Reassessment based on search in third party is valid : HC

By | April 25, 2020
(Last Updated On: April 25, 2020)

Assessing Officer: Reassessment based on search in third party is valid as there are Reasons to believe : HC

A perusal of the appraisal report, on which reliance has been placed by the Assessing Officer, reveals that there was sufficient material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. The material also specifically refers to the petitioner, which clearly establishes a link between the relied upon materials and the petitioner. Considering the nature of material available with the Revenue, it is not possible to state that on the reasons recorded, the Assessing Officer could not have formed the belief that income chargeable to tax has escaped assessment.

HIGH COURT OF GUJARAT

Purnima Komalkant Sharma

v.

Deputy Commissioner of Income-tax, Circle 1

MS. HARSHA DEVANI AND BHARGAV D. KARIA, JJ.

R/SPECIAL CIVIL APPLICATION NO.14886 OF 2018

MAY  6, 2019

B.S. Soparkar for the Petitioner. Mrs. Mauna M Bhatt for the Respondent.

JUDGMENT

Ms. Harsha Devani, J. – By this petition under article 226 of the Constitution of India, the petitioner has challenged the notice dated 31.3.2018 issued by the respondent under section 148 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) proposing to reopen the assessment of the petitioner for assessment year 2011-12.

2. The facts stated briefly are that the petitioner is an individual and engaged in the business of real estate and transportation and ship breaking. The petitioner filed a return of income for assessment year 2011-12 on 30.9.2011 declaring total income of Rs. 3,35,190/-. The return of income was accepted without any scrutiny. Thereafter, a search action took place at the premises of the petitioner on 17.2.2012. There after proceedings came to be initiated by issuance of notice under section 153A of the Act, pursuant to which the petitioner filed a revised return of income. Upon conclusion of such proceedings, assessment was framed under section 143(3) read with section 153A(1)(b) of the Act.

3. Thereafter, by the impugned notice dated 31.3.2018, the respondent seeks to reopen the assessment of the petitioner for assessment year 2011-12. Upon receipt of the notice, the petitioner requested the respondent to supply the reasons recorded for reopening the assessment, pursuant to which, the respondent supplied the reasons recorded on 24.5.2018. Thereafter, the petitioner, vide letter dated 3.7.2018, raised various objections on the merits of the reopening and requested the respondent to drop the assessment proceedings. However, by an order dated 20.7.2018, the respondent rejected the objections raised by the petitioner. Being aggrieved, the petitioner has filed the present petition.

4. Mr. B.S. Soparkar, learned advocate for the petitioner, submitted that the reasons recorded suffer from various infirmities. It was submitted that reasonable belief, as contemplated under section 147 of the Act, must be that of an honest and reasonable person based upon a reasonable ground and it should not be based on some suspicious and vague reasons whereas the reasons are vague and do not reveal any income having escaped assessment and furthermore, the reasons recorded make it clear that this is a case of borrowed satisfaction without any independent application of mind. It was also contended that in this case, the reopening is beyond a period of four years from the end of relevant assessment year and there is not even a whisper in the reasons recorded regarding any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment.

4.1 Elaborating upon the above submissions, it was submitted that there is no escapement of income inasmuch as the petitioner had disclosed all material facts in the books of accounts and, therefore, it is not permissible for the revenue to reopen the assessment.

4.2 It was submitted that there is no independent application of mind on the part of the Assessing Officer while recording the reasons for reopening and that merely placing reliance on the materials provided by the investigation wing for recording the reasons is impermissible. It was submitted that the Assessing Officer must record an independent finding as to how income has escaped assessment on a proper application of mind. However, in the present case, no inquiry has been conducted by the Assessing Officer based on the evidence collected in the earlier search. Referring to the reasons recorded for reopening the assessment, it was submitted that there is no independent correlation established in respect of any transaction between Shri Pradip Birewar and the petitioner – assessee. It was submitted that there is no link between the information received and formation of opinion that income has escaped assessment and that the reasons recorded do not indicate any relationship between the petitioner and SCN or Shri Pradip Birewar and that the reasons, as stated, do not reflect application of mind nor do they say as to how income has escaped assessment.

4.3 It was submitted that in the affidavit-in-reply filed by the respondent, the respondent seeks to supplement the reasons recorded by him, which is not permissible in law. In support of such submission the learned advocate placed reliance upon the decision of Bombay High Court in Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332 (Bom.), for the proposition that reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or by making oral submissions, otherwise, the reasons, which were lacking in material particulars, would get supplemented by the time the matter reaches to the Court on the strength of affidavit or oral submissions advanced.

4.4 Reliance was also placed upon another decision of Bombay High Court in Prashant S. Joshi v. ITO [2010] 324 ITR 154, wherein the court held that the reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For, it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits, not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 of the Act, that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer and that the reasons which are recorded cannot be supplemented by affidavits.

4.5 Reliance was also placed upon the decision of this court in Gujarat Fluorochemicals Ltd. v. Dy. CIT [2009] 319 ITR 282, wherein the court recorded that if the Assessing Officer has reason to believe that the assessee has not disclosed fully and truly all material facts, then it should have been stated clearly in the reasons recorded, which has not been done. Instead, the court found that the order dated 28.08.2008 rejecting the objections of the petitioner therein, sought to supplement the reasons which had been recorded, so as to fill in the lacunae, attempting to bring it within the ambit and scope of the proviso to section 147 of the Act. The court held that the order dated 28.08.2008 traveled far beyond the reasons recorded, as had been communicated, which is not permissible and therefore, the Court cannot look into the contents thereof, which seek to supplement the reasons recorded. It is the statutory duty of the Assessing Officer to record reasons for issuing notice under section 148 of the Act and the reasons recorded cannot further be supplemented or explained by a subsequent order so as to give an entirely different complexion to the case.

4.6 Reliance was placed upon the decision of Delhi High Court in Pr. CIT v. Meenakshi Overseas (P.) Ltd. [2017] 395 ITR 677, wherein the court held thus:

“22. As rightly pointed out by the ITAT, the ‘reasons to believe’ are not in fact reasons but only conclusions, one after the other. The expression ‘accommodation entry’ is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the assessee on his paying “unaccounted cash” is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.

23. Thus, the crucial link between the information made available to the AO and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

24. The reopening of assessment under section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of section 147(1) of the Act.

The first part of section 147(1) of the Act requires the AO to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre-condition to the assumption of jurisdiction under section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment.”

4.7 Reliance was also placed upon the decision of Delhi High Court in Pr. CIT v. RMG Polyvinyl (I) Ltd. [2017] 395 ITR 5, wherein the court placed reliance upon its earlier decision in the case of Meenakshi Overseas (P.) Ltd. (supra).

4.8 Referring to the reasons recorded, it was submitted that the crucial link between the information available to the Assessing Officer and the formation of belief is absent in the reasons recorded.

4.9 It was submitted that the reopening of assessment is, therefore, without jurisdiction and hence, the impugned notice under section 148 of the Act deserves to be quashed and set aside.

5. Vehemently opposing the petition, Mrs. Mauna Bhatt, learned senior standing counsel for the respondent, invited the attention of the court to the reasons recorded for reopening the assessment to submit that the same are clear and reflect proper application of mind on the part of the Assessing Officer.

5.1 It was submitted that the petitioner is a beneficiary of accommodation entries through Shri Shirish Chandrakant Shah and Shri Pradip Birewar and that this is not a case where the Assessing Officer’s action is without jurisdiction. The learned senior standing counsel placed reliance upon the decision of this court in Vicky Rajesh Jhaveri v. Dy. CIT [2016]  396 ITR 265, to submit that in a similar set of facts, the court had dismissed the petition challenging the notice under section 148 of the Act.

6. In the aforesaid backdrop, the question that arises for consideration is whether on the reasons recorded, the Assessing Officer could have formed the belief that income chargeable to tax has escaped assessment. In this regard, it would be necessary to briefly refer to the reasons recorded by the Assessing Officer. A perusal of the reasons recorded reveals that the Assessing Officer has recorded that a search had been carried out at the office premises of SCS on 09.04.2013 wherein MS Excel Sheet “pradeep abad” in the excel file “ac.1.xis” was found and seized from the computer (Rajen computer) in that office in form of computer backup. As per: (i) the evidence found during the course of search in the case of Shirish Chandrakant Shah, and (ii) the appraisal report, it is seen that Shri Pradip Birewar had facilitated entries for Ahmedabad based beneficiaries. Along with search in the Barter Group, Shri Pradip Birewar and some of the main beneficiaries, who had availed accommodation entries through him, were also searched/surveyed. As per the evidences seized in the search of SCS, Shri Pradip Birewar had made cash payment of Rs. 70 crores to SCS. These cash payments were made to arrange bogus LTCG/loss entries in the scrip of Shri Ganesh Spinners Ltd. and Praneta Industries Ltd. In the appraisal report, the DDIT has discussed in detail the modus operandi of SCS for arranging bogus LTCG.

7. In the reasons recorded, the Assessing Officer has then referred to the contents of appraisal report wherein, it has been stated that bogus LTCG entries were made to the beneficiaries to whom shares were allotted through private placement of convertible shares recorded as “PHY” in the “pradeep abad” sheet. “PHY” refers to the transactions where shares of SGSL (Ganesh) have been acquired by the beneficiary clients in physical certificate form. Thus, in this case, shares are not purchased through exchange. A perusal of the entries recorded shows that the assessee has received payout of Rs. 60,89,495/- for 3,62,000 shares in assessment year 2011-12, which is not genuine sale consideration, but mere accommodation entries.

8. Thus, from the reasons recorded, it emerges that the material, which formed the basis for the formation of belief that income chargeable to tax has escaped assessment is the evidence found during the course of search in the case of SCS and the appraisal report. The search had been conducted in the case of Barter Group and Shri Pradip Birewar. Search had also been conducted in case of the main beneficiaries of accommodation entries, one being SCS [Shirish Chandrakant Shah]. The material on record shows that Shri Pradip Birewar had paid Rs. 70 crores in cash to SCS. Such cash payment was made to arrange LTCG/Loss entries in the scrip of (i) Shri Ganesh Spinners Ltd. and (ii) Praneta Industries Ltd. The modus operandi is discussed in detail in the appraisal report. The material on record shows that bogus LTCG entries were made to the beneficiaries to whom shares were allotted through private placement of convertible shares recorded as “PHY” in the “pradeep abad sheet”. “PHY” refers to the transactions where shares of SGSL (Shri Ganesh Spinners Ltd.) have been acquired by the beneficiary clients in physical certificate form. That in this case, the shares are not purchased through exchange. A perusal of the entries recorded shows that the assessee has received payout of Rs. 60,89,495/-for 3,62,000 shares in assessment year 2011-12. On the basis of the evidence found during the course of search and the appraisal report, the Assessing Officer has formed the belief that the amount of Rs. 60,89,495/- received by the petitioner towards consideration for sale of 3,62,000 shares in assessment year 2011-12 is not genuine sale consideration, but accommodation entries. So, the case is that the petitioner did not receive any share sale consideration, but it was in the nature of mere accommodation entries. To put it briefly, the Assessing Officer, in the reasons recorded, has referred to the evidence on record and the appraisal report and has recorded that the same show that the LTCG shown by the petitioner was in the nature of accommodation entries and that in fact, there was no genuine sale consideration.

9. In this case, the Assessing Officer has filed a detailed affidavit and has also placed on record the appraisal report on the basis of which he has formed the opinion that income chargeable to tax has escaped assessment in the case of the assessee. It has been emphatically argued on behalf of the petitioner that the reasons have to be considered on a standalone basis and that the Assessing Officer has to make out a case on the basis of reasons recorded and not on the basis of the affidavit. In this regard, reference may be made to the decision of this court in case of Aayojan Developers v. ITO [2011] 335 ITR 234 (Guj.), wherein, the court has referred to the decision of the Calcutta High Court in case of East Coast Commercial Co. Ltd. v. ITO [1981] 128 ITR 326 (Cal.), wherein it was held that the Income Tax Officer, in his affidavit filed in the court, could explain or elaborate or clarify the reasons recorded by him, but he could not thereby introduce new grounds or new reasons or new materials, which were not to be found in the recorded reasons, either expressly or by implication.

10. Thus, it is open for the Assessing Officer to explain or elaborate or clarify the reasons recorded by him, but he cannot introduce new grounds or new reasons or new materials, which were not found in the recorded reasons, either expressly or by implication. Moreover, the reasons recorded do not have to be very elaborate, but should reflect application of mind on the part of the Assessing Officer to the evidence available and should show that on the reasons recorded, he could have formed the belief that income chargeable to tax has escaped assessment.

11. Therefore, while the reasons recorded should reflect the basis for forming the opinion that income chargeable to tax has escaped assessment on the material relied upon; such reasons can be elaborated in the affidavit-in-reply. In the present case, along with the affidavit-in-reply, the respondent has placed on record the appraisal report, which finds reference in the reasons recorded. The appraisal report is detailed and elaborate and gives a clear picture of the modus operandi by which accommodation entries were provided to convert unaccounted money into white money, however, the reasons recorded are not so elaborate and rightly so, inasmuch as the reasons have to satisfy that there was sufficient material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. Evidently, the reasons would not set out the entire modus operandi as recorded in the appraisal report, but would briefly set out the gist of the facts and material which led the Assessing Officer to form the requisite belief that income chargeable to tax has escaped assessment. However, the reasons as they stand should be sufficient to show that on the reasons recorded the Assessing Officer could have formed the belief that income chargeable to tax has escaped assessment. Once that requirement is fulfilled, the Assessing Officer can certainly clarify and explain the reasons recorded by him in the affidavit-in-reply and place the material relied upon by him for the purpose of forming the belief that income chargeable to tax has escaped assessment.

12. A perusal of the appraisal report, on which reliance has been placed by the Assessing Officer, reveals that there was sufficient material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. The material also specifically refers to the petitioner, which clearly establishes a link between the relied upon materials and the petitioner. Considering the nature of material available with the Revenue, it is not possible to state that on the reasons recorded, the Assessing Officer could not have formed the belief that income chargeable to tax has escaped assessment.

13. In the light of the above discussion, no infirmity can be found in the action of the respondent in issuing the impugned notice under section 148 of the Act. The petition, therefore, fails and is, accordingly, dismissed. Rule is discharged with no order as to costs.

For latest Notification Refer Govt Website Click Here

Assessing Officer income tax

One thought on “Reassessment based on search in third party is valid : HC

  1. Pingback: TaxHeal - GST and Income Tax Complete Guide Portal

Leave a Reply

Your email address will not be published.