2025 (1) TMI 390 - HC - Income Tax

Reopening of assessment - Report generated by the Central Goods and Service Tax ( CGST ) Authorities that certain entities were engaged in issuing/generating/providing fake/bogus invoices to pass on a fraudulent Input Tax Credit ( ITC ) without supply of goods - HELD THAT - The approach of the assessing officer was totally unfounded for more than one reason. The primary reason being the assessing officer s understanding of the GST transactions; secondly, the assessing officer s complete mis-reading of the facts, this despite the correct facts being placed on the record of the assessing officer by the petitioner; and thirdly, tangible material in the form of all documents pertaining to the professional services as rendered by the petitioner to M/s Flash Forge and all the details in that regard as reflected in the books of accounts in relation to receipt of fees, the TDS amounts deposited as also the GST amounts deposited in the treasury, have been completely overlooked, misconstrued by the officer. We are in fact not only surprised but pained with the approach of not only the assessing officer in showing such gross non-application of mind, but also with the mechanical approach of the PCIT, Mumbai, in according approval to the issuance of notice to the petitioner under Section 148A (b). This aspect we advert to little later. We wonder as to how without verifying the petitioner s credentials and merely on the basis of some information which was available with the CGST authorities, the assessing officer without verifying the returns which were filed by the petitioner and the supporting documents, qua the professional fees as received by the petitioner from M/s. Flash Forge, could have proceeded to issue a notice under section 148A (b) The information which was gathered by the department indicated that M/s Flash Forge had made payments to the petitioner. However, there was no material for the assessing officer to jump to a conclusion, that having received such amount, the petitioner was deemed to be involved and/or was the beneficiary of any bogus input tax credit as being portrayed by the CGST authorities. In our opinion, when tested on record it was a wholly unwarranted and a wholly erroneous assumption of the assessing officer and the PCIT to reopen the petitioner s assessment on such count. In fact, this is a case depicting a mechanical approach being adopted by both these officers. It is classic case wherein certain information which may be relevant in so far as the CGST authorities are concerned in relation to the transactions qua a registered person under the CGST Act is being mechanically and without application of mind, taken to be relevant, in so far as the proceedings under the IT Act are concerned, more so, when it is a case of re-opening of the assessment. We say so, as the CGST regime is governed by the provisions of the Central Goods and Service Tax Act and the State Goods and Service Tax Act as applicable. In so far as the income tax is concerned, it is governed under an independent enactment, namely the Income Tax Act, 1961. Both these Acts operate in different fields, with independent scheme of taxation, hence, there is no question of any overlapping or intermixing of the jurisdictions of these authorities, which stand compartmentalized. Even if some information is available under the CGST regime in respect of the registered person (assessee), the same cannot ipso facto and/or automatically apply to an assessee under the IT Act, unless the assessing officer has tangible material to indicate that certain transactions, which are relevant to the CGST are also relevant and necessary, in so far as the returns filed by an assessee are concerned, and any bogus transactions or anything in relation to such transactions, becomes relevant in so far as in a given case, qua the income disclosed by the assessee under the IT Act is concerned. Validity of PCIT Granting approval u/s 151 - A firm of Chartered Accountants, which is providing to its clients accounting and audit services, certainly cannot be alleged to have made bogus purchases from One World Group of Entities and in respect of which there was not a iota of material, over and above this, the petitioner has been alleged of having accommodation entries in regard to these purchases which are stated to be inflated resulting in suppression of profits, thereby reducing of the taxable income of the petitioner, while claiming fraudulent ITC, when there was no ITC whatsoever being claimed by the petitioner. All these remarks being made by the PCIT against the petitioner in granting approval under Section 151 of the IT Act for issuing notice under Section 148 of the IT Act, in our opinion, has crossed all limits of legitimacy in the discharge of the official duties by the PCIT. From the reading of the PCIT s remarks we may observe that if such high officers act with such colossal non-application of mind, amounting to an abuse of the authority and powers which are vested in him in law, which is coupled with a serious duty and an obligation to adhere to the correct facts of the case and on appropriate understanding of the law in grant of an approval, what can be the plight of the assessee. Thus, the impugned show cause notice issued to the petitioner u/s 148A (b) and also the consequent order u/s 148A (d) quashed - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the issuance of the notice under Section 148 of the Income Tax Act, 1961, to reopen the assessment for the Assessment Year 2018-2019 was justified.
• Whether the assessing officer and the Principal Commissioner of Income Tax (PCIT) exercised due diligence and applied their minds appropriately in initiating proceedings under Sections 148A(b) and 148A(d) of the Income Tax Act.
• Whether the information obtained from the Central Goods and Services Tax (CGST) authorities was relevant and sufficient to justify the reopening of the assessment under the Income Tax Act.
• Whether the petitioner had provided sufficient evidence to demonstrate that no income had escaped assessment for the Assessment Year 2018-2019.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Issuance of Notice under Section 148

• Relevant Legal Framework and Precedents: The proceedings were initiated under Sections 148A(b) and 148A(d) of the Income Tax Act, which allow for the reopening of assessments if income has escaped assessment. The court referred to previous judgments emphasizing the need for the assessing officer to have tangible material to justify such reopening.
• Court's Interpretation and Reasoning: The court found that the assessing officer acted on incorrect facts and without proper application of mind. The officer relied solely on information from the CGST authorities without verifying the petitioner's returns and supporting documents.
• Key Evidence and Findings: The petitioner had provided detailed evidence, including invoices, professional fees received, and tax payments made, which were overlooked by the assessing officer.
• Application of Law to Facts: The court applied the principles of due diligence and proper verification of facts before reopening assessments. It concluded that the assessing officer failed to meet these requirements.
• Treatment of Competing Arguments: The petitioner's arguments were supported by detailed documentation, while the revenue's reliance on CGST information was deemed insufficient.
• Conclusions: The court concluded that the notice under Section 148 was unjustified and quashed it.

Issue 2: Application of Mind by Assessing Officer and PCIT

• Relevant Legal Framework and Precedents: The court referred to the requirement for assessing officers and PCITs to exercise due diligence and apply their minds when granting approvals and issuing notices.
• Court's Interpretation and Reasoning: The court criticized the mechanical and non-application of mind by both the assessing officer and the PCIT, highlighting their failure to verify the petitioner's credentials and the nature of transactions.
• Key Evidence and Findings: The court noted the absence of any material linking the petitioner to the alleged bogus transactions.
• Application of Law to Facts: The court emphasized the need for a thorough examination of facts and evidence before taking such significant actions.
• Treatment of Competing Arguments: The court found the revenue's arguments based on CGST information to be inadequate and unsupported by evidence.
• Conclusions: The court held that both the assessing officer and the PCIT failed in their duties, leading to an unwarranted reopening of the assessment.

Issue 3: Relevance of CGST Information

• Relevant Legal Framework and Precedents: The court distinguished between the jurisdictions of the CGST and Income Tax authorities, emphasizing that information relevant to one may not automatically apply to the other.
• Court's Interpretation and Reasoning: The court found that the information from the CGST authorities was not relevant to the petitioner's case under the Income Tax Act.
• Key Evidence and Findings: The court observed that the petitioner had no transactions involving supply of goods with M/s Flash Forge, contrary to the CGST report.
• Application of Law to Facts: The court applied the principle that information must be directly relevant to the assessment under consideration.
• Treatment of Competing Arguments: The court rejected the revenue's reliance on CGST information without proper verification.
• Conclusions: The court concluded that the CGST information was irrelevant to the petitioner's income tax assessment.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The court noted, "The approach of the assessing officer was totally unfounded for more than one reason. The primary reason being the assessing officer's understanding of the GST transactions; secondly, the assessing officer's complete mis-reading of the facts."
• Core Principles Established: The judgment reinforced the principles of due diligence, proper verification, and the necessity of tangible material for reopening assessments.
• Final Determinations on Each Issue: The court quashed the notice under Section 148, criticized the non-application of mind by the assessing officer and PCIT, and emphasized the irrelevance of CGST information to the income tax assessment.

The judgment concludes by allowing the petition, quashing the impugned notices and orders, and imposing costs on the assessing officer and the PCIT for their conduct. The court also directed the Ministry to scrutinize the conduct of these officers. The petition was disposed of with these directions.