Allegation of Paper Companies without further facts insufficient to reopen assessments. High Court lays down guidelines for reopening of assessments u/s 147 and 148
ABCAUS Case Law Citation:
ABCAUS 2087 (2017) (09) HC
The Petitioner sought the quashing of a notice issued under Section 148 of the Income Tax Act (‘Act’) by the Assistant Commissioner of Income Tax (Assessing Officer ‘AO’) and the order passed by the AO disposing of the objections filed by the Petitioner to the said notice.
Assessment Year : 2008-09
Important Case Laws Cited/relied upon by the parties:
CIT v. Kelvinator of India Ltd. (2010) 187 Taxman 312
CIT v. Multiplex Trading & Industrial Co. Ltd. 378 ITR 350
Pr. CIT v. M/s Paramount Communication Pvt. Ltd.  392 ITR 444 (Delhi)
Oracle India Pvt. Ltd. v. ACIT 2017 SCC OnLine Del 9360
Unitech Limited v. DCIT 2017 SCC OnLine Del 9408
BDR Builders and Developers Pvt. Ltd. v. ACIT 2017 SCC OnLine Del 9425
Swarovski India Pvt. Ltd. v. Deputy Commissioner of Income Tax
Brief Facts of the Case:
The Petitioner was a company engaged in the business of real estate and property development. During the course of the scrutiny, the Petitioner was asked details with respect to share application money received from five companies. The Petitioner disclosed the required details. The Petitioner also submitted the confirmation from the companies along with their ITRs and PAN Cards. The Petitioner further submitted the Auditor’s Reports, Balance Sheets, Particulars of P&L accounts, and Schedules of Balance Sheet and P&L Account of the above said companies. It appeared that the AO accepted the information furnished by the Petitioner and raised no further doubt or queries in respect to the same.
Subsequently, an assessment order under Section 143 (3) of the Act was passed by the AO after the details regarding the five companies and their confirmations were submitted. The assessment order, however, did not contain any discussion in respect of the share application money.
Approximately after four and half years later, a notice was issued under Section 148 of the Act on the ground that income had escaped assessment. The reasons to believe were founded on the information received from the ITO (Inv.) that the petitioner had obtained bogus accommodation entries in the shape of share application money.
The Petitioner objected to the reopening of assessment under Sections 147 and 148 of the Act. In the said objections, the Petitioner contended that the reasons to believe do not contain any allegation as to what material facts and information the Petitioner had failed to disclose. Apart from raising various jurisdictional objections, the Petitioner also raised objections on merits. However, the objections were rejected by the AO.
Observations made by the High Court:
The Hon’ble High Court observed that the law on the subject is well settled and as held in Kelvinator case, the powers under Section 147 of the Act have to be exercised after a period of four years only if there is a failure to disclose fully and truly all material facts and information, by the Assessee. This legal position had been reiterated recently by the Court.
The Hon’ble High Court opined that, it is also now well settled that the reasons to believe have to be self explanatory. The reasons could not be thereafter supported by any extraneous material. The order disposing of the objections could not act as a substitute for the reasons to believe and neither can any counter affidavit filed before this court in writ proceedings.
The Hon’ble High Court observed that the reasons to believe contained the names of the very same five companies which were initially disclosed by the Petitioner during the assessment proceedings. The number of shares subscribed to by the said companies is the same and the amount received has been disclosed by the Assessee. There was no new material which hd been found or mentioned in the reasons to believe which were not contained in the information provided by the Assessee prior to the conclusion of assessment under Section 143 (3) of the Act.
It was further noted that in fact, the Petitioner had further provided confirmations from the said companies. The Petitioner also submitted copies of the balance sheets of the said companies for the relevant AYs showing that these amounts were duly reflected therein. The said companies were also assessed to tax. Thus, it appeared that the AO was satisfied with the details and information provided by the Petitioner.
The Hon’ble High Court observed that the impugned order overlooked the fact that the reasons for reopening did not mention as to what fact or information was not disclosed by the Petitioner. This is very vital and in fact goes to the root of the matter. An allegation that the companies are paper or bogus companies without further facts is by itself insufficient to reopen assessments that stand closed after passing of orders under Section 143 (3) of the Act.
The Hon’ble High Court went on to observe that the assessment proceedings, especially those under Section 143 (3) of the Act, have to be accorded sanctity and any reopening of the same has to be on a strong and sound legal basis. It is well settled that a mere conjecture or surmise is not sufficient. There have to be reasons to believe and not merely reasons to suspect that income has escaped assessment. Merely relying upon the statement recorded that the companies in question were ‘paper companies’, by itself, is insufficient to reopen the assessment, unless the AO had further information that these companies were non-existent after making further inquiries into the matter.
The Hon’ble High Court noted that clearly the AO did not make any inquiry or investigation, if these companies were in fact ‘paper companies’. No effort had been made to establish the connection between the statement recorded and the five companies.
Regarding the contention of the Revenue that Court cannot dictate the manner and content of what is to be written in the reasons to believe, the Hon’ble High Court observed that it was correct as a legal proposition. However, the Court has to examine the reasons to believe to see if it satisfies the rigour of the provision.
The Hon’ble High Court further stated that in the facts of the case, the primary facts had not been shown to be false. The five companies did exist. They did subscribe to the share capital of the Petitioner. They did pay the money to the Petitioner. All the five companies are assessed to tax. These were the primary facts. The reasons to believe relied upon a letter received from the Investigation Wing which as claimed by the Revenue was an investigation report. The report did not form part of the reasons and neither was it annexed to the reasons.
The Hon’ble High Court also observed that even the counter affidavit was silent as to the material which had not been disclosed by the Petitioner. The counter affidavit merely stated that the information was specific and the information would be provided to the Petitioner during the assessment proceedings. Thus, if the Revenue had any basis to show that the primary facts were incorrect, the same ought to have been set out in the reasons to believe. That had not been done in the present case.
The Hon’ble High Court observed that on a routine basis, a large number of writ petitions are filed challenging the reopening of assessments by the Revenue under Sections 147 and 148 of the Act and despite numerous judgments on this issue, the same errors are repeated by the concerned Revenue authorities.
Guidelines for reopening of assessments
The Court laid down the following guidelines for the Revenue to adhere to in matters of reopening of assessments:
(i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the AO to the Assessee is to be avoided;
(ii) the reasons to believe ought to spell out all the reasons and grounds available with the AO for re-opening the assessment – especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO on the same and if so, the conclusions thereof;
(iii) where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons;
(iv) the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.
It was held that he Petitioner could not be said to have failed to disclose fully and truly all the material facts. The assumption of jurisdiction under Sections 147 and 148 of the Act was erroneous. Accordingly, the writ petition was allowed.