2025 (5) TMI 1803 - HC - Income Tax

Reopening of assessment u/s 147 - Bogus transaction/purchases - AO had information in his possession that the Petitioner had entered into an unexplained transaction with one Sh. Shitij Malhotra - HELD THAT - Mr. Shitij Malhotra had recorded a statement that he was not carrying on any genuine activities but was engaged in providing entries on a commission of 1%. The Income Tax Authorities found that the Petitioner had shown purchases from Mr. Shitij Malhotra. This information suggests that the Petitioner s income for AY 2018-19 was concealed to escape assessment. Petitioner was also provided with a copy of the STR enquiry report in the case of Mr. Shitij Malhotra. Petitioner had responded to the said notice and had furnished its accounts as well as statements of exports sales. However it is noted that the Petitioner did not provide any documents regarding transportation of the material or any other material that would evidence movement of goods from Mr. Shitij Malhotra to the Petitioner. It is also important to note that the petitioner did not dispute that it had entered into a transaction of purchase of goods from Mr. Shitij Malhotra. The learned counsel submits that the entire information is available only for AY 2016-17 and therefore the same is not relevant to AY 2018-19. However we do not find any merit in the said contention. STR Report is placed on record and it also notes that in FY 2017-18 similar fact pattern exist . Therefore we find no merit in the said contention. Petitioner s contention that the AO did not have any evidence in the form of books of accounts assets or documents in his possession to issue the impugned notice is also unpersuasive. There is no dispute that an entry for purchase of goods amount regarding purchase made from Mr. Shitij Malhotra exist in the books of accounts of the petitioner. The entire exercise of initiation of reassessment has triggered by the finding entries in the books of accounts that have been admitted by Sh. Shitij Malhotra to be bogus. Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

- Whether the impugned notices and order issued under Sections 148, 148A(b), and 148A(d) of the Income Tax Act, 1961, for reopening the assessment for AY 2018-19, are legally valid and within jurisdiction.

- Whether the Assessing Officer (AO) had verifiable information justifying the reopening of the assessment under Section 148, particularly in light of statutory principles and the principles of natural justice.

- Whether the AO complied with procedural safeguards, including providing the petitioner an opportunity of being heard at the enquiry stage under Section 148A(a) before issuing the notice under Section 148A(b).

- The applicability and effect of the Central Board of Direct Taxes (CBDT) instructions dated 22.08.2022 regarding verification of information and opportunity of hearing prior to initiating proceedings under Section 148/147.

- The relevance and sufficiency of the information derived from the statement of a third party (Sh. Shitij Malhotra) and the Special Technical Report (STR) in justifying the reopening.

- Whether the petitioner's contention that the information related only to AY 2016-17 and not to AY 2018-19 is tenable.

- Whether the absence of direct evidence such as books of accounts or assets in possession of the AO invalidates the reopening notice.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity and Jurisdiction of Reopening Notices under Sections 148, 148A(b), and 148A(d)

The legal framework governing reopening of assessments is contained in Sections 147, 148, and 148A of the Income Tax Act, 1961. Section 148 allows reopening where the AO has reason to believe that income chargeable to tax has escaped assessment. Section 148A introduces a mandatory enquiry stage before issuing the notice under Section 148, requiring the AO to provide an opportunity of hearing to the assessee.

The Court examined whether the AO had jurisdiction to issue the impugned notices and order and whether the procedural requirements were complied with. The petitioner challenged the notices on grounds that the AO lacked verifiable information and did not afford an opportunity at the enquiry stage under Section 148A(a).

The Court referred to the CBDT instructions dated 22.08.2022, which emphasize that before initiating proceedings under Section 148/147, any information available on the Income Tax Department's database must be verified, and the taxpayer must be given an opportunity of being heard. The instructions also caution that information from reporting entities may be inaccurate due to human or technical errors, and supervisory authorities must ensure compliance with these guidelines.

The Court noted that the impugned notice under Section 148A(b) was issued based on information that the petitioner had entered into unexplained transactions with Sh. Shitij Malhotra, who admitted to issuing bogus bills on a commission basis. The AO had possession of a statement from Mr. Malhotra and an STR enquiry report corroborating these facts. The petitioner was informed of this information and provided a copy of the STR report.

Although the petitioner contended that no opportunity was afforded at the enquiry stage, the Court observed that the petitioner had responded to the notice and furnished accounts and statements of export sales. The Court found no merit in the contention that the AO failed to provide an opportunity, as the petitioner was made aware of the material facts and given a chance to respond.

Regarding jurisdiction, the Court held that the AO had sufficient reason to believe that income had escaped assessment, based on the admitted bogus nature of transactions recorded in the petitioner's books of accounts. The reopening was therefore valid and within jurisdiction.

Issue 2: Sufficiency and Relevance of Information for Reopening

The petitioner argued that the information relied upon pertained only to AY 2016-17 and not to AY 2018-19, and hence was irrelevant for reopening assessment for AY 2018-19.

The Court examined the STR report and noted that it recorded a "similar fact pattern" existing in FY 2017-18, which is relevant to AY 2018-19. The Court rejected the petitioner's argument as lacking merit, holding that the information was indeed pertinent to the assessment year in question.

Further, the petitioner contended that the AO had no evidence such as books of accounts, assets, or documents in his possession to justify reopening. The Court observed that the petitioner's own books of accounts recorded purchases amounting to Rs. 52,68,697/- from Mr. Malhotra, whose statement admitted the transactions to be bogus. This constituted sufficient material to justify reopening.

The Court applied the law to the facts and found that the AO's reliance on the statement of Mr. Malhotra and the entries in the petitioner's books of accounts was a valid basis for reopening.

Issue 3: Compliance with Principles of Natural Justice and Procedural Safeguards

The petitioner argued that the reopening violated principles of natural justice as no opportunity was given to address the statement of Mr. Malhotra or the STR report before issuance of the notice under Section 148A(b).

The Court noted that the petitioner was provided with a copy of the STR enquiry report and was given an opportunity to respond by furnishing accounts and statements. The Court found that the procedural safeguards were complied with, and the petitioner was not denied the opportunity of being heard.

The Court also highlighted the CBDT instructions mandating verification of information and opportunity of hearing, and found that these instructions were followed in the present case.

Issue 4: Treatment of Competing Arguments

The petitioner's contentions regarding lack of verifiable information, non-compliance with natural justice, and irrelevance of information to the assessment year were considered and rejected based on the evidence and legal principles.

The Court's reasoning emphasized that the AO's belief in escapement of income was based on credible information, including an admission by the third party involved, and entries in the petitioner's own books, which sufficed to initiate reassessment proceedings.

3. SIGNIFICANT HOLDINGS

- "The entire exercise of initiation of reassessment has triggered by the finding entries in the books of accounts that have been admitted by Sh. Shitij Malhotra to be bogus."

- The Court held that the AO had verifiable and relevant information justifying reopening under Section 148, supported by the third party's statement and corroborated by the STR report.

- The Court affirmed that procedural safeguards, including opportunity of hearing at the enquiry stage under Section 148A(a), were complied with, as the petitioner was informed of the material facts and given an opportunity to respond.

- The Court rejected the petitioner's argument that information pertaining to a different assessment year was irrelevant, holding that similar fact patterns in the relevant financial year justified reopening for AY 2018-19.

- The Court concluded that the impugned notices and order were valid, within jurisdiction, and not violative of statutory provisions or principles of natural justice.

- The petition was dismissed as devoid of merit.