MY CAR (PUNE) PVT. LTD. vs. INCOME-TAX OFFICER-14(2), PUNE AND ORS

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WP/14479/2018HC BombayHCBM01056963201821 February 2019Author: HON'BLE SHRI JUSTICE M.S. SANKLECHA,HON'BLE SHRI JUSTICE AKIL KURESHI9 pages
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What did the High Court hold?

The High Court held that the sanction order granted by the Principal Commissioner of Income Tax under Section 151(1) was bad in law due to a non-application of mind to the reasons recorded by the Assessing Officer. The Court noted a significant discrepancy: the reasons recorded by the AO focused on the activities of the Himanshu Verma Group in providing accommodation entries, whereas the sanction order incorrectly stated that the assessee itself was engaged in providing such entries. Furthermore, the sanction order mentioned siphoning of funds from public limited companies to private limited companies, a fact not supported by the AO's recorded reasons, which only referred to private limited companies used by the Himanshu Verma Group. The Court reiterated that granting sanction under Section 151 is not a mechanical act and requires due application of mind to safeguard assessees from unwarranted reopening. Since the sanction order demonstrated a lack of application of mind, the impugned notice under Section 148 was quashed and set aside. The petition was allowed.

What were the facts?

The petitioner, My Car (Pune) Pvt. Ltd., is challenging a notice dated March 30, 2018, issued by the Assessing Officer (AO) under Section 148 of the Income Tax Act, 1961, to reopen the assessment for Assessment Year (AY) 2011-12. The original assessment for AY 2011-12 was completed on March 21, 2014, under Section 143(3). The reasons for reopening, as communicated by the AO, were based on information received from the Assistant Director of Income Tax (Investigation) regarding the Himanshu Verma Group's alleged activities of providing accommodation entries. The AO claimed the assessee had taken accommodation entries from this group during the Financial Year 2010-11, totaling Rs. 5,42,00,000, and thus, income had escaped assessment. The Principal Commissioner of Income Tax (PCIT) granted approval for the notice on March 31, 2018. The petitioner filed objections, which were rejected by the AO on October 31, 2018, leading to the present writ petition.

What were the issues?

1. Whether the sanction granted by the Principal Commissioner of Income Tax under Section 151(1) for issuing a notice under Section 148 was based on a proper application of mind to the reasons recorded by the Assessing Officer, thereby making the impugned notice valid in law? (Question of law and fact, concerning Sections 147, 148, and 151 of the Income Tax Act, 1961). Assessee's Contention: The assessee argued that the sanction order was granted on a complete misreading of the reasons recorded by the AO, indicating a lack of application of mind by the PCIT, rendering the notice bad in law. Revenue's Contention: The revenue contended that paragraph 3(ii) of the recorded reasons was in accordance with the sanction granted by the PCIT, and therefore, the sanction was granted with due application of mind and could not be faulted.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 143(3),Section 151,Section 151(1)

AI-generated summary — verify with the full judgment below

14 wp 14479­18­c­s IN  THE HIGH  COURT OF JUDICATURE  AT BOMBAY CIVIL  APPELLATE JURISDICTION WRIT PETITION NO.14479  OF 2018

My Car (Pune) Pvt. Ltd. … Petitioner V/s. Income­tax Officer­14(4) and ors. … Respondents ­­­ Mr.Jehangir Mistri, Senior Counsel  with Mr.Sameer Dalal  for  the Petitioner. Mr.Sham Walve  for  Respondent Nos.1 and 3. ­­­ CORAM :  AKIL KURESHI AND M.S.SANKLECHA,  JJ. DATE   :   FEBRUARY 21, 2019. P.C.:­

1.

At the request of  the parties, the petition  is taken up for final  disposal  at the stage of admission.

2.

This petition  under Article  226  of the Constitution of India challenges notice dated 30th March, 2018 issued by the respondent No.1­Assessing Officer under Section  148 of the Income Tax Act, 1961 (“the Act” for short).  The impugned notice seeks to reopen the assessment  for  Assessment Year  2011­12. 14 wp 14479­18­c­s

3.

The   undisputed     facts   are   that   the   regular   assessment proceedings  were  completed  on 21st March, 2014 under Section 143(3) of the Act. Thereafter, the Assessing Officer has issued the impugned   notice   seeking   to   reopen     the   assessment   for   the assessment year  2011­12. 4. The   reasons   in   support   of     the     impugned   notice     as communicated to the petitioner  read as under:

“01. The assessee  filed its return of income declaring income of Rs.1,56,64,480/­   on   28/09/2011. The   assessee   company   is engaged  in the business of selling of  four  wheeler  and provide sales  services. The assessment was  completed u/s 143(3) of the Income Tax  Act,  1961 on  23.03.2014  and  income assessed of Rs.1,75,61,370/­.

02.

In the instant case, the information received  from Assistant Director of Income tax (Inv), unit 6(3), New  Delhi  which are as follows: This unit had  conducted search in  case of Himanshu Verma Group   on     29.03.2012. This   group   was   centralised   with   the Assessing Officer of Central Circle­20, Delhi (ACIT, Central Circle ­20, Delhi.)

2.

Shri Himanshu Verma   was engaged in the   activities   of providing  accommodation entries to various beneficiaries group. He did this by   incorporation   of numerous corporate and non­ corporate entities  where directors/partners/proprietors  were his employees   and closed associates.

3.

Modus operandi  of Sh. Himanshu Verma was observed to be mainly  of three types: i) He used to take cash from the  beneficiaries, deposit the  same in   some   of  his  entities/individuals'   bank  accounts,   routing  the 14 wp 14479­18­c­s same   and   finally   remitting   it   to     various   companies   of   the beneficiary group in the form of share application  money,  share capital and/or  unsecured loan. ii)   He   used   to   accept   cheques   of   one     set   of     companies   of beneficiary group to the  bank accounts of  some  his  corporate entities,    rotate   the  same through his  various group  entities, finally   remitting   the   same   to   some   other   set   of   beneficiary companies.   Through   this   method,   the   beneficiary     group companies used to inflate their  balance sheets for the purpose of procuring   more   funds   from   banks/financial   institutions.   This method   was   also   applied   for   siphoning   off   fund   from   public limited  company   to   the   Pvt.   Limited   companies     of   the   same group. iii) He used to take cheques of the beneficiary  companies and used to issue them   sale bills, mainly   of fabrics   and related articles. This cheque amount was either  withdrawn  immediately or after rotating the same amongst its group  entities.  The  cash was then   returned back   to the beneficiary   companies. This method was adopted by some concerns who wanted to inflate their purchases.

4.

M/s   MY   CAR PUNE PRIVATE LIMITED, the assessee   has taken  accommodation entry  from Himanshu  Verma Group  in F.Y.  2010­11  as follows: Name PAN Name

of Himanshu Verma & Group Company MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Citylife Promoters Pvt. Ltd. 6000000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Carewell Projects

& Development Pvt. Ltd. 2000000 14 wp 14479­18­c­s MY

CAR PUNE PRIVATE LIMITED AAECM271 3M

Cornelius Marketing   & Research   Pvt. Ltd. 5500000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Gyanda   Exim Pvt. Ltd. 3000000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Kripalu Promoters Pvt. Ltd. 6000000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Mayurvika Management Services   Pvt. Ltd. 7500000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Mithilianchal Investment   & Finance   Pvt. Ltd. 2000000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Saunak Technologies Pvt. Ltd. 3600000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Shulini   Realty Pvt. Ltd. 2000000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Soffpro Technologies Pvt. Ltd. 3600000 MY

CAR PUNE PRIVATE LIMITED AAECM271 3M Vedanshi Marketing   & Research   Pvt. Ltd. 5500000 14 wp 14479­18­c­s MY

CAR PUNE PRIVATE LIMITED AAECM271 3M White   Color Management Ser Pvt. Ltd. 7500000 AO's Comments: (i) It is evident  from the above said facts that the assessee had not fully   &   truly   disclosed   all the material   of   facts for   its assessment  for the year under  consideration thereby necessitating reopening  u/s 147 of  the Income Tax Act, 1961. (ii) It is true that   the assessee   has filed a copy of   annual report, P & L a/c, balance   sheet   alongwith return of   income where various information/material  were disclosed. However, the requisite  full and true disclosure  of material  facts  for necessary for  assessment  has not been  made as noted  above. It is pertinent to mention   here   that even though the assessee   has produced annual   report,   P & L a/c, balance sheet alongwith return of income as   mentioned above,   the   requisite   material facts as noted above in the   reasons   for reopening   were embedded in such a manner that  material evidences could not be  discovered by  the AO and could have been  discovered with due  diligence, according   provisions   of explanation 1 of section 147 of the Income Tax Act, 1961. (iii)  It is pertinent  to mention   here that material facts relevant for the assessment year  on the issues under consideration  were not filed during the course of the assessment  proceeding  and the same may be embedded in annual   report, audited P & L a/c, Balance sheet and   books of   account in such manner   that   it would     require     due   diligence   by   the   AO     to   extract   these information. For aforesaid reasons,  it is not  a case of change  of opinion  by the AO.

04.

Therefore,  I have reason to believe that the assessee  has not fully and truly  disclosed all the material   of facts and the income of Rs.5,42,00,000/­  has  escaped  the assessment  by reason of the failure  on the part of the assessee  within the meaning of Sec.147 of the Income tax Act,  1961.

Therefore approval for issue of notice under section 148 14 wp 14479­18­c­s may be given. Pune/Dt: 30.03.2018 (Dr.Jivan Bachhav) Deputy Commissioner of Income Tax, Circle­14, Pune. 6 Whether  Pr.C.I.T.     is satisfied    on   the reasons  recorded by  the A.O.  that it is a fit  case for issue of notice u/s 148  of the Income Tax Act, 1961. As per annexure. Pune/ Date  31.03.2018 Pr. Commissioner of Income Tax. The annexure to the aforesaid  reasons  being the sanction order in   terms   of   Section   151   (1)   of   the   Act   of     the   Principal Commissioner   of     Income   Tax     is   also   communicated   to   the petitioner.  It reads as under:­ “I have  perused the above reason  recorded by A.O. along with  the  information in his possession. It is noted that  the assessee had  heavy transaction (was providing   accommodation   entries   to   various beneficiary  groups  amounting to  Rs.5,42,00,000/­, siphoning  off  fund from Public Ltd. Co. to Pvt. Ltd. Co., inflation of beneficiaries purchases)  during the relevant   financial year. The assessee has filed the return   of   income   declaring   total   income   of Rs.1,56,64,480/­ but  all the above activities  need to be verified. Therefore,   I am also satisfied   that income   has     escaped     assessment     in   this   case. Hence,   the approval u/s 151(1) of the Income tax Act is being  accorded for Issue of Notice u/s  147 r.w.s. 148  of the Income tax Act.

14 wp 14479­18­c­s Dated 31/03/2018 (Ashok Kumar Pandey) Pr.Commissioner of  Income tax­6,

Pune.”

5.

On  receipt of  the  reasons, the petitioner filed  its objections to   the   above     reasons   on     18th  September,     2018     with   the Assessing  Officer.   By  an  order  dated  31st  October,     2018, the Assessing Officer rejected the objections. Thus, this petition.

6.

On  the perusal of the reasons  as recorded by the Assessing Officer and the sanction granted  by the Commissioner of Income Tax, we pointed out to Mr.Walve learned   counsel appearing for the revenue that the sanction appears to have been granted on a complete  misreading  of the reasons. The reasons for sanction is different from the   reasons recorded   and thus appears   to be without application  of mind to the   reasons recorded.

7.

In response  Mr.Walve for the respondent submitted  that the paragraph   3(ii) of the   recorded   reasons is in accord with the sanction granted by the Principal   Commissioner of Income Tax. Thus  the sanction was granted with due application of mind and 14 wp 14479­18­c­s cannot be faulted.

8.

We note  that the  para 3(ii) of  reasons recorded in support of the impugned notice records   the activity of   one Himanshu Verma   group in providing   accommodation entries while     the order   granting   sanction   proceeds     on   the   basis   that   it   is   the respondent assessee who is engaged in providing accommodation entries.  In the above  view, the submission of Mr. Walve does not merit   acceptance. Further, order granting the sanction   records that the funds  of  public  limited company  are being  siphoned of to the private limited companies. This is not evident  at all  from the   reasons   recorded which makes   references only to Private Limited     companies   being     used   as   vehicles   for   providing accounting  entries by the   Himanshu Verma group.  Thus,   on the face of it,  the  sanction granted is  bad in law. It is   a settled position  in  law  that  grant  of the sanction  by  the Commissioner of  Income Tax under Section 151 of the Act, is  not a mechanical act   on his part but it requires   due application of mind to the reasons recorded before granting the sanction. This has been  so provided as to safeguard against issue of reopening notice  (which 14 wp 14479­18­c­s seek to disturb  the settled  position)  to  ensure that   assessee  is not  troubled  with reopening  issues without satisfactory   reasons. Therefore, it must pass muster of the   Superior Officer   in the context  of  Sections  147  and 148 of the Act, before it is issued to the party.

9.

In   the   above   view,   as   the   sanction   order   indicates   non­ application of mind   to the reasons recorded by the Assessing Officer, the impugned notice is bad in law. Thus, quashed and set aside.

10.

Accordingly,  the petition  is allowed. (M.S.SANKLECHA,J.)                          (AKIL KURESHI,J.) ….

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