2019 (8) TMI 16 - HC - Income Tax

Reopening of assessment u/s 147 - validity of notice u/s 148 - Eligibility of reason to believe - HELD THAT - As our Court in the case of Hindustan Lever Ltd. V/s. R.B. Wadkar 2004 (2) TMI 41 - BOMBAY HIGH COURT has made it clear, the reasons, with a view to assess their reasonableness, are required to be read as they are recorded by the Assessing Officer; no substitution or deletion is permissible; no addition can be made to those reasons; and no inference can be allowed to be drawn based on these reasons which is not recorded. It is for the assessing officer to form an opinion as to whether there was escapement of income from assessment and whether such escapement occurred from failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year; and it is for him to put his opinion on record in black and white. The reasons recorded must disclose his mind and they should be self explanatory. The reasons recorded cannot be supplemented by the time the matter reaches the Court by filing of any affidavit or making any oral submission. In the premises, it is not open to the revenue to seek to sustain the re-opening notice on a new reason, namely, dis-allowance of deduction of expenditure since the whole activity was illegal. In the premises, the impugned notice issued by the Assessing Officer under Section 148 of the Act cannot be sustained and must be set aside.

Issues Involved:
1. Legality of reopening assessments under Section 148 of the Income Tax Act, 1961.
2. Validity of the Shah Commission's report as a basis for reopening.
3. Requirement of "reason to believe" for reopening assessments.
4. Allegations of under-invoicing of exports.
5. Treatment of income from allegedly illegal mining activities.
6. Adequacy of disclosure by the assessee.

Issue-wise Detailed Analysis:

1. Legality of Reopening Assessments under Section 148:
The petitions challenge the reopening of assessments by issuance of notices under Section 148 of the Income Tax Act, 1961. The court examined whether the Assessing Officer (AO) had the requisite "reason to believe" that income had escaped assessment, which is a foundational requirement for invoking Section 148.

2. Validity of the Shah Commission's Report:
The Shah Commission's report, which alleged under-invoicing of iron ore exports, was used as the basis for reopening assessments. The court noted that the report was not a judicial pronouncement but an expression of opinion, lacking finality and authoritativeness. The Union of India had assured that no action would be taken solely on the basis of the report without independent assessment and opportunity for the assessee to present their case.

3. Requirement of "Reason to Believe":
The court emphasized that the AO must have a rational connection or live link between the information and the belief that income had escaped assessment. The Shah Commission's report alone, without independent verification or additional evidence, was deemed insufficient to form such a belief. The court reiterated that mere differences in export prices do not automatically indicate under-invoicing or escapement of income.

4. Allegations of Under-Invoicing of Exports:
The court scrutinized the allegations of under-invoicing based on the Shah Commission's report. It found that the report's conclusions were speculative and not supported by concrete evidence. The AO's reliance on the report without independent verification was considered inadequate for reopening assessments. The court highlighted that the law does not obligate a trader to earn maximum profit and that income is taxable based on actual accrual, not hypothetical higher earnings.

5. Treatment of Income from Allegedly Illegal Mining Activities:
The court addressed the issue of treating income from mining activities, deemed illegal by the Supreme Court's judgment in Goa Foundation case, as "income from other sources." It clarified that the nature of the activity (business) does not change based on its legality. The income remains business income, and expenditures related to it are business expenditures, unless specifically disallowed under Section 37(1) for being prohibited by law.

6. Adequacy of Disclosure by the Assessee:
The court examined whether the assessee had failed to disclose fully and truly all material facts necessary for assessment. It found no evidence of such failure. The AO's assertion of non-disclosure was deemed a bald assertion without specific indication of what was not disclosed.

Conclusion:
The court quashed the reopening notices under Section 148, finding them unsustainable due to the lack of a direct nexus between the information (Shah Commission's report) and the belief of income escapement. It emphasized the need for independent assessment and concrete evidence before issuing such notices. The court upheld the principle that mere differences in export prices or subsequent legal findings do not suffice for reopening assessments without substantial and specific information indicating income escapement.

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