BIC CELLO (INDIA) PRIVATE LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 5(2), MUMBAI AND 2 ORS.

1/14 426-oswp-2258-2023-J.doc REPORTABLE IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 2258 OF 2023 BIC Cello (India) Private Limited, having its registered office at Plot No. 711/1, 2, 3, 4, Somnath Road, Dabhel, Daman-396210, Maharashtra, India. …Petitioner Versus 1. The Assistant Commissioner of Income Tax, Central Circle-5(2), Mumbai, Room No. 1908, 19th Floor, Air India Building, Nariman Point, Mumbai, Maharashtra-400 021. 2. The Principal Commissioner of Income Tax (Central), Mumbai-3, 16th Floor, Air India Building, Nariman Point, Mumbai, Maharashtra-400 021. 3. Union of India, through the Secretary, Department of Revenue, Ministry of Finance, Government of India, North Block, New Delhi-110 001. …Respondents Mr. J. D. Mistri, Sr. Advocate a/w Mr. Pankaj Soni i/b Vaish Associates for Petitioner. Mr. Suresh Kumar for Respondents-Revenue. CORAM: K. R. SHRIRAM & DR. NEELA GOKHALE, JJ. DATED: 11th March 2024 ORAL JUDGMENT : (Per K. R. Shriram, J.) 1. Since pleadings in the petition are complete, by consent of Counsels we decided to take up the matter for final hearing at this stage itself. Therefore, Rule, made returnable forthwith. Gitalaxmi

2/14 426-oswp-2258-2023-J.doc 2. Petitioner is a company engaged in the business of manufacture and supply of stationery products such as gel-pens, refills, pencils etc. Respondent No. 1 is the Assistant Commissioner of Income Tax, Central Circle-5(2), Mumbai and is the Assessing Officer (“AO”) of Petitioner. Respondent No. 2 is the Principal Commissioner of Income Tax (Central), Mumbai-3. Respondent No. 3 is the Union of India. 3. In this petition, Petitioner challenges the impugned notices dated 30th March 2021 & 21st June 2021 issued under Section 148 of the Income Tax Act, 1961 (“the Act”) for Assessment Year (“AY”) 2013-2014 and the impugned order dated 3rd February 2022 passed by Respondent No. 1 rejecting the objections of Petitioner challenging the validity of impugned notices as being ex-facie illegal, unsustainable, untenable, unreasonable and contrary to the provisions of Act. Prior to July 2017, Petitioner’s business was collectively housed in the companies viz. Cello Stationery Products Private Limited, Cello Writing Instruments and Containers Private Limited, Cello Tips and Pens Private Limited, Cello Pens Private Limited, Cello Plastic Products Private Limited & Pentek Pen and Stationery Private Limited. In July 2017, pursuant to the scheme of merger duly approved by the National Company Law Tribunal, Mumbai Bench and Ahmedabad Bench vide orders dated 13th July 2017 & 14th July 2017 respectively, which became effective on 20th Gitalaxmi

3/14 426-oswp-2258-2023-J.doc July 2017, the aforesaid five companies were merged into sixth company viz. Cello Plastic Products Private Limited (“CPPPL”), which was also renamed to BIC Cello India Private Limited (the present Petitioner). 4. The present reassessment notices have been initiated in the case of Petitioner in its capacity as successor in interest of Cello Stationery Products Private Limited (“CSPPL”), which merged with Petitioner with effect from 1st April 2016. For the relevant AY 2013- 2014, CSPPL filed its return of income on 25th November 2013 declaring income of Rs. 15,39,55,520/- under the normal provisions of the Act and book profits of Rs. 19,23,04,707/- under Section 115JB of the Act. The return of income was selected for scrutiny and the assessment order dated 31st October 2016 came to be passed under Section 143(3) of the Act. 5. Respondent No. 1 has issued the impugned notices dated 30th March 2021 and 21st June 2021 stating that Respondent No. 1 had reason to believe that income chargeable to tax for AY 2013-2014 has escaped assessment. Both these notices have not been signed either manually or digitally and it is not clear why two notices were issued. Reasons were recorded for believing that there has been escapement of income chargeable to tax. Gitalaxmi

4/14 426-oswp-2258-2023-J.doc 6. In the reasons, it is alleged as under : “As per ITBA System, it was noted that Cello Stationery Product (Firm) has deposited cash to the tune of Rs. 3,73,72,707/- in its bank account, details of which are stated to be as under : Sr. No. Information Code Information Description Value (In Rs.) 1. AIR-001 Deposited cash of Rs. 10,00,000/- or more in saving Bank Account 1,87,39,187/- 2. CIB-402 Deposit in cash aggregating Rs. 2,00,000/- or more, with banking company 1,86,33,520/- Based on the above information, case of Cello Stationery Product (Firm) (PAN-AADFC8145P) was reopened vide notice dated 29th March 2019. After considering the reply filed by the said Firm that the said partnership firm had been converted into CSPPL, which had subsequently merged with the Petitioner, Respondent No. 1 formed belief that income of the Petitioner for AY 2013-2014 has escaped assessment. HDFC Bank, Malad Branch, in response to notice issued under Section 133(6) of the Act allegedly informed that Account No. 039886400000010 had cash deposits during AY 2012-2013 (sic) and the account was opened for CSPPL on 29th May 2008. It was further stated that CSPPL has made total cash deposits of Rs. 1,87,39,187/- during FY 2012-2013 and that M/s. Cello Stationery Products (Firm) had Nil cash deposits during the subject AY 2013-2014.” 7. Petitioner by its letter dated 25th January 2022, filed its objections to the notices and by giving brief background of the activities, submitted that,  The conditions prescribed in Section 147 of the Act are not fulfilled in the facts of present case. Therefore, reassessment proceedings ought to be dropped. Gitalaxmi

5/14 426-oswp-2258-2023-J.doc  In the impugned reasons to believe, there was duplicity in the amount of cash, alleged to have been deposited in the bank account on account of double counting, i.e., reasons recorded that cash deposits of Rs. 3,73,72,707/- resulted in escapement of income, whereas the fact is CSPPL made cash deposits of only Rs. 1,87,39,187/- during AY 2013-2014. The documents evidencing the same, including list of cash deposits made in the HDFC Bank Account No. 03988640000010, Malad Branch, bank statement for the relevant period as well as certificate from the bank were also enclosed and it was submitted that the said error deserved to be rectified at the threshold.  In absence of any ‘income escaping assessment’ in the present case, the notices issued for initiating the impugned reassessment proceedings, were without jurisdiction. As the price at which the products of CSPPL were sold, was low, as is common practice in the trade, many customers purchased the products in cash rather than making payment through banking channels. Accordingly, in the relevant year, sales consideration of Rs. 1,87,39,187/- was received by CSPPL in cash, which was duly deposited by CSPPL in its HDFC Bank Account at regular intervals. The said amount was duly recorded in Sales Ledger maintained as part of Books of Accounts in legacy software Exact ERP and shown as part of ‘Revenue from Operations’ in the Profit and Loss Account of the audited financial statement of CSPPL. The said cash sales was also considered as income and offered for tax in the original return of income filed by CSPPL for AY 2013-2014 on 25th November 2013. Petitioner also submitted a certificate from the Chartered Accountant certifying that the amount of Rs. 1,87,39,187/-, being cash sales deposited by CSPPL in the HDFC Bank Account during AY 2013-2014, has been included in the computation of income Gitalaxmi

6/14 426-oswp-2258-2023-J.doc and offered to tax in the original return of income filed by CSPPL for AY 2013-2014.  Respondent No. 1 could not have taken shelter behind Explanation-2(c) of Section 147 of the Act inasmuch as the said Explanation deems escapement of income in cases where income chargeable to tax has, inter-alia, been underassessed or assessed at too low a rate whereas in the present case, for the reasons submitted in detail, cash deposits made by CSPPL during relevant assessment year pertain to sales made during captioned year, which are already offered for tax in original return of income filed by CSPPL and therefore, no income has escaped assessment in the present case.  In order to initiate proceedings under Section 147 of the Act, it is incumbent on the part of AO to possess ‘tangible material’, on the basis of which prima-facie belief of escapement of income is made out, whereas in the present case merely information regarding cash deposits was available in possession of Respondent No. 1 for initiating reassessment, which in itself cannot constitute tangible material/information.  Since the impugned notices under Section 148 of the Act were issued after expiry of four years from the end of relevant assessment year, approval was required to be obtained from Principal Chief Commissioner of Income Tax, Chief Commissioner of Income Tax, Principal Commissioner of Income Tax or Commissioner of Income Tax under Section 151 of the Act. However, the approval was not taken before issuing notices under Section 148 of the Act. If it is taken, it is not provided to Petitioner and therefore, the reassessment proceedings are initiated without jurisdiction. If the approval of Respondent No. 2 is not obtained before issuance of Gitalaxmi

7/14 426-oswp-2258-2023-J.doc impugned notices, reassessment proceedings are invalid and bad-in-law. 8. The objections filed by Petitioner were rejected by Respondent No. 1 by an order dated 3rd February 2022, which is also impugned in this petition. In the said order, Respondent No. 1 observes that the issue regarding duplicity of alleged amount of cash deposited in the bank account, no income escaping assessment and Explanation-2(c) to Section 147 of the Act not being applicable, are not factually correct and not acceptable as the claim of Petitioner needs to be checked and verified after receiving and perusing the necessary and required details during the course of reassessment proceedings. In short, the AO has quoted various judgments in the order disposing the objections, but has not dealt with Petitioner’s assertion that during the assessment year, CSSPL has deposited only Rs. 1,87,39,187/- in cash, which has also been confirmed by the HDFC Bank. 9. Mr. Suresh Kumar submitted that the Director of Petitioner has filed an indemnity bond on 23rd December 2019, wherein he has indemnified the cash deposits amounting to total Rs. 187,39,187/- and Rs. 1,86,33,520/- made in HDFC Bank, Malad (East) Branch as appearing in AIR/ITS(CIB Information) in the name of M/s. Cello Stationery Products (AADEF8145P) have not been deposited by them during the period from 1st April 2012 to 31st March 2013 and that the Gitalaxmi

8/14 426-oswp-2258-2023-J.doc cash belongs to CSPPL. We agree with Mr. Mistri that the amount of Rs. 1,86,33,520/- mentioned in the indemnity is a part of Rs. 1,87,39,187/-, because admittedly the certificate from HDFC Bank mentions that there was only one bank account of CSPPL, which was opened on 29th May 2008 and in that, there has been a cash deposit of only Rs. 18739187/- for Financial Year (“FY”) 2012-2013. 10. Admittedly, this is a case to which the proviso to Section 147 of the Act will apply since the notice reopening the assessment under Section 148 of the Act has been issued more than four years of the expiry of relevant assessment year and an assessment order under Section 143(3) of the Act has been passed on 31st October 2016. As per the proviso, unless there has been a failure on the part of assessee to truly and fully disclose necessary facts, the reassessment is impermissible. 11. Having considered the reason to believe, in our view, no case for reason to believe is made out. In fact, it reflects total non- application of mind not only by the AO, but also the Principal Commissioner of Income Tax, who has accorded the sanction. 12. The entire basis for reopening is the information, which is as under : “From the ITBA system, the name of Cello Stationery Products (Firm) appeared with the following details for the period from 01.04.2012 to 31.03.2013. Gitalaxmi

9/14 426-oswp-2258-2023-J.doc Sr. No. Information Code Information Description Value (In Rs.) 1. AIR-001 Deposited cash of Rs. 10,00,000/- or more in saving bank account 1,87,39,187/- 2. CIB-402 Deposit in cash aggregating Rs. 2,00,000/- or more, with banking company 1,86,33,520/- 13. In the reasons to believe itself, it is recorded that the firm M/s. Cello Stationery Products used to exist with effect from 1st April 2008 and in the year 2009, the partnership firm was converted into a private limited company. The entities were allotted different PANs due to which while filing AIR Report, bank has erroneously quoted PAN for the firm instead of the company. In the reasons, it is also recorded that in response to a notice under Section 133(6) of the Act, HDFC Bank, Malad (East) Branch vide its letter dated 19th December 2019 has stated that the Account No. 039886400000010 has cash deposits for AY 2013-2014 and the account was opened for CSPPL on 29th May 2008 and assessee has made total cash deposits of Rs. 1,87,39,187/- for FY 2012-2013. The HDFC Bank has also confirmed by its letter dated 23rd December 2019 that there were nil cash deposits for firm Cello Stationery Products. Therefore, the AO should have recorded in the reasons to believe as to how he has come to the conclusion that apart from the amount of Rs. 1,87,39,187/- certified to have been deposited in cash by HDFC Bank, there is another deposit of Rs. 1,86,33,520/-, because admittedly there is only one bank account. Moreover, in the certificate which is annexed to the Gitalaxmi

10/14 426-oswp-2258-2023-J.doc petition issued by the HDFC Bank giving details of cash deposited during the said financial year, the cash deposited is in two parts, i.e., more than Rs. 2,00,000/- and less than Rs. 2,00,000/-. The total deposit of more than Rs. 2,00,000/- comes to Rs. 1,86,33,520/- and cash deposit of less than Rs. 2,00,000/- is Rs. 1,05,667/- and the total of these two figures is Rs. 1,87,39,187/-. Therefore, the AO without examining these details has recorded the reasons to believe, which indicates non-application of mind. 14. Moreover, when these details have been brought to his notice admittedly in the objections filed by Petitioner, the AO instead of dealing with this duplicity has simply stated that those details will be considered during the reassessment proceedings. He has also not dealt with Petitioner’s assertion in the objections that those amounts deposited in cash have been offered to tax. 15. Strangely even in the affidavit-in-reply, Respondents after admitting that the bank has certified that only Rs. 1,87,39,187/- were deposited in cash during FY 2012-2013, has not explained as to how they proposed to reopen the assessment on the allegation that a sum of Rs. 3,73,72,707/- chargeable to tax has escaped assessment. It clearly shows that neither there was any independent application of mind by the AO while recording reasons nor application of mind by the sanctioning authority while giving approval. The reassessment Gitalaxmi

11/14 426-oswp-2258-2023-J.doc proceeding was made on wrong and incorrect facts and therefore, makes the reopening null and void. 16. As held in Tata Sons Ltd. v. Deputy Commissioner of Income Tax1, if the reasons for reopening assessment is based on incorrect facts or conclusions, certainly the notice issued for reopening cannot be sustained. Paragraph Nos. 6 & 7 of the said judgment read as under : “6. If we consider the table reproduced, the sale of shares of TCS Ltd. which according to Respondent No. 1 should be treated as ‘business income’ and not ‘profits arising out of sale of investment’, is only Rs. 19,32,34,27,592/- (Rs. 12,26,61,28,794/- + Rs. 7,05,72,98,798/-, i.e., “Long Term Capital Gains – Tata Consultancy Services Limited”. Mr. Pinto though made valiant attempt to defend the notice issued for reopening, in fairness, as an officer of the Court, considering the reasons as recorded agreed that the only item which could have been stated to have escaped assessment would be the Long Term Capital Gains in the sale of TCS Ltd. shares amount to Rs. 19,32,34,27,592/- and Respondent No. 1 was incorrect in stating that he had reason to believe that the sum of Rs. 22,71,25,79,374/- has escaped assessment. 7. In our view, if the reasons for reopening the assessment is based on incorrect facts or conclusions, certainly the notice issued for reopening cannot be sustained. Moreover, if according to Respondent No. 1 only the sale of shares of TCS Ltd. was ‘business income’ and not ‘profits arising of sale of investment’ to say that the amount of Rs. 22,71,25,79,374/- has escaped assessment, also indicates non-application of mind. We would also go a step ahead and observe that if only the approving authority under Section 151 of the Act had considered the reasons properly, either he would have directed Respondent No. 1 to re-work on the reasons or would not have granted the approval. Moreover, we 1. [2022]137 taxmann.com 414 (Bombay). Gitalaxmi

12/14 426-oswp-2258-2023-J.doc may keep in mind this is a case where the scrutiny assessment was completed and order under Section 143(3) of the Act has been passed followed by a rectification order under Section 154 of the Act. Therefore, Petitioner’s case has been considered at two stages, (i) When the assessment order was passed after scrutiny under Section 143(3) of the Act and (ii) When an order under Section 154 of the Act was passed. (emphasis supplied)” 17. It is also useful to reproduce Paragraph Nos. 6 & 7 of the judgment of this Court in Ankita A. Choksey v. Income Tax Officer and Others2, which read as under : “6. It is a settled position in law that the Assessing Officer acquires jurisdiction to issue a reopening notice only when he has reason to believe that income chargeable to tax has escaped assessment. This basic condition precedent is applicable whether the return of income was processed under Section 143(1) of the Act by intimation or assessed by scrutiny under Section 143(3) of the Act. Further, the reasons to believe that income chargeable to tax has escaped assessment must be on correct facts. If the facts, as recorded in the reasons are not correct and the assessee points out the same in its objections, then the order on objection must deal with it and prima-facie, establish that the facts stated by it in its reasons as recorded are correct. In the absence of the order of objections dealing with the assertion of the assessee that the correct facts are not as recorded in the reason, it would be safe to draw an adverse inference against the Revenue. 7. Thus, we are of the view that even in cases where the return of income has been accepted by processing under Section 143(1) of the Act, reopening of an assessment can only be done when the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The mere fact that the return has been processed under Section 143(1) of the Act, does not give the Assessing Officer a carte blanche to issue a 2. [2019]411 ITR 207 (Bom). Gitalaxmi

13/14 426-oswp-2258-2023-J.doc reopening notice. The condition precedent of reason to believe that income chargeable to tax has escaped assessment on correct facts, must be satisfied by the Assessing Officer so as to have jurisdiction to issue the reopening notice. In the present case, the Assessing Officer has proceeded on fundamentally wrong facts to come to the reasonable belief/conclusion that income chargeable to tax has escaped assessment. Further, even when the same is pointed out by the Petitioner, the Assessing Officer in his order disposing of the objection does not deal with factual position asserted by the Petitioner. Thus, it would be safe to conclude that the Revenue does not dispute the facts stated by the Petitioner. On the facts as found, there could be no reason for the Assessing Officer to believe that income chargeable to tax has escaped assessment. (emphasis supplied)” 18. The facts in the case at hand, it can be safe to observe, are almost identical. The assessee has pointed out that there was only one bank account where only Rs. 1,87,39,187/- has been deposited in cash. HDFC bank also has issued such a certificate in response to notice that it received under Section 133(6) of the Act. The AO in his order disposing the objections does not deal with the factual position asserted by Petitioner. Therefore, there could be no reason for the AO to believe that income chargeable to tax has escaped assessment. 19. In the circumstances, Rule is made absolute in terms of prayer clause (a), which reads as under : “a. Issue a Writ of Certiorari or any other writ order or direction under Article 226 of the Constitution of India calling for the records of the case leading to the issue of the impugned notices and passing of the impugned order and after going through the Gitalaxmi

14/14 426-oswp-2258-2023-J.doc same and examining the question of legality thereof, quash, cancel and set aside the impugned notices (Exhibit A) dated 30th March 2021 & 21st June 2021 and impugned order (Exhibit B) dated 3rd February 2022.” 20. Petition disposed. There will no order as to costs. (DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.) Gitalaxmi GITALAXMI KRISHNA KOTAWADEKAR Digitally signed by GITALAXMI KRISHNA KOTAWADEKAR Date: 2024.03.14 18:06:58 +0545