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TMI Blog2012 (8) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... eport, audited financial statements and Form No. 10CCAC for claim of deduction under section 80HHC of the Act. The case was taken for scrutiny assessment and notice was issued under section 142(1) of the Act calling for various details including details of purchase of rough diamonds and sale of polished diamonds in respect of each party, lot-wise details of rough diamonds issued for manufacturing with the details of polished diamonds received from labour parties and details of export sales in the prescribed form. By an order dated March 27, 2006, the Assessing Officer framed assessment under section 143(3) of the Act determining total income at Rs. 2,92,95,220. 4. Subsequently, after a period of about six years, the Assessing Officer has sought to reopen the assessment under section 147 of the Act by issuing the impugned notice dated February 15, 2010, under section 148 of the Act. Pursuant to the notice, the petitioner addressed a letter dated March 19, 2010, to the respondent asking him to treat the original return as a return filed in response to the notice under section 148 of the Act and requested him to furnish a copy of the reasons recorded for assuming jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he end of the relevant assessment year. It was contended that in the present case, since earlier assessment had been framed under section 143(3) of the Act, for the purpose of reopening the assessment after the expiry of a period of four years from the end of the relevant assessment year, twin conditions are required to be satisfied. Firstly, there must be reason to believe that income chargeable to tax has escaped assessment and, secondly, that such escapement must be by reason of failure on the part of the petitioner to (i) file a return under section 139(1) ; (ii) to respond to a notice under section 143(3) or section 148 of the Act ; or (iii) to disclose fully and truly all material facts necessary for its assessment for that assessment year. It was submitted that in the facts of the present case, neither of the conditions exist and as such, the proceedings under section 147 of the Act, having been initiated after the expiry of a period of four years from the end of the relevant assessment year on the basis of review of the existing material, are without jurisdiction. 5.2 Next it was submitted that in so far as the second requirement is concerned, neither of the first t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plications and as such there is no basis for formation of belief that any income has escaped assessment which is the basic require- ment for initiation of proceedings under section 147 of the Act. As regards the second ground stated in the reasons recorded, viz., theft of electricity, the learned advocate submitted that the Assessing Officer has merely placed reliance upon a newspaper report of the year 2003 and that nothing has been brought on record to suggest out of book sales or purchase to indicate any escapement of income from assessment. 5.4 The next contention raised by the learned advocate for the petitioner was that in the present case, it is an accepted fact that both the materials, namely, (i) the show-cause notice issued by the Joint Commissioner of Customs of April, 2003, as well as (ii) the newspaper report of January 20, 2003 were available on the file of the respondent at the time of original assessment. After receiving a copy of the show-cause notice and the newspaper report, the respondent did not make any enquiry on his own for formation of the belief that income has escaped assessment but has accepted the contents thereof as gospel truth. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment by reason of the omission or failure on the part of the assessee (a) to make a return under section 139, or (b) to make a return in response to a notice under section 142(1) or section 148 of the Act, or (c) to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions must co-exist to confer jurisdiction on the Income-tax Officer. Strong reliance is placed upon the concluding paragraph of the said decision which reads thus (page 10) : "It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realising that price should familiarise them- selves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Bombay High Court in the case of Hindustan Lever Ltd. v. R. B. Wadkar, Asst. CIT (No. 1) [2004] 268 ITR 332 (Bom) ; [2004] 137 Taxmann 479 (Bom) wherein the court has held thus (pages 337 and 338 of 268 ITR) : "The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the Assessing Officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no whisper as regards any failure on the part of the assessee to disclose fully and truly all material facts in the reasons recorded by the Assessing Officer. Reliance was also placed upon the decision of the Delhi High Court in the case of Haryana Acrylic Manufacturing Co. v. CIT [2009] 308 ITR 38 (Delhi) ; [2008] 175 Taxmann 262 (Delhi), wherein the court had held that the requirement of recording reasons, communicating the same to the assessee, enabling the assessee to file objections and requirement of passing a speaking order are all designed to ensure that the Assessing Officer does not reopen assessments which have been finalised on his mere whim and fancy and that he does so only on the basis of lawful reasons. These steps are also designed to ensure complete transparency and adherence to the principles of natural justice. Thus, a deviation from these directions would entail the nullifying of the proceedings. Reliance was also placed on the decisions of the Delhi High Court in the case of JSRS Udyog Ltd. v. ITO [2009] 313 ITR 321 (Delhi) ; [2009] 180 Taxmann 477 (Delhi) as well as of the Allahabad High Court in the case of Vishwanath Prasad Ashok Kumar Sarraf v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner had not brought out the fact as regards payment of penalty in relation to electricity theft in the said audit report. Referring to annexure A Form No. 3CD, which pertains to the particulars of depreciation allowable as per the Act and relates to item No. 14 on Form No. 3CD, it was pointed out that the petitioner had claimed depreciation in respect of plant and machinery to the tune of Rs. 27,22,305. It was submitted that the said machinery on which the petitioner has claimed depreciation, must have been put to use by the petitioner as a result of which there would be some consumption of electricity. However, the petitioner has not shown any consumption of electricity in respect to the factory premises and as such, it is evident that the petitioner was indulging in unaccounted production. The learned counsel accordingly submitted that from the reasons recorded, it is apparent that the petitioner has failed to disclose fully and truly all material facts necessary for its assessment. In the circumstances, the assumption of jurisdiction under section 147 of the Act by the Assessing Officer is valid. 6.2 Dealing with the submission made by the learned advocate fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner to make full and true disclosure and as such the initiation of proceedings under section 147 of the Act by issuance of the impugned notice is legal and valid and does not call for any intervention by this court. 7. Mr. Deepak Shah, learned advocate for the petitioner, in rejoinder submitted that the show-cause notice issued by the customs authorities pertains to a subsequent period and as such, the same would not be reflected in the return for the year under consideration. Referring to the reasons recorded, it was submitted that the search and seizure action had taken place on April 21, 2003, which was after the end of the relevant assessment year and as such, the diamonds seized during the search operation would not be reflected in the stock of the financial year 2002-03 and that till March, 2003, the stock was fully disclosed. Referring to the objections submitted by the petitioner, it was pointed out that the rough diamonds are not processed at the petitioner's factory but at the premises of the contractors who had incurred electricity expenses. Reiterating that on the material on record, there is nothing to suggest that there is extra production on the part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Officer, that it is a fit case for issuance of such a notice. The power conferred upon the Income-tax Officer by sections 147 and 148 is thus not an unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers. The idea was to save the assessees from harassment resulting from mechanical reopening of assessment but this protection avails of only those assessees who disclose all material facts truly and fully." 9. In S. Narayanappa v. CIT [1967] 63 ITR 219 (SC) the Supreme Court observed thus (page 221) : "It is true that two conditions must be satisfied in order to confer jurisdiction on the Income-tax Officer to issue the notice under section 34 in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year. The first condition is that the Income-tax Officer must have reason to believe that the income, profits or gains chargeable to incometax had been underassessed. The second condition is that he must have reason to believe that such 'underassessment' had occurred by reason of either (i) omission or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Customs, AIR Intelligence Unit, Mumbai (Office of the Commissioner of the Customs, Chhatrapati Shivaji International Airport, Sahar, Mumbai-400 009). The said letter mentions about an action of search and seizure by the AIR Intelligence officials on the assessee which resulted after the arrest of Shri Manish H. Kalvadiya at Sahar Airport Mumbai on April 21, 2003, with 5877 carats of cut and polished diamonds. The AIU officials searched the premises of the assessee at Mumbai and Surat. Acopy of the show-cause notice, which is in fact a complete report on the investigation carried out by the AIU officials was received by this office, vide the abovereferred letter. They found a number of discrepancies in the books of account and the stock of the assessee. 2. As per the show-cause notice the assessee had deliberately kept its accounting system in such manner, that illegally procured or smuggled diamonds could be adjusted to evade detection by any of the law enforcement agencies. The investigation by the AIU showed that the details of despatches of polished diamonds from factories at Surat to Mumbai were not entered in the stock book of Surat or Mumbai office. The sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking as a carrier for Mahesh V.Savani, partner of the assessee, long before his arrest. 6. Further, it has been noted that during the financial year 2002-03 the officials of the GEB conducted an action of the factories of the assessee located at Siddhkutir at Varaccha Road. The action resulted in detection of theft of electricity worth Rs. 48 lakhs. The information was carried in the newspaper Loktej on January 20, 2003, as is seen from this news item that the assessee has been indulging in power theft and out of books production which has resulted in unaccounted profits. 7. During the course of the regular assessment proceedings of the assessee, the above facts were not taken into consideration. In view of the above, I am of the opinion that income of the assessee has escaped assessment for the assessment year 2003-04 by not taking the above facts into consideration and making the necessary additions/disallowances. Hence, the case needs reopening under section 147 of the Income-tax Act, 1961, and necessary notice under section 148 is issued herewith. Thus, the above reasons due to which your case has been reopened is being given to you." 11. The q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrier Shri Manish H. Kalvadiya and his accomplices with the dates of entries of the above- mentioned 52,284 carats of diamonds, the coinciding dates indicate that almost 41451.6 carats appear to be directly linked to the visits of the said persons. (v) Polished diamonds exported from Surat under the invoices indicated therein were exported from Surat despite the fact that the closing stock of cut and polished diamonds at Surat during the said period was at "nil". Thus, 6914.45 carats of cut and polished diamonds were clearly procured from sources other than its own. (vi) The information carried in the newspaper Loktej on January 20, 2003, indicated that the petitioner had been indulging in power theft and out of book production which has resulted in unaccounted profits. 12. From the facts recorded in the reasons, what is required to be examined is as to whether the twin conditions precedent for the purpose of assuming valid jurisdiction under section 147 of the Act have been satisfied. 13. In so far as fulfilment of the first condition for invocation of powers under section 147 of the Act, namely, whether income chargeable to tax has escaped assessment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentatives of the assessee and according to the opinion of the officers of the Mining Department, there was under-reporting of the raising figure to the extent indicated in the said letter. The report is made by a Government Department and that too after conducting a joint inspection. It gives a reasonably specific estimate of the excessive coal-mining said to have been done by the respondent over and above the figure disclosed by it in its returns. Whether the facts stated in the letter are true or not is not the concern at this stage. It may well be that the assessee may be able to establish that the facts stated in the said letter are not true but that conclusion can be arrived at only after making the necessary enquiry. At the stage of the issuance of the notice, the only question is whether there was relevant material, as stated above, on which a reasonable person could have formed the requisite belief. Since we are unable to say that the said letter could not have constituted the basis for forming such a belief, it cannot be said that the issuance of notice was invalid. Inasmuch as, as a result of our order, the reassessment proceedings have now to go on, we do not and we ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. How- ever, there is no requirement in law that in the reasons, such failure should be expressly stated in the words of the proviso to section 147 of the Act. If on a reading of the reasons, it is possible to infer or draw a logical inference that there is failure on the part of the assessee to disclose fully and truly all material facts, the requirement of the provision would stand satisfied. Neither sub-section (2) of section 148 of the Act nor the proviso to section 147, require the Assessing Officer to expressly state in the reasons that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. If on the face of the reasons recorded, it is apparent that failure to disclose is made out, merely because a specific expression as noted hereinabove does not find place therein, it cannot be said that the Assessing Officer has not recorded satisfaction in this regard. 18. In the present case, from the language of the reasons recorded, failure to disclose fully and truly all material facts is writ large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessment. That information, must, it is true, have come to the possession of the Income-tax Officer after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected. In the case of A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC), the Supreme Court, after considering various decisions in this regard, held that the statute does not require that the information must be extraneous to the record. It is enough if the material, on the basis of which the reassessment proceedings are sought to be initiated, came to the notice of the Income- tax Officer subsequent to the original assessment. If the Income-tax Officer had considered and formed an opinion on the said material in the original assessment itself, then he would be powerless to start the proceedings for reassessment. Where, however, the Income-tax Officer had not considered the material and subsequently came by the material from the record itse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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