Sky View Counsultants Pvt. Ltd v. Income Tax Officer, Ward 23 (4) & Anr

$~10 *IN THE HIGH COURT OF DELHI AT NEW DELHI +W.P. (C) No. 10507/2016 SKY VIEW COUNSULTANTS PVT. LTD...... PetitionerThrough:Dr. Rakesh Gupta, Mr.SomilAgarwal, Mr. Rohit Kumar Gupta,Ms.Monika Ghai, Ms. Syamalima,Advocates. versus INCOME TAX OFFICER, WARD 23 (4) & ANR...... RespondentsThrough:Mr. Rahul Kaushik, Senior StandingCounsel for the Income TaxDepartment. CORAM:JUSTICE S. MURALIDHARJUSTICE PRATHIBA M. SINGH O R D E R07.09.2017 % Dr. S. Muralidhar, J.: 1. The challenge in this writ petition is to the notice dated 29[th]March 2016issued by the Income Tax Officer Ward 23(4), New Delhi (hereafterAssessing Officer - ‘AO’) under Section 148 of the Income Tax Act, 1961(‘Act’) seeking to reopen the Petitioner's assessment for the AssessmentYear (‘AY’) 2009-10. A challenge is also laid to the letter dated 4[th]July2016 rejecting the objections filed by the Petitioner to the reopening of theassessment. 2. The facts in brief are that the Petitioner, Sky View Consultants Private W.P.(C) 10507/2016 Limited, is engaged in the consultancy business and looking after ‘productpromotion and sales services’ of products being marketed by Seagram IndiaLimited, presently known as Pernod Ricard India Limited (PRIL). ThePetitioner filed its return for the AY 2009-10 on 24[th]October 2009 declaringan income of Rs. 13,59,848/-. The said return was processed under Section143 (1) of the Act. 3. On 29[th]March 2016, the AO issued the impugned notice underSection 148 of the Act proposing to reopen the assessment for AY 2009-10.The reasons recorded by the AO on 10[th]March, 2016 for reopening of theassessment, as communicated to the Petitioner, were broadly as under: (i) A Tax Evasion Petition (‘TEP’) had been received by the investigationwing of the Income Tax Department to the effect that the Petitioner hadcollected money from its Principal (PRIL) and thereafter issued accountpayee cheques in the name of various sub-contractors (allegedly bogusentities). Cash was withdrawn from the said accounts by self-cheques anddistributed in the Defence canteens as bribes. On the basis of the said TEP,the assessment of the Petitioner for the AY 2007-08 was reopened by anorder passed by the Commissioner of Income Tax (CIT) under Section 263of the Act. It was further noted that for the AY 2008-09, proceedings underSection 147 of the Act were in progress. Even for the AY in question i.e. theAY 2009-10, a perusal of the Profit and Loss (P&L) Account for the yearending 31[st]March, 2009 showed that the Petitioner was claiming an expenseof Rs.2,41,79,349/- on account of ‘contractor’s charges’. This was in fact thebribe amount distributed by it. W.P.(C) 10507/2016 (ii) The second reason was that the Income Tax Officer (Investigation) [ITO(Inv)] OSD-I, Unit-3, New Delhi issued the summons under Section 131(1A) of the Act on 4[th]March, 2015 calling upon the Petitioner to provide thenecessary details so that independent enquiries could be conducted from thethird parties. The ITO (Inv) in his report stated that the Petitioner has neitherprovided any justification with documentary evidence nor the details of theparties to whom the contract charges were paid. From both the abovedocuments and the report of the ITO (Inv) it was inferred that ‘the modusoperandi of the Assessee in the AY 2009-10 is the same as was in AY 2007-08 and 2008-09’. It was further inferred that the aforementioned sum ofRs.2,41,79,349/- had been used by the Petitioner for ‘non businesspurposes’, thus concealing its true income. (iii) The third reason was that the Director General of Income Tax (DGIT)(Vigilance) by letter dated 2[nd]November, 2011 had also suggested that theclaim of expenses made by the Petitioner would have to be examined. Thiswas after a detailed inquiry into a complaint against the then AO of Circle 8(1), New Delhi, who happened to be the AO of the Petitioner. (iii) The third reason was that the Director General of Income Tax (DGIT)(Vigilance) by letter dated 2[nd]November, 2011 had also suggested that theclaim of expenses made by the Petitioner would have to be examined. Thiswas after a detailed inquiry into a complaint against the then AO of Circle 8(1), New Delhi, who happened to be the AO of the Petitioner. 4. The AO concluded that he had reason to believe that the contractor'scharges shown in the Petitioner's P&L Account were bogus and thePetitioner had wilfully and knowingly concealed its particulars of income toavoid tax and that income of Rs.2,41,79,349/- chargeable to tax had escapedassessment for AY 2009-10. 5. As noted earlier, the objections filed by the Assessee to the re-opening ofthe assessment were disposed of by the AO by the impugned letter dated 4[th]July 2016. One of the objections raised was that the entire exerciseundertaken by the ITO (Inv) by invoking Section 131(1A) of the Act waswithout jurisdiction since that provision could not have been invokedwithout him being duly authorised. On this issue, in the impugned orderdated 4[th]July 2016, the AO noted that the said information received fromthe ITO (Inv) was not the sole basis for reopening the assessment. It wasstated that the AO had applied his mind, collected the bank statements,analysed the Financial Accounts and correlated the same with the TEPreport. The case was reopened with the prior approval of the Principal CIT.Reliance was placed on the decision in AGR Investments Ltd. v. AdditionalCIT [2011] 333 ITR 146 (Del) in support of the proposition that‘information received from investigation wing can be used for re-opening ofthe case.’ It was asserted that there was ‘live and tangible nexus between theinformation and belief formed which has been arrived at after independentevaluation of the information by the AO.’ 6. This Court has heard the submissions of Dr. Rakesh Gupta, learnedcounsel appearing for the Petitioner, and Mr. Rahul Kaushik, learned SeniorStanding Counsel for the Revenue. 7. In the counter affidavit filed on behalf of the Revenue, reference, interalia, is made to the fact that the proceedings under Section 147 of the Actfor AY 2008-09 resulted in an assessment order under which it was held thatnone of the entities in whose names cheques were issued are shown to be W.P.(C) 10507/2016 genuine entities. The said assessment order is dated 30[th]March 2016. In fact,Mr. Kaushik places considerable reliance on this assessment order to urgethat the re-opening the assessment for the present AY, i.e. AY 2009-10 wasmore than vindicated by the said assessment order which, according to him,was not challenged by the Petitioner by way of a writ petition. 8. Dr. Gupta, on the other hand, pointed out that this Court has to necessarilyexamine the reasons recorded by the AO on 10[th]March, 2016 which makeno reference, and obviously so, to an order that was passed subsequent to thedate of recording of the reasons on 30[th]March, 2016. Secondly, he pointsout that the said assessment order for AY 2008-09 was in fact challenged bythe Petitioner by filing an appeal before the CIT (A) and, therefore it wasincorrect to say that the said order was not challenged. 9. On this issue, it requires to be noted that the settled legal position is thatwhen a challenge is laid to the reopening of an assessment under Section147 of the Act, the Court has to examine only the reasons recorded by theAO and nothing else. In Northern Exim Pvt. Ltd. v. Deputy Commissionerof Income Tax [2013] 357 ITR 586 (Del), this Court reiterated the wellsettled legal position that “we have to be guided only by the reasonsrecorded for the assessment and not by the reasons or explanations given bythe AO at a later stage in respect of notices of the assessment”. Afterreferring to a large number of decisions, this Court explained: “The ratio laid down in all these cases is that, havingregard to the entire scheme and purpose of the Act, thevalidity of the assumption of jurisdiction under Section 9. On this issue, it requires to be noted that the settled legal position is thatwhen a challenge is laid to the reopening of an assessment under Section147 of the Act, the Court has to examine only the reasons recorded by theAO and nothing else. In Northern Exim Pvt. Ltd. v. Deputy Commissionerof Income Tax [2013] 357 ITR 586 (Del), this Court reiterated the wellsettled legal position that “we have to be guided only by the reasonsrecorded for the assessment and not by the reasons or explanations given bythe AO at a later stage in respect of notices of the assessment”. Afterreferring to a large number of decisions, this Court explained: “The ratio laid down in all these cases is that, havingregard to the entire scheme and purpose of the Act, thevalidity of the assumption of jurisdiction under Section 147 can be tested only by reference to the reasonsrecorded under Section 148(2) of the Act and theAssessing Officer is not authorized to refer to any otherreason even if it can be otherwise inferred and/orgathered from the records.He is confined to therecordedreasonstosupporttheassumptionofjurisdiction. He cannot record only some of the reasonsand keep the others up his sleeves to be disclosed beforethe Court if his action is ever challenged in a Court oflaw.” 10. Recently, this Court in WP (C) 7828/2010 Oracle India Pvt Limited Vs.ACIT, by the judgement dated 26[th]July, 2017 has further elaborated on the`reasons to believe' as under: "....27. A second aspect of the matter is that the abovejurisdictional requirement should be shown to have beenfulfilledfromthereasonsforre-openingoftheassessment. In other words, the reasons must speak forthemselves. The mandatory jurisdictional requirement inW.P.(C) 7828/2010 Page 18 of 29 terms of the firstproviso to Section 147 of the Act will not be fulfilled ifthe reasons do not themselves clearly indicate that therewas in fact a failure by the Assessee to make a full andtrue disclosure of all material facts. The reasons have toexplain what the material was that was not disclosed bythe Assessee which the Assessee ought to have disclosedin the first instance. This should be apparent from areading of the reasons themselves. The reasons have to gobeyond merely repeating the language of the provisionregarding the failure of the Assessee to make a full andtrue disclosure of material facts. They should indicate inwhat manner was there such a failure. 28. In many of the cases, where the re-opening of anassessment is challenged, the Revenue tries to make upfor the obvious defect in the reasons themselves which do not spell out the reasons by providing a justification at thestage of disposal of the objections or later in the counter-affidavit when the re-opening is challenged by a writpetition. This, again, is impermissible in law. Since thereasons must speak for themselves, a subsequent attemptto supply the omission at the stage of an order disposingof the objections raised by the Assessee or providingthem in the counter-affidavit in reply to the writ petitionor even worse, making good that defect in the course ofarguments before the Court, will simply not suffice...." 11. In the present case, the fact that the assessment order passed after the re-opening of the assessment for AY 2008-09 may have found the entities towhom the Petitioner issued cheques to be fictitious cannot be looked into forthe simple reason that it was an order passed 21 days after the reasons in thepresent case were recorded for re-opening of the assessment for AY 2009-10. In any event, this will not answer one of the principal grounds urged byDr. Gupta that the tangible material that is required to be shown forjustifying the re-opening of assessment has to be relevant to the AY inquestion, i.e. AY 2009-10. 11. In the present case, the fact that the assessment order passed after the re-opening of the assessment for AY 2008-09 may have found the entities towhom the Petitioner issued cheques to be fictitious cannot be looked into forthe simple reason that it was an order passed 21 days after the reasons in thepresent case were recorded for re-opening of the assessment for AY 2009-10. In any event, this will not answer one of the principal grounds urged byDr. Gupta that the tangible material that is required to be shown forjustifying the re-opening of assessment has to be relevant to the AY inquestion, i.e. AY 2009-10. 12. In Commissioner of Income Tax v. Gupta Abhushan (P)Ltd. [2009]312 ITR 166 (Del), it is emphasised that information relating to one AY willnot automatically become relevant for re-opening the assessment for anotherAY. If that would be the position, then the re-opening would be only on thebasis of suspicion and not ‘belief’. This decision in fact reiterated what wasearlier explained by the Bombay High Court in Ramkrishna Ramnath v.Income Tax Officer [1970] 77 ITR 995 (Bom). 13. There is no answer by the Revenue to the Petitioner’s contention that theTEP pertained only to two FYs and therefore only corresponded to two AYs,i.e. AY 2007-08 and 2008-09. Further, it is not disputed that the originalassessment order for AY 2007-08 was passed by the AO on 11[th]December,2009. It was re-opened by the CIT (A) by the order dated 28[th]March 2012under Section 263 of the Act. This resulted in a further assessment orderdated 28[th]March 2013 by the AO under Section 143 (3) read with Section263 of the Act. Only 7% of the 'contractor’s expenses' was disallowed andadded back. Therefore, even for AY 2007-08, the TEP did not result inadding back the entire amount. The decision in AGR Investments Ltd. v.Additional CIT (supra) only lays down a general proposition regardingassessments being reopened on the basis of reports of investigation. It doesnot obviate the need to show that there is tangible material relevant to theAY in question that warrants reopening of the assessment for that particularAY. 14. More importantly, it is not understood how despite being aware of theabove orders pertaining to AY 2007-08, the AO in his reasons for reopeningthe assessment for AY 2009-10 did not refer to them while recording hisreasons on 10[th]March 2016. Clearly this was an instance of non-applicationof mind by the AO to the relevant material. Since the AO failed to justify hisreasons to believe that income has escaped assessment for AY 2009-10 onthe basis of the TEP pertaining to AY 2007-08, it was all the more importantfor the AO to refer to all the subsequent developments in relation toreopening of the assessment for AY 2007-08. 15. As already pointed out hereinabove, the Revenue has no answer to thesubmission that the entire exercise undertaken by the ITO (Inv.) was withoutjurisdiction. Which is why in the counter affidavit filed in the present writpetition, the stand taken by the Revenue is that it is not the only reason forre-opening the assessment. The fact remains that it could not form tangiblematerial for re-opening the assessment. The fact remains that the powerunder Section 131 (1A) can be exercised only by officers named therein andthey are all officers in the Department superior to the ITO. If the ITO had toexercise the powers under that provision, he had to be duly authorized to doso. He clearly was not and, therefore, the reports submitted by him could nothave formed the valid basis for re-opening the assessment. 15. As already pointed out hereinabove, the Revenue has no answer to thesubmission that the entire exercise undertaken by the ITO (Inv.) was withoutjurisdiction. Which is why in the counter affidavit filed in the present writpetition, the stand taken by the Revenue is that it is not the only reason forre-opening the assessment. The fact remains that it could not form tangiblematerial for re-opening the assessment. The fact remains that the powerunder Section 131 (1A) can be exercised only by officers named therein andthey are all officers in the Department superior to the ITO. If the ITO had toexercise the powers under that provision, he had to be duly authorized to doso. He clearly was not and, therefore, the reports submitted by him could nothave formed the valid basis for re-opening the assessment. 16. The third material referred to in the reasons for reopening theassessment, is the investigation undertaken by the DGIT (Vigilance) into theconduct of the erstwhile AO of the Petitioner. A perusal of the letter dated2[nd]November 2011 written by the Director (Vigilance) to the DGIT(Vigilance) does not throw any light on any material relevant to AY 2009-10. In fact, the concluding paragraph of the said letter a request is made forreopening of the assessment for the AY 2007-08 by invoking Section 263 ofthe Act. This explains why that route was resorted to for AY 2007-08. 17. This Court is therefore satisfied that the jurisdictional requirement forreopening of the assessment for AY 2009-10 has not been fulfilled in thepresent case. Consequently, the notice dated 29[th]March 2016 issued by theAO under Section 148 of the Act as well as the consequent order dated4[th]July 2016 of the AO rejecting the Petitioner’s objections, are hereby W.P.(C) 10507/2016 quashed. 18. The writ petition is allowed in the above terms with no orders as to costs. S. MURALIDHAR, J. SEPTEMBER 07, 2017j PRATHIBA M. SINGH, J.