TMI Blog2012 (8) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned advocate for the petitioner contending that the electricity was being used only by the contractors and that the petitioner was not utilising the electricity for production and that the machinery on which depreciation had been claimed by the petitioner was leased out to the contractors and as such, the petitioner did not have any unaccounted production on account of theft of electricity ; all those contentions relate to the sufficiency of the reasons recorded by the Assessing Officer. It is well settled legal position that while examining the validity of proceedings under section 147 of the Act, the court is only required to see whether there was prima facie some material on the basis of which the assessment could be reopened. The sufficiency or the correctness of the material cannot be considered at this stage. - 16261 of 2010 - - - Dated:- 1-2-2011 - HARSHA DEVANI MS., ANTANI H. B., JJ. JUDGMENT Ms. Harsha Devani J.- 1. Rule. Mrs. M. M. Bhatt, learned senior standing counsel, waives service of rule on behalf of the respondent. Having regard to the controversy involved in the present case, the matter is taken up for hearing and final disposal tod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act was invalid, Mr. Deepak Shah, learned advocate appearing on behalf of the petitioner invited attention to the reasons recorded by the respondent to point out that the respondent has formed an opinion that the income has escaped assessment on two grounds ; the first ground being based upon a letter received from the Joint Commissioner of Customs and the second upon a newspaper report of the year 2003. It was submitted that the report of the Joint Commissioner of Customs is of the month April, 2003 and the newspaper report is of the year 2003 and as such, both the documents were within the knowledge of the Assessing Officer while framing the original assessment proceedings of which cognizance is now sought to be taken in the impugned proceedings without any finding to the effect that based on the show-cause notice issued by the customs authority, any income has escaped assessment. It was submitted that the information as contained in the show-cause notice was in the possession of the respondent at the time of the original assessment and the reopening is only to investigate the facts without a belief that any income has escaped assessment. According to the learned advocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of four years from the end of the relevant assessment year is without jurisdiction and deserves to be quashed and set aside. 5.3 The learned advocate has further submitted that the Assessing Officer has merely placed reliance upon the show-cause notice and no exercise has been carried out on the basis of the information to ascertain as to whether any income has in fact escaped assessment. In the circumstances, there is nothing on record to indicate that the Assessing Officer has formed any opinion as regards escapement of income. Referring to the order disposing of the objections, it was pointed out that, according to the Assessing Officer, there was definitely a fair chance that the assessee benefited from the power theft especially when the culprits were its own labour contractor and also that the power meters belonged to the assessee, to submit that the Assessing Officer was not sure about any income having escaped assessment and even, according to the Assessing Officer, there was only a fair chance of the income having escaped assessment. It was accordingly submitted that, in the present case, the Assessing Officer seeks to reopen the assessment and then verify the veraci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been claiming depreciation on machinery at more than Rs. 25 lakhs in the assessment year 2003-03 and even in the earlier assessment year 2002-03, thus the petitioner was using stolen electricity to run its machinery, it was clarified that depreciation has been claimed in relation to the machinery which has been given by the petitioner to the contractors on lease. It is the case of the petitioner that it does not use the machinery personally and that since it has leased the machinery to the contractors, the rates are decided accordingly. Referring to the order disposing of the objections, it was pointed out that, according to the respondent, the petitioner has not stated in its audit reports, the facts about any penalty being levied by GEB to submit that the petitioner is required to disclose information, which affects computation of his income. When the petitioner has not claimed any expenditure in relation to payment of penalty in respect of electricity theft, it is not necessary for the petitioner to show the same in the audit report. It was submitted that since the petitioner has not used the electricity, it was not necessary for the petitioner to disclose the same in the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt is set aside and the impugned notices are quashed. The parties in the circumstances shall bear their own costs throughout." Reliance was also placed upon the decision of the Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) for the pro- position that the grounds or reasons which lead to the formation of the belief contemplated under section 147(a) must have a material bearing on the question of escapement of income of the assessee from assessment because of failure or omission to disclose fully and truly all material facts. The reasons for the formation of belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. The powers of the Income-tax Officer to reopen assessment, though wide, are not plenary. The words of the statute are "reason to believe" and not "reason to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing an affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the court, on the strength of affidavit or oral submissions advanced." 5.8 Reliance was also placed upon a decision of the Punjab and Haryana High Court in the case of Duli Chand Singhania v. Asst. CIT [2004] 269 ITR 192 (P H) ; [2004] 136 Taxmann 725 (P H), wherein the court observed that there was not even a whisper of an allegation that escapement had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, and held that absence of this finding, which is a sine qua non for assuming jurisdiction under section 147 of the Act in a case falling under the proviso thereto, makes an action taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the details of dispatches of polished diamonds from the petitioner's factory from Surat to Mumbai were not entered in the stock book of Surat or Mumbai office and that the same were entered at Surat only when the labour bills were issued. That the Assessing Officer had also found that on the facts stated in the show-cause notice, the assessee was maintaining an accounting system which leads to manipulation of stock book to suppress its yield and profits. It was pointed out that from the report, it was also revealed that the diamonds exported from Surat were exported from Surat despite the fact that the closing stock of cut and polished diamonds at Surat was nil at the relevant time. Thus, cut and polished diamonds were clearly procured from sources other than its own. It was accordingly submitted that the aforesaid material contained in the show-cause notice is sufficient for the formation of belief that income has escaped assessment. 6.1 As regards the second issue, namely, the theft of electricity worth Rs. 48 lakhs as reported in the newspaper Loktej on January 20, 2003, is concerned, it was submitted that in respect of the said power theft, the assessee had paid the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the return of income and more particularly item No. 17 thereto, it was submitted that by not debiting the expenditure by way of penalty in the profit and loss account, and, consequently, not showing the same in Form No. 3CD, the petitioner has deliberately suppressed the aspect of electricity theft. 6.3 It was further submitted by the learned counsel that there is nothing on record to indicate that the attention of the Assessing Officer had been drawn to the show-cause notice issued by the customs authorities, hence, merely because the notice was issued prior to conclusion of the regular assessment proceedings does not mean that the Assessing Officer was aware of it while framing the assessment. Inviting attention to paragraph 8 of the reasons recorded, it was pointed out that before the Settlement Com- mission, the petitioner had paid Rs. 83 lakhs as duty at the rate of 50 per cent. on the seized diamonds which indicates that it is not the case of the petitioner that the seized goods do not belong to it, hence there is justifiable reason for the Assessing Officer to believe that income has escaped assessment. It was submitted that the facts stated in the reasons recorde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income-tax. The obligation so placed involves the further obligation to disclose all material facts necessary for his assessment for that year fully and truly. If at any subsequent point of time, it is found that either on account of an omission or failure of the assessee to file the return or on account of his omission or failure to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, the Income-tax Officer is entitled to reopen the assessment in accordance with the procedure prescribed by the Act. To be more precise, he can issue the notice under section 148 proposing to reopen the assessment only where he has reason to believe that on account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notice under section 34. Whether these grounds are adequate or not is not a matter for the court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again, the expression 'reason to believe' in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith : it cannot be merely a pretence. To put it differently it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a floating stock of cut and polished diamonds which is neither physically present at their head office at Surat nor at the branch office at Mumbai. Both these facts show that the assessee had maintained an accounting system which leads to manipulation of stock book to suppress its yield and profits. 3. The SCN also draws attention to the dates of the entries of the polished diamonds stock as mentioned earlier weighing 52,284.34 carats. It has been pointed out that the dates of entries closely match with the dates of arrivals of the arrested carrier Shri Manish H. Kalvadiya, Bharat Bodra and Girish Bodra (his accomplices). The dates of arrivals from Dubai on June 11, 2002, October 26, 2002, and September 29, 2003. These coinciding dates point out that out of the 52.284.34 carats of polished diamonds almost 41451.6 carats appear to be directly linked to the visits of the aforesaid persons. 4. It was also revealed that 1961.20 carats of polished diamond exported from Surat under invoice Nos. 128 to 135 dated December 26, 2002, and 4953.23 carats covered by invoice Nos. 140 to 146 dated January 20, 2003, were exported from Surat despite the fact that the closing stock of cut a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with 5877 carats of cut and polished diamonds. It is further stated that a copy of a show-cause notice which is in fact a complete report of the investigation carried out by the AIU officials was also received with the said letter. The said officials had found a number of discrepancies in the books of account and the stock of the assessee. The Assessing Officer has, inter alia, referred to the following noteworthy aspects mentioned in the show- cause notice : (i) The assessee had deliberately kept its accounting system in such a manner, that illegally procured or smuggled diamonds could be adjusted to evade detection by any of the law enforcement agencies. (ii) The investigation showed that details of dispatches of polished diamonds from factories at Surat to Mumbai were not entered in the stock book at Surat or Mumbai office and were entered at Surat only when the labour bills were issued. Only on receipt of labour bills, the Mumbai office made entries in the production register and stock book ; (iii) The entries in the production register and stock was made on the same day, however, in some instances like on June 14, 2002, June 29, 2002, October 30, 2002, and March 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is no doubt correct that the said finding may not be binding upon the income-tax authorities but it can be a valid reason to believe that the chargeable income has been underassessed. The court further held that the final outcome of the proceedings is not relevant. What is relevant is the existence of reasons to make the Income-tax Officer believe that there has been underassessment of the assessee's income for a particular year. 15. In ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) the Income-tax Officer had issued notices under section 148 of the Act on the basis of a letter addressed by the chief mining officer to him wherein it was stated that on a joint inspection of the colliery of the assessee it was revealed that the colliery company under reported the raising figure and that shortage of surface coal stock was also detected to the extent stated in the letter, and that it was decided to charge royalty on the said quantity of coal by the Government of West Bengal. The question before the Supreme Court was whether the letter of the chief mining officer did not constitute relevant material upon which the Income-tax Officer could have formed the requisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice issued by the customs authorities upon completion of the investigation, clearly indicate an application of mind on the part of the Assessing Officer to the facts stated in the show-cause notice as well as formation of belief that income chargeable to tax has escaped assessment. 17. Coming to the second requirement for assumption of jurisdiction under section 147 of the Act, viz., whether there is any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for that assessment year, on a plain reading of the reasons recorded, it is apparent that the same do not expressly state that income has escaped assessment on account of the failure on the part of the petitioner to disclose fully and truly all material facts. On behalf of the petitioner, various decisions have been placed reliance upon which have been referred to hereinabove for the proposition that when there is not even a whisper of an allegation as regards escapement of income from assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary, the action of the Assessing Officer is wholly with- out jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the end of the relevant assessment year is not fulfilled. 19. It has been vehemently argued by the learned advocate for the petitioner that the fact regarding the show-cause notice issued by the customs authorities as well as the report in the newspaper and the electricity theft were well within the knowledge of the Assessing Officer while framing the original assessment. Since the said material was already there before the Assessing Officer, it could not be said to be tangible material for the purpose of reopening assessment. According to the learned advocate, only on the basis of the existing material, an opinion is formed by the Assessing Officer and as such the reopening is based on a change of opinion and as such, is not sustainable in law. In this regard, it may be noticed that neither does the fact regarding the investigation carried out by the customs authority, nor the fact regarding theft of electricity, find place in the original assessment order. In the circumstances, the Assessing Officer while framing the original assessment under section 143(3) of the Act has not formed any opinion in respect of the income which is alleged to have escaped assessment in the reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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