessees are all traders and exporters of iron ore, though some of them are also miners and processors of the ore. I ‘laving regard to allegations of large-scale mining, trading and exports of iron and manganese ore illegally or without authority of law across various States, the Government of India appointed a commission of inquiry under Section 3 of the Commission of Inquiry Act, 1952. Based on the findings of this commission, which inter alia reported under-pricing of ore exported by individual exporters, the Assessing Officers issued reopening notices under Section 148 of the Act. These notices are challenged by individual Assessees in these petitions. The petitions can be broadly classified into four groups. There are some petitions where notices under Section 148 have been issued after the expiry of four years from the end of the relevant assessment year, whilst there are others where the reopening has been within four years. In these latter petitions, the Assessees’ case is that the Assessing Officers had no reason to believe that any income chargeable to tax had escaped assessment, whereas in the former cases the Assessees allege both want of such reason to believe and also want of any case of their failure to disclose fully or truly all material facts necessary for the assessments. Then there are petitions where the allegations of the Revenue for reopening assessments are that there was a case of under-pricing of export goods and also that the businesses conducted by the Assessees were illegal and hence, their income ought to be brought to tax not as business income but as income from other sources. On the other hand, there are some petitions where the allegation of illegality does not find place in the reasons recorded for reopening notices issued under Section 148.
3. Since Writ Petition No.329 of 201.5 involves all four aspects referred to above, and since the basis of reassessment proposed in that case is the same as in the case of the other petitions, wherever applicable, though individual facts and figures may be different, this Writ Petition is taken as a lead case and the controversy is discussed in the light of the facts and circumstances stated in it. Separate references are made to individual petitions of the other groups, wherever there are individual elements to be distinguished as noted in the following order.
4. The petitioner is a mining concessionaire or lessee carrying on business of mining and production as well as export/trading of iron ore. For the assessment year 2008-09, the petitioner filed its return of income declaring a total income of 463,09,28,770.00. The petitioner’s case was selected for scrutiny by the Revenue by issuing of a notice under Section 143(2) of the Act. The particulars called for by the Assessing Officer from the petitioner were supplied by it with details of export of iron ore with quantity, quality, names and countries of the respective purchasers Based on the information supplied by the Assessee, respondent no.2 passed an assessment order under Section 143(3) of the Act, determining the total income of the Assessee at 478,49,83,060.00. Being aggrieved by the adjustments made in the assessment order, the petitioner filed an appeal before CIT (Appeals), who, disposed it of by his order dated 12/11/2013. Being aggrieved, the petitioner filed an appeal before the Income Tax Appellate Tribunal (HAT), who, by an order dated 31/10/2014, partially allowed it.
5. In the meantime, the Union of India through Ministry of Mines appointed a commission of inquiry under the Chairmanship of Mr. Justice M.B. Shah (Retired), inter alia, to inquire into allegations of illegal mining and trading of ore in various States including the State of Goa. The commission was appointed purportedly on the basis of reports received by the Union Government from. various State Governments of wide spread mining of iron ore and manganese ore in contravention of various provisions of law including the provisions of Mines and Minerals (Development and Regulation) Act, 1.957, The Forest (Conservation) Act, 1.980, The Environment: (Protection) Act, 1.986 and rules and guidelines issued thereunder. The terms of reference of the commission, inter alia, included inquiry into, and determination of, the nature and extent of mining, transportation and trading of iron ore and manganese ore done illegally or without lawful authority and the losses arising therefrom as also identification of, as far as possible, persons responsible for the same and of the extent to which regulatory and monitoring systems had failed to deter, prevent, detect and punish offences relating to mining, storage, transportation, trade and export of ore done illegally or without lawful authority and persons responsible for the same.
6. Shah Commission visited Goa, and issued notices arid, in particular, called for information from various State authorities. Based on the information made available to the Commission, it made three reports finding inter alia violation of various statutes and other infirmities.
7. The first two reports were considered by the Supreme Court., when it heard a public interest litigation filed by Goa Foundation under Article 32 of the Constitution of India purportedly on the basis of those two reports and praying inter alia for directions to Union of India as well as State of Goa to take steps for termination of mining leases issued in the State in violation of various laws and for incidental and consequential reliefs. In answer, it was pointed out by the mining lessees that there was a serious violation of principles of natural justice vis-a-vis the mining lessees. It was submitted that neither did the commission issue any notice under Section 8-B of the Commission of Inquiry Act giving a reasonable opportunity of hearing to the lessees or to produce evidence in their defence nor did the commission permit them to cross-examine witnesses or address the commission and be represented by legal practitioners. It was submitted that the inquiry and the findings arrived at by the commission in its reports were thus contrary to the provisions of Section 8-B and 8-C of Commission of Inquiry Act. Both Union of India and State of Goa, however, took a stand before the Supreme Court that no action would be taken against the mining lessees only on the basis of the findings of Shah Commission and that both would make their own assessments and give opportunity to show cause to the lessees before taking such action. The Supreme Court was, in the premises, not inclined to consider quashing of the commission’s report on the ground of violation of Sections 8-B or 8-C or infraction of principles of natural justice. The Court chose instead to examine the legal and environmental issues raised in the report of Shah Commission on its own and on the basis of its findings on those issues, consider granting of reliefs prayed for in the petition. After considering the issues thus in the light of the answers of the respondents, the Supreme Court declared that the deemed mining leases of all lessees in Goa had expired on 27/11/1987, whereas maximum renewal period of 20 years in case of such mining leases had expired on 27/11/2007 and consequently, mining by the lessees after 22/11/2007 was illegal. The Supreme Court. passed various other directions with which we are not concerned in the present matter. These were basically consequential upon its main finding on determination of mining leases. We are also not directly concerned with the first two reports of Shah Commission which, as we have noted above, were before the Supreme Court and considered by it in the manner outlined above.
8. After presenting its first two reports, Shah Commission made a third report, by which it inter alia observed that there were illegal exports particularly by means of under-invoicing on the part of the mining lessees and exporters. After this report was submitted by Shah Commission, the Income Tax Officer proceeded to issue a notice to the petitioner under Section 148 of the Act, proposing reopening of its assessment under Section 147 for the assessment year 2008-09. Reasons for reopening communicated in the order sheet to the Assessee were as follows: (i) there was under-invoicing of exports by the Assessee, (ii) alternatively, mining activity being held to be illegal, income arising from it ought to be assessed as income from other sources, and (iii) escapement of income from assessment was on account of failure on the part of the Assessee to disclose wholly and truly all material facts necessary for the assessment.
In support of reason (i), it was stated that the third report of Shah Commission on illegal mining and exports of iron and manganese ore in the State of Goa had disclosed that for the same period and for the same corresponding grade, the Assessee’s prices were less than the market prices and that prima facie the Assessee had under-invoiced its exports. A chart of such instances of under-invoicing of exports forming part of the report of Shah Commission (third report), was set out in the reasons.
It was submitted that these instances were not noticed till the report of Shah Commission was made available to the Assessing Officer. Reason (ii) pertained to the Supreme Court order in the Goa Foundation petition, which had held all deemed mining leases to have finally expired on 22/11/2007 and mining by lessees after 22/1.1./2007 to be illegal. It was submitted that based on this order of the Supreme Court, income accruing during financial year 2007-08 relevant to assessment year 200809 could not he said to be legitimate business income and was required to be treated as income from other sources. In support of reason (iii) it was alleged that having regard to the information given by Shah Commission report of under-invoicing of exports of iron ore by the Assessee, prima facie, it was found that for the same period and for the same FE content, the actual prices were higher than what was disclosed by the Assessee. It was submitted that the Assessee had under-invoiced its exports and was carrying on. an illegal activity on an expired deemed mining lease and these facts were not disclosed to the Assessing Officer when the original assessment was made. The Assessing Officer, accordingly, claimed that the Assessee’s case needed to be reopened since income to the tune of ‘116,75,46,110.00 had escaped assessment. The amount was arrived at as a total of all amounts by which exports in the relevant financial year were allegedly under-invoiced by the Assessee and which were referred to in the reasons for re-opening.
9. The petitioner outlined its objections to the reasons indicated by the revenue by pointing out inter alia brief facts of its case and submitting that no income had in fact escaped assessment. It was submitted that the Assessee had a well laid out process for exports, which was closely monitored by a separate export division. Depending upon the business policies/customer requirements, long term or spot contracts were entered into by the Assessee and export prices for such contracts were determined on the basis of various factors, such as nature of contract (long term or spot), quality of the ore, impurities in the ore, size of the vessel (freight rate), loading rate of vessel, dispatch, demurrage, market factors as well as overall negotiations. It was pointed out that all parties with whom the Assessee was dealing for its exports were unrelated parties and payments were received directly through banking channels and export duly was duly paid on the basis of prices agreed in the contracts. It was submitted that there was no question of any under-invoicing of exports as alleged by the department. So far as the information for his formation of belief indicated by the Assessment Officer is concerned, it was submitted that reopening was solely proposed on the basis of Shah Commission report; the department itself did not have any material. It was submitted that no new information was brought out in the reasons recorded for reopening of the assessment. It was submitted that from the reasons recorded, it was clear that the department was indulging in a fishing inquiry and did not have any reason to believe escapement of income which could form the basis of a valid reassessment notice. It was submitted that there was no direct. nexus between the material available to the Assessing Officer and the formation of his belief concerning escapement of income on the basis thereof. The Assessee also objected to the basis suggested by the Assessing Officer for treating its income as income from other sources. The Assessee requested the Assessing Officer to pass a speaking order in this behalf.
10. The objections raised by the Assessee were considered and dealt with by respondent no.2 in his order dated 20/02/201.5. Respondent no.2, inter alia, observed that the commission report was not prepared merely on the basis of hearsay or conjectures but on the basis of facts collected from the concerned authorities or the lessees. It was observed that as per the third report of the commission, there was under-invoicing of exports of iron ore, which was quantified and calculated year-wise. Respondent no.2 observed that under-invoicing was apparent from the evidence obtained from the concerned authorities and the Assessee had failed to disclose its true income earned on account of sale of iron ore; it had suppressed the sale value by resorting to under-invoicing as a modus operandi. Respondent no.2 explained that the statement made by the Union of India before the Supreme Court in the case of Goa Foundation and the observations of the Supreme Court on the basis of such statement required that no prosecution could be initiated against mining lessees on the basis of the report alone, without the lessees being given due opportunity. What was meant by this was ‘prosecution’ of the lessees and not any ‘action’ against the lessees. So far as the reason of taxability of the Assessee’s income as income from other sources is concerned, respondent no.2 referred to Section 37(1.) of the Act and its applicability. It was observed that the expenditure incurred by the Assessee was for a purpose which was prohibited by law and was not allowable for deduction.
11. The reopening of the assessment, in the premises, is challenged by the petitioner Assessee in the present petition.
12. Mr. Pardiwala, learned Senior Counsel appearing for the petitioner, submits that the reasons to believe escapement of income disclosed by the Assessing Officer do not indicate any information available to the department for formation of any such belief. Learned Counsel submits that the assessment is sought to be reopened solely on the basis of Shah Commission report. Learned Counsel submits that the commission report itself was vitiated on account of serious violation of principles of natural justice and, at any rate, by reason of breach of Sections 8-B and 8-C of the Commission of Inquiry Act. Learned Counsel submits that the lessees including the petitioner herein were not given any opportunity to explain the material used by Shah Commission in its report. It is submitted that, at any rate, the report of the commission is in the nature of expression of an opinion by the Commissioner and has no efficacy either as a legal finding or admissible evidence. Learned Counsel submits that so far as reasons to believe within the meaning of Section 147 of the Act are concerned, one must go by the reasons disclosed by the Assessing Officer himself; these reasons cannot be supplemented or improved upon in any subsequent order dealing with the petitioner’s objections or otherwise. Learned Counsel submits that at. any rate, there is no direct nexus or live link between the information said to be available to the Assessing Officer and the formation of his belief that income has escaped assessment. So far as the alleged ground of illegality of the business is concerned, learned Counsel submits that, in the first place, at the relevant time, that is to say, either during the relevant previous year or at the time of assessment, all concerned proceeded on the basis that the business of mining and export/trade of ore was perfectly legitimate. It is submitted that only when the Supreme Court decided the Goa Foundation petition on 21./04/201.4 that the question of illegality of mining activities on account of expiry of deemed leases arose for the first time. Learned Counsel submits that at any rate, the Mines and Minerals (Development and Regulation) Act, 1.957 was amended after the Supreme Court judgment in. Goa Foundation case extending the periods of mining leases and even the State of Goa subsequently renewed the period of lease in case of mining lessees in Goa including the petitioner herein and that at the date of the reopening notice there was a valid lease in place so far as the mining lessees including the petitioner are concerned. Learned Counsel submits that, in any event, the legality or otherwise of mining operations would not have any bearing on the character of the activity carried out by the Assessee. It is submitted that the activity was anyway in the nature of business and the income deemed from it was business income chargeable to tax after making allowance for deductible business expenditure.
1.3. It is submitted on. behalf of the revenue by Mr. Aravind, learned Counsel for the respondents, that Shah Commission was an official commission appointed by the Government of India under the Commission of Inquiry Act and its findings could well form the information available to the Assessing Officer for formation of a belief that income had escaped assessment. Learned Counsel submits that it is not relevant at the stage of a notice of reopening of assessment under Section 148 that under-invoicing reported by the commission should have demonstrably led to any escapement of income. In other words, learned Counsel submits that the link between the information, namely, under-invoicing of exports and escapement of income need not be complete. Learned Counsel submits that at the stage of a reopening notice, what is relevant is whether there is material at all for formation of a belief that income has escaped assessment; adequacy of that material from the point of view of formation of such belief is not a matter which the Court can scrutinize when a notice is challenged before it under. Article 226 or 227. Learned Counsel submits that under Section 37(1) of the Act, particularly having regard to the explanation provided thereunder, no business expenditure is allowable as deduction if the business was conducted illegally, and that the entire gross income of the Assessee was, in the premises, taxable in the hands of the Assessee. Secondly, and at any rate, it is submitted that income referred to in the reassessment notice, not having been earned in a disclosed transaction, would have to be treated as income from other sources.
14. For any reassessment, the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment for any assessment year. Such reason to believe, which is the foundation of Section 147, is formed on the basis of information extraneous to the original assessment proceedings. As observed by the Supreme Court in the case of Commissioner of Income Tax, Gujarat V/s. A. Raman and Co.‘, the condition which invests the Income Tax Officer with jurisdiction of reassessment has two branches: (i) that the Income Tax Officer has reason to believe that income chargeable to tax has escaped assessment; and (ii) that it is in consequence of information which he has in his possession that he has reason so to believe. The expression “information”, in the context in which it occurs, must, as explained by the Supreme Court, mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment. If, as a result of such information, the Income Tax Officer has a reason to believe that income chargeable to tax had escaped assessment, he has jurisdiction to assess or reassess the income under Section 147 of the Act. The information, thus, is the starting point and the formation of belief the end point, so far as reopening of assessment is concerned. The High Court, exercising jurisdiction under Article 226 of the Constitution of India, has power to set aside a re-opening notice, if these conditions precedent for the exercise of jurisdiction do not exist. The Court, thus, has to first see whether the officer had in his possession any information as explained in Raman and Co.(supra) and whether from that information he could have formed the belief that income chargeable to tax had escaped assessment. As explained by the Supreme Court in the case of Income Tax Officer V/s. Lakhmani Mewal Das2, the reasons for formation of such belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. In case such reassessment is to he made in respect of an assessment made under Sub-section (3) of Section 143 or 147 after the expiry of four years from the end of the relevant assessment year, the Assessing Officer must additionally believe that the escapement of income had occurred as a result of the Assessee’s failure to disclose fully and truly all material facts necessary for the assessment. No doubt, the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income Tax Officer on whether action should be initiated for reopening assessment. At the same time, it is to be borne in mind, as explained in Lakhmani Mewal Das (supra), that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of belief relating to escapement of income from the assessment. These then are the parameters for the Court to assess the legality of any reopening notice.
15. Let us now see what was the information or material available to the Assessing Officer and which is disclosed in the reasons to believe stated in the original order sheet. The information is said to be the Shah Commission report, which inter alia reported under-invoicing of exports by the exporters of iron ore mentioned in it including the Assessee herein. If one has regard to the Shah Commission report and its use made in the reopening notice, it is at once apparent that under-invoicing in the concerned exports is nothing but a matter of expression of opinion by the commissioner. As this Court has explained in the case of Fomento Resources Private Ltd. & Anr. V/s. Union of India & Ors.,3 where this very report of Shah Commission was a matter of direct challenge by the mining lessees and exporters, including the Assessee herein, facts found, as also conclusions drawn, by a Commission of Inquiry are not judicial pronouncements. The report of the Commission neither constitutes a binding judgment nor a definitive pronouncement. The Commission, as held by the Supreme Court in the State of Karnataka V/s. Union of India’, is required to submit its report, which may or may not be accepted by the appointing authority. If it is not accepted, it has no legal consequences. The Commission, in other words, has no power to adjudicate in the sense of passing an order which can be enforced. What the Commission says is merely an expression of its opinion; it lacks both finality and authoritativeness. The differences in export: prices of various exporters, so far as iron ore is concerned, may be matters of fact, which are said to have been derived by Shah Commission from the material available in public domain, but the Commission’s conclusion on the basis of these differences in prices that there was under-invoicing, is a matter of conclusion drawn by the commission. This conclusion is purportedly drawn on the basis of the primary facts of differences in export prices; and it is a deduction by the Commissioner by way of an expression of his opinion, as we have explained above. That per se cannot he treated as a primary fact, on the basis of which any belief can he formed by the assessing authorities. Besides, it must be noted that when the Shah Commission matters were argued before this Court, the Union of India made an express statement on the same lines as was made before the Supreme Court in the Goa Foundation petition. Learned Counsel appearing for the Union stated before this Court, and which statement has been noted in our order dated 02/07/2019, that the Union would not take any action against mining lessees or traders for exports of ore only on the basis of the Commission’s report without making its own assessment of facts and without first giving opportunity of producing evidence to the affected parties. For the reasons stated above, which bear generally on the status of the Commission’s report and its findings, as well as the statement made by the Union of India as noted above, it is impermissible to the department to act exclusively on the basis of the Commission’s report. It must make its own assessment of facts before any action is initiated. In the present case, since it is a reopening notice under Section 148, it may not be necessary to give any pre-notice opportunity of hearing or producing of evidence to the affected parties. The notice itself admits of a cause being shown by the affected parties, namely, in the present case, the Assessee. It is, however, imperative that the Assessing Officer must apply his own mind and make his own. assessment of facts before he issues any notice under Section 148.
16. In the present case, as we have noted above, the only primary fact which was available in public domain and which is made part of the Shah Commission report is the differences in export prices charged by the Assessee to its counter parties abroad as compared to other exporters, in the cases referred to in Shah Commission report, and noted in the reopening notice; the Assessee’s prices were lower than other exporters. Even if it is assumed that so far as this fact is concerned, the information contained in the report of Shah Commission by itself can be treated as information available to the Assessing Officer within the meaning of Section 1.47, the further information, however, that there was therefore under-invoicing of exports by the Assessee does not simply follow from this primary information. There is nothing whatsoever in the impugned notice issued by the Assessing Officer to indicate that he has applied his mind to this aspect of the matter. Learned counsel for the Revenue relies on the case of Calcutta Discount Company Ltd., Vs Income Tax Officer’ to support his contention that it is not only the primary facts but inference to be drawn from such facts which also can form part of the material on which the Assessing Officer may form his belief. Learned counsel is right there. As the Supreme Court has explained in this case, from the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the Assessing Authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw a proper legal inference on whether any income has escaped assessment. But then, any inference to be drawn from the primary facts in possession of the Assessing Officer must he such as might follow from those primary facts; it cannot he a matter of conjecture or surmise and in any event, the officer has to apply his mind to arrive at such inference.
17. As the Supreme Court has explained in the case of A. Raman and Co. (supra), the law does not oblige a trader to make maximum profit out of his trading transactions. It is the income which accrues to a trader which is taxable in his hands; not the income which he could have, but has not earned. No doubt, by adopting a device, if it is made to appear that income which really belonged to the assessee had been earned by some other person or by the Assessee in some other form or means, that income may he brought to tax in the hands of the Assessee and if such income has escaped tax in a previous assessment, a case for reassessment under Section 147(b) may be made out. There is nothing, however, in the reasons indicated by the Assessing Officer in the present case to suggest that any such income has accrued to any person or the Assessee. The reasons do not indicate that the Assessing Officer has formed any belief that under-pricing was adopted by the Assessee as a device by which income had accrued to any other person or the Assessee himself in any other form and such income had escaped assessment.
18. In any event, as we have explained above, there must be a direct nexus or live link between the information found by the Assessing Officer and the escapement of income arising in the case. In the present case, all that was available to the Assessing Officer was the information that the export prices recovered by the Assessee were less in some cases than the market prices said to he prevailing on those days. This information itself is highly doubtful, since there is nothing to indicate that there was any particular market price as at the relevant date which ruled or which alone was the correct price. The export prices of other exporters, considered in Shah Commission report, do not suggest even a trend to indicate any particular market price. Besides, the price in an individual export contract is a function of various parameters as claimed by the Assessee, and as indicated whilst noting the Assessee’s objections to the re-opening notice. But, these are matters of merit and need not engage us today, except the fact that. the Commission’s conclusion that any particular price was the market price was itself a matter of conjecture and hardly a primary fact. For our purposes, even if we assume that the Assessee’s export prices were in fact so less, there is nothing to indicate that any particular income has accrued to anyone as a result of such difference in prices. There is, thus, no direct nexus or live link between the difference in prices and escapement of income. There is, in other words, no way the Assessing Officer could have formed a belief that any income has escaped assessment simply on the basis of the differences in the export prices of the Assessee when compared to others.
19. Learned Counsel for the revenue places strong reliance on the case of Central Provinces Manganese Ore Co. Ltd. V/s. Income Tax Officer. Relying on this case, it is submitted that based on export prices showing a systematic lesser value as compared with the prevailing market prices for the same quality of goods, a reopening notice could indeed be issued under Section 148. In Central Provinces Manganese Ore Co. Ltd. (supra), the facts were quite peculiar. The appellant before the Court was a non-resident company having its office in London. It also had an office in India at Nagpur and was assessed to income tax in Nagpur. It had been the practice of the appellant to produce before the Income Tax Officer relevant books kept at its local office at Nagpur and balance sheets, trading accounts and profit and loss accounts at its head office in London. The customs authorities came to know that the appellant had declared very low prices in respect of all its consignments of manganese ore exported out of India. It was also found that most of its export was only to 2 to 3 buyers, who in turn did not purchase ore from any other company except the appellant. After due inquiry/ investigation, customs authorities had found that the appellant was systematically showing lesser value for the manganese ore exported as compared with the prevailing market prices for the same grade of manganese ore. The customs authorities accordingly came to a definite conclusion that the prices mentioned in the relevant contracts between the Assessee and its buyers were lesser than contemporaneous market prices and it was found as a fact that the appellant company was indulging in under-invoicing. Final orders were accordingly passed under the Customs Act. It is in the context of these facts that the Supreme Court countenanced a reopening notice under Section 148 in that case. It is to be noted, firstly, that what the customs authorities found was by way of an order passed under law; it was a final order of Collector of Customs, and it found under-invoicing as a matter of fact. Secondly, the facts disclosed peculiar circumstances such as all consignments of exports being systematically priced at lesser value. Thirdly, it must be noticed that these exports were made to related parties who did not buy from any other source. In the light of these circumstances, which were found as matters of fact, and that in a quasi judicial order, which had attained finality, the Supreme Court found formation of belief by the Assessing Officer as having a reasonable connection with the information available to him and did not find fault with the reopening notice. These facts are entirely distinguishable. In our case, there is no systematic undervaluation of export prices. In fact, as pointed out by Mr. Pardiwala, there have been cases where the export prices of the petitioner are taken to be market prices and on the basis of those prices, under-invoicing has been claimed vis-a-vis other exporters. So much for systematic under-valuation. There is no finding by a court of law or a statutory authority as a matter of fact that there was any under-invoicing. The so called finding is by a commission of inquiry; that commission has itself made it clear in its very opening statement that it was not in a position to finalize illegalities or irregularities with regard to the export of iron ore by individual lessees or their representatives or traders comprehensively due to time constraints. It is at best a tentative opinion expressed by a Commission of inquiry without affording any opportunity to the concerned exporters to explain the material used against them. Besides, there is no case of related parties to whom such exports were made. At least, the reopening notice and the reasons indicated by the Assessing Officer do not indicate any of these things. In the absence of these and such other materials, the simple and bare primary fact of the Assessee having charged lesser export prices from its counter-parties as compared to some other exporters, is no basis for formation of any belief that any income has escaped assessment to tax.
20. The judgments in cases of Phool Chand Bajranglal v/s. I.P. Patel & Co. v/s. Dy. Commissioner of Income tax8, Income Tax Officer v/s. Selected Dalurband Coal Co. (P). Ltd.‘, Rattan Gupta v/s. Union of India’, AGR Investment Ltd. vs. Addl. Commissioner of Income Tax“, Raymond Wollen Mills Ltd. v/s. Income Tax Officer’, and ACIT v/s. Rajesh Jhaveri Stock Brokers (P) Ltd.“, cited by learned Counsel for the revenue, bear on the aspect of sufficiency or otherwise of the material used for formation of belief. These judgments make it clear that what can be submitted to judicial scrutiny is whether or not there was material on the basis of which belief could have been formed about escapement of income from assessment, and not whether the material was actually adequate or sufficient for formation of such belief. There is no quarrel with this proposition here. Here, we are precisely concerned with whether or not such belief could have been formed on the basis of such material as was available with the Assessing Officer. In every State action or order submitted to judicial scrutiny, the matter is assessed from the point of view of Wednesbury unreasonableness. The focus of the scrutiny is, firstly, on whether the authority has kept itself within the four corners of law and, secondly, and even if it has so kept itself, whether it has nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it. A reopening notice issued under. Section 148 of the Income Tax Act is no exception to this rule. The Courts have made it clear time and again that belief under Section 147 of the Act is not a matter of a mere opinion of the Assessing Officer. It must be demonstrably shown that the material used by Assessing Officer is reasonably capable of formation of his belief that income has escaped assessment. As the Supreme Court observed in Lakhmani Mewal Das (supra), belief does not mean a purely subjective satisfaction on the part of the Income Tax Officer. It must be held in good faith; it cannot be merely a pretense. It is open to the Court to examine whether the reason has a rational connection with or relevant bearing on the formation of the belief; it must not be extraneous or irrelevant for the purpose. In the present case, as we have noted above, the reason has no such bearing or rational connection with the formation of the belief. It is purely speculative on the part of the Assessing Officer to form a belief of escapement of income from taxation simply on the basis of lesser export prices charged by the Assessee. There is no material or even suggestion that any income corresponding to the so-called under-invoicing of exports was in fact received by any party or by the Assessee through any backdoor method. In the premises, there is no legitimate reason to believe which can sustain the impugned notice issued by the Assessing Officer.
21. The other main objection of the Assessee is that there was no belief on the part of the Assessing Officer that escapement of income had arisen by reason of any failure on the part of the Assessee to make a return under Section 1.39 or in response to a notice issued under subsection (1) of Section 142 or. Section 148 or to disclose fully or truly all material facts necessary for the assessment. It is not good enough for the Assessing Officer to simply make a bald assertion that escapement of income is as a result of failure on the part of the assessee to fully and truly disclose all material facts. He must indicate, however briefly, what is it that was not disclosed and which gives the Assessing Officer reason to believe that income has escaped assessment. The entire case of the revenue is founded on the so called under-invoicing of exports. It is difficult to fathom what information or particulars was the Assessee expected to disclose in its assessment insofar as the export prices charged by it are concerned and which is now available to the Assessing Officer so as to enable him to form a belief that income has indeed escaped assessment.
22. When we come to the third reason alleged by the Assessing Officer for reopening the case, namely, illegality of the business and taxation of income derived from it as income from other sources, the department is on an even thinner ground. In the first place, when the income from the activity of mining and export of ore arose and also when it was assessed to tax, there was nothing to suggest that the activity was illegal. Six years later, when the Supreme Court decided the case of Goa Foundation, and declared that deemed mining leases had already expired and mining carried out thereafter was illegal, the question of illegality of the activity arose for the first time. But be that as it may, even if it is assumed that at all times the activity carried on by the Assessee, through which income was said to have accrued to it, was in violation of law, that does not alter the character of the activity. Income earned from the activity is still very much business income and any expenditure made for the activity is business expenditure. Section 37(1) of the Act refers to expenditure incurred by an Assessee “for any purpose which is an offence” or “which is prohibited by law”. Such expenditure is not deemed to be incurred for the purpose of business and no deduction or allowance can be made in respect of such expenditure. This does not imply that the character of the very activity itself changes having regard to the legality or otherwise of the activity. It is submitted on behalf of the revenue at the Bar that the mining activity itself being an illegal activity, expenditure incurred by the Assessee for it is not deductible. There is no such ground alleged in the reopening notice or the reasons indicated in support of the notice. For the first time, a faint suggestion to this effect was made in the order passed by the Assessing Officer on the objections communicated by the Assessee. As our Court in the case of Hindustan Lever Ltd. V/s. R.B. Wadkar14 has made it clear, the reasons, with a view to assess their reasonableness, are required to be read as they are recorded by the Assessing Officer; no substitution or deletion is permissible; no addition can be made to those reasons; and no inference can be allowed to be drawn based on these reasons which is not recorded. It is for the assessing officer to form an opinion as to whether there was escapement of income from assessment and whether such escapement occurred from failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year; and it is for him to put his opinion on record in black and white. The reasons recorded must disclose his mind and they should be self explanatory. The reasons recorded cannot be supplemented by the time the matter reaches the Court by filing of any affidavit or making any oral submission. In the premises, it is not open to the revenue to seek to sustain the re-opening notice on a new reason, namely, dis-allowance of deduction of expenditure since the whole activity was illegal.
23. In the premises, the impugned notice issued by the Assessing Officer under Section 148 of the Act cannot be sustained and must be set aside.
24. The following companion writ petitions, Writ Petition Nos.1015, 1016, 328, 329, 955, 959, 1019 of 2015, 3, 5, 22,23, 99, 100,113, 116, 117, 120, 133, 142, 166, 190, 191, 224,225,261,263, 270 of 2016 are all matters which involve all four aspects referred to above as in the case of Writ Petition No.329 of 2015. Mr. Diniz appearing in. WP Nos.22 and 23 of 2016 and Ms. Kakodkar appearing in WP No.120 of 2016 make additional submissions in support of their respective cases
Mr. Diniz relies on the case of Sarada Mines Pvt. Ltd. V/s State of Orissa’s, decided by Orissa High Court. The case was in respect of value added tax under Odisha Value Added Tax Act, 2004. There was a tax evasion report in that case against the assessee. Based on the report, reassessment proceedings were initiated against the assessee. This was also a mining lease case and concerned trade of iron ore. The error purportedly discovered by the Assessing Authority was on a reconsideration of the same material which was before the Authority at the time of the original assessment. The Court held that reopening in the case was on a mere change of opinion and was impermissible. The Court held that the factual background, which remained the same, could not constitute new/fresh information under Section-43(1) of the Odisha Act, for initiating reassessment proceedings. The main controversy in the matter concerned the quality of ore sold by the Petitioner. What the assessee claimed to have sold was “Run of Mines” (ROM) ore. Based on a fresh analysis of material on record, the Assessing Authority came to the conclusion that what was sold was not ROM but Calibrated Lump Ore (CLO). Apart from holding that this new conclusion was impermissible, being based on the same material which was available at the time of the original assessment, the Court held that there was nothing on record to show that the Petitioner had received any undisclosed sums beyond the record and which were suppressed during the self-assessment/audit assessment proceedings or had concealed any turnover. This latter part of the reasoning of the Orissa High Court does support the Petitioner’s case even in these matters. Learned Counsel appearing in WP No.120 of 2016 refers to the case of Hemant Traders Vs Income Tax Officer16. In that case, reassessment was initiated by issuance of a notice under Section 148(2) in pursuance of a survey action under Section 133A of the Act. The Court held that neither the survey report nor any other material indicated that any income chargeable to tax has escaped the assessment in the relevant assessment year. It was submitted by the Revenue that even if that was so, the writ jurisdiction of the Court should not be exercised to interfere with a notice at the threshold. The Court negatived this contention, observing inter alia that once the Court found that the foundation or basis for initiating of reassessment proceedings did not contain the requisite satisfaction or reason for belief, the Court was required to step in and at the threshold itself; it could not allow the officer to continue the proceedings which might result into undue harassment or embarrassment to the assessee. This part of the observation of the Court does support the assessee’s case even in these matters. We are fortified in taking the view that we have taken in this group of writ petitions by these authorities cited additionally on behalf of the assessees.
25. The following writ petitions, Writ Petition Nos.102, 325,327, 956, 958 of 2015, and Writ Petition Nos.4, 6, 15, 16, 17, 24, 25, 101, 102, 114, 115, 118, 141, 143, 144, 145, 150, 167, 165, 207, 226, 227, 777, 791 of 2016, are all cases where reassessment notices are issued within four years from the end of the relevant Assessment Years. There is no requirement or failure on the part of the assessee to disclose fully and truly material facts in these cases. So far as the information and belief formed on such information of escapement of income from taxation, however, are concerned, the above discussion in Writ Petition No. 329 of 2015 squarely applies to these cases. Mr. Rivankar appearing in WP No.791 of 2016. makes a few additional submissions. Learned counsel submits that in his case, the assessee is a mere trader and not a mining lessee and that there is accordingly no case for any illegal activities so far as his business is concerned. Learned counsel submits that there is no response on the part of the Revenue to this aspect of the Petitioner’s case. This is one more instance which exposes lack of application of mind on the part of the Revenue before issuing re-opening notices. For the same reasons, as are discussed above in case of Writ Petition No.329 of 2015, reopening notices even in this group of petitions deserve to be set aside.
26. The following petitions, Writ Petition Nos.9, 12, 123, 124, 75, 80, 105,106, 110, 148, 149, 192, 604, 605, 606, 651, 674, 866 of 2016, are all matters where reassessment proceedings are initiated under the proviso to Section 147 of the Act, since four years have already expired from the end of the relevant assessment years in all these cases. The distinguishing feature of this group of petitions, however, is that there is no allegation in these cases that there was any income derived from illegal activities, which needs to be assessed as income from other sources. The reopening notices in these cases are solely on the ground of under-invoicing of exports. This aspect of the controversy has already been dealt with above in connection with Writ Petition No.329 of 2015 and these petitions also deserve to be allowed on that basis. Mr. Chaitanya, learned Counsel appearing for the Petitioners in Writ Petition No.866 of 2016 makes a few additional submissions. It is, firstly, submitted that though the re-opening notice is issued four years after the end of the relevant assessment year, there is not even an averment in the reasons stated for issuance of the notice that there was any nondisclosure on the part of the Petitioners. Learned Counsel relies on the cases of Hubtown Ltd. Vs. Deputy Commissioner of Income-tax17 and Akshar Developers Vs. Assistant Commissioner of Income-tax‘ in support of his case. The notice in the present case is indeed deficient and cannot sustain reassessment in accordance with the law stated in these cases. Learned Counsel also relies on the case of Assistant Commissioner of Income-tax Vs. Dhariya Construction Co.wto assail reliance by the Revenue on the opinion of Shah Commission so far as the alleged case of under-invoicing is concerned. In that case, the opinion of District Valuation Officer (DVO) was held per se as no information for the purposes of reassessment under Section 147. It is quite plain that as in that case, even here the expression of opinion by Shah Commission on the alleged under-invoicing of exports cannot qualify as information so as to sustain a belief on the part of the Assessing Officer of income having escaped assessment.
27. The following cases, Writ Petition Nos.8, 10, 11, 125 of 2016, 1020 of 2015, 1022 of 2015, 173 of 2016, 174 of 2016, are on the same footing as the group of petitions referred to in the paragraph above inasmuch as the re-opening is only on the basis of under-invoicing of exports and not accrual of income from illegal activities. They are, however, all cases of reopening within four years from the end of the relevant Assessment Years. For the reasons stated above, even these petitions deserve to be allowed and reopening notices quashed.
28. The following petitions, Writ Petition Nos.141 and 233 of 2015, and Writ Petition Nos. 198, 199, 262, 264, 265, 271, 272, 879, 880, 881, 882, 883 of 2016, are all petitions where reopening notices contained additional reasons involving issues under Section 10B of the Act or Section 14A of the Act or commission paid to foreign agents, etc. These petitions deserve to be detagged from the group of petitions to be disposed of by this order.
29. Rule is accordingly made absolute and Writ Petition Nos.1o2 of 2016, 325, 327, 328, 329, 955, 956, 958, 959, 1015, 1016,1019, 1020, 1022 of 2015, and Writ Petition Nos. 3, 4, 5, 6, 8, 9, 10, 11, 12, 15, 16, 17, 22, 23, 24, 25, 75, 80, 99, 100, 101, 102, 105, 106, 110, 113, 114, 115, 116, 117, 118, 120, 123, 124, 125, 133, 141, 142, 143, 144, 145,148, 149, 15o, 165, 166, 167, 173, 174, 19o, 191, 192, 207, 224, 225, 226,
227, 261, 263, 270, 604, 605, 6o6, 651, 674, 777, 791, 866 of 2016 and 1104 of 2017 are allowed by quashing and setting aside notices of reopening under Section 148 which have been challenged therein. No order as to costs.
30. Writ Petition Nos. 141 and 233 of 2015 and Writ Petition Nos. 198, 199, 262, 264, 265, 271, 272, 879, 880, 881, 882 and 883 of 2016 are detagged. These shall come up for hearing in due course.
1 [1968 (67) VTR 11]
2 [(1976) 103 I’M 437 (SC)]
3 Writ Petition No.6o6 of 2014 decided on 2nd July, 2019
4 (1977) 4 SCC 608
5 (1961) 41 l’l’R 191 (SC)
6 (1991) 191 ITR 0662
7 203 ITR 456 (SC)
8 346 ITR 0207 (Guj)
9 217 ITR 0597 (SC)
10 234 ITR 220 (Del)
11 333 ITR 97 (Del)
12 (1999) 236 ITR 34 (SC) 13 (2007) 291 ITR 500 (SC)
14 (2004) 268 ITR 332 (Bombay)
15 2017(I) ILR-CUT949
16 (2015) SCC Online Born 4244.
17 (2016) 74 taxmann.com 18 (Bombay)
18 (2019) 411 ITR 602.
19  328 ITR 515 (SC)