TMI Blog2019 (8) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... time the matter reaches the Court by filing of any affidavit or making any oral submission. In the premises, it is not open to the revenue to seek to sustain the re-opening notice on a new reason, namely, dis-allowance of deduction of expenditure since the whole activity was illegal. In the premises, the impugned notice issued by the Assessing Officer under Section 148 of the Act cannot be sustained and must be set aside. - Writ Petition No. 141/2015, 233/2015 and Others - - - Dated:- 9-7-2019 - S.C. GUPTE AND NUTAN D. SARDESSAI, JJ. R.G. Ramani, Advoccate for the Petitioner. K.V. Aravind, Sr. Standing Counsel, Y.V. Raviraj, Ms. Susan Linhares and Ms. Amira Razaq, Standing Counsel for the Department. Writ Petition Nos. 141/2015, 233/2015, 1015/2015, 1016/2015, 326/2015, 327/2015, 328/2015, 329/2015, 955/2015, 956/2015, 958/2015, 959/2015, 03/2016, 04/2016, 05/2016, 06/2016, 08/2016, 09/2016, 10/2016, 11/2016, 12/2016, 123/2016, 124/2016, 125/2016, 1020/2015, 1022/2015, 1019/2015, 1023/2015, TXA No.1/2016, Writ Petition Nos.15/2016, 16/2016, 17/2016, 22/2016, 23/2016, 24/2016, 25/2016, 75/2016, 80/2016, 99/2016, 100/2016,101/2016, 102/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The Assessees are all traders and exporters of iron ore, though some of them are also miners and processors of the ore. Having regard to allegations of large-scale mining, trading and exports of iron and manganese ore illegally or without authority of law across various States, the Government of India appointed a commission of inquiry under Section 3 of the Commission of Inquiry Act, 1952. Based on the findings of this commission, which inter alia reported under-pricing of ore exported by individual exporters, the Assessing Officers issued reopening notices under Section 148 of the Act. These notices are challenged by individual Assessees in these petitions. The petitions can be broadly classified into four groups. There are some petitions where notices under Section 148 have been issued after the expiry of four years from the end of the relevant assessment year, whilst there are others where the reopening has been within four years. In these latter petitions, the Assessees' case is that the Assessing Officers had no reason to believe that any income chargeable to tax had escaped assessment, whereas in the former cases the Assessees allege both want of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India through Ministry of Mines appointed a commission of inquiry under the Chairmanship of Mr. Justice M.B. Shah (Retired), inter alia, to inquire into allegations of illegal mining and trading of ore in various States including the State of Goa. The commission was appointed purportedly on the basis of reports received by the Union Government from various State Governments of wide spread mining of iron ore and manganese ore in contravention of various provisions of law including the provisions of Mines and Minerals (Development and Regulation) Act, 1957, The Forest (Conservation) Act, 1980, The Environment (Protection) Act, 1986 and rules and guidelines issued thereunder. The terms of reference of the commission, inter alia, included inquiry into, and determination of, the nature and extent of mining, transportation and trading of iron ore and manganese ore done illegally or without lawful authority and the losses arising therefrom as also identification of, as far as possible, persons responsible for the same and of the extent to which regulatory and monitoring systems had failed to deter, prevent, detect and punish offences relating to mining, storage, transportation, trade and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining leases of all lessees in Goa had expired on 27/11/1987, whereas maximum renewal period of 20 years in case of such mining leases had expired on 27/11/2007 and consequently, mining by the lessees after 22/11/2007 was illegal. The Supreme Court passed various other directions with which we are not concerned in the present matter. These were basically consequential upon its main finding on determination of mining leases. We are also not directly concerned with the first two reports of Shah Commission which, as we have noted above, were before the Supreme Court and considered by it in the manner outlined above. 8. After presenting its first two reports, Shah Commission made a third report, by which it inter alia observed that there were illegal exports particularly by means of under-invoicing on the part of the mining lessees and exporters. After this report was submitted by Shah Commission, the Income Tax Officer proceeded to issue a notice to the petitioner under Section 148 of the Act, proposing reopening of its assessment under Section 147 for the assessment year 2008-09. Reasons for reopening communicated in the order sheet to the Assessee were as follows: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to in the reasons for re-opening. 9. The petitioner outlined its objections to the reasons indicated by the revenue by pointing out inter alia brief facts of its case and submitting that no income had in fact escaped assessment. It was submitted that the Assessee had a well laid out process for exports, which was closely monitored by a separate export division. Depending upon the business policies/customer requirements, long term spot contracts were entered into by the Assessee and export prices for such contracts were determined on the basis of various factors, such as nature of contract (long term or spot), quality of the ore, impurities in the orc, size of the vessel (freight rate), loading rate of vessel, dispatch, demurrage, market factors as well as overall negotiations. It was pointed out that all parties with whom the Assessee was dealing for its exports were unrelated parties and payments were received directly through banking channels and export duty was duly paid on the basis of prices agreed in the contracts. It was submitted that there was no question of any under-invoicing of exports as alleged by the department. So far as the information for his for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and its applicability. It was observed that the expenditure incurred by the Assessee was for a purpose which was prohibited by law and was not allowable for deduction. 11. The reopening of the assessment, in the premises, is challenged by the petitioner Assessee in the present petition. 12. Mr. Pardiwala, learned Senior Counsel appearing for the petitioner, submits that the reasons to believe escapement of income disclosed by the Assessing Officer do not indicate any information available to the department for formation of any such belief. Learned Counsel submits that the assessment is to be reopened solely on the basis of Shah Commission report. Learned Counsel submits that the commission report itself was vitiated on account of serious violation of principles of natural justice and, at any rate, by reason of breach of Sections 8-B and 8-C of the Commission of Inquiry Act. Learned Counsel submits that the lessees including the petitioner herein were not given any opportunity to explain the material used by Shah Commission in its report. It is submitted that, at any rate, the report of the commission is in the nature of expression of an opinion by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a belief that income had escaped assessment. Learned Counsel submits that it is not relevant at the stage of a notice of reopening of assessment under Section 148 that under-invoicing reported by the commission should have demonstrably led to any escapement of income. In other words, learned Counsel submits that the link between the information, namely, under-invoicing of exports and escapement of income need not be complete. Learned Counsel submits that at the stage of a reopening notice, what is relevant is whether there is material at all for formation of a belief that income has escaped assessment; adequacy of that material from the point of view of formation of such belief is not a matter which the Court can scrutinize when a notice is challenged before it under Article 226 or 227. Learned Counsel submits that under Section 37 (1) of the Act, particularly having regard to the explanation provided thereunder, no business expenditure is allowable as deduction if the business was conducted illegally, and that the entire gross income of the Assessee was, in the premises, taxable in the hands of the Assessee. Secondly, and at any rate, it is submitted that income referred to in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his belief that there has been escapement of income of the assessee from assessment in the particular year. In case such reassessment is to be made in respect of an assessment made under Sub-section (3) of Section 143 or 147 after the expiry of four years from the end of the relevant assessment year, the Assessing Officer must additionally believe that the escapement of income had occurred as a result of the Assessee's failure to disclose fully and truly all material facts necessary for the assessment. No doubt, the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income Tax Officer on whether action should be initiated for reopening assessment. At the same time, it is to be borne in mind, as explained in Lakhmani Mewal Das (supra), that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of belief relating to escapement of income from the assessment. These then are the parameters for the Court to assess the legality of any reopening notice. 15. Let us now see what was the information or material available to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de before the Supreme in the Goa Foundation petition. Learned Counsel appearing for the Union stated before this Court, and which statement has been noted in our order dated 02/07/2019, that the Union would not take any action against mining lessees or traders for exports of ore only on the basis of the Commissioner s report without making its own assessment of facts and without first giving opportunity of producing evidence to the affected parties. For the reasons stated above, which bear generally on the status of the Commission's report and its findings, as well as the statement made by the Union of India as noted above, it is impermissible to the department to act exclusively on the basis of the Commission's report. It must make its own assessment of facts before any action is initiated. In the present case, since it is a reopening notice under Section 148, it may not be necessary to give any pre-notice opportunity of hearing or producing of evidence to the affected parties. The notice itself admits of a cause being shown by the affected parties, namely, in the present case, the Assessee. It is, however, imperative that the Assessing Officer must apply his own mind and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is taxable in his hands; not the income which he could have, but has not earned. No doubt, by adopting a device, if it is made to appear that income which really belonged to the assessee had been earned by some other person or by the Assessee in some other form or means, that income may be brought to tax in the hands of the Assessee and if such income has escaped tax in a previous assessment, a case for reassessment under Section 147(b) may be made out. There is nothing, however, in the reasons indicated by the Assessing Officer in the present case to suggest that any such income has accrued to any person or the Assessee. The reasons do not indicate that the Assessing Officer has formed any belief that under-pricing was adopted by the Assessee as a device by which income had accrued to any other person or the Assessee himself in any other form and such income had escaped assessment. 18. In any event, as we have explained above, there must be a direct nexus or live link between the information found by the Assessing Officer and the escapement of income arising in the case. In the present case, all that was available to the Assessing Officer was the information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad declared very low prices in respect of all its consignments of manganese ore exported out of India. It was also found that most of its export was only to 2 to 3 buyers, who in turn did not purchase ore from any other company except the appellant. After due inquiry/ investigation, customs authorities had found that the appellant was systematically showing lesser value for the manganese ore exported as compared with the prevailing market prices for the same grade of manganese ore. The customs authorities accordingly came to a definite conclusion that the prices mentioned in the relevant contracts between the Assessee and its buyers were lesser than contemporaneous market prices and it was found as a fact that the appellant company was indulging in under-invoicing. Final orders were accordingly passed under the Customs Act. It is in the context of these facts that the Supreme Court countenanced a reopening notice under Section 148 in that case. It is to be noted, firstly, that what the customs authorities found was by way of an order passed under law; it was a final order of Collector of Customs, and it found under-invoicing as a matter of fact. Secondly, the facts disclosed peculi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 (Del), Raymond Wollen Mills Ltd. V/s. Income Tax Officer (1999) 236 ITR 34 (SC), and ACIT V/s. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 291 ITR 500 (SC), cited by learned Counsel for the revenue, bear on the aspect of sufficiency or otherwise of the material used for formation of belief. These judgments make it clear that what can be submitted to judicial scrutiny is whether or not there was material on the basis of which belief could have been formed about escapement of income from assessment, and not whether the material was actually adequate or sufficient for formation of such belief. There is no quarrel with this proposition here. Here, we are precisely concerned with whether or not such belief could have been formed on the basis of such material as was available with the Assessing Officer. In every State action or order submitted to judicial scrutiny, the matter is assessed from the point of view of Wednesbury unreasonableness. The focus of the scrutiny is, firstly, on whether the authority has kept itself within the four corners of law and, secondly, and even if it has so kept itself, whether it has nevertheless come to a conclusion so unreasonable that no reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information or particulars was the Assessee expected to disclose in its assessment insofar as the export prices charged by it are concerned and which is now available to the Assessing Officer so as to enable him to form a belief that income has indeed escaped assessment. 22. When we come to the third reason alleged by the Assessing Officer for reopening the case, namely, illegality of the business and taxation of income derived from it as income from other sources, the department is on an even thinner ground. In the first place, when the income from the activity of mining and export of ore arose and also when it was assessed to tax, there was nothing to suggest that the activity was illegal. Six years later, when the Supreme Court decided the case of Goa Foundation, and declared that deemed mining leases had already expired and mining carried out thereafter was illegal, the question of illegality of the activity arose for the first time. But be that as it may, even if it is assumed that at all times the activity carried on by the Assessee, through which income was said to have accrued to it, was in violation of law, that does not alter the character of the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panion writ petitions, Writ Petition Nos.1015, 1016, 328, 329, 955, 959, 1019 of 2015, 3, 5, 22, 23, 99, 100, 113, 116, 117, 120, 133, 142, 166, 190, 191, 224, 225, 261, 263, 270 of 2016 are all matters which involve all four aspects referred to above as in the case of Writ Petition No.329 of 2015. Mr. Diniz appearing in WP Nos.22 and 23 of 2016 and Ms. Kakodkar appearing in WP No. 120 of 2016 make additional submissions in support of their respective cases. Mr. Diniz relies on the case of Sarada Mines Pvt. Ltd. V/s State of Orissa 2017(1) ILR-CUT 949, decided by Orissa High Court. The case was in respect of value added tax under Odisha Value Added Tax Act, 2004. There was a tax evasion report in that case against the assessee. Based on the report, reassessment proceedings were initiated against the assessee. This was also a mining lease case and concerned trade of iron ore. The error purportedly discovered by the Assessing Authority was on a reconsideration of the same material which was before the Authority at the time of the original assessment. The Court held that reopening in the case was on a mere change of opinion and was impermissible. The Court held that the factual back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition Nos.4, 6, 15, 16, 17, 24, 25, 101, 102, 114, 115, 118, 141, 143, 144, 145, 150, 167, 165, 207, 226, 227, 777, 791 of 2016, are all cases where reassessment notices are issued within four years from the end of the relevant Assessment Years. There is no requirement or failure on the part of the assessee to disclose fully and truly material facts in these cases. So far as the information and belief formed on such information of escapement of income from taxation, however, are concerned, the above discussion in Writ Petition No. 329 of 2015 squarely applies to these cases. Mr. Rivankar appearing in WP No. 791 of 2016 makes a few additional submissions. Learned counsel submits that in his case, the assessee is a mere trader and not a mining lessee and that there is accordingly no case for any illegal activities so far as his business is concerned. Learned counsel submits that there is no response on the part of the Revenue to this aspect of the Petitioner's case. This is one more instance which exposes lack of application of mind on the part of the Revenue before issuing re-opening notices. For the same reasons, as are discussed above in case of Writ Petition No.329 of 2015, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The following cases, Writ Petition Nos.8, 10, 11, 125 of 2016, 1020 of 2015, 1022 of 2015, 173 of 2016, 174 of 2016, are on the same footing as the group of petitions referred to in the paragraph above inasmuch as the re-opening is only on the basis of under-invoicing of exports and not accrual of income from illegal activities. They are, however, all cases of reopening within four years from the end of the relevant Assessment Years. For the reasons stated above, even these petitions deserve to be allowed and reopening notices quashed. 28. The following petitions, Writ Petition Nos.141 and 233 of 2015, and Writ Petition Nos. 198, 199, 262, 264, 265, 271, 272, 879, 880, 881, 882, 883 of 2016, are all petitions where reopening notices contained additional reasons involving issues under Section 10 B of the Act or Section 14A of the Act or commission paid to foreign agents, etc. These petitions deserve to be detagged from the group of petitions to be disposed of by this order. 29. Rule is accordingly made absolute and Writ Petition Nos.102 of 2016, 325, 327, 328, 329, 955, 956, 958, 959, 1015, 1016, 1019, 1020, 1022 of 2015, and Writ Petition Nos. 3, 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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