KALA RAMESH PARMAR ,MUMBAI vs. ITO WARD- 23(2)(6), MUMBAI

This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC)/CIT(A), Delhi passed u/s 250 of the Act. The assessee has raised the following grounds of appeal:

The Appellant craves leave to add, alter, amend, delete, rescind or withdraw any of the grounds of appeal mentioned hereinabove

The brief facts of the case are that, the assessee is engaged in the business and has filed the return of income for the A.Y 2012-13 on 18.07.2012 disclosing a total income of Rs.3,72,978/- and the return of income was processed u/s143(1) of the Act and the asseseement was completed u/s 143(3) of the Act with the assessed the total income of Rs. 4,58,640/-.Subsequently, the Assessing Officer(AO) has received the information from JDIT (Inv), Mumbai that the assessee has dealt in shares of Scan Steels Ltd and the scrip has been used to facilitate the Long term capital gains claimed as exempt or short term capital loss and the assessee is one of the beneficiary. Therefore the AO has reason to believe that the income has escaped assessment and has issued notice u/s 148 of the Act. In response to notice, the assessee has filed the return of income on 18.04.2019 disclosing a total income of Rs.3,72,978/-, subsequently notice u/s 143(2) and 142(1) of the Act are issued and the reasons for reopening of the assessment was provided to the assessee. The assessee has filed the objections vide letter dated 13.05.2019 and objections were disposed off.

Whereas the A.O has issued notice u/s 148 of the Act dated 31.03.2019 for reopening of assessment.The original assessment was completed u/s 143(3) of the Act vide order dated 23.03.2015. The A.O has recorded the reasons without any tangible material/ fresh material except charges based on the information. The assessee has purchased shares in the financial year 2007-08 The Ld.AR submitted that the information of sale and purchase of shares was already filed on record vide letter dated 20-08-2014 placed at page 12 & 13 of the paper book in the original assessment proceedings U/sec143(3) of the Act and the A.O after verifying the facts and information has passed order on 23-03-2015. Therefore the reopening of assessment is based on the same set of facts and is only a change of opinion and no inquiry or independent investigation by the A.O. The assessee in the present reassessment proceedings has submitted letter dated 11-12-2019 placed at page 48 &49 of the paper book. On the validity of issue of notice on the same share scrip, the Hon’ble Jurisdictional High Court in writ petition No. 2518 of 2019 Gateway leasing Pvt Ltd Vs. ACIT for the A.Y 2012-13 dated 11-03-2020 (426 ITR 228(Bombay)) has granted relief to the assessee and has observed at Para 19 to 40 of the order read as under:

From the above, it is seen that according to Respondent No. 2 information was received from the Investigation Wing about search and seizure action carried out in the premises of Shri Naresh Jain on 19-3-2019 which concluded on 21-3-2019. The search action revealed that a syndicate of persons were acting in collusion and had managed transactions in the stock exchange, thereby generating bogus long-term capital gains, bogus short term capital gains and bogus business loss entries for various beneficiaries. The search action unravelled the workings of the syndicate and brought on record the make believe nature of paper work that is manufactured in order to show the arranged transactions as legitimate market transactions. Statements of various persons were recorded in the course of the search action. In his statement Shri Naresh Jain stated that during the assessment year 2012-13, he had used scrips of seven entities to provide bogus entries which included the scrip of M/s. Scan Steels Ltd.. Further, information revealed that the Petitioner had traded in the shares of M/s. Scan Steels Ltd., and was in receipt of Rs. 23,98,014/-. Therefore, Respondent No. 2 stated that he had reasons to believe that this income had escaped assessment within the meaning of section 147 of the Act.

Thus what is discernible is that the main ground on which assessment is sought to be re-opened is that Petitioner had traded in the shares of Scan Steels Ltd., and was in receipt of Rs. 23,98,014/-, which the Petitioner failed to disclose fully and truly before the Assessing Officer and which Respondent No. 2 believed had escaped assessment. 21. Before adverting to the initial assessment order passed under section 143(3) of the Act dated 28-3-2015, it would be apposite to advert to the averments made by the Respondents in the affidavit in reply, more particularly the reasons given to justify re-opening of the assessment. In para 3.3 of the affidavit in reply, it is stated that the Petitioner had disclosed TDS credit of Rs. 34,05,533.00 and claimed refund of the said amount. On perusal of the tax assessment form prepared and issued by the Assessing Officer alongwith the assessment order, it was noticed that Petitioner was issued a refund of Rs. 26,13,268.00 alongwith interest of Rs. 2,87,463.00 which was reduced while determining the tax liability which thereafter stood at 'NIL'. But in the return filed, Petitioner had not reduced the amount of refund already received by him, which prima facie, resulted in excess claim of refund to the tune of Rs. 26,13,268.00 being refund already granted. However, this was not the ground for reopening the assessment as per the reasons furnished to the Petitioner on 31-5-2019 viz., that petitioner had traded in the shares of M/s. Scan Steels Ltd. and was in receipt of Rs. 23,98,014.00 which Respondent No. 2 stated that he had reasons to believe had escaped assessment. Thus, this contention of the Respondents is beyond the reasons furnished for re-opening of the assessment.

In para 3.4 of the affidavit in reply it is stated that though the Petitioner had furnished details relating to purchase and sale of shares of Mittal Securities Ltd., (now Scan Steels Ltd.), but that did not amount to full and true disclosure of all material facts unless true and real facts are disclosed before the Assessing Officer. Assessing Officer had not discussed in the assessment order about the genuineness or camouflage nature of the transactions of purchase and sale of shares of Mittal Securities Ltd. by the Petitioner.

From the above, it is seen that what Respondent No. 2 contends is that though Petitioner had disclosed details of the transactions pertaining to purchase and sale of shares of Mittal Securities Ltd., (now Scan Steels Ltd.), Petitioner did not disclose the real colour/true character of such transactions and therefore, he did not make a full and true disclosure of all material facts which was also overlooked by the Assessing Officer.

Reverting back to the original assessment proceeding, we find from the materials on record that after the Petitioner had filed the initial return of income on 20-9-2012, Assessing Officer had issued notice to the Petitioner under section 142(1) of the Act dated 7-8-2013, calling upon the Petitioner to produce the following documents :- "1. Reasonably detailed note on the nature of business including details of addresses, phone number of all premises - Office, Branch, Godown, Workshop etc..

Any other details and/or documents for the purpose of assessment." 24.1 By another notice of even date, Petitioner was informed by the Assessing Officer that there were certain points in connection with the return of income submitted by the Petitioner about which he would like some further information. Accordingly, Petitioner was asked to appear before the Assessing Officer and to produce any documents, accounts and any other evidence on which it relied upon in support of the return filed.

On 10-6-2014 Assessing Officer issued another notice under section 142(1) of the Act, calling upon the Petitioner to submit the particulars mentioned therein including the details regarding increased authorized share capital with the list of the shareholders and details of purchase of equity shares of Rs. 7,04,92,390.44 with details of payment. Petitioner has stated that in response to such notice, all relevant details were furnished to the Assessing Officer. Finally, Assessing Officer issued another notice under section 142 (1) of the Act on 19-3- 2015, calling upon the Petitioner to furnish in writing the details party-wise with name, address and PAN with supporting evidence who had subscribed for security premium reserve or how it was created and details of statement/transactions mentioned at serial no. 2 which stated that in case of capital gain/loss, it should provide a comprehensive chart with regard to sale and purchase of securities/shares quoted/unquoted as well as dividend received. It was further stated that in case of capital loss whether the loss was adjusted after dividends in terms of section 94(7) of the Act. In his response, Petitioner informed the Assessing Officer on 19-3-2015 itself that there was no increase in the security premium reserve during the said assessment year. No capital gains were earned during the said year by the Petitioner. It had not received any dividend income during the said year too. Hence, question of applicability of section 94(7) did not arise. Petitioner did not make any investment nor was there any inventory of shares; no dividend was earned during the year. Alongwith the said letter relevant documentary evidence in respect of the concerned transactions were enclosed.

Thereafter, assessment order was passed on 28-3-2015, wherein Assessing Officer had noted that during the course of scrutiny details of income, expenditure, assets and liabilities were called for, examined and placed on record. After perusing all details and after examination of those and upon discussion, total income was computed in terms of the return filed by the Petitioner. As already noted above, the assessment order was passed under section 143(3) of the Act. It was mentioned therein that representative of the Petitioner had attended the assessment proceedings from time to time and had filed details with explanations.

At this stage, we may briefly refer to the relevant legal provisions. 28. Section 147 of the Act deals with "income escaping assessment". Section 147 says that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under section 147 of the Act. 28.1 The first proviso to section 147 is important. As per this proviso, where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no action shall be taken under section 147 after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. 28.2 Section 149 deals with time limit for notice under section 148. As per clause (a) of sub-section (1), no notice under section 148 shall be issued for the relevant assessment year, if four years have elapsed from the end of the relevant assessment year unless the case falls under clause (b) or clause (c). Clause (b) says that no notice shall be issued if four years have elapsed but not more than six years have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year. Clause (c) deals with a situation where limitation is extended upto sixteen years but the escaped income must relate to any asset located outside India.

Insofar the present case is concerned, the assessment year is 2012-13. The assessment year ends on 31-3-2013. In this case impugned notice under section 148 of the Act was issued on 31- 3-2019. Therefore, it is a case of re-opening of assessment under section 149 (1) (b) of the Act after expiry of four years but before expiry of six years. 29.1 Of course the limitation point though pleaded in the writ petition, has been given up by the Petitioner following filing of affidavit by the Respondents which clearly shows that the re- opening notice was issued within the limitation period of six years.

In such a case, the first condition for invoking section 147 is that the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment for the relevant assessment year. The second condition is that the Assessing Officer must arrive at the satisfaction that income chargeable to tax has escaped assessment for the said assessment year by reason of the failure on the part of the assessee to make a return under section 139 or to respond to a notice under section 142(1) or section 148 or due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.

The key or crucial expressions appearing in section 147 are "reason to believe" and "failure to disclose fully and truly all material facts necessary for assessment". 31.1 Before dilating on these two expressions, it would be apposite to refer to section 148 of the Act, which deals with issue of notice where income has escaped assessment. As per sub- section (1), before making the assessment, re-assessment or re- computation under section 147, a notice in the prescribed form is required to be served upon the assessee by the Assessing Officer, calling upon him to file return of income in terms of such notice within the period specified and in such event the return so filed would be construed to be a return filed under section 139. As per sub-section (2) of the said section, the Assessing Officer shall before issuing any notice under section 148, record his reasons for doing so. 31.2 In GKN Driveshafts (India) Ltd. (supra), Supreme Court held that when a notice under section 148 of the Act is issued, the proper course of action for the assessee is to file the return and if he so desires, to seek the reasons for issuing the notice. If sought for, Assessing Officer is bound to furnish the reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to the notice in which event the Assessing Officer would be under an obligation to dispose of the same by passing a speaking order.

Reverting back to the two expressions as noticed above, we may mention that these two expressions were examined and interpreted in great detail by the Supreme Court in Income-tax Officer v. Lakhmani Mewal Das [1976] 103 ITR 437. That was also a case where notice under section 148 of the Act was put to challenge. Though provisions of section 147 of the Act as it existed then have since been reconstructed and have undergone change, the two key expressions continue to retain their relevance in so far section 147 of the Act is concerned. It may further be noticed that in Lakhmani Mewal Das (supra), Supreme Court was considering validity of notice under section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year. Supreme Court observed that in such a case, two conditions would have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice. These two conditions are - 1. He must have reason to believe that income chargeable to tax has escaped assessment; and 2. He must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee to make a return under section 139 for the assessment year under consideration or to disclose fully and truly all material facts necessary for his assessment for that year. 32.1 Both the two conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. Supreme Court observed that duty is cast upon the assessee to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer the books of account or other evidence from which material evidence with due diligence could have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law but the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. If the Income- tax Officer draws an inference, which appears subsequently to be erroneous, it would amount to change of opinion and mere change of opinion with regard to that inference would not justify initiation of action for re-opening assessment. 32.2 The grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exists reasonable grounds for the Income-tax Officer to form the above belief that would be sufficient to clothe him with jurisdiction to issue notice. However, sufficiency of the grounds is not justiceable. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income- tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant. To this limited extent, initiation of proceedings in respect of income escaping assessment is open to challenge in a court of law. 32.3 Dilating further, Supreme Court held that reasons for formation of the 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 the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. But it has to be borne in mind that it is not any and every material howsoever vague and indefinite or distant, remote and far-fetched which would warrant formation of the belief relating to escapement of income. Moreover, powers of the Income-tax Officer to reopen assessment, though wide are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". Reopening of assessment after the lapse of many years is a serious matter.

It may be mentioned here that the proposition of law enunciated in Lakhmani Mewal Das (supra) has withstood the test of time and is being consistently applied while examining challenge to a notice issued under section 148 of the Act.

In Prashant S. Joshi v. ITO [2010] 189 Taxman 1/324 ITR 154, this Court observed that the basic postulate which underlines section 147 is formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. In other words, the Assessing Officer must have reason to believe that income chargeable to tax for a particular assessment year has escaped assessment for the relevant assessment year before he proceeds to issue notice under section 148. The reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which can be considered when the formation of the belief is impugned. Recording of reasons distinguishes an objective from a subjective exercise of power and is a check against arbitrary exercise of power. The reasons which are recorded cannot be supplemented subsequently by affidavits. The question as to whether there was reason to believe within the meaning of section 147 that income has escaped assessment must be determined with reference to the reasons recorded by the Assessing Officer. Even in a case where only an intimation is issued under section 143(1), the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment.

Having discussed the above, we may once again revert back to the reasons furnished by Respondent No. 2 for re-opening of assessment under section 147 of the Act. After referring to the information received following search and seizure action carried out in the premises of Shri Naresh Jain, it was stated that information showed that Petitioner had traded in the shares of M/s. Scan Steels Ltd., and was in receipt of Rs. 23,98,014.00 and therefore, Respondent No. 2 concluded that he had reasons to believe that this amount had escaped assessment within the meaning of section 147 of the Act.

First of all it would be evident from the materials on record that Petitioner had disclosed the above information to the Assessing Officer in the course of the assessment proceedings. All related details and information sought for by the Assessing Officer were furnished by the petitioner. Several hearings took place in this regard where-after the Assessing Officer had concluded the assessment proceedings by passing assessment order under section 143 (3) of the Act. Thus it would appear that Petitioner had disclosed the primary facts at its disposal to the Assessing Officer for the purpose of assessment. He had also explained whatever queries were put by the Assessing Officer with regard to the primary facts during the hearings.

In such circumstances, it cannot be said that Petitioner did not disclose fully and truly all material facts necessary for the assessment. Consequently, Respondent No. 2 could not have arrived at the satisfaction that he had reasons to believe that income chargeable to tax had escaped assessment. In the absence of the same, Respondent No. 2 could not have assumed jurisdiction and issued the impugned notice under section 148 of the Act.

That apart, Respondents have tried to traverse beyond the disclosed reasons in their affidavit which is not permissible. The same cannot be taken into consideration, while examining validity of notice under section 148. As has been held in Prashant S. Joshi (supra), the reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which can be considered when the formation of the belief is impugned; such reasons cannot be supplemented subsequently by affidavit (s).

Therefore, in the light of the discussions made above, we are of the view that the attempt made by Respondent No. 2 to reopen the concluded assessment is not at all justified and consequently the impugned notice cannot be sustained.

Accordingly, we allow the Writ Petition by setting aside the impugned notice dated 31-3-2019 issued under section 148 of the Act and also the impugned order dated 26-8-2019. However, there shall be no order as to costs.

Considering the facts, circumstances and the ratio of the judicial decision, the notice issued by the A.O falls beyond the period of time limit specified and the assessing officer has to show/high light the failure on part of the assessee to disclose fully and truly all material facts at the time of assessement. Accordingly, the notice issued for reassesement is bad in law and quash the assessment order passed u/s 143(3) r.w.s 147 of the Act. Since the legal issue is decided in favour of the assessee and again adjudicating on merits becomes academic and are left open. And the grounds of appeal are allowed in favour of the assessee.

In the result, the appeal filed by the assessee is allowed.