Priti Marine Pvt Ltd vs Assistant Commissioner Of Income Tax Circle 1

(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 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 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.

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 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 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 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 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 JUDGMENT

14. In the result, the petition fails and is dismissed. Rule is discharged.

Interim relief stands dismissed.

(Akil Kureshi,J.) (Harsha Devani,J.) (raghu)