Pratap Narain Agarwal vs Asstt. Commissioner of Income Tax and Others

By this writ petition, the petitioner has challenged the notice dated 29-4-2004 (Annex. PI) given to the petitioner u/s 148 of the Income Tax Act, 1961. Quashing of the reassessment proceedings initiated by the said notice is also prayed. The petitioner has also challenged the order dated 20-1-2006 (Annex. P15) whereby the objections of the petitioner to the reassessment proceedings have been rejected by the Assistant Commissioner.

By an interim order dated 6-2-2006, proceedings pursuant to the impugned notice were stayed in this writ petition.

Counter affidavit has been filed. The counter affidavit discloses that under the Voluntary Disclosure of Income Scheme of 1997 (hereinafter referred to as the VDIS), unscrupulous assessees in Maharashtra, Gujarat, Madhya Pradesh, Bihar, Karnataka, West Bengal, Goa, Tamil1 Nadu, Punjab, Uttar Pradesh, Delhi, Andhra Pradesh etc. disclosed unaccounted money in the form of non-existent diamonds in their possession. These non-existent diamonds were shown to have been sold, immediately after the disclosure, by the assessees to 4 concerns (hereinafter referred to as the "front concerns"). These 4 "front concerns" in turn are alleged to have sold the non-existent diamonds to another group of 5 concerns (hereinafter referred to as the "bulk concerns"). From these "bulk concerns", the diamonds were shown to have been sold to another group of 10 concerns (hereinafter referred to as "retail concerns"). Ultimately, the diamonds were shown to have been disposed of by these "retail concerns" to a large number of persons from Surat without even mentioning their names and addresses. All transactions of sale by the "retail concerns" are in cash and have been routinely kept below Rs. 20,000 by the "retail concerns". The money of such cash sales were deposited in about 83 bank accounts opened in Mumbai in the names of the "retail concerns". Thereafter, in order to show accommodation, cheques/demand drafts to the beneficiaries have been issued from the bank accounts of the "retail concerns" to the "bulk concerns" who in turn have issued cheques from their accounts at Mumbai to the "front concerns", and from the accounts of the "front concerns" cheques/demand drafts have been issued to the beneficiaries assessees.

Investigations revealed that this entire exercise involving money to the tune of Rs. 2,32,03,17,879 was master-minded by two chartered accountants namely Kamal Kumar Johari and Hari Om Sharma. who had floated these concerns wherein their close relatives, acquaintances, confidants were made either partners or proprietors or shareholders. All the 4 "front concerns" and the 5 "bulk concerns" have shown their business address at Mumbai as B-12/B-18, Swati Manor Building, N.C. Kelkar Road, Dadar(W), Mumbai, which is actually office address of the two chartered accountants. The Surat branch office of all the "front concerns" and the "bulk concerns" is shown to have operated only from one premises namely 406, Pooja Building, Hawardsheri, Mahidharpura, Surat and 9 of the "retail concerns" have been shown as operating from Renuka Niwas, 2nd Floor, Bhatwadi Opera House, Mumbai, which was a small premises in control of Mahendra Johari brother of Kamal Kumar Johari, chartered accountant. Five of the "retail concerns" have also been shown as operating from B-18, Swati Manor Building, N.C. Kelkar Road, Dadar(W), Mumbai, i.e., the office of the CAs.

All the bank accounts of the "retail concerns" and some of the bank accounts of the "front" and "bulk" concerns were opened simultaneously around the time of announcement of VDIS and were closed simultaneously shortly after the VDIS concluded, that is after the fraudulently declared non-existent diamonds were purchased back on paper from the unscrupulous assessees by this group. Even the bank account numbers of these concerns are in a running serial indicating that they were opened together in one go at the same time. The account opening forms in the banks show that at the time of opening as many as 14 bank accounts of the "retail concerns", only one telephone number namely 437991 has been given to the banks for contacting all these concerns. This telephone number belongs to the office of Kamal Kumar Johari and Hari Om Sharma, CAs.

This is the background.

The petitioner also disclosed diamonds under the VDIS and filed return for the assessment year 1998-99 showing that immediately after disclosure under the VDIS, the diamonds were sold by the petitioner for a sum of Rs. 4,82,18,687. It was mentioned in the return that the cost of acquisition as escalated by the ''cost inflation index'' came to Rs. 5,00,14,100 and, thereby a capital loss of Rs. 17,95,413 was shown in respect of the transactions of sale of the non-existent diamonds. The return was accepted.

After investigation, the Deputy Commissioner, CC-38, Mumbai, submitted a detailed report dated 18-11-2003 (enclosed with the counter affidavit). The report was in respect of the entire fraud. In respect of the petitioner, a letter dated 17-3-2004 (Annexure C-II) sent by the Director of IT (Investigation), Kanpur, to the CIT-II, Agra, saying that in respect of some of the transactions of sale of diamonds shown to have been done on 10-11-1997 by the petitioner, the purchaser was non-existent. It was mentioned in that letter that in fact accommodation entry was given to the petitioner by the concerns floated by the two Chartered Accountants and the alleged sale proceeds are actually Hawala entries.

The impugned notice u/s 148 dated 29-4-2004 (Annex. PI) was consequently issued. The ''reasons to believe'' were communicated by letter dated 2-11-2005 (Annex. P12). The reasons mentioned in Annex. P12 as well as the reasons given in the order dated 20-1-2006 (Annex. PI 5) by which the objections of the petitioner to reassessment were rejected and the counter affidavit all point to one fact namely that the purchaser was non-existent or fictitious.

In this bulky writ petition, which has been filed by the petitioner, there is neither any pleading nor any corroborative material to show the existence or genuineness of the purchaser namely M/s Galaxy Exports, or of other concerns to which the petitioner had allegedly sold the diamonds.

Learned senior counsel Sri C.S. Agarwal, assisted by Sri R.R. Agarwal, advocate has argued this matter at length and we have devoted entire post-lunch session on 27-2-2008 to hear arguments advanced on behalf of the petitioner. The argument mainly devoted to the question that the reasons assigned for issuing notice u/s 148 are conjectures and sprmises and do not fulfil the requirement of reason to believe and other conditions prescribed u/s 147 of the Act. He also cited some of the authorities of this Court and various other High Courts in order to explain what is the meaning of reason to believe and contended that no person can conclude on the basis of the said material that there is any case of escaped assessment u/s 147.

We have gone through various authorities, most of them are in respect to Section 147 as it was before its amendment prior to Direct Tax Laws (Amendment) Act, 1989. However, the learned Counsel insisted that he wanted to argue the case for further a period of "at least three days" so as to read every case from beginning to end decided by various Courts. When we inquired in respect to some of the authorities as to how they are helpful to him in the present dispute, instead of giving reply to our query, he only insisted to read the judgments. In these circumstances, we do not find that his insistence to read out the entire judgments irrespective of the fact whether the same have any relevance to issue in question or not, should be accepted as it amounts to wastage of precious time of the court and depriving other bona fide litigants of valuable time of deciding their cases involving important issues of legal and constitutional rights. We therefore, decline the said liberty and the arguments thus were concluded at the end of the session.

Notice u/s 148 is required to be issued before making assessment/reassessment/recomputation u/s 147. Section 147 of the Act reads as under:

If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 - 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 - 153 referred to as the relevant assessment year):

Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1. "Production before the assessing officer of account books or other evidence from which material evidence could with due diligence have been discovered by the assessing officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation "For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:

(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to Income Tax;

(b) 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;

(c) where an assessment has been made, but

(i) income chargeable to tax has been underassessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.

Basically the proviso to Section 147, which is applicable in this case permits reopening of a completed assessment even after expiry of four years from the end of''the relevant assessment year, only if income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The sum and substance of the case law on the point is that (1) the finding to the effect that the assessee has failed to disclose truly and fully all material facts necessary for the assessment has to be objective one and not a subjective, (2) it cannot be based upon a mere change of opinion on the material which was available at the time of original assessment, and (3) it cannot be based upon a mere suspicion of income having escaped assessment. (4) ''Reasons to believe'' must be recorded, before issuing notice for reassessment.

It is not necessary to refer the various authorities cited by learned Counsel for the petitioner for the reason that recently Section 147 has come up for consideration before the apex court in Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., wherein the scheme of legislative amendments under Sections 143 and 147 and other relevant provisions has been explained in detail and it would be appropriate to reproduce the same as under ;

What were permissible under the first proviso to Section 143(1)(a) to be adjusted were, (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible,, were to be rectified/allowed/disallowed. What was permissible was correction of errors apparent on the basis of the documents accompanying the return. The assessing officer had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the assessing officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief.

One thing further to be noticed is that intimation u/s 143(1)(a) is given without prejudice to the provisions of Section 143(2). Though technically the intimation issued was deemed to be a demand notice issued u/s 156, that did not per se preclude the right of the assessing officer to proceed u/s 143(2). That right is preserved and is not taken away. Between the period from 1-4-1989 to 31-3-1998, the second proviso to Section 143(1)(a), required that where adjustments were made under the first proviso to Section 143(1)(a), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. With effect from 1-4-1998, the second proviso to Section 143(1)(a) was substituted by the Finance Act, 1997, which was operative till 1-6-1999. The requirement was that an intimation was to be sent to the assessee whether or not any adjustment had been made under the first proviso to Section 143(1) and notwithstanding that no tax or interest was found due from the assessee concerned. Between 1-4-1998 and 31-5-1999, sending of an intimation u/s 143(1)(a) was mandatory. Thus, the legislative intent is very clear from the use of the word ''intimation'' as ''substituted'' for assessment that two different concepts emerged. While making an assessment, the assessing officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to Section 143(1)(a), no addition which is impermissible by the information given in the return could be made by the assessing officer. The reason is that u/s 143(1)(a) no opportunity is granted to the assessee and the assessing officer proceeds on his opinion on the basis of the return filed by the assessee. The very fact that no opportunity of being heard is given u/s 143(1)(a) indicates that the assessing officer has to proceed accepting the return and making the permissible adjustments only. As a result of insertion of the Explanation to Section 143 by the Finance (No. 2) Act of 1991 with effect from 1-10-1991, and subsequently with effect from 1-6-1994, by the Finance Act, 1994, and ultimately omitted with effect from 1-6-1999, by the Explanation as introduced by the Finance (No. 2) Act of 1991, an intimation sent to the assessee u/s 143(1)(a) was deemed to be an order for the purposes of Section 246 between 1-6-1994 to 31-5-1999, and u/s 264 between 1-10-1991, and 31-5-1999. It is to be noted that the expressions, intimation and assessment order have been used at different places. The contextual difference between the two expressions has to be understood in the context the expressions are used. Assessment is used as meaning sometimes the computation of income, sometimes ''the determination of the amount of tax payable'' and sometimes ''the whole procedure laid down in the Act for imposing liability upon the taxpayer''. In the scheme of things, as noted above, the intimation u/s 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. u/s 143(1)(a) as it stood prior to 1st April, 1989, the assessing officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the CBDT spell out the intent of the legislature, i.e., to minimize the departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns. These aspects were highlighted by one of us (D.K. Jain, J.) in Apogee International Ltd. Vs. Union of India and Another, It may be noted above that under the first proviso to the newly substituted Section 143(1), with effect from 1-6-1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation u/s 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any assessing officer, but mostly by ministerial staff. Can it be said that any ''assessment'' is done by them ? The reply is an emphatic ''no''. The intimation u/s 143(1)(a) was deemed to be a notice of demand u/s 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment u/s 143(1)(a), the question of change of opinion, as contended, does not arise.

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. Vs. I.-T.O., Nagpur, for initiation of action u/s 147(a) (as the provision stood at the relevant time) fulfilment 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 INCOME TAX OFFICER Vs. SELECTED DALURBAND COAL CO. (P) LTD., Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others,

The scope and effect of Section 147 as substituted with effect from 1-4-1989, as also Sections 148 - 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate clause (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction u/s 147(a) two conditions were required to be satisfied firstly the assessing officer must have reason to believe that income profits or gains chargeable to Income Tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the assessing officer could have jurisdiction to issue notice u/s 148 read with Section 147(a). But under the substituted Section 147 existence of only the first condition suffices. In other words if the assessing officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfiled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso.

Learned Counsel for the petitioner at this stage sought to argue that before applying proviso to Section 147 it has to be shown that the assessee has failed to disclose fully and truly all facts necessary for his assessment before reopening a completed assessment after expiry of four years. In the present case, it is not in dispute that "reasons to believe" had been recorded. Notice for reassessment has been issued on the ground that the petitioner had failed to disclose truly about the non-existent nature of the alleged purchases, that such disclosure was necessary for completing assessment cannot be disputed. The finding regarding non-existent purchases has been objectively arrived at and is based upon the facts and material uncovered by subsequent investigation. Thus it is not a case of a mere change of opinion on the pre-existing material. The writ petition does not even allege that the alleged sales were not fictitious, made to the "front concerns", created only for the purpose of the fraudulent paper transactions. The petitioner''s reliance on the valuer''s report for proving existence of diamonds, in the background facts and circumstances given above, does not permit this Court to record a pure finding of fact to that effect in writ jurisdiction. As held by the apex court in Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others, the formation of belief by the assessing officer is within the realm of subjective satisfaction and at the stage of issuance of notice the, only . question is whether there was relevant material upon which a reasonable person could have formed requisite belief or not. Beyond this there is no scope of judicial review in such matters. Even otherwise, considering the facts and circumstances as also the entire modus operandi as noticed by the Deputy Commissioner, Mumbai in his report dated 18-11-2003 (Annexure CA1), in our view, this is a matter which requires proper investigation and it is not the stage where this Court in discretionary extraordinary jurisdiction should stop the administration from making its necessary inquiry under the Act. Remedy under Article 226 of the Constitution of India is discretionary and even if there is some irregularity or illegality, the court is not bound to exercise discretion at the instance of the petitioner if it is satisfied that it is not otherwise a fit case warranting exercise of discretionary jurisdiction under Article 226 of the Constitution.

Having regard to the above facts and circumstances and in view of the above discussions, we decline to exercise our discretionary jurisdiction in this matter and thereby to encourage such fraud on such massive scale.

The writ petition is accordingly dismissed. It is, however, made clear that any observation in this judgment should not be taken as expression of opinion on merits of the issue and the authorities will proceed in the matter in accordance with law without being influenced from the observations, if any, made in this judgment.