2016 (7) TMI 929 - HC - Income Tax

Reopening of assessment - the case of the department is that the assessee had claimed bogus labour contract charges paid to these contractors to inflate the expenses and thereby deflate the profit - Held that - Labour contractors were paid sizable amount of labour charges without such labour work having been taken by the assessee. Surely, these aspects were not at large before the Assessing Officer during the original assessment proceedings. Any examination by the Assessing Officer of the assessee s claim of labour expenses would be confined to the declarations made by the assessee and the material produced by the assessee in response to the queries raised by the Assessing Officer. When later on, fresh material has come on record, which would primafacie suggest claim of bogus labour charges, examination by the Assessing Officer at the time of scrutiny assessment, would not permit the petitioner to argue that such issue cannot be gone into again by reopening the assessment. The question of true and full disclosure and the issue having been examined during the original assessment proceedings substantially overlap in the present case. If the allegations contained in the reasons recorded are ultimately established, which must depend on the nature of material that may ultimately be brought on record during the reassessment and with respect to which we obviously would not make any comment, it would certainly indicate that the assessee had claimed bogus labour contract charges without incurring them. According to the department, in large number of cases, labour contractors who were in fact, the employees of the assessee, were paid labour charges without their being any such expenditure being incurred by the assessee. If these facts are ultimately established, it would only indicate that the assessee had claimed higher expenditure than what was incurred thereby suppressing the profit. It is true that the Assessing Officer had relied heavily on the investigation carried out by the investigation wing and the material collected during such process, which culminated into a final report submitted by the investigation wing. However, it is not impermissible for the Assessing Officer to rely on such material, as long as of course he has applied his mind to the materials on record and formed his own belief that on the basis of such material, it can be stated that income chargeable to tax has escaped assessment. It was in this context, we have reproduced the concluding portion of the reasons recorded by the Assessing Officer, which are in the nature of his observations on the basis of materials supplied by the investigation wing collected during the search operations. These observations indicate the application of mind by the Assessing Officer and his own formation of belief that income chargeable to tax has escaped assessment. This is therefore, not a case of the Assessing Officer proceeding on a borrowed satisfaction of the investigation wing. Thus Assessing Officer shall carry out the reassessment on the basis of material that may come on record during the assessment, unmindful of any of the observations made herein above. - Decided against assessee

Issues Involved:
1. Validity of the notice for reopening the assessment beyond a period of four years.
2. Alleged failure of the assessee to disclose fully and truly all material facts.
3. Examination of labour charges during the original assessment and the concept of change of opinion.
4. Sufficiency and application of mind by the Assessing Officer in forming a belief of income escapement.
5. Reliance on the investigation wing's report and whether it constitutes borrowed satisfaction.

Issue-wise Detailed Analysis:

1. Validity of the notice for reopening the assessment beyond a period of four years:
The petitioner challenged the reopening notice issued by the Assessing Officer beyond four years from the end of the relevant assessment year, arguing it was issued without authority. The court acknowledged that for reopening beyond four years, it must be shown that the income escapement was due to the assessee's failure to disclose fully and truly all material facts.

2. Alleged failure of the assessee to disclose fully and truly all material facts:
The court examined the reasons recorded by the Assessing Officer, which included findings from a search operation revealing predecided limits on expenses for labour contractors and bogus labour expenses. The court noted that these findings suggested the assessee had not disclosed all material facts fully and truly, justifying the reopening.

3. Examination of labour charges during the original assessment and the concept of change of opinion:
The petitioner argued that the labour charges were scrutinized during the original assessment, and reopening on this ground would constitute a change of opinion. However, the court found that the original assessment did not consider the new material from the investigation wing, which indicated that labour charges were bogus. The court held that the fresh material justified reopening the assessment, as it suggested non-disclosure of true facts by the assessee.

4. Sufficiency and application of mind by the Assessing Officer in forming a belief of income escapement:
The petitioner contended that the reasons for reopening did not disclose any material basis for forming a belief of income escapement and that the Assessing Officer relied solely on the investigation wing's report. The court disagreed, stating that the Assessing Officer had applied his mind to the materials provided by the investigation wing and formed his own belief about the income escapement, thus fulfilling the requirement for reopening.

5. Reliance on the investigation wing's report and whether it constitutes borrowed satisfaction:
The court addressed the issue of whether the Assessing Officer's reliance on the investigation wing's report constituted borrowed satisfaction. It concluded that it is permissible for the Assessing Officer to rely on such material as long as he applies his mind independently. The court found that the Assessing Officer had indeed applied his mind and formed his own belief based on the investigation wing's findings.

Conclusion:
The court dismissed the petition, upholding the validity of the notice for reopening the assessment. The court emphasized that the reassessment should be carried out based on the material that comes on record during the assessment, without being influenced by the court's observations.

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