M/S.p.g.foils Limited v. Income Tax Settlement Commission, Additional Bench, 488-489, Anna Salai, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 11.02.2008 C O R A M : THE HONOURABLE MR.JUSTICE P.D.DINAKARANandTHE HONOURABLE MR.JUSTICE R.REGUPATHI W.A.No.3036 of 2003 M/s.P.G.Foils Limited,37, Arcot Road, Vadapalani,Chennai-26.... Appellant / Petitioner -vs- 1. Income Tax Settlement Commission, Additional Bench, 488-489, Anna Salai, Chennai. 2. Assistant Commissioner of Income- tax, Circle 5, Ahmedabad. ... Respondents/ RespondentsAppeal against the order of this Court dated 1.9.2003 madein W.P.No.12598 of 2003 to issue a writ of certiorari to call forthe records of the 1[st] respondent in No.12/III/76/95 IT, dated28.10.2002.For Appellant :: Mr.N.MuthukumarFor Respondents:: Mr.J.Narayanaswami Jr. Standing Counsel ***** JUDGMENT The unsuccessful writ petitioner/assessee is the appellantin this appeal, which is directed against the order dated1.9.2003 made in W.P.No.12598 of 2003, where the appellant/writpetitioner/assessee had chosen to challenge the order of thefirst respondent/Settlement Commission dated 28.10.2002, based onwhich notices dated 21.3.2003 under Section 148 of the Income-taxAct, 1961 (in short, 'the Act'), were issued to theappellant/writ petitioner/ assessee, stating the reason for re- https://hcservices.ecourts.gov.in/hcservices/ opening the assessment with respect to assessment years 1995-96and 1996-97, as contemplated under Section 147 of the Act. 2.1.The facts, in nutshell, are as follows: The first respondent/Settlement Commission has passed anorder dated 28.10.2002 with respect to one M/s.Mohan Aluminium(P) Ltd., Bangalore (hereinafter will be referred to as 'MAL'),for the assessment year 1995-96. Before the SettlementCommissioner, one V.Jagadisan, Chartered Accountant, who appearedon behalf of MAL admitted that the duty free imported materialswere sold in the open market and undisclosed profits were earnedby it. It was further submitted that MAL was experiencing severeliquidity problem at the relevant time and in order to tide overthis difficulty, it had indulged in unauthorised sale of theimported items and unable to mobilise funds for such imports, MALcame to an understanding with M/s.P.G. Foils Ltd., theappellant/writ petitioner/assessee herein, for its business. Asperthesaidunderstanding,theappellant/writpetitioner/assessee would finance the entire operation and importthe aluminium items for MAL and they also undertook to sell theseitems in the open market. It was further stated that the profitsfrom such imports and sales were agreed to be shared equallybetween MAL and the appellant/ writ petitioner/assessee and thatfor convenience of operation, MAL opened a bank account in theState Bank of Bikaner and Jaipur at Mumbai in its own name andauthorised the appellant/writ petitioner/assessee to operate thesame. 2.2.Consequent to the above said statement, it was noticedthat even though a sum of Rs.2,43,57,295/- and Rs.83,18,591/- hadbeen shown as profits in the accounts of MAL for assessment years1995-96 and 1996-97 respectively, yet the appellant/writpetitioner/assessee did not disclose such profits of their sharein the Profit & Loss A/c. It was under such circumstances,notices dated 21.3.2003 were issued by the Assessing Officerstating that he had reason to believe that due to the lapse onthe part of the appellant/writ petitioner/assessee, a sum ofRs.2,43,57,295/ and Rs.83,18,591/- had escaped assessment for theassessment years 1995-96 and 1996-97 respectively andaccordingly, the assessment was reopened. 2.2.Consequent to the above said statement, it was noticedthat even though a sum of Rs.2,43,57,295/- and Rs.83,18,591/- hadbeen shown as profits in the accounts of MAL for assessment years1995-96 and 1996-97 respectively, yet the appellant/writpetitioner/assessee did not disclose such profits of their sharein the Profit & Loss A/c. It was under such circumstances,notices dated 21.3.2003 were issued by the Assessing Officerstating that he had reason to believe that due to the lapse onthe part of the appellant/writ petitioner/assessee, a sum ofRs.2,43,57,295/ and Rs.83,18,591/- had escaped assessment for theassessment years 1995-96 and 1996-97 respectively andaccordingly, the assessment was reopened. 2.3.Aggrieved by the above said notices dated 21.3.2003, theappellant/assessee had chosen to challenge the order of theSettlement Commission dated 28.10.2002 by filing the above writpetition. The learned single Judge, in his order dated 1.9.2003,rightly observed that the appellant/writ petitioner/assesseecannot be allowed to challenge the proceedings of the SettlementCommission dated 28.10.2002 made in the case of MAL, to which theappellant/ writ petitioner/assessee is not a party at all. Moreover, the assessing authority has only placed reliance on theproceedings of the Settlement Commission dated 28.10.2002 made inthe case of MAL and issued the notices dated 21.3.2003.Therefore, the learned single Judge has made it clear that ifthe appellant/writ petitioner/assessee is really aggrievedagainst the said reason for reopening the assessment, they are atliberty to submit their explanation or objections to the noticesissued under Section 148 of the Act within thirty days andaccordingly, dismissed the writ petition. 3.1. However, the writ petitioner/assessee had chosen toprefer the above appeal against the said order reiterating thecontentions made before the learned single Judge, viz., thereason for reopening the assessment invoking Section 148 of theAct is not sustainable in law, inasmuch as the observations madein the proceedings of the Settlement Commission dated 28.10.2002cannot be acted upon against the writ petitioner/assessee, as thesame is not binding on the appellant/writ petitioner/assessee, onthe ground that it violates the principles of natural justice. 3.2. Per contra, Mr.J.Narayanaswami, learned standingcounsel appearing for the respondent/assessing authority, submitsthat the observations of the Settlement Commission dated28.10.2002withreferencetotheappellant/writpetitioner/assessee would become a conclusive proof against them,only after giving them an opportunity to submit their objectionsto the notices issued under Section 148 of the Act statingreasons for reopening the assessment, if they so desire. Sincethe appellant/writ petitioner/assessee is not aggrieved by thesaid reason for reopening, much less, the notice issued underSection 148 of the Act, there is no need to quash theobservations made by the Settlement Commissioner in hisproceedings dated 28.10.2002, to which the appellant/writpetitioner/assessee is not even a party. 4. We have given our careful consideration to thesubmissions made on both sides. 5.1. It is trite law that the subsequent information, basedon which the reassessment was proposed, should be definite,specific, relevant and reliable and then only such material wouldconstitute to satisfy the test of reason to believe, because suchreason to believe should not be construed as a reason to suspect.In other words, what is relevant is whether the material has gotany rational connection or live link for the purpose of reason tobelieve. To put otherwise, if the information which forms thebasis for the reason to believe for the department to reopen theassessment are materials which lacks specific, relevant andreliable criterions, such materials are liable to be rejected 4. We have given our careful consideration to thesubmissions made on both sides. 5.1. It is trite law that the subsequent information, basedon which the reassessment was proposed, should be definite,specific, relevant and reliable and then only such material wouldconstitute to satisfy the test of reason to believe, because suchreason to believe should not be construed as a reason to suspect.In other words, what is relevant is whether the material has gotany rational connection or live link for the purpose of reason tobelieve. To put otherwise, if the information which forms thebasis for the reason to believe for the department to reopen theassessment are materials which lacks specific, relevant andreliable criterions, such materials are liable to be rejected only on the ground that they may be reason to suspect, but notreason to believe, vide Phool Chand Bajrang Lal's case reportedin 203 ITR 456 {AIR 1993 SC 2390} {1993 4 SCC 77}. 5.2. The above proposition was subsequently followed by aDivision Bench of this Court in COMMISSIONER OF INCOME TAX v.SULOCHANA, 2004 (5) CTC 410, to which one of us was a party(P.D.DINAKARAN, J.), wherein it was held that before such actionof reopening the assessment is taken, requirement of law such asthe live link or close nexus between the material coming to thenotice of the income tax officer and the formation of his beliefthat there has been escapement of the income of the assesseeshould be satisfied. Otherwise, the power conferred underSection 147 of the Income Tax Act would amount to arbitrary andunreasonable exercise. Hence, while making it clear that theauthorities do have the power to reopen the assessment underSection 147, the materials relied for such purpose should not bevague but it should be definite, specific, relevant and reliable. 6. In the instant case, as rightly pointed out by thelearned counsel for the appellant, the proceedings of theSettlement Commission dated 28.10.2002 is binding only onM/s.Mohan Aluminium (P) Ltd. (MAL) and not on the appellant.While disposing the case of MAL, the Settlement Commissioner,based on the statement obtained from one V.Jagadisan, CharteredAccountant who appeared on behalf of MAL and other materialsplaced before him, was constrained to make certain observationswith reference to the transactions between MAL and theappellant/writ petitioner/assessee. Those materials, in ourconsidered opinion, can definitely be a reason for reopening theassessment in respect of the appellant/writ petitioner/assessee.But the said reason by itself cannot be a conclusive proof forreopening the assessment in the absence of any explanation orobjections by the appellant/ writ petitioner/assessee. 7. Therefore, suffice it to give liberty to theappellant/writ petitioner/assessee to submit his objections tothe notices issued under Sec.148 of the Act, reopening theassessment for the assessment years 1995-96 and 1996-97 and totheobservationsmadeagainsttheappellant/writpetitioner/assessee in the proceedings of the SettlementCommissioner dated 28.10.2002 in the matter of MAL, as the saidobservations would not automatically bind on the appellant/writpetitioner/assessee. On receipt of such objections, theassessing authority is directed to consider the same and disposeof the matter on merits, without being influenced by any of theobservations made by the Settlement Commissioner in theproceedings dated 28.10.2002 in the case of MAL. 7. Therefore, suffice it to give liberty to theappellant/writ petitioner/assessee to submit his objections tothe notices issued under Sec.148 of the Act, reopening theassessment for the assessment years 1995-96 and 1996-97 and totheobservationsmadeagainsttheappellant/writpetitioner/assessee in the proceedings of the SettlementCommissioner dated 28.10.2002 in the matter of MAL, as the saidobservations would not automatically bind on the appellant/writpetitioner/assessee. On receipt of such objections, theassessing authority is directed to consider the same and disposeof the matter on merits, without being influenced by any of theobservations made by the Settlement Commissioner in theproceedings dated 28.10.2002 in the case of MAL. With the above observations and direction, the writ appealis disposed of. No costs. Consequently, W.A.M.P. No.4808 of2003 is closed.SraSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1. The Income Tax Settlement Commission, Additional Bench, 488-489, Anna Salai, Chennai.2. The Assistant Commissioner of Income- tax, Circle 5, Ahmedabad.+ 1 cc to Dr. Anita Sumanth, Advocate, SR No.6816+ 1 cc to Mr. Pushyasitaraman, Advocate, SR No.6886W.A.No.3036 of 2003ASM(CO)SR/3.3.2008