2023 (2) TMI 358 - HC - Income Tax

Reopening of assessment u/s 147 - reasons to believe - objections submitted by the petitioner against the reasons to believe and reopening of proceedings were turned down - unexplained investment in property - HELD THAT - Petitioner had not procured any property at Delhi with the description C-152 Nirman Vihar Delhi during the financial year 2016-2017. It was emphatically mentioned in this letter that the assessee had rather purchased land located at plot No.A-4 Nextgen Textile Park Sardarsamand Road Pali from M/s. Nextgen Textile Park Private Limited having its registered office at C-152 Nirman Vihar Delhi. This transaction was duly disclosed in the audited financial statement i.e. balance-sheet and fixed asset chart as well as the return of income filed by the petitioner for the Assessment Year 2016-17. It was asserted that the reasons formed by the A.O. were based merely on suspicion assumptions and conjectures and there was nothing in the communication dated 28.06.2021 which could suggest that there was any material to support the allegation/assumption of non-disclosure of land transaction. As from reasons for reopening the assessment it becomes clear that the same are founded on a non-existent transaction of purchase of immovable property situated at C-152 Nirman Vihar Delhi. In spite of the petitioner elaborating in its reply as well as objections that it had never entered into any such transaction the respondent authorities made no effort whatsoever to rectify the blatant blunder and instead they have tried to justify the fundamentally flawed reopening proceedings on entirely a new ground that the petitioner did not upload the financial statement with the return and that the details of the land transaction were not mentioned in the Schedule 6 of the balance sheet. This observation of the authority is also incorrect on the face of record because the balance-sheet was admittedly uploaded with the return filed by the petitioner pursuant to receiving the notice under Section 148 of the Income Tax Act. In Schedule 6 of the balance sheet transaction pertaining to procurement of immovable property is clearly stated. The very foundation of the impugned notice the reasons to believe and the order turning down objections is non-existent. All the three proceedings are based sheerly on conjectures and surmises. A.O. had no tangible evidence to initiate the re-assessment proceedings against the petitioner and the impugned action is based sheerly on borrowed satisfaction. Even if it is assumed for argument s sake that the transaction made by the petitioner for acquisition of immovable property at Pali may be read in place of Delhi then also the said transaction is duly mentioned in the return filed by the petitioner for the relevant financial year and is supported by the audited balance-sheet which was accepted by the Assessing Officer. Hence there is no escape from the conclusion that no tangible material was available with the Assessing Authority so as to initiate the re-assessment proceedings against the petitioner by taking recourse to the provisions under Section 148 and 143 (2) of the Income Tax Act. Decided in favour of assessee.

Summary

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

• Whether the reopening of assessment under Section 148 of the Income Tax Act, 1961 was legally valid and justified.
• Whether the Assessing Officer had a bona fide belief, supported by tangible material, that income chargeable to tax had escaped assessment within the meaning of Section 147 of the Income Tax Act.
• Whether the foundational facts relied upon by the Assessing Officer for issuing the reassessment notice were factually correct and legally sufficient.
• Whether the petitioner's objections against the reopening of assessment were rightly rejected by the Income Tax Officer.
• Whether the writ petition under Article 226 of the Constitution of India was maintainable against the order disposing of objections to the reasons recorded under Section 148.

Issue-wise Detailed Analysis

1. Validity of Reopening under Section 148 and Existence of Bona Fide Belief

The legal framework governing reassessment proceedings under Sections 147 and 148 of the Income Tax Act requires that the Assessing Officer must have a "reason to believe" that income chargeable to tax has escaped assessment. This belief must be bona fide and founded on tangible material, not mere suspicion or conjecture. The Supreme Court and various High Courts have emphasized that the Assessing Officer, being a quasi-judicial authority, must apply independent mind and cannot rely solely on borrowed satisfaction from the investigating wing or third-party information.

The petitioner relied on authoritative precedents, including the Supreme Court judgment in Jeans Knit (P) Ltd., which held that a writ petition is maintainable against orders disposing objections to reasons recorded under Section 148 and that reopening must be based on a genuine and independent application of mind.

The Court examined the reasons recorded by the Assessing Officer, which alleged that the petitioner had made a large investment of Rs.1,21,40,000/- in immovable property at C-152, Nirman Vihar, Delhi, which was not disclosed in the return of income. However, the petitioner contended that the transaction related to purchase of land at plot No. A-4, Nextgen Textile Park, Sardarsamand Road, Pali, and that the address C-152, Nirman Vihar, Delhi was the registered office of the seller, not the property purchased.

The respondents admitted that the property address mentioned in the reopening notice was erroneous and was based on information from the investigating wing without verifying the facts. The registered sale deed confirmed the petitioner's position that the property was at Pali, not Delhi. The Court found that the Assessing Officer's belief was founded on a non-existent transaction and thus lacked any tangible material or prima facie evidence.

2. Disclosure of the Property Transaction in the Return and Financial Statements

The petitioner had filed the original return under Section 139(1) for the relevant assessment year, disclosing the investment in the immovable property at Pali. The return was verified without any defect. Furthermore, the petitioner filed a fresh return after issuance of the Section 148 notice, attaching the audited financial statements, including Schedule 6 of the balance sheet, which clearly disclosed the land transaction worth Rs.1,26,25,900/- under fixed assets.

The Assessing Officer alleged that the petitioner had not uploaded the relevant annexure (Schedule 6) and hence the transaction was not disclosed. The Court rejected this assertion, noting that the balance sheet and Schedule 6 were indeed uploaded and undisputedly showed the land transaction. Thus, the foundational premise of non-disclosure was factually incorrect.

3. Treatment of Petitioner's Objections and the Order Disposing Them

The petitioner submitted detailed preliminary objections challenging the reopening notice on grounds of factual inaccuracy and absence of any material to support the belief that income had escaped assessment. The objections highlighted the misidentification of the property and the disclosure of the transaction in the return and financial statements.

Despite these objections, the Income Tax Officer passed an order rejecting them, stating that the Assessing Officer had a bona fide belief based on prima facie evidence. However, the Court noted that this order itself admitted that the belief must be based on material and not suspicion, yet the material relied upon was factually incorrect and non-existent.

The Court found the rejection of objections to be erroneous and based on conjecture rather than evidence. The authority's attempt to justify the reopening on a new ground (non-uploading of Schedule 6) was also factually incorrect and could not salvage the flawed proceedings.

4. Maintainability of Writ Petition under Article 226

The petitioner invoked Article 226 of the Constitution to challenge the legality of the reassessment notice and the order disposing objections. Reliance was placed on judicial precedents affirming that writ petitions are maintainable to test the validity of reopening assessments, especially when the foundational reasons are flawed or non-existent.

The respondents contended that the correctness or sufficiency of material should not be examined at the writ stage and that the petitioner could raise these issues during the faceless assessment proceedings. However, the Court distinguished this approach, emphasizing that the reopening itself must be legally valid and founded on material facts before the proceedings commence.

Application of Law to Facts and Treatment of Competing Arguments

The Court applied the legal principles requiring a bona fide belief supported by tangible material to the facts, finding that the reopening notice and reasons were based on incorrect property details and an erroneous premise of non-disclosure. The petitioner's disclosure in the return and audited financial statements negated any claim of escapement of income.

The respondents' admission of the error in property description and reliance on borrowed satisfaction without independent verification was held to be a fundamental flaw. The Court rejected the argument that the matter should be left open for the Assessing Officer to decide during faceless assessment, holding that the initiation of reassessment itself was illegal.

Significant Holdings

The Court held:

"In order to determine as to whether the Assessing Officer had a bona fide belief about the escapement of income of the assessee, it has to be considered as to whether the facts and circumstances justify the formation of the belief in contrast to suspicion. There has to be some material on record on the basis of which the Assessing Officer formed a bona fide belief that the income of the assessee has escaped assessment. In other words, the material on the basis of which belief is formed must be in the nature of prima facie evidence, direct or circumstantial, giving rise to belief in the mind of the Assessing Officer about the escapement of income."

It was further held that:

• The foundational facts for reopening assessment must be factually correct and supported by material; mere suspicion or borrowed satisfaction is insufficient.
• The petitioner had disclosed the land transaction in the original return and audited financial statements, negating any claim of undisclosed income.
• The reopening notice and reasons were based on a non-existent transaction and erroneous property details, rendering the reassessment proceedings illegal.
• The objections raised by the petitioner were wrongly rejected by the Income Tax Officer.
• The writ petition under Article 226 was maintainable and the Court exercised its jurisdiction to quash the impugned notice, reasons to believe, and order disposing objections.

Consequently, the Court quashed and set aside the reassessment notice dated 31.03.2021 under Section 148, the reasons recorded under Section 143(2) dated 28.06.2021, and the order dated 13.09.2021 disposing objections, along with all consequential proceedings.