2017 (4) TMI 64 - HC - Income Tax

Reopening of assessment - reasons to believe - whether statement made by Mr. Sanjay Rastogi that he and his associates provided bogus entries to various entities, could not have been the basis for valid reassessment notice? - Held that - The entire basis for the reassessment notice impugned by the petitioner is Sanjay Rastogi s statement. His questioning and his answers nowhere implicate the petitioner. He specifically names 2-3 concerns as the beneficiaries of the bogus entry business / activity that he was carrying on. However, the statement nowhere mentions the petitioner. The second aspect - and more crucially in this case-is that the issue with respect to the commission expenditure claimed by the petitioner had undergone a further fresh inquiry albeit in one previous AY 1996-97. The Assessing Officer, on that occasion too felt that the expenditure needed more scrutiny or inquiry. The assessee / petitioner was able to show that M/s Hallmarks Healthcare Ltd. was an existing company which had filed returns and was assessed to income tax. The statement of Sanjay Rastogi may have been the starting point for some kind of an inquiry but in the circumstances of this case, to hold or assume that the individual concern had some association and every transaction of that concern needed scrutiny, was too far at a distance to tread as to sustain as reasons to believe , under Sections 147/148 of the Act.

Summary

Issues:
Reassessment notice validity based on statement by Mr. Sanjay Rastogi, Fresh material for reopening assessment, Link between fresh material and assessee, Quashing of notice and proceedings.

Analysis:
The petitioner challenged a notice issued under Sections 147/148 of the Income Tax Act proposing reassessment for AY 1997-98 to 2001-02 based on a statement by Mr. Sanjay Rastogi implicating bogus entries by various entities, including M/s Hallmark Healthcare Ltd. The petitioner argued that the statement could not be the sole basis for a valid reassessment notice. The petitioner had previously explained the commission expenditure for AY 1996-97, which was accepted by the AO after inquiry. The petitioner contended that the statement did not directly implicate them, and the reassessment notice lacked a valid basis.

The petitioner relied on precedents to argue that there was no live link between the fresh material (Sanjay Rastogi's statement) and the assessee. The inquiry in AY 1996-97 had already addressed the genuineness of M/s Hallmark Healthcare Ltd., and the petitioner's explanation was accepted. The petitioner claimed that the statement did not mention them and, therefore, could not be a valid ground for reassessment.

The Revenue contended that the reassessment was justified based on the fresh material of Sanjay Rastogi's statement, indicating suspect entries by entities associated with him, including M/s Hallmark Healthcare Ltd. Despite the statement not directly naming the petitioner, the Revenue argued that it could still indicate a sham transaction, constituting fresh material for reassessment.

The court found that the reassessment notice was solely based on Sanjay Rastogi's statement, which did not implicate the petitioner. Moreover, the commission expenditure had undergone scrutiny in AY 1996-97, where the petitioner's explanation was accepted. The court held that there was no proximate link between the fresh material and the petitioner's suspected income, as required by law. Citing precedents, the court quashed the reassessment notice and all related proceedings, ruling in favor of the petitioner.

In conclusion, the court allowed the writ petition, quashing the impugned notice dated 13.01.2005 and all proceedings stemming from it, as the reassessment lacked a valid basis and did not establish a direct link between the fresh material and the petitioner's tax liability.