PRINCIPAL COMMISSIONER OF INCOME TAX 5 vs. MANZIL DINESHKUMAR SHAH

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TAXAP/451/2018HC GujaratGJHC24025289201807 May 2018Bench: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE B.N. KARIA6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court dismissed the Revenue's appeals. The Court held that while the AO must have reason to believe that income chargeable to tax has escaped assessment, and this belief cannot be based on a mere fishing or roving inquiry, the reasons recorded by the AO are crucial. In this case, the AO explicitly stated that the information received 'needed deep verification'. This indicated that the notice was being issued for the purpose of verification, rather than based on a formed belief of escaped income. The Court found that the AO's subsequent recitation of the mandatory words that he believed income had escaped assessment did not cure this fundamental defect. Accepting the Revenue's plea to ignore the sentence 'it needs deep verification' would require the court to disregard an important part of the recorded reasons. Therefore, the Tribunal was correct in quashing the reassessment notice. The Court lamented the potential revenue loss but upheld the legal principles.

What were the facts?

The Revenue is in appeal against the Income Tax Appellate Tribunal's order dated June 16, 2017, concerning Assessment Year 2009-10. The assessee, an individual and proprietor of a trading firm, had his return accepted under Section 143(1) without scrutiny. The Assessing Officer (AO) reopened the assessment based on information from the VAT Department, Mumbai, alleging bogus purchases of Rs. 3,21,74,262 by the assessee from hawala dealers during the Financial Year 2008-09 (AY 2009-10). The AO recorded that this information 'needed deep verification' and stated he had reason to believe income had escaped assessment due to the assessee's failure to disclose material facts. The Tribunal quashed the reassessment order, holding the notice invalid.

What were the issues?

1. Whether the Appellate Tribunal was right in law and fact in admitting an additional ground challenging the reopening of assessment, which was not raised earlier in assessment proceedings or before the CIT(A) and thus not emerging from the CIT(A)'s order? (Question of law) 2. Whether the Appellate Tribunal was right in law and fact in quashing the reassessment order? (Question of law) Assessee's contentions: Not recorded in the judgment. Revenue's contentions: The Assessing Officer had sufficient material to form a belief that income chargeable to tax had escaped assessment. The AO was of the prima facie opinion that the assessee had shown purchases from hawala dealers, implying bogus purchases. The Tribunal erred in invalidating the reassessment proceedings. The Revenue urged the court to read the reasons as a whole and conclude that the AO had independently formed a belief of escaped income, despite the sentence 'it needs deep verification'.

Which sections of the Income-tax Act were involved?

Section 143(1),Section 143(3),Section 148

AI-generated summary — verify with the full judgment below

C/TAXAP/451/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 451 of 2018 With R/TAX APPEAL NO. 457 of 2018 With R/TAX APPEAL NO. 458 of 2018 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX 5 Versus MANZIL DINESHKUMAR SHAH ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA Date : 07/05/2018 COMMON ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. These   Tax   Appeals   arise   out   of   common background,   we   may   record   facts   from   Tax   Appeal No.451 of 2018. 2. Revenue is in appeal against the judgment of the Income   Tax   Appellate   Tribunal   dated   16.06.2017 raising following questions for our consideration: “[A] Whether   the   Appellate   Tribunal   was right in law and on facts in admitting the additional ground challenging the reopening of assessment which was not raised earlier in assessment proceedings as well as before the   CIT(A)   and   therefore   was   not   emerging from the order of the CIT(A)? [B] Whether   the   Appellate   Tribunal   was Page 1 of 6

C/TAXAP/451/2018 ORDER right in law and on facts in quashing the reassessment order ?” 3. Respondent   assessee   is  an  individual   and  is  a proprietor of one trading firm.   For the assessment year 2009­10, the return filed by the assessee was accepted   without   scrutiny. To   reopen   such assessment, the Assessing Officer issued a notice. In order to issue the notice, he had recorded following reasons: “The assessee has filed his return of income in ACIT, CPC, Bangalore vide acknowledgment No.96931140300909for

A.Y.

2009­10

on 30/09/2010   declaring   total   income   Rs. 3,44,587/­ which was processed u/s. 143(1) of the I.T. Act on 11/08/2010.   However no scrutiny assessment u/s. 143(3) was made. In this case the information conveyed by the DGIT   (Inv.)   Mumbai   dated   22/02/2013 addressed   to   DGIT(Inv.)Ahmedabad   alongwith the   Board's   confidential   letter   dated 21/02/2013   to   take   actions   in   respect   of cases   of   no­genuine   Bills­information emanating out of VAT Department, Mumbai to the   CCIT­III,   Ahmedabad.     The   CCIT­III, Ahmedabad   vide   letter   dated   20/03/2013 forwarded the same to the CIT­V, Ahmedabad. The same was forwarded to the O/o. The Jt. CIT, Range­11, Ahmedabad by the CIT­A'bad­V, Ahmedabad

vide

letter

No.VIT­ V/Ahd/Inf.VAT/2012­13/6675 DATED 21/03/2013. The Jt. CIT. Range­11, Ahmedabad vide letter No.Jt.CIT/R­11/Non­Genuine

Bills/2012­ 13/6675 dated 22/03/2013 forwarded the same to this office. The   information   received   from   the   VAT Department,   Mumbai   relating   to   bogus Page 2 of 6

C/TAXAP/451/2018 ORDER purchases   of   each   beneficiary   firm   from Hawala   Biller. On   verification   of information   it   is   found   that   the   assessee MANJIT   DINESHKUMAR   SHAH   has   also   made purchases   of   Rs.3,21,74,262/­   during   the F.Y.   2008­09   (A.Y.   2009­10)   from   Hawala Dealer   as   information   received   by   this office.  It needs deep verification. I have therefore firm reason to believe that the   income   chargeable   to   tax   has   escaped assessment for the A.Y. 2009­10 due to the omission   or   failure   on   the   part   of   the assessee   to   disclose   fully   and   truly   all material   facts   necessary   for   assessment. Thus,   the   case   needs   to   be   re­opened   by issuing   notice   u/s   148   of   the   I.T.   Act, 1961.” 4. The Tribunal by the impugned judgment held that the   notice   was   invalid,   against   which   view   of   the Tribunal, the Revenue has preferred this appeal. 5. Mrs.Bhatt   for   the   department   vehemently contended   that   Assessing   Officer   had   sufficient material to enable him to form a belief that income chargeable   to   tax   has   escaped   assessment.     After verifying the information emerging from the record he was prima­facie of the opinion that the assessee had shown purchases from Hawala dealers.  In other words, the purchases were bogus.   Original assessment was made under section 143(1) of the Income Tax Act, 1961 ('the   Act'   for   short).     The   Tribunal   committed   an Page 3 of 6

C/TAXAP/451/2018 ORDER error in invalidating the reassessment proceedings. 6. By   now   it   is   well   settled   that   even   in   case where   the   original   assessment   is   made   without scrutiny,   the   requirement   of   the   Assessing   Officer forming the belief that income chargeable to tax has escaped assessment, would apply.   Reference in this respect   can   be   made   of   the   judgment   in   case   of Inductotherm (India) P. Ltd. v. M. Gopalan, Deputy Commissioner   of   Income­Tax  reported   in  [2013]   356 ITR 481 (Guj). 7. It is equally well settled that the notice of reopening can be supported on the basis of reasons recorded   by   the   Assessing   Officer.     He   cannot supplement such reasons.  The third principle of law which is equally well settled and which would apply in   the   present   case   is   that   reopening   of   the assessment would not be permitted for a fishing or a roving inquiry.  This can as well be seen as part of the first requirement of the Assessing Officer having reason to believe that  income chargeable to tax has escaped   assessment.     In   other   words,   notice   of reopening which is issued barely for making fishing inquiry, would not satisfy this requirement. Page 4 of 6

C/TAXAP/451/2018 ORDER 8. With   this   background,   we   may   revert   to   the reasons   recorded   by   the   Assessing   Officer. Information from the Value Added Tax Department of Mumbai   was   placed   for   his   consideration.     This information   contained   list   of   allegedly   bogus purchases made by various beneficiaries from Hawala dealers.     Assessee   was   one   of   them.     As   per   this information,   he   had   made   purchases   worth   Rs.3.21 crores (rounded off) from such Hawala dealers during the   financial   year   2010­11.     According   to   the Assessing   Officer,   this   information   'needed   deep verification'. 9. If on the basis of information made available to him and upon applying his mind to such information, the Assessing Officer had formed a belief that income chargeable to tax has escaped assessment, the Court would have readily allow him to reassess the income. In   the   present   case   however,   he   recorded   that   the information   required   deep   verification.     In   plain terms therefore, the notice was being issued for such verification.  His later recitation of the mandatory words that he believed that income chargeable to tax has   escaped   assessment,   would   not   cure   this Page 5 of 6

C/TAXAP/451/2018 ORDER fundamental defect.

10.

Learned counsel for the Revenue however urged us to   read   the   reasons   as   a   whole   and   come   to   the conclusion   that   the   Assessing   Officer   had independently   formed   a   belief   on   the   basis   of information available on record that income in case of the assessee had escaped assessment.   Accepting such a request would in plain terms require us to ignore   an   important   sentence   from   the   reasons recorded viz. 'it needs deep verification'. 11. Before   closing,   we   can   only   lament   at   the possible revenue loss.   The law and the principles noted above are far too well settled to have escaped the notice of the Assessing Officer despite which if the   reasons   recorded   fail   the   test   of   validity   on account of a sentence contained, it would be for the Revenue to examine reasons behind it. 12. Both these Tax Appeals are dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) ANKIT SHAH Page 6 of 6

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