Income Tax Case

1/10 415-aswp-3345-2024.doc IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION WRIT PETITION NO.3345 OF 2024 M/s. S V Jadhav1 Sathe Complex, Opp. Tahsil OfficeFort Area MIRAJSangli 416410…Petitioner1 Sathe Complex, Opp. Tahsil OfficeFort Area MIRAJSangli 416410…PetitionerPAN: ACDFS1001NVersusVersus1.The Income Tax Officer Ward 1, SangliAaykar Bhawan, Bhinge Building,Miraj Road, Opp.Z.P.,SANGLI, 416416Email: Bhawan, Bhinge Building,Miraj Road, Opp.Z.P.,SANGLI, 416416Email: Commissioner of Income Tax-4, PuneAayakar Sadan, Bodhi Towers,548/2B, Salisbury Park, Gultekdi,Sangli 411037.PuneAayakar Sadan, Bodhi Towers,548/2B, Salisbury Park, Gultekdi,Sangli 411037.3.Union of IndiaThrough the Secretary (Revenue),Department of Revenue, Ministry of Finance, Room No.128-A,North Block, New Delhi 110001Email: …RespondentsThrough the Secretary (Revenue),Department of Revenue, Ministry of Finance, Room No.128-A,North Block, New Delhi 110001Email: …Respondents Mr. Mihir C. Naniwadekar with Ms Rucha Vaidya and Mr. Ruturaj H Gurjar, for Petitioner.Mr. Suresh Kumar, for Respondents-Revenue. CORAM:K. R. SHRIRAM &DR. NEELA GOKHALE, JJ.DATED:22ND APRIL, 2024 ORAL JUDGMENT:- (Per K.R.Shriram, J.) 1.Rule. By consent, Rule made returnable forthwith. 2.Petitioner is a partnership firm engaged in the business ofGovernment contracts mainly of water supply schemes. Petitioner’swork includes construction of elevated service reservoirs, watertreatment plants, laying of water pipelines, etc. 3.Respondent No.1 is the Assessing Officer (“AO”), RespondentNo.2 is the Principal Commissioner of Income Tax (“PCIT”), who hassanctioned the impugned order and Respondent No.3 is the Union ofIndia. 4.Petitioner filed return of income (“ROI”) on 12[th] September2019 for Assessment Year (“AY”) 2019-20 disclosing an income atRs.1,45,78,825/-. Mr. Naniwadekar, on instructions, states Petitionerwas unaware about the status of returns because Petitioner has noteven received any intimation under Section 143(1) of the Income TaxAct, 1961 (“the Act”). 5.Petitioner thereafter received a notice dated 23[rd] March 2023issued under Section 148A(b) of the Act. The annexure to the noticestated thus: “As per information available on Insight portal of Income TaxDepartment, it is noticed that you have undertaken hugetransaction during F.Y.2018-19 relevant to A.Y.2019-20 but havenot filed Income Tax Return (ITR) which suggests that incomechargeable to tax for the year under consideration has escapedassessment within the meaning of section 147 of the Act. Thedetails of the information on which reliance is being place are asunder……..” Department, it is noticed that you have undertaken hugetransaction during F.Y.2018-19 relevant to A.Y.2019-20 but havenot filed Income Tax Return (ITR) which suggests that incomechargeable to tax for the year under consideration has escapedassessment within the meaning of section 147 of the Act. Thedetails of the information on which reliance is being place are asunder……..” A table containing details of payments made to contractors wasalso provided. Petitioner filed an undated reply but served on 17[th]April 2023 in which, after giving background of the business carriedout by Petitioner, Petitioner also informed Respondent No.1 that hehad filed ROI for AY 2019-20 and gave details thereof. The details oftransactions given in the annexure to the impugned notice dated 23[rd]March 2023 was also made available. Petitioner informed RespondentNo.1 that the income generated from all the transactions referred toin the notice had been offered for taxation and nothing had escapedthe assessment. A table containing details of payments made to contractors wasalso provided. Petitioner filed an undated reply but served on 17[th]April 2023 in which, after giving background of the business carriedout by Petitioner, Petitioner also informed Respondent No.1 that hehad filed ROI for AY 2019-20 and gave details thereof. The details oftransactions given in the annexure to the impugned notice dated 23[rd]March 2023 was also made available. Petitioner informed RespondentNo.1 that the income generated from all the transactions referred toin the notice had been offered for taxation and nothing had escapedthe assessment. 6.Petitioner received the impugned order dated 21[st] April 2023passed under Section 148A(d) of the Act in which it is stated that alltransactions reported in Insight portal about gross receipts ofPetitioner, interest income received by Petitioner and time depositsmade by Petitioner have been verified and the information report byInsight portal is accounted by Petitioner in his books and incomearising out of those transactions is duly offered for taxation. Theimpugned order, however, also stated as under: "On detail verification of the records it is also noticed that theassessee has executed sub-contracting work of M/s PrathmeshConstructions which is one of the party with which contractwork has been done. A Search action was conducted u/s 132 ofthe Income Tax Act 1961 on the assessee M/s PrathmeshConstructions. In order to enquire about the genuineness of thesub-contract transactions, details of sub-contracting parties ofM/s Prathmesh Constructions with their sub-contractagreements were called for from the assessee. The assessee M/sPrathmesh Constructions provided only list of names of sub-assessee has executed sub-contracting work of M/s PrathmeshConstructions which is one of the party with which contractwork has been done. A Search action was conducted u/s 132 ofthe Income Tax Act 1961 on the assessee M/s PrathmeshConstructions. In order to enquire about the genuineness of thesub-contract transactions, details of sub-contracting parties ofM/s Prathmesh Constructions with their sub-contractagreements were called for from the assessee. The assessee M/sPrathmesh Constructions provided only list of names of sub- contractors and the amount of subcontract. No supportingdocuments related to these parties were furnished. Presentassessee M/s S.V. Jadhav is one of such sub-contractor of M/sPrathmesh Constructions. Hence it is necessary to verify thegenuineness of the contract-work done or mere accommodationentry is provided to the firm M/s Prathmesh Construction. Allthe transactions with Prathmesh Construction are needed to beexamined as the genuineness of the contract work is in question.Details of contractual expenses of the assessee with M/sPrathmesh Constructions also need to be verified to establish thegenuineness of work done. Thus considering this aspect, theprovisions of section 147 and 148 are applicable in this case.Therefore, for the assessment year under consideration, theassessee's case is a fit case where any income chargeable to taxhas escaped assessment.... I have, therefore, reason to believe that income to the extent ofRs. 25,25,57,767/- (Contract receipts from M/s PrathmeshConstructions) has escaped assessment for . .2019-20"Α Υ Petitioner was also served with the impugned notice dated 21[st] April2023 under Section 148 of the Act. 7.It is at this stage, Petitioner has filed the present Petitionimpugning the order dated 21[st] April 2023 passed under Section148A(d) of the Act and the notice also of the same date issued underSection 148 of the Act on various grounds. I have, therefore, reason to believe that income to the extent ofRs. 25,25,57,767/- (Contract receipts from M/s PrathmeshConstructions) has escaped assessment for . .2019-20"Α Υ Petitioner was also served with the impugned notice dated 21[st] April2023 under Section 148 of the Act. 7.It is at this stage, Petitioner has filed the present Petitionimpugning the order dated 21[st] April 2023 passed under Section148A(d) of the Act and the notice also of the same date issued underSection 148 of the Act on various grounds. 8. An affidavit in reply has been filed through one AjayRaghunath Pawar, who is Respondent No.1, affirmed on 20[th]September 2023. In the affidavit in reply, Petitioner’s averment thatin the impugned order dated 21[st] April 2023, Respondent hasaccepted that on verification, the information reported by Insightportal is accounted for, has not been denied. The stand taken in effectis that the AO is a mere post office, who finds materials and then forwards it to the Faceless Assessing Officer (“FAO”) and the FAO willgo into the details to decide whether there is any escapement ofincome. We do not agree with the stand taken in the affidavit in reply. 9.Admittedly, in the notice issued under Section 148A(b) of theAct, certain allegations have been made to which reply has been filedand the AO has accepted that the information is accounted for by theassessee. Paragraph 6 of the impugned order reads as under: “6.Thus all the transaction reported in INSIGHT portal aboutgross receipts of the assessee, interest income received by theassessee and time deposits made by the assessee. It is verifiedthat the information report by the INSIGHT portal is accountedby the assessee in its books and income arising out of thosetransactions is duly offered for taxation. 6.1 On detail verification of the records it is also noticed that theassessee has executed sub-contracting work of M/s PrathmeshConstructions which is one of the party with which contractwork has been done. A Search action was conducted u/s 132 ofthe Income Tax Act 1961 on the assessee M/s PrathmeshConstructions. In order to enquire about the genuineness of thesub-contract transactions, details of sub-contracting parties ofM/s Prathmesh Constructions with their sub-contractagreements were called for from the assessee. The assessee M/sPrathmesh Constructions provided only list of names of sub-contractors and the amount of sub- contract. No supportingdocuments related to these parties were furnished. Presentassessee M/s S.V. Jadhav is one of such sub-contractor of M/s.Prathmesh Constructions. Hence it is necessary to verify thegenuineness of the contract-work done or mere accommodationentry is provided to the firm M/s. Prathmesh Construction. Allthe transactions with Prathmesh Construction are needed to beexamined as the genuineness of the contract work is in question.Details of contractual expenses of the assessee with M/sPrathmesh Constructions also need to be verified to establish thegenuineness of work done. Thus considering this aspect, theprovisions of section 147 and 148 are applicable in this caseTherefore for the assessment year under consideration, theassessee's case is a fit case where any income chargeable to taxhas escaped assessment.” In paragraph 6.1, however, the AO proceeds on the basis that on a search conducted under Section 132 of the Act on one In paragraph 6.1, however, the AO proceeds on the basis that on a search conducted under Section 132 of the Act on one Prathamesh Constructions, it was found that PrathameshConstructions was subcontracting its jobs to various sub-contractors and Petitioner was one of such subcontractors. TheAO, therefore, wanted to verify the genuineness of the contractwork done by Petitioner or whether any accommodation entrywas provided to Prathamesh Constructions. It is necessary tonote that, first of all, in re-assessment proceedings, the law isclear. An Assessing Officer cannot indulge in a fishing enquiry. InAssistant Commissioner of Income Tax v. Rajesh Jhaveri StockBrokers Private Limited[1], the Apex Court has held that at thestage of issuance of notice, the only question is whether therewas relevant material on which a reasonable person could haveformed the requisite belief of escapement of income. In thenotice issued under Section 148A(b) of the Act, there is not evena reference of what is stated in paragraph 6.1 of the impugnedorder. As held by this Court in Neetu M. Chandaliya v. IncomeTax Officer-14(2)(3)[2], the reasons as mentioned in paragraph6.1 of the impugned order, at the highest, can only be termed as“a suspicion subject to a case of fishing enquiry”. 10.Moreover, in the impugned notice dated 23[rd] March 2023under Section 148A(b) of the Act, there is reference to PrathameshConstructions to whom an amount of Rs.39,80,357/- has been paid. In the reply that was filed to the notice issued under Section148A(b) of the Act, Petitioner has, in the reconciliation of theannexure, mentioned that gross amount paid to PrathameshConstructions was Rs.44,58,000/- of which basic amount wasRs.39,80,357/- and 12% GST was Rs.4,77,643/-. This has beenaccepted by the AO in paragraph 6 of the impugned order, which isquoted above. The AO states “………...It is verified that theinformation report by the INSIGHT portal is accounted by theassessee in its books and income arising out of those transactions isduly offered for taxation.” 11.Mr. Suresh Kumar submits that in paragraph 7 of the impugnedorder, the AO is referring to the explanation to Section 147 of the Act,which reads as under: “ Section 147.- xxxxxxx Explanation.- For the purposes of assessment or reassessment orrecomputation under this section, the Assessing Officer mayassess or reassess the income in respect of any issue, which hasescaped assessment, and such issue comes to his noticesubsequently in the course of the proceedings under this section,irrespective of the fact that the provisions of section 148A havenot been complied with.” We do not find that to be the case of the AO in the impugned order nor is it so stated in the affidavit in reply filed. In any case, theDivision Bench of this Court in Commissioner of Income Tax v. JetAirways[3 ]held that the effect of Section 147 is that the AO has toassess or reassess such income that has escaped assessment and which was the basis of the formation of belief and if he does so, hecan also assess or reassess any other income which has escapedassessment and which comes to his notice during the course of theproceedings. However, if after issuing a notice under Section 148 ofthe Act, the AO accepts the contention of the assessee and holds thatthe income which he has initially formed a reason to believe hadescaped assessment, has as a matter of fact not escaped assessment, itis not open to him independently to assess some other income.Paragraphs 22 and 23 read as under: which was the basis of the formation of belief and if he does so, hecan also assess or reassess any other income which has escapedassessment and which comes to his notice during the course of theproceedings. However, if after issuing a notice under Section 148 ofthe Act, the AO accepts the contention of the assessee and holds thatthe income which he has initially formed a reason to believe hadescaped assessment, has as a matter of fact not escaped assessment, itis not open to him independently to assess some other income.Paragraphs 22 and 23 read as under: “22. Explanation 3 lifts the embargo, which was inserted byjudicial interpretation, on the making of an assessment ofreassessment on grounds other than those on the basis of whicha notice was issued under section 148. Setting out the reasons,for the belief that income had escaped assessment. Thosejudicial decisions had held that when the assessment was soughtto be reopened on the ground that income had escapedassessment on a certain issue, the Assessing Officer could notmake an assessment or reassessment on another issue whichcame to his notice during the proceedings. This interpretationwill no longer hold the field after the insertion of Explanation 3by the Finance (No. 2) Act of 2009. However, Explanation 3does not and cannot override the necessity of fulfilling theconditions set out in the substantive part of section 147. AnExplanation to a statutory provision is intended to explain itscontents and cannot be construed to override it or render thesubstance and core nugatory. Section 147 has this effect that theAssessing Officer has to assess or reassess the income ("suchincome") which escaped assessment and which was the basis ofthe formation of belief and if he does so, he can also assess orreassess any other income which has escaped assessment andwhich comes to his notice during the course of the proceedings.However, if after issuing a notice under section 148, he acceptedthe contention of the assessee and holds that the income whichhe has initially formed a reason to believe had escapedassessment, has as a matter of fact not escaped assessment, it isnot open to him independently to assess some other income. Ifhe intends to do so, a fresh notice under section 148 would benecessary, the legality of which would be tested in the event of achallenge by the assessee. 23. We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of firstprinciple, based on the language used in section 147 and on thebasis of the precedent on the subject. We agree with thesubmission which has been urged on behalf of the assessee thatsection 147 as it stands postulates that upon the formation of areason to believe that income chargeable to tax has escapedassessment for any assessment year, the Assessing Officer mayassess or reassess such income "and also" any other incomechargeable to tax which comes to his notice subsequently duringthe proceedings as having escaped assessment. The words "andalso" are used in a cumulative and conjunctive sense. To readthese words as being in the alternative would be to rewrite thelanguage used by Parliament. Our view has been supported bythe background which led to the insertion to Explanation 3 tosection 147. Parliament must be regarded as being aware of theinterpretation that was placed on the words "and also" by theRajasthan High Court in Shri Ram Singh (2008) 306 ITR 343.Parliament has not taken away the basis of that decision. Whileit is open to Parliament, having regard to the plenitude of itslegislative powers to do so, the provisions of section 147 as theystood after the amendment of April 1, 1989, continue to holdthe field.” (emphasis supplied) In this case, the AO has accepted the contention of the assessee andheld that the information report by the Insight portal is accounted forby the assessee in his books and income arising out of thosetransactions is duly offered for taxation. Therefore, the impugnedorder dated 21[st] April 2023 under Section 148A(d) of the Act cannotbe sustained. At the same time if the AO wishes to, he could issue afresh notice under Section 148A(b) of the Act if, that is permitted inlaw. We are expressing no opinion. 12.In the circumstances, the AO having accepted the explanationof Petitioner, he could not have gone ahead and recommended that itwas a fit case where income chargeable to tax has escapedassessment. We would add that the approval granted by the PCIT is also without application of mind. In the approval, it is stated “I haveperused the facts of the case vis-a-vis information/material availableon record and found the case to be fit case for issue of notice u/s 148of the I.T.Act, 1961. Accordingly, the draft order u/s 148A(d) of theI.T. Act submitted by the AO is approved.” If only the PCIT had read the impugned order and the notice issued under Section 148A(b) ofthe Act, he would have refused to grant the approval. The PCITseems to have done nothing and it is clear that he has mechanicallysigned the approval. 13.In the circumstances, we allow the Petition in terms of prayer clause (b), which reads as under: “(b)Issue a writ of Certiorari or a writ in thenature of certiorari or any other writ, order ordirection, quashing the Impugned Order u/s. 148A(d)of the Act dated 21[st] April 2023 (Exhibit E) and theImpugned Notice under s.148 of the Act dated 21[st]April 2023 (Exhibit F);” 14.Rule is made absolute accordingly. 15.Petition disposed. (DR. NEELA GOKHALE, J.) (K. R. SHRIRAM, J.)