CEAT LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME-TAX, 6(2)(1)/6(1)(1), MUMBAI

Subsequently, on the basis of information alleging that the Assessee had obtained bogus contract work of Rs.5,04,00,000/- from M/s Totem Infrastructure Private Limited, the assessment was reopened by issuing notice dated 28.03.2016 u/s 148 of the Act. The Assessee sought the reasons recorded vide letter dated 25.04.2016. However, the AO furnished the reasons only on 27.06.2016 and, on the same date, issued notice u/s 143(2) of the Act. The Assessee filed its objections on 12.07.2016, which were rejected vide order dated 18.07.2016.

The AO thereafter passed the reassessment order dated 21.12.2016 u/s 143(3) r.w.s. 147 of the Act, treating the transaction with M/s Totem Infrastructure Private Limited as non-genuine. Consequently, the AO reduced the cost of freehold land by Rs.4,60,31,706/-, excluded Rs.43,68,294/- from the cost of building and disallowed the consequential depreciation of Rs.2,18,415/-. The Ld. Commissioner affirmed the validity of the reopening as well as the aforesaid adjustments.

The Ld. Counsel submitted that the AO issued notice u/s 143(2) simultaneously with furnishing the reasons recorded on 27.06.2016, without first affording the Assessee reasonable time to file objections and without disposing of such objections before proceeding further with the reassessment. Reliance was placed upon the judgment of the

The Ld. DR, on the contrary, relied upon the orders passed by the authorities below and supported the validity of the reassessment proceedings.

We have heard the parties and perused the material available on record. The Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. (supra) has laid down the following dictum:

The Hon’ble Jurisdictional High Court in Fomento Resorts & Hotels Ltd. v. ITO, Tax Appeal No.63 of 2007, decided on 30.08.2019, also applied the dictum laid down in GKN Driveshafts (India) Ltd. (supra) and set aside the impugned proceedings for non- compliance with the prescribed jurisdictional requirements.

Similarly, in CIT v. Videsh Sanchar Nigam Ltd. [2012] 21 taxmann.com 53/340 ITR 66 (Bombay), the Hon’ble Jurisdictional High Court held that non-furnishing of the reasons recorded rendered the reassessment order unsustainable in view of the decision in GKN Driveshafts (India) Ltd. (supra).

In Troikaa Pharmaceuticals Ltd. v. DCIT [2023] 156 taxmann.com 621 (Gujarat), the AO proceeded with the reassessment by issuing statutory notices before disposing of the Assessee’s objections. Applying GKN Driveshafts (India) Ltd. (supra), the Hon’ble Gujarat High Court held that proceeding further with the reassessment without first disposing of the objections violated the prescribed procedure and consequently quashed the notice u/s 148, the order disposing of the objections and the consequential assessment order.

In the instant case, though the Assessee sought the reasons recorded vide letter dated 25.04.2016, the AO furnished the same only on 27.06.2016 and simultaneously issued notice u/s 143(2) of the Act. Thus, the AO proceeded further with the reassessment even before the Assessee could examine the reasons and file its objections. The Assessee filed objections on 12.07.2016, which were disposed of subsequently on 18.07.2016.

The chronology of events clearly establishes that the AO did not follow the mandatory sequence prescribed in GKN Driveshafts (India) Ltd. (supra). The Assessee was not afforded a reasonable opportunity to file objections before the AO proceeded further by issuing notice u/s 143(2), and the reassessment proceedings had

Thus, respectfully following the aforesaid judgments, we hold that the reassessment proceedings were conducted in breach of the mandatory procedure laid down by the Hon’ble Supreme Court. Consequently, the notice dated 28.03.2016 issued u/s 148 and the consequential reassessment order dated 21.12.2016 passed u/s 143(3) r.w.s. 147 of the Act are quashed. Thus, Ground No.1 is allowed.

Since the reassessment has been quashed on the legal ground, the remaining legal objections become academic. However, as the parties have also addressed the merits, we proceed to adjudicate the same.

Coming to the merits of the case, we observe that the sole external foundation of the adverse conclusion is the information that Totem had admitted to providing accommodation entries without executing work. The Assessee repeatedly requested a copy of the letter dated 08.04.2014 and the material or statement relied upon. The assessment order records the request but does not show that the material was supplied. There is also no record of an opportunity to cross-examine the maker of the alleged statement. The identity of the deponent, the precise questions and answers, and whether the alleged admission referred to this Assessee’s work order, are not available in the orders below.

An undisclosed statement cannot be treated as substantive evidence against the Assessee. In H.R. Mehta (supra), the jurisdictional High Court emphasised that the material used against the Assessee must be furnished and cross-examination must be permitted. Kishinchand Chellaram (supra) likewise recognised that material

The Ld. DR, on the contrary, supported the orders passed by the authorities below and contended that the adverse conclusion was justified in view of the deficiencies noticed in the evidence produced by the Assessee and the failure to produce further material called for during the appellate proceedings.

We have considered the aforesaid contention of the Ld. DR. However, the violation is not cured by the appellate questionnaire. The Ld. Commissioner did not furnish or test the very material which formed the foundation of the allegation. Instead, the Assessee was called upon, nearly 15 years after the work, to produce an extensive range of collateral documents. The burden cannot be shifted in this manner while the primary adverse material remains withheld. Thus, Ground No.5 is also allowed.

Ground Nos.2 to 4 pertain to genuineness of work, capitalised cost and depreciation. The Assessee placed on record a contemporaneous work order dated 03.08.2010 describing the work as area grading, including removal of bushes and shrubs, removal of loose debris, loading, transporting, unloading, spreading and levelling within the plant premises. The Assessee also produced the invoice, work certification/payment-release note, Totem’s letter dated 10.11.2010 recording completion and seeking release of retention money, proof of payment by demand draft, the Totem ledger, journal entries and evidence of tax deduction at source under section 194C. The books were audited and the transaction was recorded therein. The commencement of commercial production at Halol on 25.03.2011 and the statutory approvals furnished in appeal corroborate the existence

The Ld. DR relied upon the findings of the authorities below and submitted that the aforesaid material was insufficient to establish that the work had actually been carried out by Totem and that the deficiencies noticed by the Ld. Commissioner justified the disallowance.

Against this body of evidence, the Assessing Officer did not conduct any independent enquiry. There is no summons to Totem or its responsible officers, no enquiry from the Assessee’s General Manager—Projects or Engineer-In-Charge, who certified the work, no verification from the bank concerning the payment trail, no examination of the retention-money release, and no site or project- record enquiry. Nor is there any material showing that the payment or any part of it returned to the Assessee. The conclusion of non- genuineness rests on the undisclosed third-party information alone.

We have also considered the contention of the Ld. DR regarding the deficiencies noticed by the Ld. Commissioner. However, the Ld. Commissioner’s reasoning proceeds, in material part, on requirements which do not correspond with the work actually contracted. The work order expressly describes a labour-based area-grading job. Bills of construction material and proof of construction by Totem were therefore not relevant to determine whether Totem performed the grading work; the Assessee never claimed that Totem supplied construction material or erected the building. Similarly, no factual finding was made that the job involved sale of minerals attracting tax collection at source under section 206C or mining activity requiring mining approval. The absence of such documents cannot be treated as evidence that the stated labour work was not performed.

The Assessee on being directed us, has also filed relevant documents in order to substantiate its claim such as :

The evidence must be evaluated cumulatively. The Assessee produced primary commercial documents, accounting records, banking evidence and TDS details consistent with the nature and timing of the work. The Revenue neither disproved these documents nor produced the alleged admission for scrutiny. In CIT v. M.K. Brothers (1987) 163 ITR 249 (Guj), a subsequent third-party admission of issuing bogus vouchers was held not conclusive against an Assessee, where the Assessee’s own transaction was not shown to be bogus. In Babulal C. Borana v. Third ITO (2006) 282 ITR 251 (Bom), the jurisdictional High Court did not sustain an addition merely on a vendor’s denial, when the transaction was recorded in the regular books and the explanation was not displaced by cogent material. These principles support the Assessee on the present facts.

We accordingly hold that the material on record is sufficient to discharge the Assessee’s initial burden regarding the transaction with Totem. The burden then shifted to the Revenue to rebut that evidence through disclosed and testable material. That burden has not been discharged. The treatment of the entire payment of Rs.5,04,00,000/- as non-genuine is therefore unsustainable.

The AO is, therefore, directed to restore Rs.4,60,31,706/- to the cost of freehold land and Rs.43,68,294/- to the cost of freehold building, as recorded in the Assessee’s books. Consequently, the value of freehold land shall be restored to Rs.4,16,54,87,000/- and depreciation of Rs.2,18,415/- on the building component shall be allowed in accordance with law. Thus, Ground Nos.2, 3 and 4 are also allowed.

Resultantly, the reassessment is quashed and the impugned reduction in the cost of freehold land and building and the disallowance of depreciation are deleted.

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