PRITI MARINE PVT.LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1

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SCA/3188/2005HC GujaratGJHC24010253200510 July 2012Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MS. JUSTICE HARSHA DEVANI10 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Assessing Officer had sufficient material to form a belief that income chargeable to tax had escaped assessment. The court noted that in cases where no scrutiny assessment under Section 143(3) was framed, and the return was accepted under Section 143(1), the Assessing Officer's belief for reopening under Section 147 is based on the information available at that stage. The court relied on the Supreme Court's decision in Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that at the stage of issuing a notice for reopening, it is sufficient if there is 'reason to believe' and not an established fact of escapement of income. The material available indicated that the petitioner had introduced sales to a fictitious party, M/s. Shital Marketing, which was found to be a bogus concern used for introducing unaccounted sales. This led the AO to believe that the petitioner's books were unreliable and income had escaped assessment, satisfying the condition for reopening under Section 147, particularly Explanation 2(b) of Section 147. Therefore, the petition was dismissed.

What were the facts?

The petitioner, Priti Marine Pvt. Ltd., filed its income tax return for Assessment Year 2000-2001, showing an income of Rs. 12,26,430. This return was accepted under section 143(1) of the Income Tax Act, 1961, and a refund was issued. No assessment under section 143(3) was framed. The Assessing Officer (AO) issued a notice dated 2.5.2003 under section 148 of the Act to reopen the assessment. The AO's reasons, communicated on 6.9.2004, stated that during assessment proceedings of M/s. Prakash Re-rollers Pvt. Ltd., it was found that the petitioner had shown sales of Rs. 30.56 lakhs to M/s. Shital Marketing, Ahmedabad, which was identified as a bogus concern used by ship-breakers to introduce unaccounted sales. The AO concluded that the petitioner had understated its income, and it had escaped assessment, making it fit for notice under section 148. The petitioner objected to the reopening, which were rejected by the AO on 28.1.2005. The petitioner then filed a Special Civil Application challenging the notice and the order rejecting objections.

What were the issues?

1. Whether the Assessing Officer had valid reasons to form a belief that income chargeable to tax had escaped assessment, as required under Section 147 of the Income Tax Act, 1961, for reopening the assessment, particularly when the original return was accepted under Section 143(1) and no scrutiny assessment under Section 143(3) was framed? Assessee's contention: The Assessing Officer lacked valid reasons to form a belief that income had escaped assessment. The reasons recorded did not demonstrate a reasonable basis for such a belief. Revenue's contention: No assessment under Section 143(3) was framed. The Assessing Officer, based on information received during another assessee's assessment proceedings, found M/s. Shital Marketing to be a bogus concern to which the petitioner had shown sales. This led to the opinion that the petitioner's books were unreliable and income had escaped assessment. Therefore, no interference was called for.

Which sections of the Income-tax Act were involved?

Section 143(1),Section 143(3),Section 147,Section 148,Section 158BD

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
SCA/3188/2005 1/10 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 3188 of 2005 For Approval and Signature: HONOURABLE MR.JUSTICE AKIL KURESHI HONOURABLE MS.JUSTICE HARSHA DEVANI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge? ========================================================= PRITI MARINE PVT.LTD. - Petitioner(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1 - Respondent(s) ========================================================= Appearance : MR KH KAJI for Petitioner(s) : 1,MR MANISH K KAJI for Petitioner(s) : 1, MR MANISH BHATT SR COUNSEL, WITH MRS MAUNA M BHATT for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS.JUSTICE HARSHA DEVANI Date : 10/07/2012 SCA/3188/2005 2/10

ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

1.

The petitioner has challenged a notice dated 2.5.2003 issued by the   respondent   under   section   148   of   the   Income   Tax   Act, 1960(“the Act” for short) in the following factual background :

2.

The petitioner is a company registered under the Companies Act and is regularly assessed to tax. The petitioner for the assessment year   2000­2001   filed  its   return  of   income   showing   income   of Rs.12,26,430/­. The return of the petitioner was accepted under section 143(1) of the Act. On such basis refund of Rs.2403/­ was found payable to the petitioner.

3.

It is not in dispute that such return was never taken in scrutiny by the Assessing Officer and resultantly, no assessment under section 143(3) of the Act was framed. It is this return the Assessing Officer desired to take in assessment under section 147 of the Act for which he issued a notice dated 2.5.2003. Such notice is though not produced on record, it is not in dispute that same was issued under section 148 of the Act.

4.

The petitioner asked for the reasons recorded by the Assessing Officer   for   issuance   of   such   notice.   Such   reasons   were communicated to the petitioner under letter dated 6.9.2004. Such reasons read as under : “During the course of assessment proceedings in the case of M/s. Prakash Re­rollers Pvt. Ltd. for A.Y. 2000­01, the books of account of   M/s.   Priti   Marine   Pvt.   Ltd.   were   called   for   and   examined. During the course of examination of the books of M/s. Priti Marine Pvt. Ltd. it was found that the party had shown sales of Rs.30.56

SCA/3188/2005 3/10 lacs to M/s. Shital Marketing, Ahmedabad. M/s. Shital Marketing, Ahmedabad is the bogus concern, whose name has been used by the various ship breakers for the purpose of introducing part of unaccounted   sales   in   the   books   of   account.   This   fact   was discovered during the course of proceedings u/s.158BD of the Act in   the   cases   of   M/s.   Priya   Blue   Industries   Ltd.,   M/s.   Rushil Industries Ltd. and Bansal Ispat P. Ltd.  M/s. Priti Marine P. Ltd. has introduced part of its unaccounted sales in its books by showing sales  to a fictitious party i.e. M/s. Shital Marketing. It is clear that the books of M/s. Priti Marine Pvt. Ltd. is not reliable and liable to be rejected, as part of the unaccounted sales has not been shown in its books. As the assessee has understated its income, its income chargeable to tax has escaped assessment. The case is covered by Expl.2(b) of s. 147 of the Income Tax Act and is fit for issue of notice u/s148 of the Income Tax Act. The same is being misused.”

5.

The petitioner raised several objections to the Assessing Officer exercising   power   under   section   147   of   the   Act   under communication dated 27.9.2004. Such objections however, were disposed of by the Assessing Officer vide his order dated 28.1.2005 at which stage the petitioner filed this petition challenging the notice of reopening of the assessment as well as the order of the Assessing Officer rejecting the objections of the petitioner to such reopening.

6.

Learned counsel Shri K.H.Kazi for the petitioner contended that the assessment could not have been reopened on the basis of reasons recorded by the Assessing Officer. He submitted that to exercise power under section 147 of the Act, the Assessing Officer had to form a belief that income chargeable to tax had escaped assessment. He submitted that the reasons recorded for reopening of assessment must demonstrate that the Assessing Officer had reasonable basis for forming such a belief. He submitted that from the   reasons   recorded   in   the   present   case,   it   can   nowhere   be ascertained that the Assessing Officer had any valid reasons to

SCA/3188/2005 4/10 hold   a   belief   that   income   chargeable   to   tax   has   escaped assessment.

7.

Learned   senior   counsel   Shri   Manish   Bhatt   on   behalf   of   the department opposed the petition contending that in the present case no assessment under section 143(3) of the Act was framed. The   Assessing   Officer   therefore,   on   the   basis   of   information received   by   him   during   the   assessment   proceedings   of   M/s. Prakash Re­rollers Pvt. Ltd., found that M/s. Shital Marketing, Ahmedabad was bogus concern. The assessee had shown sales made to such M/s. Shital Marketing. On such basis, the Assessing Officer formed an opinion that books of the petitioner assessee are not reliable and are liable to be rejected. He therefore, submitted that in the present case no interference is called for.

8.

Having thus heard learned counsel for the parties, we may recall that present is a case where no assessment under section 143(3) of the  Act  was  framed.   The  Assessing  Officer  without  taking  the return   of   the   petitioner   assessee   in   scrutiny,   merely   sent   an intimation under section 143(1) of the Act. In that view of the matter, the Assessing Officer having formed any opinion on any aspects of the matter arising out of such return, would not arise. The reopening of the assessment therefore, being based on a mere change of opinion, would not be a ground for challenge available to the petitioner. In all fairness, counsel for the petitioner also never pressed such a ground in service. He however, harped on the issue namely, the validity of the belief of the Assessing Officer that income chargeable to tax in case of the petitioner assessee had escaped assessment.

SCA/3188/2005 5/10

9.

Before examining such a contention, we may notice the decision of the Apex Court in case of Assistant Commissioner of Income­tax v. Rajesh Jhaveri Stock Brokers P. Ltd.  reported in (2007) 291 ITR 500 (SC). It was also a case where the assessment was not made under section 143(3) of the Act but the return filed by the assessee was accepted under sub­section(1) of section143. The Apex   Court   noticed     major   statutory   changes   made   in   the provisions   pertaining   to   assessment   and   reassessment   of   the returns particularly, under sections 147 of the Act after 1.4.1989. The Apex Court also noticed the significant contextual difference in case of a return being accepted under section 143(1) of the Act and assessment  framed after scrutiny under section 143(3) of the Act. The Apex Court in such background in context of expression “reason to believe” in section 147 of the Act opined that such expression   cannot  be   read  to   mean  that   the  Assessing   Officer should have finally ascertained the fact by any legal evidence or conclusion. At the stage when the notice is issued for reopening the   assessment,   the   final   outcome   of   the   proceeding   is   not relevant. At the initial stage what is required is reason to believe but not the established fact of escapement of income. At the stage of   issuance   of   notice   the   only   question   is   whether   there   was relevant   material     on   which   a   reasonable   person   could   have formed a requisite belief. The Apex Court held and observed as under :

“16. Section 147 authorises and permits the Assessing Officer  to assess or reassess income chargeable to tax if he has   reason to believe   that   income   for   any   assessment   year   has     escaped assessment. The word “reason” in the phrase “reason  to believe” would mean cause or justification. If the Assessing   Officer has cause or justification to know or suppose that  income had escaped assessment, it can be said to have reason  to believe that an income had escaped assessment. The  expression cannot be read to mean

SCA/3188/2005 6/10 that the Assessing Officer  should have finally ascertained the fact by legal evidence or   conclusion. The function of the Assessing Officer is to  administer the statute with solicitude for the public exchequer     with   an   inbuilt   idea   of   fairness   to   taxpayers.   As observed by  the Delhi High Court in Central Provinces Manganese Ore Co.  Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under  section 147(a) (as the provision stood at the relevant time) fulfillment   of   the   two   requisite   conditions   in   that   regard   is essential. At that stage, the final outcome of the proceeding is  not relevant. In other words, at the initiation stage, what is  required is “reason to believe”, but not the established fact of  escapement of income. At  the stage  of issue of notice,  the  only    question  is whether there was relevant material on which a  reasonable person could have formed a requisite belief.  Whether the materials would conclusively prove the  escapement is not the concern at that stage. This is so  because the formation of belief by the Assessing Officer is  within the realm of subjective satisfaction (see ITO v. Selected Dalurband   Coal   Co.   Pvt.   Ltd.   [1996   (217)   ITR   597   (SC)]   ; Raymond Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)].

18.

So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section  147 and failure to take steps under section 143(3) will not  render the Assessing Officer powerless to initiate reassessment  proceedings even when intimation under section 143(1) had  been issued.”

In   case   of  Raymond   Woollen   Mills   Ltd.   v.   Income­tax Officer and others reported in (1999) 236 ITR 34(SC), the Apex Court expressed similar opinion in following manner : “In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the Court cannot strike down the reopening  of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous.”

In case of Shri Krishna Pvt. Ltd., Etc. v. Income­tax Officer and others reported in (1996) 221 ITR 538(SC), it was observed

SCA/3188/2005 7/10 as under : “So far as the first condition is concerned, the Income­tax officer, In his recorded reasons, has relied upon the fact as found by the Customs Authorities  that the  appellant had under­invoiced the goods it exported. It is no doubt  correct that the said finding may not be binding upon the income­tax authorities but it can be valid reason   to   beliveve   that   the   chargeable   income   has   been underassessed.   The   final   outcome   of   the   proceedings   is   not relevant. What is relevant is the existence of reasons to make the Income­tax Officer believe that there has been under­assessment of the assessee’s income for particular year. We are satisfied that the first condition to invoke the jurisdiction of the Income tax Officer under Section 147 (a) of the Act was satisfied.”

In a recent decision the Andhra Pradesh High Court in case of GVK Gautami Power Ltd. (formerly known as Gautami Power Ltd.)   v.   Assistant   Commissioner   of   Income­tax(OSD)   and another  reported in (2011) 336 ITR 451(AP), referring to large number   of   decisions   of   the   Apex   Court   on   the   question   of reopening of the assessment culled out several principles on the issue including following : “(xxvii). At the stage of examining the validity of the notice under Section 148/147, the enquiry is only to see whether there are reasonable grounds for the ITO to believe, and not whether the omission/failure and the escapement of income is established. (Sri Krishna Pvt. Ltd.19) [1996] 221 ITR 538(SC) (xxviii).   Whether   the   material   would   conclusively   prove   the escapement is not of concern at the initiation stage. (Selected Dalurband Coal Co. (P) Ltd18; Raymond Woollen Mills Ltd.21; Central   Provinces   Manganese   Ore   Co.   Ltd.16;   Rajesh     Jhaveri [2007] 291 ITR 500.” 10.With above legal provisions in mind, if we revert back to the facts of the case, the Assessing Officer had recorded his reasons for issuing notice under section 148 of the Act. In the reasons, he had noted that during the course of assessment proceedings in case of

SCA/3188/2005 8/10 M/s. Prakash Re­rollers Pvt. Ltd., the books of account of the petitioner   were called for. During the course of examination of books of the petitioner,  it was found that the petitioner had shown sales of Rs.30.56 lakhs to M/s. Shital Marketing, Ahmedabad. M/s. Shital Marketing was found to be bogus concern, whose name had been used by various ship breakers for the purpose of introducing unaccounted   sales   in   their   books   of   account.   Such   facts   were disclosed   during   the   the   course   of   proceedings   under   section 158BD of the Act in case of M/s. Priya Blue Industries Ltd., M/s. Rushil Industries Ltd. and Bansal Ispat P. Ltd. The petitioner had also   introduced   part   of   its   unaccounted   sales   in   its   books   by showing sales to a fictitious party i.e. M/s. Shital Marketing. The Assessing Officer therefore, was of the opinion that the books of the petitioner assessee were not reliable and liable to be rejected. On such basis he was of the opinion that the petitioner's income chargeable to tax had escaped assessment. According to him, case was covered in explanation 2(b) of section 147 of the Act.

11.

As is well­known, section 147 of the Act enables the Assessing Officer to assess or reassess any income, if he has reason to believe that income chargeable to tax has escaped assessment.   Before making such assessment or reassessment, the Assessing Officer is required to issue notice under sub­section(1) of section 148 of the Act and before issuing such notice; under sub­section(2) of section 148   of   the   Act   he   has   to   record   his   reasons   for   doing   so. Explanation(2) of section 147 of the Act provides that for the purpose of the said section instances provided in clause(a) to (c) shall also be deemed to be cases where income chargeable to tax has escaped assessment. Clause(b) to explanation(2) to Section 147 provides that where a return of income has been furnished by

SCA/3188/2005 9/10 the assessee but no assessment has been made  and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return. 12.In the present case, admittedly no assessment was framed in case of the petitioner under section 143(3) of the Act.   During the assessment   proceeding   in   case   of   another   assessee,   books   of account of the present petitioner were called for and it was found that the petitioner had shown sales to one M/s. Shital Marketing. M/s. Shital Marketing was found to be a bogus concern who was used   by   several   ship   breakers   for   the   purpose   of   introducing unaccounted sales in their books of account. On that basis the Assessing   Officer   formed   an   opinion   that   the   books   of   the petitioner are not reliable and liable to be rejected. 13.If on the basis of such material available with the Assessing Officer, he   formed   a   belief   that   income   chargeable   to   tax   in   case   of assessee has escaped assessment, we do not think the Assessing Officer lacked sufficient material to hold such a belief. At this stage, particularly, in a case where no previous scrutiny assessment was framed in case of the petitioner, our inquiry would not permit any further scrutiny beyond ascertaining whether there was some material available with the Assessing Officer to enable him to form such a belief. When it is specifically pointed out that the petitioner had introduced sales in favour of fictitious parties and on such basis, the Assessing Officer found that books were not reliable and liable to be rejected, further proceeding in terms of section 147 of the Act cannot be scuttled.

SCA/3188/2005 10/10

14.

In the result, the petition fails and is dismissed. Rule is discharged. Interim relief stands dismissed. (Akil Kureshi,J.) (Harsha Devani,J.) (raghu)

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