2017 (9) TMI 1589 - HC - Income Tax

Reopening of assessment - Reasons recorded for initiating proceedings u/s 148 - unexplained subscription to assessee s capital of assessee - Held that - The law on this subject is well settled. As held in Kelvinator (2010 (1) TMI 11 - SUPREME COURT OF INDIA), the powers under Section 147 of the Act have to be exercised after a period of four years only if there is a failure to disclose fully and truly all material facts and information, by the Assessee. In the present case, the reasons to believe contained the names of the very same five companies which were initially disclosed by the Petitioner during the assessment proceedings. The number of shares subscribed to by the said companies is the same and the amount received has been disclosed by the Assessee. There is no new material which has been found or mentioned in the reasons to believe which were not contained in the information provided by the Assessee prior to the conclusion of assessment under Section 143 (3) of the Act. In the facts of this case, the primary facts have not been shown to be false. The five companies do exist. They did subscribe to the share capital of the Petitioner. They did pay the money to the Petitioner. All the five companies are assessed to tax. These are the primary facts. The reasons to believe rely upon a letter received from the Investigation Wing and Mr. Chaudhary submits that this letter was in fact an investigation report. The report does not form part of the reasons and neither was it annexed to the reasons. Interestingly, even the counter affidavit is silent as to the material which has not been disclosed by the Petitioner. The counter affidavit merely states that the information was specific and the information would be provided to the Petitioner during the assessment proceedings. Thus, if the Revenue had any basis to show that the primary facts were incorrect, the same ought to have been set out in the reasons to believe. That has not been done in the present case. Thus, the Petitioner cannot be said to have failed to disclose fully and truly all the material facts. This being a jurisdictional issue, the assumption of jurisdiction under Sections 147 and 148 of the Act was erroneous. - Decided in favour of assessee.

Issues Involved
1. Quashing of notice under Section 148 of the Income Tax Act.
2. Validity of the reasons to believe for reopening assessment.
3. Alleged failure to disclose material facts by the Petitioner.
4. Adequacy of the Assessing Officer's (AO) inquiry and investigation.
5. Compliance with procedural requirements for reopening assessment.

Detailed Analysis

Quashing of Notice under Section 148 of the Income Tax Act
The Petitioner sought quashing of a notice dated 20th March 2015 issued under Section 148 of the Income Tax Act by the Assistant Commissioner of Income Tax (AO) and the order dated 1st February 2016 disposing of the objections filed by the Petitioner to the said notice. The Petitioner contended that there was no failure to disclose fully and truly all material facts during the initial assessment proceedings.

Validity of the Reasons to Believe for Reopening Assessment
The AO issued the notice under Section 148 on the ground that income had escaped assessment, based on information received from the Investigation Wing. The reasons to believe cited a statement from Mr. Navneet Kumar Singhania, who admitted to being an entry operator and stated that the companies involved were 'paper companies.' The AO concluded that the Petitioner had not disclosed fully and truly all material facts, resulting in under-assessment of income.

Alleged Failure to Disclose Material Facts by the Petitioner
The Petitioner argued that all material facts were fully disclosed during the original assessment proceedings. The Petitioner provided names of the companies, share amounts received, and relevant documents including confirmations from the companies, balance sheets, and tax assessments. The AO accepted these details without further inquiry, indicating satisfaction with the disclosures.

Adequacy of the Assessing Officer's Inquiry and Investigation
The court found that the AO did not conduct any further inquiry or investigation to verify the claim that the companies were 'paper companies.' The reasons to believe did not specify what material facts were allegedly not disclosed by the Petitioner. The court emphasized that mere reliance on a statement without further verification was insufficient to reopen the assessment.

Compliance with Procedural Requirements for Reopening Assessment
The court highlighted that the reasons to believe must be self-explanatory and cannot be supplemented by extraneous material. The reasons should clearly state what facts or information were not disclosed by the Petitioner. The court observed that the reasons provided by the AO lacked specificity and did not mention any new material that was not already disclosed by the Petitioner during the original assessment.

Conclusion
The court concluded that the Petitioner had disclosed all material facts fully and truly. The reasons to believe did not meet the required legal standards, as they failed to specify what facts were not disclosed and relied solely on unverified information. Consequently, the notice dated 20th March 2015 and the subsequent order dated 1st February 2016 were quashed.

Guidelines for Reopening of Assessments
The court issued guidelines for the Revenue to follow in future cases of reopening assessments:
1. Provide the standard form used by the AO for obtaining approval from the Superior Officer to the Assessee.
2. Reasons to believe must spell out all grounds for reopening, including any investigation report and the AO's inquiry conclusions.
3. Enclose any referenced documents or reports with the reasons.
4. Treat the exercise of considering objections to reopening as a quasi-judicial function, addressing each objection with proper reasons.

Order
The writ petition was allowed, and the notice and order were quashed. There was no order as to costs.

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