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ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 1395 OF 2014
Mrs. Neetu M. Chandaliya, G – 6/7, Amit Indl. Estate, Dr. S. S. Rao Road, Parel (East), Mumbai – 400 012. ...Petitioner
Floor, R. No. 306, Earnest House, Nariman Point, Mumbai – 400 012. ...Respondent
Mr. Pramod M. Chandaliya,
Mrs. Indira S. Chandaliya,
Mr. Manish S. Chandaliya,
Mr. Ankit P. Chandaliya,
Mr. Manoj Shantilal Chandaliya (HUF),
Priti Shantilal Chandaliya (HUF),
Mrs. Shweta M. Chandaliya,
Mr. Sandeep S. Chandaliya (HUF),
Mr. Manish S. Chandaliya (HUF),
Mr. Pramod M. Chandaliya (HUF),
Mrs. Vijaya P. Chandaliya,
Mr. Sandeep S. Chandaliya,
Mr. Shantilal L. Chandaliya (HUF),
Mr. P. C. Chhotaray for Respondents-Revenue.
DATED: 15th September, 2023
ORAL JUDGMENT
1. Petitioners in these 14 Petitions are related to each other. In all these cases, Petitioners had filed returns of income for Assessment Year 2007-2008. In all the cases, the returns of income were processed under Section 143(1) of the Income Tax Act, 1961 (“the Act”), but no intimation was served on Petitioners. All Petitioners received notice under Section 148 of the Act and those notices are all dated 25th March 2014, six days prior to the expiry of the limitation. The reason to believe in all these 14 matters are identical and it reads as under: “A letter dated 18.03.2014 was received from DCIT 4(1), Mumbai intimating that cash worth Rs. 7,00,000/- had been deposited in the bank account of the assessee and immediately afterward the amount was transferred through cheque in the bank account of M/s. Crown Consultants Pvt. Ltd. during the Financial Year 2006-07 relevant to A.Y. 2007- 08, and the above assessee is a Director/family member of M/s. Crown Consultants Pvt. Ltd. It is required to examine the case of the assessee for A.Y. 2007-08 so that such unaccounted money could be brought to tax. In view of the above, I have reason to believe that such income chargeable to tax and also any other income chargeable to tax exceeding Rs. 1 lakh for A.Y. 2007-08 has escaped assessment within the meaning of provision of sec. 147 and hence I propose to re-open the case of the assessee u/s. 147 of the I.T. Act for A.Y. 2007-08. Date: 20.03.2014.”
2. Rule was issued in all the Petitions on 17th June 2014. No reply, however, has been filed.
3. It is Petitioners’ case that notices have been issued that cannot, by any stretch of imagination, indicate any reason to believe that income chargeable to tax has escaped assessment. Mr. Pardiwala submitted that the reason recorded is more reason to suspect than reason to believe. Hence, the prerequisite of re-opening of assessment is not satisfied. There is also no material relied upon from which a reasonable inference can be drawn that the cash deposit in the bank account, referred to in the reasons recorded, represents any income chargeable to tax that has escaped assessment. The reasons recorded indicate that the notice has been issued entirely at the behest of the Deputy Commissioner of Income Tax (“DCIT”) - 4(1) and the Assessing Officer (“AO”) did not have any reason of his own that any income chargeable to tax has escaped assessment.
4. Mr. Pardiwala submitted that indisputably the law is clear that AO has power to re-open under Section 147 of the Act provided there is tangible material to come to the conclusion that there is escapement of income from assessment, but the reasons must have a live link with the formation of the belief. The reasons to believe could mean a cause or justification. Though it is not necessary that the material before the Court should conclusively prove or establish that income has escaped assessment, the touch-stone to be applied is as to ‘whether there was reason to believe that income had escaped assessment’. The reasons as recorded would never have led a person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act.
5. Relying on an order of this Court in Laxmikant Vinod Lath v. Income Tax Officer, Ward 17(2)(2), Mumbai and Others[1], Mr. Pardiwala submitted that just because some information has been received from the Investigation Wing, does not entitle Respondents to re-open assessment. Merely deposit of money into the bank account by way of cheque itself is not a ground for escapement of income. Mere high value deposit in the bank account cannot be a reason for re-opening under Section 148 of the Act. The reason as made available to Petitioner merely indicates information received from Investigation Wing about a particular entity entering into suspicious
1. Writ Petition No. 111 of 2020 dated 10th January 2022 (Unreported). transaction. That material is not further linked to the conclusion that Petitioner has indulged in any activity which can give rise to reason to believe on the part of AO that income chargeable to tax has escaped assessment.
6. Relying on the order of this Court in The Principal Commissioner of Income Tax-5 v. M/s. Shodiman Investments Pvt. Ltd.2, Mr. Pardiwala submitted that re-opening of an assessment is an exercise of extraordinary power on the part of AO as it leads to unsettling the settled issue and assessments. 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 between material coming to the notice of AO and the formation of belief regarding escapement of income.
7. Mr. Pardiwala also submitted that reason clearly shows that AO has not applied his mind to the information received by him from the Deputy Director of Income Tax (“DDIT”’) (Investigation). The AO has merely issued a re-opening notice on the basis of intimation regarding re-opening notice from DDIT (Investigation). This is clearly in breach of the settled position in law that re-opening notice
2. [2018] 93 taxmann.com 153 (Bombay). has to be issued by AO on his own satisfaction and not on borrowed satisfaction.
8. Relying on the order passed by this Court in Principal Commissioner of Income-tax-32 v. Rajesh D. Nandu (HUF)3, Mr. Pardiwala submitted that the reason as recorded at the highest only shows it is a suspicion subject to inquiry. In fact, this is a case of fishing inquiry and thus, there is no material available with AO to have the reason to believe that income chargeable to tax has escaped assessment.
9. Mr. Pardiwala also submitted, relying on a judgment of this Court in Nivi Trading Limited v. Union of India and Anr.4, where the facts were almost similar, that if more details are sought or some verification is proposed, that cannot be a substitute for the reasons which led the AO to believe that an income chargeable to tax has
10. Mr. Chhotaray opposed and at the outset submitted that it is rather a strange coincidence that AO noticed that in case of all 14 Petitioners, the returned income is around Rs. 3,00,000/- to Rs.
3. [2019] 101 taxmann.com 401 (Bombay).
4. 2015 (64) taxmann.com 92 (Bom). 4,00,000/- but each Petitioner/assessee has deposited the exact amount of Rs. 7,00,000/- in cash in each account and, therefore, the AO was justified in issuing notice to re-open. It arose the suspicion of AO that income has escaped assessment. Mr. Chhotaray submitted that even Explanation-2 to Section 147 of the Act, as it was in force then, 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 AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, that shall also be deemed to be cases where income chargeable to tax has escaped assessment’. Though, we cannot have any quarrel with Mr. Chhotaray on this submission, none of what Mr. Chhotaray submitted is reflected in the reason to believe. The reason to believe is very clear that AO wishes to examine the case. The AO in the reason to believe does not state that he has examined the return of income filed by all assessees in the family or all assessees have strangely deposited exact figure of Rs. 7,00,000/- when their return of income shows income of only Rs. 3,00,000/- to Rs. 4,00,000/- or that AO has noticed that the assessees have understated the income or has claimed excessive loss or deduction or allowance or relief in the return.
11. Mr. Chhotaray, relying on a judgment of the Apex Court in Income Tax Officer, Cuttack and Others v. Biju Patnaik[5] submitted that even if the notice does not prima facie disclose the satisfaction of the conditions precedent enjoined under Section 147 of the Act, it is an administrative action and, therefore, it does not per se become illegal. Mr. Chhotaray submitted that the Apex Court in Biju Patnaik (supra) has held that even if the notice does not disclose the satisfaction of the requirement of Section 147 of the Act, if it indicates that the AO has applied his mind to the facts and after prima facie satisfying himself of the existence of conditions precedent reached the conclusion for re-opening the assessment, the notice issued should be held to be valid.
12. In our view, this judgment in Biju Patnaik (supra) would not help Mr. Chhotaray because in the cases at hand except the sketchy, more of a fishing inquiry kind of reason to believe, which also does not disclose any application of mind by the AO, there is nothing on record in the form of an affidavit or otherwise to even presume that the AO might have applied his mind or had prima facie satisfied himself to the existence of the conditions precedent to arrive at a conclusion for re-opening the assessment.
5. 1991 (188) ITR 247.
13. Relying on the judgment of the Apex Court in Assistant Commissioner of Income Tax v. Rajesh Zaveri Stock Brokers P. Ltd.[6] Mr. Chhotaray submitted that 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 material would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO, is within the realm of subjective satisfaction.
14. A Division Bench of this Court in the case of Prashant S. Joshi and Another v. Income Tax Officer and Anr.7, after considering Rajesh Zaveri (supra), observed that the Apex Court has held that so long as the ingredients of Section 147 of the Act are fulfilled, the AO is free to initiate proceedings under Section 147 of the Act. When an intimation has been issued under Section 143(1) of the Act, the AO is competent to initiate reassessment proceedings “provided that the requirements of Section 147 of the Act are fulfilled”. The Court held that even in such a case the touch-stone to be applied is as to whether there was reason to believe that income had escaped assessment.
6. [2007] 291 ITR 500 (SC).
7. 2010 (324) ITR 154 (Bom.).
15. In Prashant Joshi (supra) the Division Bench of this Court held that even though Explanation-2 to Section 147 of the Act creates a deeming fiction of cases where income chargeable to tax has escaped assessment, for the purpose of Clause (b) to Explanation-2, the AO must notice “that the assessee has understated his income or has claimed excessive loss or deduction or allowance or relief in the return”. The taking of such notice must be consistent with the provisions of applicable law. In this case no such notice has also been taken. The Division Bench in Prashant Joshi (supra) went on to say that even where such notice has been taken, the act of taking notice cannot be at the arbitrary whim or caprice of the AO and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court, but the existence of the belief is sine qua non for a valid exercise of power.
16. The contents of the reasons recorded as reproduced above, only indicates that the AO wants to examine the case of assessee to ascertain whether there is any escapement of income. In the case of Commissioner of Income Tax v. Smt. Maniben Valji Shah[8], this Court emphasized that the important words in Section 147 of the Act are “has reason to believe” and they are stronger than the words “is
8. 2006 (283) ITR 453. satisfied” and the belief entertained by the ITO must not be arbitrary or irrational and must be reasonable and based on the reasons which are relevant and material.
17. While the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the ITO in coming to the belief, the Court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which the AO is required to entertain the belief before he can issue notice under Section 148 of the Act. If there is no rational or intelligible nexus between the reasons and the belief, the exercise undertaken by the ITO can be interfered with.
18. The reason recorded only indicates that the officer was only wanting to examine the case of assessees with regard to the deposits of Rs. 7,00,000/-. That also on the basis of report which he received from another Investigating Officer. Obviously, in such a case, there is no question of the AO having any basis to reasonably entertain the belief that any part of income of the assessee had escaped assessment. Thus, if more details are sought or some verification or examination is proposed, that cannot be a substitute for the reasons and which led the AO to believe that income chargeable to tax has
19. In the present case, Respondents do not state that income chargeable to tax has escaped assessment. All that the Revenue desires is to examine certain details pertaining to information that it received from another AO. That is also not founded on the belief that any income, which is chargeable to tax, has escaped assessment and hence, such verification is necessary. That belief is not recorded which alone would enable the AO to proceed. The reasons must be founded on the satisfaction of AO that income chargeable to tax has escaped assessment. Once that is not to be found, then the impugned notice cannot be sustained.
20. The reasons as recorded at the highest, can only be termed as “a suspicion subject to a case of fishing inquiry”. Even though the Revenue has a greater latitude in re-opening an assessment where the return of income has been processed under Section 143(1) of the Act, even in such cases the re-opening of an assessment can only be done if there is reason to believe that income chargeable to tax has escaped assessment. The reason recorded in support of the re-opening notice must disclose the basis of the reasons to believe that income chargeable to tax has escaped assessment. The AO has not applied his mind to the information received by him from the DDIT (Investigation). The AO has merely issued a re-opening notice on the basis of intimation regarding re-opening notice from the DDIT (Investigation) which is clearly in breach of the settled position in law that re-opening notice has to be issued by AO on his own satisfaction and not on borrowed satisfaction. Perhaps, it is for this reason that the recorded reason even does not indicate the amount which, according to the AO, has escaped assessment. This is an evidence of a fishing inquiry and not a reasonable belief that income chargeable to tax has escaped assessment.
21. The reasons which have been recorded, could never lead a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act.
22. In these circumstances, the Petitions will have to be allowed by setting aside the notices dated 25th March 2014. Consequential orders rejecting the objections are also set aside.
23. Rule made absolute accordingly. Petitions disposed. (DR. N. K. GOKHALE, J.) (K. R. SHRIRAM, J.)
KRISHNA KOTAWADEKAR