HARAKH SAMIR MEHTA ,MUMBAI vs. ACIT , WARD 19 (2), MUMBAI

The appellant, Shri Harakh Samir Mehta Alisa Nihar Samir Mehta (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 30.05.2019 passed by Commissioner of Income Tax (Appeals)-53, Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 2012-13 on the grounds inter alia that :- “1 NATURAL JUSTICE 1.1 The Learned Commissioner of Income - tax (Appeals) - 53, Mumbai ["Ld. CIT (A)"] erred in not granting proper, sufficient and adequate opportunity of being heard to the Appellant while framing the appellate order.

Briefly stated facts necessary for adjudication of the controversy at hand are : assessee is into the business of trading and manufacturing of diamonds. On the basis of search and seizure operation carried out in the case of Shri Bhanwarlal Jain group on 03.10.2013 by investigating wing of Mumbai it has noticed that Shri Bhanwarlal Jain group along with associates were managing and controlling several entities used for providing accommodation entries to various beneficiaries against the cash and commission and the assessee is one of such beneficiaries who has been given loan of Rs.10,00,000/- by one M/s. Daksh Diamonds. The assessee has also claimed interest on the said loan. On failure of the assessee to produce evidence to show the creditworthiness and genuineness of the lenders the AO proceeded to make addition of Rs.10,00,000/- as income of the assessee under section 68 of the Income Tax Act, 1961 (for short ‘the Act’) and also disallowed the expenses to the tune of Rs.20,904/- claimed by the assessee and thereby framed the assessment under section 143(3) read with section 147 of the Act.

Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has upheld the addition made by the Assessing Officer (AO) by dismissing the appeal. Feeling aggrieved the assessee has come up before the Tribunal by way of filing present appeal.

I have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Furthermore, it has been stated that the information by the investigation wing was gathered by conducting surveys at the premises of the few brokers. However, in this connection we may invite your kind attention to the fact that M/s. Daksh Exports was never been surveyed and therefore, entire basis of conclusion is totally on factually incorrect premises and. therefore, such conclusion cannot be any basis of reassessment.

From the copy of the reasons recorded it is clear that the reopening is based merely on some alleged information purportedly to have been received by the office of your goodself from the DGIT (Investigation), Mumbai. Your assessee has not been supplied copy of the information / letter / email purportedly received from DGIT (Investigation), Mumbai. As a matter of fact the contents of the said letter are neither incorporated in the reasons recorded prior to the issue of notice u/s 148 nor the contents of the same are produced in the said letter. Accordingly, such material is required to be ignored altogether. In simple words, such material is non existent material in eyes of law. If such materials ignored, then admittedly, there is no other material which can lead to belief that the income has escaped assessment. As such, it is submitted that the reassessment is bad, illegal and without jurisdiction.

Without prejudice to the above, and going further it is submitted that in absence of knowledge about contents of the alleged communication, there is absolutely no clue what is the information contained and how it is related to present case. It does not disclose even the very basic information such as dates of alleged transactions, intention and contention behind the transactions, terms and conditions of transactions in which alleged modification made. Simply it is a case of no information / vague information. Such information cannot be regarded as tangible material on the basis which any person can arrive at such conclusion that any income has escaped assessment. It is also pertinent to note that merely because of the transactions of the hawala entries, accommodation entries by these concerns (not by the assessee) cannot lead to any conclusion of the escapement of income. The loan can be taken for several reasons and therefore, mere transactions between them cannot lead to conclusion about escapement of income.

Without prejudice to the above, in any case we have to request your goodself to provide us a copy of information / communication purportedly received from DGIT (Investigation) as well as any other material which is relied upon to arrive at the satisfaction that the income has escaped assessment. This request is made to judge whether there existed 'tangible material" and thereafter "rational nexus" between such material and the satisfaction. The assessee reserves the right to raise further objection upon the receipt of such information.

In view of the above submission, we have to request your goodself to kindly drop the reassessment proceedings initiated u/s 147. In any case, pending supply of the information requested for in paragraphs 8 above, we request you not to proceed with the reassessment proceedings.

This issue has already been decided in favour of the assessee by the Hon’ble Bombay High Court in case of Fomento Resorts & Hotel Ltd. vs. ACIT (supra) wherein assessment framed under section 147/148 of the Act without deciding objections filed by the assessee has been quashed on the ground of want of compliance with jurisdictional parameters by the AO by returning following findings: “11. In this case, the Assessing Officer, vide notice dated 13th March, 2003, sought to reopen the assessment by invoking the provisions of Section 11 of the said Act. At the reverse of this notice, the Assessing Office, had stated the reason for reopening. Accordingly, it cannot be said that no reasons were furnished to the Appellant for reopening of the assessment or that there is breach of the law laid down by the Hon’ble Apex Court in GKN Driveshafts (India) Ltd. (supra), at least, in so far as requirement of furnishing of the reasons for reopening of the assessment is concerned. To that extent, therefore, we are unable to agree with the contention of Mr. Dada that this is a matter where the Assessing Officer failed to furnish the reasons for reopening of assessment whilst invoking the provisions of Section 11 of the said Act. 12. Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. (supra) has, however, further held that once reasons are furnished, the Assessee is entitled to lodge his objections and the Assessing Officer is duty bound to dispose of such objections, by passing a speaking order.

In the present case, the Appellants did lodge their objections vide letter dated 14th April, 2003. By a further letter dated 25th March, 2004, the Appellants requested the Assessing Officer to dispose of such objections by passing a speaking order before proceeding with the reassessment in respect of the Assessment Year 1997-98. However, the Assessing Officer, without proceeding to dispose of the objections raised by the Appellants by passing a speaking order, straight away proceeded to make the assessment order dated 26th March, 2004, bringing to charge taxable expenditure on ₹10,22,73,987/-. The assessment order dated 26th March, 2004, no doubt, deals with the objections raised by the Appellant and purports to dispose of the same. Ms. Linhares contends that this is a sufficient compliance with the procedure set out in GKN Driveshafts (India) Ltd. (supra), assuming that the same is at all applicable to the proceedings under the said Act. Mr. Dada, however, submits that such disposal in the assessment order itself does not constitute the compliance with the mandatory conditions prescribed by the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. (supra). In support, as noted earlier, Mr. Dada relies upon Bayer Material Science (P) Ltd. (supra) and KSS Petron Private Ltd. (supra) .

The contention of Ms. Linhares that the decisions relied upon by Mr. Dada relate to the provisions of the Income Tax Act and, therefore, are not applicable to the proceedings under the Expenditure Tax Act, cannot be accepted. In the first place, the provisions relating to reopening of assessment are almost pari materia. Secondly, in so far as Assessment Year 1995-96 is concerned, the Respondent applied the very same ruling in GKN Driveshafts (India) Ltd. (supra) to hold that the notice of reopening of assessment was ultra vires Section 11 of the said Act. This view, in the specific context of the said Act and incidentally in the specific context of this very Appellant, was upheld not only by this Court, but also by the Hon’ble Supreme Court. This was in ETA No.1 and 5/PANJ/01 decided by the Tribunal on 4.4.2006.

The aforesaid decision of the ITAT was appealed by the Respondent vide Tax Appeal No.71/2006. This appeal was dismissed by this Court vide order dated 27th November, 2006, which reads thus:

The Respondent, instituted a Special Leave to Appeal (Civil) No.5711/2007 which was, however, dismissed by the Hon’ble Apex Court vide order dated 16/7/2007, by observing that there were no merits.

Accordingly, for the aforesaid reasons, we are unable to accept Ms. Linhares’s contention based upon the any alleged variance between the provisions of the said Act and the provisions of the Income Tax Act, in so far as applicability of the principles in GKN Driveshafts (India) Ltd. (supra) is concerned.

The moot question is, therefore, the disposal of the objections by the Assessing Officer in his assessment order dated 26th March, 2004 constitutes sufficient compliance with the procedure prescribed by the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) or, whether it was necessary for the Assessing Officer to have first disposed of the Appellant’s objections by passing a speaking order and only upon communication of the same to the Appellants, proceeded to reopen the assessment for the Assessment Year 1997-98.

Virtually, an identical issue arose in the cases of Bayer Material Science (P) Ltd. (supra) and KSS Petron Private Ltd. (supra) before the Division Benches of our High Court at Bombay.

In Bayer Material Science (P) Ltd. (supra), by a notice dated 6/2/2013, the Revenue sought to reopen the assessment in the year 2007-08. The Assessee filed a revised return of income and sought for reasons recorded in support of the notice dated 6.2.2013. The reasons were furnished only on 19.3.2015. The Assessee lodged objections to the reasons on 25th March, 2015. The Assessing Officer, without disposing of the Petitioner’s objections, made a draft assessment order dated 30th March, 2015, since this was a matter involving transfer pricing. In such circumstances, the Division Bench of this Court, set aside the assessment order by observing that the Court was unable to understand how the Assessing Officer could, at all, exercise the jurisdiction and enter upon an inquiry on the reopening notice before disposing of the objections on the reasons furnished to the Assessee. This Court held that the proceedings initiated by the Transfer Pricing Officer (TPO), on the basis of such a draft assessment order, were without jurisdiction and quashed the same.

Similarly, in the case of KSS Petron Private Ltd. (supra), this Court was concerned with the following substantial question of law :

In the aforesaid case, the Assessing Officer had purported to dispose of the objections to the reasons in the assessment order, consequent upon reopening of the assessment. This Court, however, held that the proceedings for reopening of assessment prior to disposing of the Asessee’s objections by passing a speaking order, was an exercise in excess of jurisdiction.

KSS Petron Private Ltd. (supra), this is what the Division Bench has observed at paragraphs 7 and 8 of the Judgment :

According to us, the rulings in Bayer Material Science (P) Ltd. (supra) and KSS Petron Private Ltd. (supra) afford a complete answer to the contentions raised by Ms. Linhares in defence of the impugned order.

Since, in the present case, the Assessing Officer has purported to assume the jurisdiction for reopening of the assessment, without having first disposed of the Assessee’s objections to the reasons by passing a speaking order, following the law laid down in GKN Driveshafts (India) Ltd. (supra), Bayer Material Science (P) Ltd. (supra) and KSS Petron Private Ltd. (supra), we are constrained to hold that such assumption of jurisdiction by the Assessing Officer was ultra vires Section 11 of the said Act. The first substantial question of law will, accordingly, have to be answered in favour of the Appellant and against the Respondent-Revenue.

As noted earlier, in view of the aforesaid, there is no necessity to advert to the second substantial question of law, at least, in so far as this Appeal is concerned. The Appeal is, therefore, allowed and the impugned orders dated 26th March, 2004 made by the Assessing Officer, 30th November, 2004 made by the Commissioner (Appeals) and 12th January, 2007 made by the ITAT are set aside on the ground of want of compliance with jurisdictional parameters by the Assessing Officer, and without going into the second substantial question of law framed in this Appeal. Accordingly, we clarify that the second substantial question of law, raised in this Appeal, is not to be treated as decided in this Appeal, one way or the other.”