2021 (2) TMI 200 - HC - VAT and Sales Tax

Validity of initiation of reassessment proceedings - rate of tax on Multi Function Digital (MFD) - Change of opinion - reason to belief - Whether the Tribunal erred in law in upholding the validity of initiation of reassessment proceedings, when the same was based on belief which was totally irrelevant and also amounts to change of opinion? - HELD THAT - The principle that has to ever remain clear is - the assessee may be subjected to reassessment proceeding only when the jurisdictional fact is first found to exist. That fact is the existence of a valid reason to believe that any turnover has escaped assessment to tax . In the facts of the present case, the submission advanced by Sri Mishra as to change of opinion cannot be accepted since the original assessment order dated 17.03.2010 is completely silent as to the reason why the assessing authority chose to tax on MFD @ 4%. No basis or other reason was recorded by the Assessing Officer to tax the commodity MFD @ 4%. In absence of any opinion being formed and expressed at that stage, no change of opinion may arise or be alleged when at a subsequent stage, the assessing authority forms any opinion. At the same time, merely because no opinion had been formed by the Assessing Officer at the stage of original assessment, it would not automatically lead to the conclusion, either that any turnover had escaped assessment or that the Assessing Officer had absolute discretion to initiate reassessment proceedings as has been suggested by the learned Standing Counsel relying on a decision of the Division Bench of this Court in KALPANA KALA KENDRA VERSUS SALES TAX OFFICER, CIRCLE-20, KANPUR 1988 (12) TMI 318 - ALLAHABAD HIGH COURT . In that case also, the original assessment order was silent as to the enquiry, if any, to accept the returned turnover. However, at the stage of the initiation of the reassessment proceedings under Section 21 of the Uttar Pradesh Sales Tax Act, 1948, three factual basis existed on the record that gave rise to the reason to believe that tax had escaped assessment. These were (i) wide discrepancy noted with respect to value of purchases of the assessee, (ii) escapement of tax on the closing stock and (iii) also non-verification of the information received on assessment record. In the instant case, there is no recital in the reason to believe of any factual basis or of any information received or of material existing on record on the assessment file of the assessee as may have given rise to any reason to believe . The notice issued by the Additional Commissioner dated 15.05.2012, which is stated to contain the reason to believe only refers to the fact that MFD had been subjected to tax @ 4% in the original assessment order treating the same to be computer peripherals whereas that commodity was not computer peripheral and, therefore, liable to be taxed as an unclassified commodity. In the first place, the reason to believe suffers from a factual fallacy. There was no entry available under the Act to tax computer peripherals . That entry first appeared only by virtue of Entry no.22 of Part B of Schedule II of the VAT Act - there was no question of introducing that entry in the assessment proceedings under the Act or to examine that entry for the purpose of either making an assessment under the Act or to re-open any assessment under that Act. That fact was plainly or completely extraneous to the assessment made under the Act. The existence of a valid reason to believe must be established as a fact, by the revenue, before a valid reassessment proceeding may arise. Recording of a reason to believe is a conscious act by the assessing authority. It is the result of an application of mind made by the assessing officer to all relevant material before him. Unless he first initiates this exercise and consequently records his reason to believe that any part of turnover of an assessee has escaped assessment to tax, the consequential exercise of reassessment would remain without jurisdiction. The material and reasons arising therefrom create the objective skeleton on which the subjective flesh of belief may stand - even if the conclusion ultimately drawn by the Tribunal, may appear to be correct in the given facts that the commodity was taxable not as computer hardware but as other electronic goods, that reasoning would not validate and otherwise invalid reassessment proceeding. It is found that neither there exists any material nor any valid reason to believe was recorded by the assessing officer as to any part of the turnover of MFD having escaped assessment from tax - there was a jurisdictional error on part of the assessing officer in initiating the assessment proceeding. The question of law is answered in the negative i.e. in favour of the assessee and against the revenue - Revision allowed.

Summary

Issues Involved:

1. Validity of initiation of reassessment proceedings.
2. Classification and applicable tax rate on Multi-Function Digital (MFD) devices.

Detailed Analysis:

1. Validity of Initiation of Reassessment Proceedings:

The central issue in this case was whether the Tribunal erred in law by upholding the initiation of reassessment proceedings based on an allegedly irrelevant belief, amounting to a change of opinion. The original assessment for A.Y. 2007-08 concluded on 17.03.2010, taxed MFD at 4% without any inquiry or discussion. The reassessment proceedings were initiated based on a "reason to believe" that MFD should be taxed as an unclassified commodity at 10%. The Tribunal upheld this initiation but modified the tax rate to 8%.

The court emphasized that reassessment can only proceed when there's a valid "reason to believe" that any turnover has "escaped assessment to tax." The Supreme Court in *The Commissioner of Sales Tax, U.P. Vs M/S. Bhagwan Industries (P) Ltd., Lucknow* established that there must be rational grounds for such belief, which must be germane to escaped assessment. Similarly, *State of Uttar Pradesh And Others Vs. Aryaverth Chawal Udyog & Others* reiterated that the material for "reason to believe" must not be arbitrary, irrational, vague, or irrelevant.

In this case, the original assessment order was silent on why MFD was taxed at 4%. Hence, no change of opinion could be alleged when the assessing authority later formed an opinion. However, the court found that the reassessment notice dated 15.05.2012 lacked any factual basis or material to support the "reason to believe" that MFD was an unclassified commodity. The notice erroneously assumed MFD was taxed as a computer peripheral, which was factually incorrect since no such entry existed under the Act at that time. Therefore, the reassessment proceedings were based on a factual fallacy and lacked jurisdiction.

2. Classification and Applicable Tax Rate on MFD Devices:

The assessee argued that MFD should be taxed at 4% as computer hardware, as accepted in the original assessment. The Tribunal later modified this to 8% under the category of "other electronic goods." The court noted that the relevant notification (No.K.A.N.I.-2-5746/XI-9(236)/96-U.P. Act-15-48-Order-(30)-2002) amended the tax entry to include various electronic goods at different rates.

The court observed that the assessing officer did not refer to any relevant taxing entry or law at the time of reassessment. The reassessment notice did not establish any material or evidence to justify the belief that MFD was an unclassified item. The existence of a valid "reason to believe" must be established by the revenue before reassessment. The Tribunal's conclusion that MFD was taxable as "other electronic goods" at 8% did not validate the reassessment proceedings, which lacked jurisdiction due to the absence of a valid "reason to believe."

Conclusion:

The court found that there was no material or valid "reason to believe" recorded by the assessing officer regarding the escaped assessment of MFD. Consequently, the initiation of reassessment proceedings was a jurisdictional error. The question of law was answered in favor of the assessee, and the revision was allowed with no order as to costs.