Reassessment initiated based on non-existent transaction of purchase of immovable property is invalid : High Court

ORDER

Sandeep Mehta, J. – The petitioner has filed the instant writ petition under Article 226 of the Constitution of India for questioning the legality and validity of the re-assessment notice dated 31-3-2021 (Annex.5) under section 148 of the Income-tax Act, 1961 and the order dated 13-9-2021 (Annex.12) disposing of the objections submitted by the petitioner against the re-opening of the assessment for the Assessment Year 2017-18.

2. Brief facts relevant and essential for the disposal of the writ petition are noted hereinbelow:-

3. The petitioner firm came into existence in the financial year 2016-2017 (Assessment year 2017-2018) and since then it is engaged in the business of textile job work at Pali. The petitioner filed its original return of income in terms of Section 139 (1) of the Income-tax Act, 1961 for the assessment year 2017-2018 on 30-9-2017 and the same was verified by the respondent Department without any defect. After filing of the return of income for the Assessment Year 2017-18, a notice/summon dated 24-8-2017 under section 131 (1A) of the Income-tax Act was issued to the petitioner for making an enquiry in relation to the source of large investment to the tune of Rs. 1,21,40,000/- made by the petitioner firm in acquiring immovable property situated at plot No. A-4, Nextgen Textile Park, Sardarsamand Road, Pali. The petitioner filed detailed explanation in prescribed format alongwith documentary evidence in response to the said notice/summon. No further proceedings were forthcoming after the explanation submitted by the petitioner as above. However, a notice dated 31-3-2021 (Annex.5) was served upon the petitioner under section 148 of the Income-tax Act proposing to reopen proceedings for the assessment year 2017-2018 stating therein that the Assessing Officer (A.O.) had reasons to believe that income chargeable to tax had escaped assessment for the Assessment Year 2017-18 within the meaning of section 147 of the Income-tax Act. The petitioner filed a fresh return of income in response to the notice issued under section 148 of the Income Tax Act declaring identical particulars of income as per the original return filed under section 139(1) of the Act. Thereafter, the petitioner requested the respondent I.T.O., Pali to supply copy of the reasons recorded prior to initiation of proceedings under section 148 of the Act alongwith copy of approval/sanction from the competent authority in terms of the section 151 of the Income-tax Act. In response thereto, the petitioner received a communication dated 28-6-2021 (Annex.8) issued under section 143 (2) of the Act incorporating therein the reasons to believe and so also the approval for initiating the re-assessment proceedings. The reasons for reopening the assessment as highlighted in the Annex.8 are reproduced hereinbelow for the sake of ready reference:-

“The assessee M/s Rajhans Processors has invested in immovable property situated C-152, Nirman Vihar, Delhi for an amount of Rs. 1,21,40,000/- . Thus, the assessee has made huge investment to the tune of Rs. 1,21,40,000/- for purchase of above property during the F.Y. 2016-17. On verification through system & record, it is noticed that, the assessee has not disclosed this investment in its return of income as well as the source of investment made for purchase of above undisclosed income. As such the amount of Rs. 1,21,40,000/- is actually the undisclosed income of the assessee and the same has escaped assessment. The same is liable to be brought to tax by initiation of proceedings u/s 147/148 of the I.T. Act.

I have gone through the information as well as the facts of the case, I have reason to believe that the income of Rs. 1,21,40,000/- is chargeable to tax has escaped income for A.Y. 2017-18 and accordingly I am satisfied that taxable income to the tune of Rs. 1,21,40,000/- which has escaped income, and it is a fit case for initiation of proceedings u/s 147 of the I.T. Act, 1961.”

4. The petitioner filed preliminary objections dated 30-8-2021 (Annex.9) to the above communication stating therein that the very foundation of the notice was non-existent as the petitioner had not procured any property at Delhi with the description C-152, Nirman Vihar, Delhi for the amount of Rs. 1,21,40,000/- during the financial year 2016-2017. It was emphatically mentioned in this letter that the assessee had rather purchased land located at plot No. A-4, Nextgen Textile Park, Sardarsamand Road, Pali for a sum of Rs. 1,26,37,900/- from M/s. Nextgen Textile Park, Private Limited having its registered office at C-152, Nirman Vihar, Delhi. This transaction was duly disclosed in the audited financial statement, i.e. balance-sheet and fixed asset chart as well as the return of income filed by the petitioner for the Assessment Year 2016-17. It was asserted that the reasons formed by the A.O. were based merely on suspicion, assumptions and conjectures and there was nothing in the communication dated 28-6-2021, which could suggest that there was any material to support the allegation/assumption of non-disclosure of land transaction. The preliminary objections submitted by the petitioner against the reopening of assessment for the Assessment Year 2017-18 were disposed of by the respondent I.T.O., Ward-1, Pali by order dated 13-9-2021 (Annex.12).

5. The notice under section 148 of the Income-tax Act dated 31-3-2021 (Annex.5), the reasons to believe conveyed vide notice under section 143(2) of the Income Tax Act dated 28-6-2021 (Annex.8) and the order dated 13-9-2021 (Annex.12), whereby the objections submitted by the petitioner against the reasons to believe and reopening of proceedings were turned down, are assailed in this writ petition filed on behalf of the petitioner under Article 226 of the Constitution of India.

6. Learned counsel Shri Sharad Kothari, representing the petitioner, placed reliance on the Supreme Court judgment in the case of Jeans Knit (P.) Ltd. v. Dy. CIT [2017] 77 taxmann.com 176/[2018] 12 SCC 36 and urged that a writ petition is maintainable against the order disposing objections against the reasons supplied under section 148 of the Income-tax Act. Reliance is also placed on the judgment rendered by the Delhi High Court in the case of Pr. CIT v. Meenakshi Overseas (P.) Ltd. [2017] 82 taxmann.com 300/395 ITR 677 and it was submitted that reopening of assessment cannot be done merely on the basis of borrowed satisfaction, i.e. on the basis of the information received from investigating wing, and independent application of mind before adverting to this course of action is essential because the Assessing Officer is a quasi judicial authority. Shri Kothari also placed reliance on the Bombay High Court judgment in the case of South Yarra Holdings v. ITO [2019] 104 taxmann.com 216/263 Taxman 594 and urged that where the very foundational facts in support of notice for re-assessment are lacking, such notice cannot be considered compliant of law. Reliance was also placed on the judgment rendered by Bombay High Court in the case of Sea Glimpse Investments (P.) Ltd. v. Dy. CIT 2021 (12) TMI 1096 and it was submitted that re-assessment could not be permitted for the reason that the foundation thereof is factually incorrect. Shri Kothari urged that the petitioner had filed the return for the assessment year 2017-18, wherein the investment for acquiring the immovable property situated at Pali was clearly reflected. At that point of time, there was no requirement upon the petitioner of uploading the audited financial statements, but no sooner the impugned notice under section 148 of the Income-tax Act was issued, the petitioner filed a fresh return annexing therewith the duly audited financial statements, wherein entire details of the subject land transaction are reflected. He submitted that the order dated 13-9-2021 (Annex.12) is erroneous on the face of the record because at point No. 2.1, the Assessing Officer has mentioned that the assessee had not uploaded the schedule of fixed assets as mentioned in the schedule 6 in the balance-sheet. He urged that this schedule was duly annexed with the duly uploaded balance-sheet, which fact is not disputed in the reply of the respondents. In this schedule, the transaction to the tune of Rs. 1,26,25,900/- for purchase of land situated at Pali is clearly depicted under the column of fixed assets. Shri Kothari, thus, urged that the foundation of the impugned notice and the impugned order being non-existent, the same are liable to be struck down.

7. Shri K.K. Bissa, learned counsel representing the respondents, has filed a detailed reply to the writ petition, wherein the allegations made in the impugned notice; the order indicating reasons to believe and the order disposing the objections are reiterated and highlighted. However, the pertinent assertion of the petitioner that it did not acquire any property with the description “C-152, Nirman Vihar, Delhi” is not disputed and rather it is submitted that as the investigating wing supplied the information regarding investment in the immovable property located at C-152, Nirman Vihar, Delhi and since the proceedings were lapsing on account of bar of limitation, the notice was issued on the basis of the details supplied by the investigating wing. It is also mentioned in the reply that purchase deed was not available with the information and since the DDIT, in its note, mentioned address of the property as C-152, Nirman Vihar, Delhi, the authority bonafide proceeded to issue the notice under section 148 of the Income-tax Act for undisclosed transaction with the above details of the property. Respondents have stated in reply to the writ petition that the objections raised by the assessee could not be accepted because the assessee had not uploaded the relevant annexure of the balance-sheet, i.e. Schedule-6 and only the figures under the fixed asset column were mentioned in the balance-sheet.

8. At this stage, it would be fruitful to mention that these figures in the head of fixed assets are incorporated in the Schedule-6 filed by the assessee as an annexure of the balance-sheet and the same refer to the land transaction worth Rs. 1,26,25,900/-. Apparently thus, the assertion made in the reply regarding the land transaction made by the petitioner in the financial year 2016-2017 not being disclosed in the financial statements is factually incorrect. It has been admitted by the respondents in the reply that the property at Delhi was inadvertently mentioned in the proceedings under section 147/148 of the Income-tax Act and reference thereto may be considered as the property at Pali. The respondents have further averred in the reply that the address C-152, Nirman Vihar Delhi, is the registered business place of M/s. Rajhans Processers. It may be reiterated that this assertion made in the reply of the respondents is again factually incorrect because the registered sale deed filed on the record of the writ petition confirms the fact that C-152, Nirman Vihar, Delhi is the registered business place of the firm M/s. Nextgen Textile Park Private Limited, which sold the plot at Pali to the petitioner. Apparently thus, the proceedings were initiated by the respondents in hot haste without ascertaining the correct facts and with sheer non-application of mind.

9. Learned counsel Shri Bissa, in utmost sincerity, tried to justify the impugned notice and the impugned orders urging that the petitioner may contest the assessment proceedings which are faceless in nature and in case, the averments of the petitioner are found to be correct, the assessment can be completed/dropped. Shri Bissa placed reliance on the Delhi High Court judgment in the case of Touchstone Holdings (P.) Ltd. v. ITO [2022] 142 taxmann.com 336/289 Taxman 462 and urged that the sufficiency or correctness of the material is not to be considered at this stage when the matter is before the writ court. The Court cannot strike down the reopening of the case on these grounds and it will be open to the assessee to prove that the assumptions of facts made in the notice were erroneous. The questions of fact and law should be left open to be investigated and decided by the assessing authority. On these submissions, he implored the Court to dismiss the writ petition.

10. Nonetheless Shri Bissa was candid enough in admitting during the course of arguments that the impugned notice dated 31-3-2021 (Annex.5), the order conveying reasons dated 28-6-2021 (Annex.8) and the order dated 13-9-2021 (Annex.12) turning down the objections of the petitioner suffer from a fundamental flaw inasmuch as the property transaction which as referred to and reiterated by the A.O. (of the property at C-152, Nirman Vihar, Delhi) does not exist. It is an admitted fact that the petitioner filed detailed objections to the reopening proceedings, highlighting the fact that this is the address of the firm M/s. Nextgen Textile Park Private Limited, which sold the plot at Pali to the petitioner. In the order dated 13-9-2021, whereby the objections of the petitioner were turned down by the competent authority the following observations were made:-

“In order to determine as to whether the Assessing Officer had a bona fide belief about the escapement of income of the assessee, it has to be considered as to whether the facts and circumstances justify the formation of the belief in contrast to suspicion. There has to be some material on record on the basis of which the Assessing Officer formed a bona fide belief that the income of the assessee has escaped assessment. In other words, the material on the basis of which belief is formed must be in the nature of prima facie evidence, direct or circumstantial, giving rise to belief in the mind of the Assessing Officer about the escapement of income.”

11. Thus, the authority admits in this order that there has to be some material on record on the basis of which, the A.O. would form a bonafide belief that income of the assessee had escaped assessment for the Assessment Year 2017-18. When we peruse the impugned notice (Annex.5) and the reasons for reopening the assessment (Annex.8), it becomes clear that the same are founded on a non-existent transaction of purchase of immovable property situated at C-152, Nirman Vihar, Delhi. In spite of the petitioner elaborating in its reply as well as objections that it had never entered into any such transaction, the respondent authorities made no effort whatsoever to rectify the blatant blunder and instead they have tried to justify the fundamentally flawed reopening proceedings on entirely a new ground that the petitioner did not upload the financial statement with the return and that the details of the land transaction were not mentioned in the Schedule 6 of the balance sheet. This observation of the authority is also incorrect on the face of record because the balance-sheet was admittedly uploaded with the return filed by the petitioner pursuant to receiving the notice under section 148 of the Income-tax Act. In Schedule 6 of the balance sheet, transaction pertaining to procurement of immovable property worth Rs. 1,26,25,900/- is clearly stated.

12. Resultantly, we are of the firm view that the very foundation of the impugned notice, the reasons to believe and the order turning down objections is non-existent. All the three proceedings are based sheerly on conjectures and surmises. The A.O. had no tangible evidence to initiate the re-assessment proceedings against the petitioner and the impugned action is based sheerly on borrowed satisfaction. Even if it is assumed for argument’s sake that the transaction made by the petitioner for acquisition of immovable property at Pali may be read in place of Delhi, then also, the said transaction is duly mentioned in the return filed by the petitioner for the relevant financial year and is supported by the audited balance-sheet, which was accepted by the Assessing Officer. Hence, there is no escape from the conclusion that no tangible material was available with the Assessing Authority so as to initiate the re-assessment proceedings against the petitioner by taking recourse to the provisions under section 148 and 143 (2) of the Income-tax Act.

13. As a consequence, the impugned notice under section 148 of the Income-tax Act dated 31-3-2021 (Annex.5), the reasons to believe conveyed vide notice under section 143(2) of the Income-tax Act dated 28-6-2021 (Annex.8), the order dated 13-9-2021 (Annex.12) disposing of the objection of the petitioner and all consequential proceedings sought to be taken in pursuance thereof deserve to be and are hereby quashed and struck down.

14. The writ petition is allowed, accordingly.

15. No order as to costs.