Income Tax Case

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1798 OF 2022 Digi1 Electronics Pvt.Ltd. A Company incorporated in India, having office at 7, Sevak Apartment Dhobi Talao Road, Andheri West 400058. PAN : Vs. .. Petitioner 1.Assistant Commissioner of Income Tax- 13(2)(2), Mumbai, Room No. 571, Aaykar Bhavan, M.K. Road,Mumbai 400020 .Mumbai 400020 . 2.The Joint Commissioner of Income Tax-5(2), Aaykar Bhavan, M.K. Road, 5(2), Aaykar Bhavan, M.K. Road, Mumbai 400020. 3.The Union of India throughthe Secretary, Ministry of the Secretary, Ministry of Finance, Government of India,North Block, New Delhi 110001.North Block, New Delhi 110001. 4.National Faceless Assessment Centre, 2[nd] floor, E-Ramp, Jawaharlal Nehru Stadium, Delhi - 110003. .. Respondents … Mr. Dharan V. Gandhi, for the Petitioner. Mr. Akhileshwar Sharma with Ms. Shilpa Goel, for the Respondent. … CORAM : DHIRAJ SINGH THAKUR &KAMAL KHATA, J.J.RESERVED ON : 19TH JANUARY, 2023. PRONOUNCED ON : 8TH MARCH, 2023. J U D G M E N T [PER KAMAL KHATA, J] : 1.By this petition, the petitioner challenges the notice dated 31[st]March 2021, issued under section 148 of the Income Tax Act, 1961(‘the Act’) by respondent No.1 seeking to reopen the assessment, onthe basis of ‘his reason to believe’ that income chargeable to tax forthe assessment year 2016-17 had escaped assessment within themeaning of section 147 of the Act;and the order dated 11[th] March,2022 disposing of the objections raised by the Petitioner inter alia onthe ground that the respondent failed to consider the contentionsraised did not conduct any further enquiry. FACTS : 2.The Petitioner is engaged in the business of trading inelectronic appliances and has filed its returns on a regular basis andeven for A.Y.2013-14. The respondent No. 1 by its order under Talwalkar . WP1798.2022.doc section 143(3) of the Act dated 14[th] March 2016 accepted thereturned income of the Petitioner for A.Y. 2013-14 after consideringthe submissions filed by the Petitioner. It filed its return of incomeunder section 139(1) of the Act on 13.10.2016 for A.Y. 2016-17declaring a total income of Rs. 2,85,63,750/-. The Petitioner’s booksof accounts were audited, and the auditor uploaded the audit reportin the Form No. 3CD. On 31[st] March, 2021 notice under section 148of the Act was issued to the Petitioner for the A.Y. 2016-17 with theprior approval of Respondent No. 2. Pursuant thereto, on 23[rd] April,2021, the Petitioner filed its return of income. By letter dated 4[th] May,2021, the Petitioner issued a letter seeking reasons recorded. On 23[rd]June, 2021 however, the respondent No. 1 issued a notice undersection 143(2) of the Act and also supplied reasons recorded forreopening the assessment, which are summarized in the petition asfollows : “(a) Information was shared on INSIGHTS PORTALunder the “verification module” under the head “HighRisk Transaction cases”.under the “verification module” under the head “HighRisk Transaction cases”. (b) The Description of such information says‘Account Balance or value at the end of the reportingPeriod” and the amount mentioned is Rs.103,79,33,586/-.‘Account Balance or value at the end of the reportingPeriod” and the amount mentioned is Rs.103,79,33,586/-. (c) In para 5 the finding of the officer is recordedwhich says that “there is credible informationreceived on the Insights portal that high riskwhich says that “there is credible informationreceived on the Insights portal that high risk transactions have taken place in the case of theassessee which needs to be verified.” “(a) Information was shared on INSIGHTS PORTALunder the “verification module” under the head “HighRisk Transaction cases”.under the “verification module” under the head “HighRisk Transaction cases”. (b) The Description of such information says‘Account Balance or value at the end of the reportingPeriod” and the amount mentioned is Rs.103,79,33,586/-.‘Account Balance or value at the end of the reportingPeriod” and the amount mentioned is Rs.103,79,33,586/-. (c) In para 5 the finding of the officer is recordedwhich says that “there is credible informationreceived on the Insights portal that high riskwhich says that “there is credible informationreceived on the Insights portal that high risk transactions have taken place in the case of theassessee which needs to be verified.” 3.In response thereto, on 6[th] July, 2021, the Petitioner fileddetailed objections. Further objections were filed by a letter dated17[th] July, 2021. Since there was no progress on the disposal of theobjections, the Petitioner uploaded online response on 18[th] February,2022, whereby the Petitioner requested disposal of the objectionsraised by the letters dated 6[th] July, 2021 and 17[th] July, 2021.Thereafter, on 28[th] February, 2022, second reminder letter was filed.On 11[th] March, 2022 impugned order was passed disposing thePetitioner’s objections to the proposed reassessment. Immediately,thereafter, a notice under section 142(1) of the Act was issued to thePetitioner calling upon them to provide certain details. In response tothe notice, the Petitioner filed letter on 15[th] March, 2022 raisinggrievance that the notice only gave one working days’ time to file areply. The Petitioner apprehending arbitrary and huge demands, filedthis petition. 4.Mr. Dharan Gandhi the learned Counsel for the Petitionersubmitted that the A.O. has failed to establish that thejurisdictional conditions are satisfied to initiate reassessment WP1798.2022.doc proceedings. He submitted that the reassessment is based solely onthe information received under the head High Risk Transaction casesunder the verification module on the “INSIGHTS PORTAL”. Hesubmits that the description on the portal is “Account Balance orvalue at the end of the reporting Period”, against which an amount ofRs. 103,79,33,586/- is mentioned. He submits that there is nothingin the reasons or in the order disposing objections in this regard.Accordingly, on such vague and ambiguous information, assessmentcannot be reopened. He submits that there is no live link or nexusbetween information received and the purported income i.e. escapedassessment. He further submits that there is no information or detailabout the nature of transaction or account which is signed, sine quanon for the A.O. to have a “reason to believe” that incomechargeable to tax has escaped assessment. In support of hiscontention, he relied upon the decision of the Apex Court in the caseof ITO vs. Lakhmani Mewal Das1. He submitted that there is no newtangible material based on which the assessment was beingreopened and that from the reasons recorded, one could not deducewhat was the new tangible material. He submitted that thereasons categorically recorded that the information requires furtherverification. He apprehends that the reopening would only lead to 1.(1976) 103 ITR 437(SC) WP1798.2022.doc fishing and roving enquiry conducted by the respondent No.1. Hesubmitted that a reopening of the assessment cannot be based onconjecture, surmises and assumptions. In support of the saidcontention, he relied upon following judgments: (i)375 ITR 308(Bom) Nivi Trading Limited vs. UOI. (ii)262 Taxman 404(Bom) Jalaram Enterprises (P) Ltd. vs. ITO. (iii) 261 Taxman 110(Bom) PCIT vs. Rajesh D. Nandu. (iv)406 ITR 326 (Guj) PCIT vs. Manzil Dineshkumar Shah. 1.(1976) 103 ITR 437(SC) WP1798.2022.doc fishing and roving enquiry conducted by the respondent No.1. Hesubmitted that a reopening of the assessment cannot be based onconjecture, surmises and assumptions. In support of the saidcontention, he relied upon following judgments: (i)375 ITR 308(Bom) Nivi Trading Limited vs. UOI. (ii)262 Taxman 404(Bom) Jalaram Enterprises (P) Ltd. vs. ITO. (iii) 261 Taxman 110(Bom) PCIT vs. Rajesh D. Nandu. (iv)406 ITR 326 (Guj) PCIT vs. Manzil Dineshkumar Shah. 5.He further submitted that from the information available on the“INSIGHT PORTAL” it can be concluded that the impugned order waspassed in mechanical and in routine manner without any applicationof mind, which by itself would make reassessment proceeding bad inlaw and liable to be set aside. He submitted that since the respondentNo. 1 had taken no efforts to verify the records of the Petitioner, theactions were without any due diligence and therefore, contrary to thelaw. He placed reliance on the following decisions in support of hiscontention. “(I) Chhuganmal Rajpal vs. SP Chaliha (1971) 79 ITR603(SC).603(SC). (ii) PCIT vs. Shodiman Investments (P) Ltd. 93 taxmann.com 153(Bom). (iii) Nu Power Renewables (P) Ltd. vs. DCIT 94 taxmann.com 29(Bom). (iv) South Yarra Holdings vs. ITO 263 Taxman594(Bom).”594(Bom).” 6.He relied upon the decision of this Hon’ble Court in the case ofHindustan Lever Ltd. vs. R.B. Wadkar2 to contend that in the presentcase, the reasons were absolutely silent about the nature oftransaction/account and consequently, were vague andunambiguous and unsubstantiated information. He furthersubmitted that a copy of the sanction or approval by the PCIT was notfurnished to the Petitioner and consequently one could concludethat either there is no such approval or the same is sanctionedwithout any application of mind. He further submitted that the noticeunder section 143(2) of the Act dated 23[rd] June, 2021 is incontravention of the Judgment of the Apex Court in the case of GKNDriveshafts (India) Ltd. v/s. Income-tax Officer3 which held that theassessing officer has to supply reasons after which the assessee canfile objections and thereafter, the same had to be disposed of by aspeaking order. He submitted that a period of 4 weeks is required tobe kept between the order disposing of the objections and the timebarring date, which is not done in the present case. He submittedthat whilst the assessing officer required more information, heaverred “the debit and credit figures mentioned in the STR 001 for 2.268 ITR 332(Bom)3.(2003) 259 ITR19(SC),3.(2003) 259 ITR19(SC), WP1798.2022.doc A.Y. 2016-17 are as under: “Debit transaction: Rs.105,94,63,630Credit Transaction: Rs. 103,79,33,586/-.” He submitted that thedebit figure had appeared for the first time and was ignored whilerecording reasons. He submitted that the debit figure is more thancredit figure and that since the clarification about the nature oftransactions/accounts is unanswered by the respondent, thePetitioner is unable to explain the same. He lastly submitted that theorder has been passed by NFAC i.e. respondent No. 4 whereas thereasons are recorded by respondent No. 1, which consequentlyvitiates the order passed disposing the objections. In view of theabove, he prayed that the petition be made absolute. 7.Mr. Suresh Kumar, learned Counsel for the respondent submitsthat the information on the “INSIGHT PORTAL” from the FinancialIntelligence Unit of the Government of India is tangible and concreteinformation. He submits that new tangible information was receivedin relation to the suspicious transactions from the FinancialIntelligence Unit and the reasons for satisfaction were recorded andapproved under section 151 of the Act from the Additional CIT 5-2,Mumbai. He submitted that the impugned order dated 11[th] March,2022 passed by the Faceless Assessing Officer disposing of the 7.Mr. Suresh Kumar, learned Counsel for the respondent submitsthat the information on the “INSIGHT PORTAL” from the FinancialIntelligence Unit of the Government of India is tangible and concreteinformation. He submits that new tangible information was receivedin relation to the suspicious transactions from the FinancialIntelligence Unit and the reasons for satisfaction were recorded andapproved under section 151 of the Act from the Additional CIT 5-2,Mumbai. He submitted that the impugned order dated 11[th] March,2022 passed by the Faceless Assessing Officer disposing of the objections was based on facts available on the record. He submittedthat since the case was reopened within four years from the end ofthe relevant assessment year and there was a large sum of cashtransactions mentioned in the information, the same has not beenscrutinized. He stated that the only requirement to initiateproceedings under section 147 of the Act was to record reasonsto believe satisfaction of the A.O., which had been recorded. Hesubmits that the notice under section 148 was issued after priorapproval of the Additional CIT under section 151 of the Act andconsequently, the notice was issued under section 143(3) of the Act isnot in violation of the Supreme Court Judgment in the case of GKNDriveshafts (India) Ltd.(Supra). He submitted that the informationon the INSIGHT PORTAL clearly mentioned that the assessee hasindulged in large sums of cash debit/credits and that by itself issufficient reason for reopening of assessment as it can be construed asnew tangible material. He submitted that by reassessment furtherverification and enquiry was permissible. He submitted that theassessment was reopened for verification of high risk transactionswhich are in the nature of large cash transactions. He submitted thatas per the Faceless Assessment Scheme, cases are reopened undersection 147 of the Act by the Jurisdictional Assessing Officer and thereafter cases are transferred to the Faceless Assessing Officer(FAO). 8.The learned Counsel distinguished the case of ITO vs.Lakhmani Mewal Das(supra)on the ground that in that casereopening proceeding was initiated after four years whereas in thepresent case, reopening was done before 4 years and based on newand tangible information received from the FIU in relation to thesuspicious transaction, that are in the nature of large cashtransactions and moreover, the reasons to the satisfaction wererecorded and approved by the Additional CIT as per section 151(2)of the Act. He further distinguished the case of HindustanLever(supra) on the ground that in the present case, there wasinformation received on the insight portal under High RiskTransaction category received from FIU. He further distinguished thecase of GKN Driveshaft India Ltd.(Supra) on the ground that theassessee in the present case was supplied with the reasons recordedalong with notice under section 143(2) of the Act and the impugnedorder dated 11[th] March, 2022 was passed by FAO disposing of theobjections. He consequently submitted that decision in the case ofAsian Paints Ltd. v/s. Deputy Commissioner4on the ground that 4. (2008)296 ITR 90 (Bom.) in the present case, assessment proceedings are still pending, asagainst in the case of Asian Paints(supra), assessment wascompleted. In view of the above, it was urged that the petition bedismissed. CONCLUSION 9.We have heard the learned Counsel at length. We are inagreement with the contention of the Petitioner and we find that thecontentions raised in the affidavit in reply are completely differentfrom the reasons which states: “High risk transaction to be verifiedhave been updatedunder the new system. In this case high risk transactionhas been reported.”; and “Finding of the AO: There is credible informationreceived on the Insights portal that high risktransactions have taken place in the case of theassessee which needs to be verified” place in the case of the in the present case, assessment proceedings are still pending, asagainst in the case of Asian Paints(supra), assessment wascompleted. In view of the above, it was urged that the petition bedismissed. CONCLUSION 9.We have heard the learned Counsel at length. We are inagreement with the contention of the Petitioner and we find that thecontentions raised in the affidavit in reply are completely differentfrom the reasons which states: “High risk transaction to be verifiedhave been updatedunder the new system. In this case high risk transactionhas been reported.”; and “Finding of the AO: There is credible informationreceived on the Insights portal that high risktransactions have taken place in the case of theassessee which needs to be verified” place in the case of the and the paragraph 5 of the affidavit in reply states as under: “… the Cash credits and subsequent debits in the current account of the assessee.” We could not find any mention about the “cash credits and subsequent debits” in the reasons recorded. Moreover, as per thereasons itself the said transactions were to be verified. Hence there was a clear departure from the stand. There is no averment in thereply that would suggest that the information was verified and thereafter approval was taken. We are in agreement with thepetitioner's counsel who placed reliance on the following Judgments: (i)268 ITR 332 (Bom) Hindustan Lever Ltd. vs. R.B. Wadkar.Wadkar. (ii)362 ITR 402(Bom) Aroni Commercials Ltd. vs. DCIT. (iii) 439 ITR 582(Bom) Peninsula Land Ltd. vs. ACIT. (iv)438 ITR 139(Bom) First Source Solutions Ltd. vs. Asstt. CIT.CIT. 10. Having perused the reasons and the information, we find nonew tangible material as contended by the respondents. Debits andCredits can in no way disclose the nature of transactions or lead to aninference of income escaped assessment. The respondents have nottaken any ground of extrapolation. The debits and credits cannot bea ground for further enquiry and verification and the same isimpermissible. We find no live link or nexus between the informationreceived and the income escaping assessment. The Petitioner iscarrying on a retail business of electronic appliances. Usually,appliances would be supplied to clients wherever required andpayment would be received in cash upon delivery. Therefore, the cashdeposits from various places cannot be doubted be consideredsuspicious transactions. In our view, there is no prima facie casemade out that income has escaped assessment. The Petitioner hasfully and truly disclosed all the material facts and there is no specificaverment to show what material fact was required to be disclosed byTalwalkar .12/15 the Petitioner that is not disclosed. The ratio of the Judgment in thecase of Lakhmani Mewal Das(supra) that the reasons for formation ofthe belief must have rational connection with or relevant barringon formation of belief is squarely applicable to the present case. ThePetitioner in the present case has filed Tax Audit reports and hasshown total turnover in the sum of Rs. 189 Crores. The cashdeposits which find mention in the affidavit in reply is a sum of Rs.11Crores. Being in the retail business of trading in electronic items, thisis not a large sum that would lead to a belief that the income hasescaped assessment. The respondent No. 1 ought to have made priorenquiries about the nature of business before considering reopeningof the assessment, which they have failed to do. We also find that therespondent No. 2 has not applied his mind before granting approvalunder section 151 of the Act. We have seen the details mentioned inthe rejoinder by the Petitioner which shows that out of 8 accountsmentioned, only 3 accounts belong to the Petitioner and the other 5accounts did not belong to the Petitioner. It appears that from thetable at page 181 that there was no application of mind. It can alsobe seen from the averments in the rejoinder that although totalcash deposits mentioned at page 151 is only Rs.11.52 Crores asagainst the figure of Rs. 103 Crores mentioned in the reasons recorded, it also appears that the cash deposit was for a period of 21[st]November, 2014 till 20[th] November, 2015 and consequently, did notfall in the year under consideration. The respondent has also notdisputed that the Petitioner is operating from approximately 25different shops of varied sizes at different locations and not only froma rented commercial premises of area between 500 to 1000 sq.ft.. 11. In the impugned order it has been stated that sufficiency ofmaterial is not required to be gone into at that stage. The decision ofthe Apex Court in the case of ACIT vs. Rajesh Jhaveri StockBrokers(P) Ltd.5 is vaguely relied upon. It is further vaguely statedinformation about the account balance is provided. There is noreason provided as to why the debit and credit transaction had nomention in the recorded reasons nor was there meaningful avermentwith regard to the nature of transaction. It is pertinent to note thatwhilst the order has been passed by NFAC the reasons are recorded byrespondent No. 1 to which there is no explanation in the affidavit inreply. In our view the response in the impugned order as to thenature of transaction, and as to how it makes it suspicious aremissing. We also find that the decision of the Apex Court in the caseof GKN Driveshafts (I) Ltd. v/s. ITO(Supra) and the decision of this 5[. (2007) 161 Taxman-316(SC)] Court in the case of Asian Paint Ltd. v/s. Dy. CIT (supra) are also notfollowed. 12. Be that as it may, the law is well settled in respect of all theissues raised by the Petitioner herein and we find no reason to differfrom it. In view of the above, we set aside the impugned notice dated31[st] March, 2021 and the impugned order dated 11[th] March, 2022and stay all consequential proceedings, that may be taken pursuantor in implementation of the said notice and order. 13. Writ Petition is allowed. No order as to cost. [ KAMAL KHATA, J. ] [ DHIRAJ SINGH THAKUR, J. ]