2024 (3) TMI 737 - HC - Income Tax

Reopening of assessment - non-application of mind by AO - reopening after the expiry of four years - Borrowed satisfaction - Reliance on investigation initiated by Directorate General of Goods and Services Tax ( DG GST ) - as per AO Assessee had made transaction with two concerns concerns did not have any assets or inventories or were indulging in sales and purchases that appeared to be fraudulent and bogus - HELD THAT - Entire basis on which the AO has formed a belief that income chargeable to tax has escaped assessment is that an investigation was initiated by Directorate General of Goods and Services Tax ( DG GST ), Mumbai on M/s. Meher and M/s. Nyles Sales Agencies Pvt. Ltd. ( Nyles ) in the month of September 2019. During the course of investigation it was found both these entities did not have any assets or inventories or were indulging in sales and purchases that appeared to be fraudulent and bogus. Reasons state that on analysis of available bank statements of Nyles it has been noticed that amounts were debited in the bank accounts immediately after credit entries. Assessee company was one of the beneficiary entities who made transaction of Rs. 3,39,00,000/- with Nyles. The fact is Assessee did have financial transactions with Nyles but Assessee had taken a loan from Nyles and not made any payment to Nyles or supplied any goods to Nyles. In the order disposing objections, the AO simply says that Assessee had made transaction with Nyles and that was enough to issue the notice for reassessment. The least that was expected of the AO is, on receipt of information, examine the same in the context of the facts of this case and satisfy himself whether the information received does prima facie lead to a reasonable belief that income chargeable to tax has escaped assessment. If the AO had only bothered to examine the records, he would have certainly found that in the annexure to the Form No. 3CD filed under Rule 6G(2)-statement of particulars required to be furnished under Section 44AB of the Act, Petitioner has disclosed that it had taken from Nyles an amount as loan. Even the PAN number of Nyles is recorded. Even the balance sheet as on 31st March 2015 indicates under the head Long Term Borrowings-Unsecured Loans against Nyles. Therefore, it clearly shows that the AO has acted on the satisfaction of the DG GST, Mumbai that income chargeable to tax has escaped assessment. It must also be borne in mind that a notice has been issued more than four years after the expiry of relevant assessment year and this was a case where assessment under Section 143(3) of the Act has been completed. Therefore, the AO was obliged to examine the information received in the context of the facts on record. If such an exercise were to be done, it is likely that the AO would have come to the conclusion that there was no failure to disclose truly and fully all material facts necessary for assessment. The entire proceedings in this case would also be hit by proviso to Section 147 of the Act which bars any reopening after the expiry of four years where assessment u/s 143(3) of the Act has been completed unless there was failure to truly and fully disclose material facts. The impugned notice is bad in law as it has not been issued by the AO on his satisfaction that there is reason to believe that income chargeable to tax has escaped assessment. Further, there has been total non-application of mind by the AO, the Range Head and the PCIT. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the reopening of assessment u/s 147 of the Income Tax Act, 1961.
2. Non-application of mind by the Assessing Officer (AO) and approval authorities.
3. Examination of alternative remedy under Article 226 of the Constitution of India.

Summary:

Validity of the Reopening of Assessment u/s 147:
The petitioner, engaged in real estate and trading of steel items, filed its return of income (ROI) for AY 2015-16 on 30th September 2015. A scrutiny assessment was completed with an order dated 29th December 2017 u/s 143(3) of the Income Tax Act, 1961. Subsequently, a notice dated 31st March 2021 u/s 148 was issued, indicating that income chargeable to tax for AY 2015-16 had escaped assessment. The petitioner filed its ROI again and was provided reasons for reopening and the approval u/s 151. The court found that both the reasons and the approval indicated total non-application of mind by the AO, the Range Head, and the Principal Commissioner of Income Tax (PCIT). The court noted that the reasons incorrectly stated that no regular assessment u/s 143(3) was made, despite an assessment order being passed on 28th December 2017. This error was not identified by the approving authorities, leading to the conclusion that the approval granted suffered from non-application of mind.

Non-application of Mind by the AO and Approval Authorities:
The court observed that the AO formed a belief that income chargeable to tax had escaped assessment based on an investigation by the Directorate General of Goods and Services Tax (DG GST), Mumbai, which found that M/s. Meher and M/s. Nyles Sales Agencies Pvt. Ltd. were shell companies. The petitioner had financial transactions amounting to Rs. 3,39,00,000/- with Nyles, but these were loans, not payments or supplies. The AO failed to examine the records, which clearly indicated the nature of the transactions. The court emphasized that the AO acted on the satisfaction of the DG GST without verifying the facts, leading to a flawed reopening process. The court cited past judgments, including South Yarra Holdings and Crompton Greaves Ltd., to highlight the necessity of the AO's independent satisfaction and the requirement to disclose material facts fully and truly.

Examination of Alternative Remedy under Article 226:
The court rejected the preliminary objection raised by the respondents that the petitioner should exhaust the alternative remedy available before approaching the court under Article 226 of the Constitution of India. The court noted that the case reflected a gross instance of non-application of mind, justifying the exercise of its jurisdiction under Article 226. The court also noted the respondents' failure to file a reply despite multiple extensions, further supporting the decision to intervene.

Conclusion:
The court concluded that the impugned notice dated 31st March 2021, the order disposing of objections dated 24th February 2022, the reassessment order dated 23rd March 2022, the notice of demand dated 23rd March 2022, and the show-cause notice for levy of penalty dated 23rd March 2022 were all unsustainable and liable to be quashed and set aside. The petition was allowed in terms of prayer clause (a), effectively nullifying the reopening of the assessment.