2015 (7) TMI 1281 - HC - Income Tax

Reopening of the assessment u/s 147 - suppression of sales - Held that - Entire sale transaction cannot be taken as income. By the impugned notice though the department has subjected GP at the rate of 26.10% on the suppressed sale transaction now the entire suppressed sale transaction is sought to be brought under the net of income tax which is not permissible. In view of this settled legal propositions we are of the opinion that the respondent could not have issued impugned notice to the petitioner subject to suppressed sale transaction to income. In our opinion impugned notice is inherently illegal and invalid and therefore it cannot be sustained for the aforesaid reasons - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction of the High Court under Article 226 of the Constitution of India.
2. Validity of the notice issued under Section 148 of the Income Tax Act for reopening the assessment.
3. Availability and exhaustion of alternative remedies.
4. Legitimacy of reasons recorded for reopening the assessment.
5. Assessment of undisclosed income and whether the entire suppressed sale transaction can be treated as income.

Issue-wise Detailed Analysis:

1. Jurisdiction of the High Court under Article 226 of the Constitution of India:
The petitioner invoked the jurisdiction of the High Court under Article 226 of the Constitution to challenge the notice dated 20/03/2014 issued under Section 148 of the Income Tax Act. The petitioner contended that the reasons recorded for reopening the assessment were misconceived and baseless. The respondent argued that the petitioner had prematurely approached the High Court without exhausting the alternative remedy. The Court noted exceptions to the rule of alternative remedy, such as when statutory authorities act in defiance of judicial procedure or principles of natural justice. The Court cited precedents affirming that it retains the power to exercise extraordinary jurisdiction under Article 226 when these conditions are met.

2. Validity of the notice issued under Section 148 of the Income Tax Act for reopening the assessment:
The petitioner challenged the validity of the notice issued under Section 148, arguing that the reasons for reopening the assessment were inherently wrong and invalid. The respondent countered that the notice was based on the failure of the petitioner to disclose a sale transaction amounting to Rs. 7,98,68,610/-. The Court examined whether the reasons recorded for reopening the assessment were valid and whether the petitioner had made a full and true disclosure of income.

3. Availability and exhaustion of alternative remedies:
The respondent argued that the petition should be rejected on the grounds that the petitioner had not exhausted alternative remedies available under the Income Tax Act. The petitioner contended that there was no efficacious alternative remedy and that the High Court had the power to examine the validity of the reasons recorded in the impugned notice. The Court referenced several judgments, including those of the Supreme Court and other High Courts, which supported the view that the High Court could entertain a petition under Article 226 even when alternative remedies were available, especially when the petition had already been admitted.

4. Legitimacy of reasons recorded for reopening the assessment:
The Court scrutinized the reasons provided by the Assessing Officer for reopening the assessment. The petitioner argued that the Assessing Officer had already assessed the gross profit on the suppressed sale transaction during the original assessment and that reopening the assessment to include the entire sale amount was unjustified. The Court noted that the Assessing Officer had sufficient information about the suppressed sale transaction during the original assessment and had already taxed the gross profit. Therefore, reopening the assessment to tax the entire sale amount was deemed invalid.

5. Assessment of undisclosed income and whether the entire suppressed sale transaction can be treated as income:
The Court referred to the case of Commissioner of Income Tax vs. President Industries, which established that the entire sale amount cannot be treated as income. Only the profit margin from the sale transaction should be considered for taxation. The Court observed that the respondent's attempt to tax the entire suppressed sale transaction was contrary to established legal principles. The Court concluded that the notice issued for reopening the assessment was inherently illegal and invalid.

Conclusion:
The High Court allowed the petition, quashing the impugned notice dated 20/03/2014 issued under Section 148 of the Income Tax Act. The Court held that the notice was invalid as it sought to tax the entire suppressed sale transaction, which was not permissible under the law. The Court emphasized that once a petition is admitted, the petitioner cannot be non-suited on the ground of availability of alternative remedies. The rule was made absolute, and no order as to costs was issued.