2014 (7) TMI 391 - HC - Income Tax

Reopening of assessment u/s 148 of the Act Full disclosure of material facts not made - Held that - The scrutiny of return of income filed for the AY 2006-07 was undertaken - It was also noted during such scrutiny that the assessee was engaged in the business of trading in shares securities and future option - The assessee also showed income from other sources i.e. from dividend - In respect of unsecured loans various queries were raised and they have been also answered - there was disclosure and the occasion would not arise to term this as the assessee not having disclosed fully and truly all the material facts necessary for assessment - the AO when forms his belief on the basis of subsequent new and specific information that the income chargeable to tax has escaped assessment on account of omission on the part of the assessee to make full and true disclosure of primary facts he may start reassessment proceedings as fresh facts revealed the non-disclosure full and true - Such facts were not previously disclosed or it can be said that if previously disclosed they expose untruthfulness of facts revealed. The Assessing Officer required jurisdiction to reopen u/s 147 r.w. section 148 of the Act where the information must be specific and reliable Relying upon Phool Chand Bajrang Lal And Another Versus Income-Tax Officer And Another 1993 (7) TMI 1 - SUPREME Court - since the belief is that of the Income-tax Officer the sufficiency of reasons for forming the belief is not for the Court to judge but is open to an assessee to establish that there exists no belief or that the belief is not at all a bona fide one or based on vague irrelevant and non-specific information - To that limited extent the Court may look at the view taken by the Income-tax Officer and can examine whether any material is available on record from which the requisite belief could be formed by the AO and whether that material has any rational connection or a live link with the formation of the requisite belief - It is also immaterial that at the time of making original assessment the AO could have found by further inquiry or investigation as to whether the transactions were genuine or not - If on the basis of subsequent valid information the AO forms a reason to believe on satisfying twin conditions prescribed u/s 147 of the Act that no full and true disclosure of facts was made by the assessee at the time of original assessment - the income chargeable to tax had escaped assessment his belief and the notice of reassessment based on such belief/ opinion needs no interference. The information furnished at the time of original assessment when by subsequent information received from the DCIT Kolkata itself found to be controverted the objection to the notice of reassessment u/s 147 of the Act must fail - at the time of scrutiny assessment a specific query was raised with regard to unsecured loans and advances received from the said company namely Basant Marketing Pvt. Ltd. based at Kolkata - These being the transactions through the cheques and drafts there would arise no question of the AO not accepting such version of the assessee and not treating them as genuine loans and advances - Furnishing the details of names addresses PANs etc. also would lose its relevance if subsequently furnished information which has been made basis for issuance of notice impugned concludes that Basant Marketing Pvt. Ltd. is merely a dummy company of one Shri Arun Dalmia which provided the accommodation entries to various beneficiaries. The Joint Director CBI Mumbai intimated to the DIT (Investigation) Mumbai - From the analysis of details furnished and the beneficiaries reflected which are spread across the country the CIT Kolkata suspected the accommodation entry related to the AY 2006-07 as well this information has been provided to Director General of Income-tax Kolkata who in turn communicated to the Chief Commissioner of Income-tax Ahmedabad - revelation of investigation as could be noticed from the record examined (file) deserves no reflection in this petition - Insistence on the part of the petitioner to provide any further material forming the part of investigation carried out against Dalmias also needs to meet with negation as the law requires supply of information on which AO recorded her satisfaction without necessitating supply of any specific documents - The proceedings initiated u/s 147 of the Act would not be rendered void on non-supply of such document for which confidentiality is claimed at this stage the decision in Acorus Unitech Wireless Private Limited Versus Assistant Commissioner of Income Tax 2014 (3) TMI 154 - DELHI HIGH COURT followed - assumption of jurisdiction on the part of the AO is based on fresh information specific and reliable and otherwise sustainable under the law challenge to reassessment proceedings warrant no interference Decided against Assessee.

Summary

The core legal questions considered by the Court in this judgment include:

(1) Whether the reopening of the assessment beyond the four-year period under section 148 read with section 147 of the Income-tax Act, 1961, was valid in the facts of the case.

(2) Whether the Assessing Officer had a valid reason to believe that income chargeable to tax had escaped assessment due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

(3) Whether the information relied upon by the Assessing Officer to form the reason to believe was specific, reliable, and relevant, and whether there was a rational nexus or live link between such material and the formation of belief.

(4) Whether the petitioner had made full and true disclosure of all material facts during the original scrutiny assessment.

(5) Whether the petitioner was entitled to the information on which the reasons to believe were based, including confidential investigation reports, and whether non-disclosure of such confidential material vitiated the reopening proceedings.

(6) Whether the objections filed by the petitioner against the reopening notice were properly disposed of and whether the reopening notice amounted to a fishing inquiry.

(7) The applicability of judicial precedents concerning the scope and limits of reopening assessments under section 147, including the distinction between mere change of opinion and formation of belief based on fresh information.

Issue-wise Detailed Analysis

1. Validity of Reopening Notice under Section 148/147 beyond Four Years

The Court examined the statutory framework under sections 147 and 148 of the Income-tax Act, which permit reopening of assessment beyond four years only if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

The Court relied heavily on the Apex Court decision in Phul Chand Bajrang Lal, which clarified that reopening is permissible on the basis of fresh, specific, reliable, and relevant information that exposes the untruthfulness of facts disclosed during original assessment. The Court noted that the Assessing Officer's belief must be based on tangible material and not mere suspicion.

The Court also referred to Dishman Pharmaceuticals and Chemicals Ltd., which emphasized that both conditions-reason to believe income escaped assessment and failure to disclose fully and truly all material facts-are conditions precedent for reopening beyond four years.

The Court observed that the reasons recorded by the Assessing Officer must have a rational connection or live link with the formation of belief, as held in Lakhmani Mewal Das and other precedents.

2. Whether the Assessing Officer Had Reason to Believe Income Escaped Assessment Due to Non-Disclosure

The petitioner had filed a scrutiny assessment for the assessment year 2006-07, disclosing unsecured loans including those from Basant Marketing Pvt. Ltd. Details such as names, PANs, addresses, and confirmation letters were furnished. The scrutiny assessment was completed with certain disallowances unrelated to the loans.

However, subsequent to the original assessment, the Assessing Officer received a report from the DCIT, Kolkata, based on investigation and search operations by the CBI, indicating that Basant Marketing Pvt. Ltd. was a dummy company providing accommodation entries and engaged in money laundering. This information was new, specific, and reliable.

The Court found that this subsequent information was sufficient to form a reason to believe that the loans were bogus and that the petitioner had failed to disclose fully and truly all material facts at the time of original assessment. The Court held that mere disclosure of the transaction does not amount to full and true disclosure if the transaction itself is found to be bogus on the basis of subsequent information.

The Court distinguished this from a mere change of opinion, emphasizing that the Assessing Officer acted on fresh, tangible information that exposed the untruthfulness of the original disclosures.

3. Sufficiency and Nature of Material on Which Reason to Believe Was Based

The Court examined the nature of material relied upon by the Assessing Officer, including the DCIT report and statements recorded under section 131(1)(a) of the Act. It also considered the fact that the petitioner had requested disclosure of the investigative report but was refused on grounds of confidentiality.

Relying on the Delhi High Court decision in Acorus Unitech Wireless (P.) Ltd., the Court held that the law requires communication of the information or material on which the Assessing Officer forms satisfaction but does not mandate disclosure of confidential documents. The Court found that the reasons recorded and communicated to the petitioner contained sufficient details independent of the confidential report to justify the reopening.

Thus, the Court upheld the Assessing Officer's jurisdiction to reopen the assessment based on the material available.

4. Whether the Petitioner Made Full and True Disclosure at the Time of Original Assessment

The petitioner had furnished extensive details and confirmation letters regarding unsecured loans, including those from Basant Marketing Pvt. Ltd. The scrutiny assessment did not disallow the loans as such, only making disallowances under other provisions.

However, the Court emphasized that full and true disclosure requires that the primary facts themselves be true. Where subsequent information reveals that the transactions were bogus or fictitious, the initial disclosure cannot be treated as full and true.

The Court relied on the principle from Phul Chand Bajrang Lal that an assessee cannot shelter behind an untruthful disclosure and then claim protection from reopening.

5. Treatment of Petitioner's Objections and Allegation of Fishing Inquiry

The petitioner challenged the reopening notice on grounds that it was based on suspicion and that the Assessing Officer had not conducted any preliminary inquiry before issuing the notice.

The Court noted that the sufficiency of reasons recorded is not to be examined at the stage of challenge to the reopening notice except to the extent of verifying whether the Assessing Officer had any material to form a reason to believe.

It was held that the Assessing Officer had valid material, including statements recorded during investigation and reports from other Income-tax authorities, to form the requisite belief. The Court rejected the contention that the reopening was a fishing inquiry.

6. Applicability of Precedents and Legal Principles

The Court extensively relied on several precedents:

• Phul Chand Bajrang Lal: Distinction between fresh information exposing untruthfulness and mere change of opinion; reopening valid if based on specific, reliable subsequent information.
• Dishman Pharmaceuticals: Conditions precedent for reopening beyond four years.
• Rajesh Jhaveri Stock Brokers: Meaning of "reason to believe" as cause or justification, not final proof.
• Acours Unitech Wireless: Disclosure of reasons without mandating confidential documents.
• Kamdhenu Steel & Alloys Ltd. and Patel Alloy Steel: Burden of proof on assessee to prove genuineness; Revenue must investigate further if suspicion arises.

The Court reaffirmed that the jurisdiction to reopen is not unbridled but subject to safeguards, and that the Court's role is limited to ensuring that the Assessing Officer had some material on record to form a bona fide belief.

7. Application of Law to Facts

The Court found that the Assessing Officer had received specific and reliable information from DCIT, Kolkata, based on CBI investigations, that Basant Marketing Pvt. Ltd. was a dummy company providing accommodation entries.

This information was not available at the time of original assessment and materially contradicted the disclosures made by the petitioner.

The petitioner's husband's statement under section 131(1)(a) further supported the Assessing Officer's belief that the transactions were not genuine.

Accordingly, the Court held that the Assessing Officer had valid reason to believe that income had escaped assessment due to failure of full and true disclosure, justifying the reopening under section 147.

8. Treatment of Competing Arguments

The petitioner argued that all material facts were disclosed, that the loans were genuine and confirmed by the lending company, and that the reopening was based on suspicion without proper inquiry.

The Court rejected these arguments, holding that subsequent reliable information exposing the transactions as bogus overrides the earlier disclosures.

The petitioner's contention that the Assessing Officer should have made further inquiry before reopening was held to be irrelevant at the stage of challenge to the reopening notice.

The Court also rejected the claim that non-disclosure of confidential investigation reports vitiated the proceedings, relying on precedents that require only communication of the reasons recorded.

Significant Holdings

"The Assessing Officer acquires jurisdiction to reopen assessment under Section 147(a) read with Section 148 of the Income Tax Act, 1961 only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons which he must record, to believe that by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income chargeable to income tax has escaped assessment."

"Where the transaction itself on the basis of subsequent information is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings cannot be said to be disclosure of the 'true' and 'full' facts in the case and the Income-tax Officer would have the jurisdiction to reopen the concluded assessment in such a case."

"The law only requires that the information or material on which the Assessing Officer records his satisfaction is communicated to the assessee, without mandating the disclosure of any specific document."

"The expression 'reason to believe' in section 147 would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion."

"One of the purposes of Section 147 appears to be to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be travesty of justice to allow the assessee that latitude."

"It is necessary to reiterate that we are now at the stage of the validity of the notice under section 148/147. The enquiry at this stage is only to see whether there are reasonable grounds for the Income Tax Officer to believe and not whether omission/failure and the escapement of income is established."

"If on the basis of subsequent valid information, the Assessing Officer forms a reason to believe on satisfying twin conditions prescribed under section 147 of the Act that no full and true disclosure of facts was made by the assessee at the time of original assessment and, therefore, the income chargeable to tax had escaped assessment, his belief and the notice of reassessment based on such belief/opinion needs no interference."

In conclusion, the Court dismissed the petition challenging the reopening notice, holding that the Assessing Officer had valid jurisdiction based on fresh, reliable, and specific information indicating that the petitioner had failed to disclose fully and truly all material facts at the time of original assessment, thereby justifying the reopening of the assessment beyond the four-year period under section 147 of the Income-tax Act.