2024 (1) TMI 1080 - HC - Income Tax

Reopening of assessment u/s 147 - notice was issued beyond period of four years - reasons to believe - reliance on third report of Shah Commission by which it was observed that there were illegal export particularly by means of under invoicing on the part of mining lessees and the exporters - HELD THAT - AO claimed that assessee failed to disclose fully and truly all the material at the time of filing the returns that income derived was from the illegal mining activities. First of all such observations are incorrect as though the leases were declared as illegal from 22.11.2007, there is absolutely no finding or observation of the Apex Court that mining activities or business activities continued after 23.11.2007 till the same were stopped as per orders of the Supreme Court, were also illegal. Decision concerning leases was delivered in the year 2014. Till that time neither the assessee nor the Assessing Officer had knowledge that such leases were illegal after 22.11.2007. When assessee was not knowing, there was no occasion for him to make disclosure to that effect. In Mr. Teofilo Fernando Antonio Pinto Vs Union of India and anr. 2023 (9) TMI 625 - BO MBAY HIGH COURT the Coordinate Bench of this Court while considering all the earlier decisions including decisions in case of Aroni Commercial Limited 2014 (2) TMI 659 - BOMBAY HIGH COURT and CIT Vs Kelvinator India Limited 2010 (1) TMI 11 - Supreme Court observed that twin conditions must be satisfied when the reopening is beyond the period of four years. Justification offered while rejecting objections of the petitioner cannot be regarded as valid defence of the impugned notice. Such justification/reason given for the first time at the time of disposal of the objections filed by the assessee objecting to reopen the assessment. Such reasons must exist and recorded at the time of issue of notice under Section 147/148 of the Act. In the present matters, notices issued for reopening of the assessment failed to satisfy twin conditions and thus the Assessing Officer could not have exercised jurisdiction for reopening of the assessments which were concluded way back. First of all placing reliance only on opinion in the third Shah Commission Report without independently assessing or recording reasons by the Assessing Officer is itself considered to be jurisdictional error on the part of such officer. Secondly when the notice was issued beyond period of four years, conditions regarding disclosure to be made fully and truly is also not established for the simple reason that the fact that such lease was illegal beyond 22.11.2007 was not to the knowledge of the assessee while submitting returns for the Year 2008-09 and also for the year 2011-12. The Apex Court in the year 2014 for the first time declared that the mining leases in Goa beyond 22.11.2007 were illegal. Thus prior to 2014 i.e. declaration by the Apex Court neither the assessee nor the Assessing Officer had knowledge that such leases were illegal, the question of making such declaration in the year 2008-09 or 2011-12 while submitting returns would not arise. Thus notice for reopening failed to satisfy twin conditions and therefore, both these notices under Section 147 of the Act need to be quashed and set aside. Decided in favour of assessee.

Issues Involved:
1. Legality of reopening assessment based on Shah Commission Report.
2. Validity of reopening assessment based on DRI Mumbai's findings.
3. Requirement of independent inquiry by the Assessing Officer.
4. Necessity of disclosing reasons for reopening assessment.
5. Requirement for Assessing Officer to have reason to believe income escaped assessment.
6. Applicability of Supreme Court's decision on mining leases to tax assessments.

Summary:

1. Legality of Reopening Assessment Based on Shah Commission Report:
The court examined whether reopening assessments based on the Shah Commission Report was valid. The petitioners argued that the Shah Commission's findings were merely opinions and lacked binding effect. The court noted that the Coordinate Bench had previously held that the Shah Commission Report alone couldn't justify reopening assessments without independent inquiry by the Assessing Officer. The court found that the Assessing Officer had relied solely on the Shah Commission Report without conducting an independent inquiry, rendering the reopening invalid.

2. Validity of Reopening Assessment Based on DRI Mumbai's Findings:
For the second petitioner, the reopening was based on findings from the Directorate of Revenue Intelligence (DRI) Mumbai concerning under-invoicing of exports. The petitioners contended that the Assessing Officer merely lifted DRI's findings without independent verification. The court observed that the Assessing Officer must independently assess the information received and not rely solely on external reports. Since no independent inquiry was conducted, the reopening was deemed invalid.

3. Requirement of Independent Inquiry by the Assessing Officer:
The court emphasized that the Assessing Officer must conduct an independent inquiry to form a reason to believe that income had escaped assessment. In both cases, the court found that the Assessing Officers had failed to conduct such inquiries and had instead relied on external reports, which was insufficient to justify reopening assessments.

4. Necessity of Disclosing Reasons for Reopening Assessment:
The court reiterated that reasons for reopening must be disclosed to the assessee to allow them to effectively challenge the reopening. In both cases, the reasons provided were found to be inadequate and speculative, failing to establish a rational connection to the belief that income had escaped assessment.

5. Requirement for Assessing Officer to Have Reason to Believe Income Escaped Assessment:
The court highlighted that the belief of income escaping assessment must be based on tangible material and not mere opinion or borrowed satisfaction. The reasons must demonstrate that the material used by the Assessing Officer is reasonably capable of forming a belief that income has escaped assessment. The court found that this requirement was not met in both cases.

6. Applicability of Supreme Court's Decision on Mining Leases to Tax Assessments:
The court addressed the argument that the Supreme Court's decision declaring mining leases in Goa illegal from 2007 should affect tax assessments. The court noted that the decision was made in 2014, and neither the assessee nor the Assessing Officer had knowledge of the leases being illegal at the time of filing returns for 2008-09 and 2011-12. Therefore, the assessee couldn't be expected to disclose this in their returns, and the reopening on this ground was invalid.

Conclusion:
The court quashed the notices for reopening assessments in both cases, holding that the Assessing Officers had failed to satisfy the jurisdictional requirements and twin conditions necessary for reopening assessments. The petitions were disposed of, and the rule was made absolute.

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