Re-opening of assessment is not permissible for mere verification or for fishing inquiry

short overview : Re-assessment even if in case where return was not scrutinized before the income chargeable to tax had escaped before acceptance originally could not be made unless AO has reason to believe that the income chargeable to tax had escaped, therefore, for mere verification or for fishing inquiry, reopening of assessment was not permissible.

During search and survey, it was detected that the transactions of commodities on the platform of NSEL was only paper transactions and actual delivery of commodities had never taken place. According to revenue, assessee had made investment of Rs. 50 Lakhs and investment was also reflected in the Balance Sheet of assessee under the head of investment. According to revenue, transaction was booked as a paper transaction and delivery of the commodities in the present case had not taken place and therefore, the same was required to be disallowed. Thus, transaction did not correspond to the return filed by assessee and therefore, according to AO income chargeable to tax had escaped assessment.

it is held that From the reasons recorded for reopening the assessment, it was clear that the AO wished to verify the transaction with respect to information received by department. It is well settled through series of judgments of this Court that re-assessment even if in case where return was not scrutinized before the income chargeable to tax had escaped before acceptance originally could not be made unless AO has reason to believe that the income chargeable to tax had escaped. In other words, for mere verification or for fishing inquiry, reopening of assessment was not permissible.

Decision: In assessee’s favour

Referred: Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007) 291 ITR 500 (SC) : 2007 TaxPub(DT) 1257 (SC), ITO & Ors. v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) : 1976 TaxPub(DT) 0742 (SC), S. Narayanappa & Ors. v. CIT (1967) 63 ITR 219 (SC) : 1967 TaxPub(DT) 0198 (SC), Pr. CIT v. Shodiman Investments Pvt. Ltd. [Income Tax Appeal No. 1297 of 2015] : 2018 TaxPub(DT) 2370 (Bom-HC).

IN THE GUJARAT HIGH COURT

J.B. PARDIWALA & A.C. RAO, JJ.

Mridulla Badarmal Jain v. Asstt. CIT

R/Special Civil Application No. 16881 of 2018

19 August, 2019

Petitioners by: Darshan R. Patel, (8486)

Respondents by: Mauna M. Bhatt, (174)

A.C. Rao, J.

By way of this petition under article 227 of the Constitution of India, the petitioner has challenged the impugned notice dated 29-3-2018 issued by the respondent under section 148 of the Income Tax Act, 1961 (“the Act” for short) for reopening of assessment for the assessment year 2011-12 as well as Order, dated 12-10-2018 disposing of the objections raised by the petitioner against reopening of the assessment.

2. Short facts leading to the present petition are as under :–

2.1 The return of income was filed by the petitioner for the assessment year 2011-12. Intimation under section 143 of the Act was received by the Income Tax department. Thereafter, no scrutiny assessment was undertaken by the concerned assessing officer However, reopening notice under section 148 of the Act was issued on 29-3-2018 by the respondent. The petitioner filed reply to the notice of reopening. The reasons of reopening were supplied to the petitioner, which are placed on record. As per the reasons for reopening, National Stock Exchange Ltd., Bombay had found some irregularity in the business of Javerilal Oswal Commodities (P.) Ltd. and search and survey operation was carried out on the residential and business premises of the said Company. Search and Survey action was also carried out in the cases of M/s. Swastik Overseas Corporation & N.K. Proteins Ltd. and it was found that a huge amount was shown as outstanding. During the search and survey, it was detected that the the transactions of commodities on the platform of NSEL was only paper transactions and actual delivery of commodities had never taken place. According to the revenue, the petitioner had made investment of Rs. 50 Lakhs on 28-3-2011 and the investment was also reflected in the Balance sheet of the petitioner as on 31-3-2011 under the head of investment. According to the revenue, the assessment was booked as a paper transaction and delivery of the commodities in the present case had not taken place and therefore, the same is required to be disallowed. Thus, there is escapement of income and the transaction do not correspondent to the return filed by the assessee and therefore, according to the assessing officer he has reason to believe that the income chargeable to the tax has escaped assessment. So, the impugned notice came to be issued for reopening the assessment for the assessment year 2011-12.

2.02. The petitioner filed objections against the impugned notice to the Assistant Commissioner of Income Tax and contended that the assessee had filed return of income in pursuance to the notice under section 148 on 18-4-2018. It is contended that the petitioner filed original return of income under section 139 on 28-9-2011 disclosing all transactions including transactions entered into with Javerilal Oswal Commodities (P.) Ltd. and said return was processed under section 143(1). It is also contended that the said amount was also paid to the companies by way of withdrawal from the regular bank account. It is contended that in the said assessment, the assessee had not booked any profit or loss in the commodities related transaction in the year under consideration and therefore, there is no question of any taxable income in the said assessment year. However, the objections raised by the petitioner vide letter, dated 8-8-2018 came to be rejected vide Order, dated 12-10-2018. Hence, the petitioner has preferred the present petition.

3. Darshan Patel, learned counsel for the petitioner has vehemently contended that as per the reasons, the reopening of the assessment is sought on the ground that broker – Jhaverilal Oswal Commodities (P.) Ltd. had squared up the transaction of the petitioner. It is contended that as per the Books of Accounts of the petitioner, an amount of Rs. 50 Lakhs is very much receivable, as the said amount is not paid back to the petitioner by the broker.

3.1 Darshan Patel, learned counsel for the petitioner has also relied upon the decision of the Bombay High Court in the case of The Pr. CIT-5 v. Shodiman Investments Pvt. Ltd., rendered in Income Tax Appeal No. 1297 of 2015] : 2018 TaxPub(DT) 2370 (Bom-HC).

4. Mauna Bhatt, learned Senior Standing Counsel for the revenue has opposed the present petition. She contended that the the impugned notice for reopening has been issued after recording reasons on the basis of information received from the DGIT (Investigation), Mumbai in connection with the alleged irregularities of the National Stock Exchange Limited (NSEL) occurred in connivance with the investors/clients/brokers of NSEL pursuant to which, search and survey actions were carried out at the residential as well as business premises of various investors/clients/brokers. It is contended that as pr the information obtained from NSEL, Javerilal Oswal Commodities Pvt. Ltd. being one of the brokers had carried out transactions at NSEL Platform to the tune of Rs. 66.48 Crores on behalf of its client/investor and therefore, survey operation under section 133 was carried out at the office premises of Javerilal Oswal Commodities (P.) Ltd. at Ahmedabad. During the course of survey, it was found that an amount of Rs. 51,88,301 was shown as outstanding from NSEL in the case of the petitioner as on 3-9-2013. It is contended that during the course of post survey proceedings, copy of the return of income of the relevant period, copy of client registration form and necessary supporting evidence in support of the source of investment were called. It is contended that on verification of the ledger account of Javerilal Oswal Commodities Pvt. Ltd. it was noticed that the petitioner had made investment of Rs. 50 Lakhs on 28-3-2011 and the account of the petitioner had been squared off by showing balance as on 31-3-2013 as NIL. It is contended that the investment made by the petitioner was duly reflected in the balance sheet as on 31-3-2011 under the head of “Investment”. It is contended that the assessing officer formed belief upon analysis of the information received that the transactions by Javerilal Oswal Commodities Pvt. Ltd. at NSEL Platform were paper transactions which were carried out in absence of actual delivery of commodities. She contended that in other words, the transactions were bogus as delivery of the commodities had never taken place in the case of the petitioner. It is contended that the assessing officer independently applied his mind to such information and has formed reason to believe that the income chargeable to tax has escaped assessment by an amount of more than Rs. 1 lac. She contended that the impugned notice is valid and legal. She requested to reject the present petition.

5. Heard the Darshan Patel, learned counsel for the petitioner and Mauna Bhatt, learned Senior Standing Counsel appearing for the revenue at length.

5.1 The crux of the reasons recorded for reopening reads reads thus :–

“4. As per record, the assessee has booked a paper transactions and delivery of commodities in her case has not taken place. There the same is to be disallowed. As the case was not selected for scrutiny, it is therefore, necessary to verify the transactions with respect to the information received as there is an escapement of income of more than 1 lakh as the transactions do not correspond to the return that if filed.”

5.2 From the reasons recorded for reopening the assessment, it is clear that the assessing officer wish to verify the transaction with respect to the information received by the department. It is well settled through serious of judgements of this Court that re-assessment even if in case where return was not scrutinized before the income chargeable to tax has escaped before acceptance originally cannot restore unless the assessing officer has reason to believe that the income chargeable to tax has escaped. In other-words, for mere verification or for fishing inquiry, reopening of assessment is not permissible.

5.3 The Bombay High Court in the case of Shodiman Investments Pvt. Ltd. (supra) has held as under :–

“11.…..it is clear that the reasonable belief on the basis of tangible material Could be, prima facie, formed to conclude that income chargeable to tax has escaped assessment. Mohanty, learned Counsel is ignoring the fact that the words ‘whatever reasons‘ is qualified by the words ‘having reasons to believe that income has escaped assessment’. The words whatever reasons only means any tangible material which would on application to the facts on record lead to reasonable belief that income chargeable to tax has escaped assessment. This material which forms the basis, is not restricted, but the material must lead to the formation of reason to believe that income chargeable to tax has escaped Assessment. Mere obtaining of material by itself does not result in reason to believe that income has escaped assessment. In fact, this would be evident from the fact that in para 16 of the decision in Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007) 291 ITR 500 (SC) : 2007 TaxPub(DT) 1257 (SC) (supra), it is observed that the word ‘reason’ in the ‘reason to believe’ would mean cause or justification. Therefore, it can only be the basis of forming the belief However, the belief must be independently formed in the context of the material obtained that there is an escapement of income. Otherwise, no meaning is being given to the words ‘to believe’ as found in section 147 of the Act. Therefore, the words ‘whatever reasons’ in Rajesh Jhaveri Stock Brokers Pvt. Ltd., (supra), only means whatever the material, the reasons recorded must indicate the reasons to believe that income has escaped assessment. This is so as reasons as recorded alone give the assessing officer power to re-open an assessment, if it reveals/ indicate, reasons to believe that income chargeable to tax has escaped assessment.

12. The re-opening of an Assessment is an exercise of extra ordinary power on the part of the assessing officer, as it leads to unsettling the settled issue assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of section 148 of the Act, before re-opening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of reopening Assessment and its reasons which would evidence the linkage/nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as observed by the Supreme Court in S. Narayanappa v. CIT, (1967) 63 ITR 219 (SC) : 1967 TaxPub(DT) 0198 (SC), that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in ITO v. Lakhmani Merwal Bus, (1976) 103 ITR 437 (SC) : 1976 TaxPub(DT) 0742 (SC) had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link material coming the notice of the assessing officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re-opening of Assessment and assuming jurisdiction on the part of the assessing officer.

13. In this case, the reasons as made available to the Respondent Assessee as produced before the Tribunal merely indicates information received from the DIT (investigation) about a particular entity, entering into suspicious transactions However, that maternal is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give use to reason to believe on the part of the assessing officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the assessing officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment.

14. Further, the reasons clearly shows that the assessing officer has not applied his mind to the information received by him from the DDFT (lnv.). The assessing officer has merely issued a reopening notice on the basis of intimation regarding reopening notice from the DDIT (Inv.) This is clearly in breach of the settled position m law that reopening notice has to be issued by the assessing officer on its own satisfaction and not on borrowed satisfaction.”

Considering facts of the case and and decision referred to hereinabove, the impugned notice is bad and illegal and cannot sustain.

6. In the result, present petition is allowed. The impugned Notice, dated 29-3-2018 issued by the respondent under section 148 of the Income Tax Act, 1961 (“the Act” for short) for reopening of assessment for the assessment year 2011-12 as well as Order, dated 12-10-2018 disposing of the objections raised by the petitioner against reopening of the assessment, are hereby quashed and set aside. No costs.