Parmarth Steel and Alloys Pvt. Ltd. vs State of U.P. and Others

Prakash Krishna, J.—These two writ petitions were heard together and are being disposed of by a common judgment. Learned counsel for the parties have stated before the court that common questions of law and facts are involved in them. The petitioners of both the writ petitions are registered under the Companies Act. All the directors, three in number in M/s. Parmarth Steel Alloys (P) Ltd. are also the directors in M/s. Parmarth Iron Pvt. Ltd. The facts are noticed from file of Writ Petition No. 874 of 2010. By means of these petitions, the petitioners have questioned the legality and validity of the permission given by the Additional Commissioner Grade I, Commercial Tax, Moradabad Zone, Moradabad/respondent No. 3 (hereinafter referred to as "the Additional Commissioner") to reopen the assessments for the assessment years 2003-04 to 2006-07 and reassessment notice u/s 21 of the U.P. Trade Tax Act (hereinafter referred to as "the Act") for the assessment year 2007-08.

The background facts may be noticed in brief.

The petitioner, M/s. Parmarth Steel and Alloys Pvt. Ltd., having its registered office at 7th Mile Stone Nagina Road, Bijnor, U.P., is a company incorporated under the provisions of the Companies Act, 1956 and Sri Raj Karnal is one of its directors. It is engaged in the manufacture of steel ingots, M.S. round, square bar in the district of Bijnor which are excisable items also. The assessments under the U.P. Trade Tax Act for the assessment years 2003-04, 2004-05, 2005-06 and 2006-07 were completed by the Trade Tax Department and account books were accepted. On July 10, 2007 the Excise Department searched the business places of the petitioner-company as also one of the directors of the company. In the said search, incriminating documents were found and seized. The Excise Department also made inquiries from the persons who were connected with the petitioner having business relations. A report was prepared on the basis of material found during search and in the course of inquiry, by the Director-General, Central Excise Intelligence, R.K. Puram, New Delhi, which was sent to the Commercial Tax Department along with hard disk of the seized computer and DVD. On the basis of aforesaid information, prima facie, it was found that the petitioner has concealed turnover of sale of M.S. ingots for the period February, 2004 to June, 2007. In the assessment year 2003-04, the escaped turnover is estimated to 1557 ton of iron and for the other assessment years, the escaped turnover was estimated on similar figures. Copies of statement recorded during search, investigation and enquiry, were made available to the Commercial Tax Department. On getting information, show-cause notice u/s 21(2) of the Act was issued as to why the permission/sanction for re-opening of the assessments for assessment years referred to above should not be granted on the basis of these materials.

The petitioner submitted a reply stating that the matter is still pending consideration before the Excise Department. It was stated that the manufacturing capacity of the petitioner''s unit is at 16,000.00 M.T. per year and any production beyond the above, is not possible. It has no concern with M/s. Parmarth Iron Pvt. Ltd. or with the seized computer hard disk. It has no concern with the building wherein the search operation has taken place. The statements which were recorded before the Excise Department were obtained by the excise officials under duress and subsequently, those statements have been retracted. The assessments were completed after taking into consideration the annual manufacturing capacity of the petitioner''s unit and there is no reason to believe that the turnover has escaped assessment.

Refuting the allegations made in the writ petition, counter-affidavit has been filed on the allegations that the permission under the proviso to section 21(2) of the Act has been rightly granted. The Additional Commissioner has sufficient material and basis for granting permission and has also passed a reasoned order considering the reply submitted by the petitioner as well as the material before him. The permission granted by the Additional Commissioner does not amount to adjudication of the matter finally; the petitioner will have sufficient opportunity of placing his grievance as well as material before the assessing authority in the reassessment proceedings. In para 5 of the counter-affidavit, it has been stated that the petitioner has not deposited the excise duty on the evaded sale of Rs. 65,47,51,765 which is also taxable turnover under the U.P. Trade Tax Act.

Copy of the counter-affidavit was served on the petitioner on December 7, 2010 and since then, the matter has been listed along with connected matters from time to time as per convenience of the petitioner''s counsel but till the date of hearing the petitioner could not file any rejoinder affidavit, controverting the allegations made in the counter-affidavit.

Heard Sri Pradeep Agrawal along with Sri Krishna Agrawal, learned counsel for the petitioner and Sri C.B. Tripathi, Special Counsel for the respondents.

Challenging the impugned orders granting sanction and reassessment notice relating to assessment years referred to hereinabove, learned counsel for the petitioner submitted that there was no material before respondent No. 3 who has granted sanction for reopening of the assessments for all these years. Submission is that the order granting sanction is in the nature of roving and fishing inquiry and the effect of search matter is still sub-judice before the excise authority. The Trade Tax Department should have stayed its hands till finalization of the matter by the excise authorities. There being ho tangible material in possession of the respondents, resort to proceedings u/s 21 of the Act for verification of the information is not permissible under the law. The court was taken through the impugned orders in their entirety and it was submitted that M/s. Parmarth Steel and Alloys Pvt. Ltd. and M/s. Parmarth Iron Pvt. Ltd. are two separate legal entities, separately registered as companies under the provisions of the Companies Act.

Reliance has been placed on certain decisions in support of the above proposition that the proceedings cannot be initiated for the purposes of verification of the information received by the S.T.O.

In reply, learned counsel for the respondents, on the other hand, submits that in the aforesaid search operation which also took place at the business places and at the residence of the directors of both companies, concealment of huge production of goods was detected by the Excise Department. Statements of the directors were recorded wherein they have accepted the clandestine removal of goods and production of goods out of books. Subsequent retraction by them is nothing but after-thought. The effect of the statements and their withdrawal at the subsequent stage will be examined in the light of the attending facts and circumstances of the case at the reassessment proceedings itself. It is not an appropriate stage to rake up or raise these issues which touch the merit of the case, sufficiency or adequacy of the material cannot be gone into in writ proceedings and the Department is in possession of all relevant materials to form a belief that the turnover of the petitioner has escaped assessment during these years.

Considered the respective submissions of the learned counsel for the parties and perused the record.

These petitions have been filed challenging the permission granted by the Commissioner concerned, permitting the assessing authority to proceed with reassessment proceedings. The reassessment proceedings have yet to take place. The very initiation of the proceedings has been questioned.

Before coming to the merits of the case, it would be appropriate to examine the nature of the order granting sanction to reopen the assessments as contemplated under the proviso to section 21(2) of the Act. For the sake of convenience, the said provisions is reproduced below:

Assessment of tax on the turnover not assessed during the year.--(1)...

(2) Except as otherwise provided in this section, no order of assessment or the reassessment under any provision of this Act or any assessment year shall be made after the expiration of two years from the end of such year or March 31, 1998, whichever is later:

Provided that if the Commissioner on his own on the basis of reasons recorded by the assessing authority, is satisfied, that it is just and expedient so to do authorizes the assessing authority in that behalf, such assessment or the reassessment may be made after the expiration of the period aforesaid but not after the expiration of six years from the end of such year or March 31, 2002, whichever is later notwithstanding that such assessment or the reassessment may involve a change of opinion:

Provided further that the assessment or reassessment for the assessment year 1987-88 may be made by March 31, 1993:

Provided also that if the eligibility certificate granted u/s 4A has been amended or cancelled by the Commissioner under sub-section (3) of section 4A, the order of assessment or reassessment may be made within one year from the date of receipt by the assessing authority of the copy of the order amending or cancelling the aforesaid certificate or by March 31, 1995, whichever is later:

Provided also that the assessment or reassessment for the assessment year 1989-90 may be made by March 31, 1995.

A Division Bench decision of this court in the case of S.K. Traders Vs. Additional Commissioner, Grade-I, Trade Tax and Assistant Commissioner (Assessment), Trade Tax, , has held that the change of opinion may arise even if some material has been brought on record after assessment has been completed or it may be because of result of lack of care or inadvertence on the part of the assessing officer. The relevant paragraphs are reproduced below (page 631 in 26 VST):

First proviso to sub-section (2) of section 21 of the Act empowers the authority to initiate proceedings for reassessment even in the case where there is a change of opinion. The change of opinion may arise even if some material has been brought on record after assessment has been completed or it may be because of the result of lack of care or inadvertence on the part of the assessing officer.

In the case of Shyam Babu Vaishya and Co. and Another Vs. Assistant Commissioner, Trade Tax and Others, , a Division Bench of this court has held that section 21 of the Act is wider than that of section 147(a) of the Act and the escapement envisaged by section 21 of the Act need not necessarily spring from a source extraneous to the original record and action u/s 21 can be taken on the basis of material already on record at the time of the original assessment, if the escapement of assessment to tax was a result of lack of care or inadvertence on the part of the assessing officer. In the present case the escapement has resulted on account of lack of care or inadvertence on the part of the assessing officer. In the facts and circumstances of the case as there is binding decision of the this court in the case of Kabar Khana, Turkmanpur [1985] ATJ 73 wherein it has been held that goods purchased from Kabaris is not exempt from tax but is liable to tax as unserviceable goods the proceedings can therefore be taken on mere change of opinion.

in Dhanawat Marketing v. State of U.P. [2011] Tax Law Diary 41, it has been held as follows:

The approval granted by the Additional Commissioner, Kanpur, is not as detailed as one might expect, however, he has approved the proposal sent by the assessing officer. It is not necessary on the part of the approving authority to give detailed reasons lest it may he said he had influenced the reassessment proceedings on merit.

In Radico Khaitan Limited v. State of U.P. [2010] 35 VST 280 (All), a Division Bench decision of this court, has held that the court can only examine whether there was any material and whether material is relevant to form belief of escaped turnover. The relevant paragraph is reproduced below (page 290 in 35 VST):

The Division Benches of this court in the case of S.K. Traders Vs. Additional Commissioner, Grade-I, Trade Tax and Assistant Commissioner (Assessment), Trade Tax, and Manaktala Chemicals Pvt. Limited Vs. State of U.P. and Others, , have held that before granting the approval under the proviso to section 21(2) of the Act the opportunity should be given to the assessee. We are of the view that under the proviso the Commissioner does not exercise the judicial power in strict sense. He is not supposed to adjudicate the issue. He has to satisfy on the basis of the reasons recorded by the assessing authority that it is just and expedient to authorise the assessing authority to make the assessment or reassessment beyond the period of limitation prescribed u/s 21(2) of the Act. Therefore, we are of the view that a detailed reasoning is not required to be given while granting the authorisation. What is required under the proviso is that there should be an application of mind to arrive at the satisfaction on the consideration of the reasons recorded and the submissions of the assessee. We have gone through the order passed by the Additional Commissioner, Grade-1, Trade Tax, Moradabad Zone, Moradabad under the proviso to section 21(2) of the Act. The order reveals that he has considered the reasons recorded by the assessing authority and also considered the reply and after being satisfied granted the approval. Therefore, the order cannot be said to be mechanical and without application of mind. Learned counsel for the petitioner has rightly withdrew his submission challenging the order u/s 21(2) of the Act passed by the Additional Commissioner, Grade-1, Trade Tax, Moradabad Zone, Moradabad.

These decisions, therefore, lay down the following:

(1) Section 21(2) provides that permission can be granted even if there is change of opinion.

(2) The change of opinion may arise even if some material is brought on record after the assessment or there was lack of care or inadvertence of mistake.

(3) Order granting sanction need not contain reasons in details but it should show application of mind.

Having noticed the ambit and scope of the inquiry as contemplated by the authority granting sanction, we may now proceed to address the issue raised by the petitioner that there is no material in possession of the Department to form opinion that the turnover of the petitioner has escaped assessment.

A bare perusal of the impugned order would show that sanctioning authority on the basis of the material and on consideration of the reply of the petitioner has found that the concealment of turnover is established. The said finding is prima facie finding for the purposes of granting permission.

So far as the material is concerned, it is not disputed by the petitioner that the search took place on July 10, 2007 at the various business places of Parmarth Iron Pvt. Ltd. and in that search operation, computer hard disk was seized. The said computer hard disk contains the details of raw material as well as finished goods and those details show suppression of production of goods. The stand of the petitioner is that the petitioner has no concern with the premises H-8, Geeta Nagari, Bijnor. This question shall be examined in reassessment proceedings. At this stage, bare denial by the petitioner is not sufficient to hold that there is no material against it. It could not be denied by the learned counsel for the petitioner that statements of the directors were recorded. Statements show that in M/s. Parmarth Iron Pvt. Ltd., Raj Kamal Agrawal, Lalit Kumar Agrawal and Atul Kumar Agrawal Sons of Jitendra Mohan Agrawal and Vijay Kumar, Sanjay Kumar and Raj Kumar sons of late Ramesh Chandra are the directors while in M/s. Parmarth Steel and Alloys Pvt. Ltd., Sri Raj Kamal Agrawal, Lalit Kumar Agrawal and Atul Kumar Agrawal are directors who are brothers. Thus, in M/s. Parmarth Iron Pvt. Ltd. besides the aforesaid three brothers, Vijay Kumar, Sanjay Kumar and Raj Kumar are the directors. Statement of Lalit Kumar Agrawal, one of the directors in both, i.e., in M/s. Parmarth Iron Pvt. Ltd. and M/s. Parmarth Steel and Alloys Pvt. Ltd. was also recorded, who has confirmed the statement given by Mohan Agrawal, Cashier. He has confirmed panchnama, seizer of computer''s hard disk and other documents during search operation. He has further stated that the goods were sold by under-billing or even without bills. Cash sales were also affected. The modus operandi of the business has been given in reply to question No. 3. Therefore, the argument of the petitioner that there is no material to form the belief that turnover has escaped assessment, is not correct. The seized material is relevant material.

Whether the statements were obtained under duress or not, shall be considered at appropriate stage of the proceedings. Suffice it to say that the material for forming opinion that the turnover of the petitioner has escaped assessment, is there. It cannot be said that the permission has been granted either mechanically or without application of mind. The matter has been discussed in detail while granting permission.

Strong reliance was placed on para 11 of the judgment of the apex court in the case of The Commissioner of Sales Tax, U.P. Vs. Bhagwan Industries (P) Ltd., Lucknow, , wherein the import of phrase "reason to believe" has been explained. For the sake of convenience, the said paragraph is reproduced below (page 299 in 31 STC):

The controversy between the parties has centered on the point as to whether the assessing authority in the present case had reason to believe that any part of the turnover of the respondent had escaped assessment to tax for the assessment year 1957-58. Question in the circumstances arises as to what is the import of the words ''reason to believe'', as used in the section. In our opinion, these words convey that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this court, for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence.

The proposition of law as culled out from the above is that the words "reason to believe" show that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has escaped assessment. This appears to be the basis of judicial pronouncements in this regard. The question is with regard to its applicability to the facts and circumstances of each case. It has also been laid down that the insufficiency of material is no ground for interference by the court but the relevancy of the material can be examined by the court. The court has to find out as to whether the grounds are of extraneous character. The belief entertained by the assessing officer must not be arbitrary or irrational. It should have rational nexus with the reasons.

The other limb of the argument of the petitioner''s learned counsel is that the information may be there but it is for the assessing authority to form a belief which according to him is lacking in the present case that the turnover has escaped assessment. A distinction between reason to suspect and reason to believe was put forward. In this regard, reliance was placed upon the apex court judgment in the case of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , para 13, in particular, a case u/s 147(b) of the income tax Act. We hardly see its application to the present case. There the apex court was called upon to interpret the word "information" as had occurred in section 147(b) of the income tax Act (as it then stood). In that connection, the apex court held that that part alone of the note of an audit party which mentions the law which escaped the notice of the income tax Officer constitutes "information" within the meaning of section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the income tax Officer. Suffice it to say that in section 21 of the Act, the word "information'''' has not been used. The only phrase mentioned therein is that "reason to believe". This being so, the aforesaid decision is not of any help to the petitioner as it was rendered in different factual and legal matrix. In any view of the matter, it is too much to say that on the information with regard to excess stock of raw material and finished goods a belief that the turnover has escaped assessment cannot be found.

At the stage of issue of notice as pointed out by the apex court in the case of The Commissioner of Sales Tax, U.P. Vs. Bhagwan Industries (P) Ltd., Lucknow, , the relevant consideration is whether there is some relevant material giving rise to prima facie inference that some turnover has escaped assessment. Whether that material is sufficient for making assessment or reassessment u/s 21 of the Act would be gone into after notice is issued to the dealer and he has been heard in the matter or given an opportunity for that purpose. It has been laid down therein that the assessing authority would then decide the matter in the light of material already in its possession as well as fresh material procured as a result of the enquiry which may be considered necessary. Para 12 of the aforesaid case indicates that at this stage only this much is to be examined as to whether there is some relevant material or not giving rise to prima facie inference, which is present in the present case.

A detailed inquiry or finding is not required at the stage of grant of sanction as held by this court, time and again, in the cases of S.K. Traders Vs. Additional Commissioner, Grade-I, Trade Tax and Assistant Commissioner (Assessment), Trade Tax, , Dhanawat Marketing [2011] Tax Law Diary 41 and Radico Khaitan Limited [2010] 35 VST 280 (All).

On the facts of the case as discussed above, the irresistible conclusion is that there is valid material to form a belief that the turnover of the petitioners has escaped assessments. In the impugned order granting sanction, besides the relevant considerations of the matter, mention that the reassessment proceedings are going to be time-barred shortly, or that opportunity of cross-examination be granted are superfluous observations, nothing to do with the grant of sanction. They are liable to be ignored. The assessing authority shall proceed in the matter in accordance with law.

It is not necessary for us to consider the other following cases individually relied upon by the petitioner:

(1) M.L. Shukla & Co. v. Sales Tax Officer, Kanpur [1981] UPTC 396;

(2) Das''s Friends Builders Pvt. Ltd. Vs. The Deputy Commissioner Income Tax, ;

(3) Commissioner of Trade Tax v. Uttar Pradesh Minerals, Dehradun [1998] UPTC 476;

(4) The Coca-Cola Export Corporation Vs. Income Tax Officer and Another, ;

(5) Aryaverth Chawal Udyog v. State of U.P., (2009) 22 VST 10 (All) ;

(6) Swati Menthol and Allied Chemicals Pvt. Limited Vs. Assistant Commissioner (Assessment)-II Trade Tax .

The aforestated decisions do not lay down any other principles of law and the view taken by us is not in any manner, different than one expressed in these citations. In view of the above discussions, we do not find any merit in these writ petitions. Both the writ petitions are, hereby, dismissed with cost of Rs. 5,000.