Wp/21919/2018 Of M/S.a.thangavel Nadar Stores v. The Income Tax Officer

IN THE HIGH COURT OF JUDICATURE AT MADRAS Orders reservedOrders pronounced on 19.02.2019on 25.02.2019 CORAM: THE HON'BLE Dr. JUSTICE ANITA SUMANTH W.P.No.21919 to 21921 of 2018 andW.M.P.Nos.25719 , 25720, 25721 & 34931 of 2018 M/s.A.Thangavel Nadar Stores,227, R.K.Mutt Road,MylaporeChennai-600 004Pan No:AAAFA7426Qrep. by its partner ... Petitioner --Vs-- The Income Tax OfficerNon-Corporate Ward 1(1)Chennai-600 034 ... Respondent PRAYER in WPs: Writ Petitions filed under Article 226 of theConstitution of India praying for a writ of Certiorari callingfor the records of the respondent in PAN No. and quashthe proceedings u/S 148 dated 31.03.2018 and the consequentialorder disposing objection raised against issue of notice u/S 148for Assessment years 2013-14 to 2015-16 dated 30.07.2018 issuedby the respondent. Heard Mr.R.L.Ramani, learned senior counsel forMr.B.Raveendran, learned counsel for the petitioner andMr.Naveen Durai Babu, learned Standing counsel for therespondent. 2. The writ petitioner has approached this Court challengingproceedings under Section 148 of the Income Tax Act, 1961 (inshort 'Act') dated 31.03.2018 and an order disposing objectionsraised against issuance of the aforesaid notice, dated30.07.2018, in respect of assessment years 2013-14 to 2015-16. https://hcservices.ecourts.gov.in/hcservices/ 3. The facts in relation to all writ petitions are common.The petitioner is a partnership firm with two partners. Returnsof income have been filed in respect of the three assessmentyears in question. Intimations under Section 143(1) of the Acthad been issued by the respondent for all the years. A surveyunder Section 133A of the Act was initiated in the premises ofthe petitioner on 12.01.2018. There had been no incriminatingmaterial found in the course of the survey as can be seen fromthe Mahazarnama recorded on the day of survey by the surveyingteam. 4. A statement under Section 133A was recorded from one ofthe partners of the firm, one, Mr.A.T.Janakiraman. Since the re-opening of the assessments by the Income Tax Department is basedentirely on the contents of the statement, I extract therelevant portions hereunder for better appreciation of thematter. In statement dated 12.01.2018 question nos. 6, 7 and 9are as follows: Q.6. Have you maintained any books of accountssupporting the turnover reported? Ans. No I have not maintained any proper booksof accounts in respect of the turnoverreported. But I have maintained month-wisejust sales summary ledger as. Howeverindividual bills were discarded after making aturnover entry. Hence I am not in a positionto provide the individual bills/vouchers daywise. Q.7. Since you have not maintained individualbills and you have provided sales turnovermonthwise, your estimated turnover for Fin.Year 2017-18 is worked out to Rs.8 crores? Ans. Yes my average monthly sales amounted toaround Rs.65 lakhs approximately. Going by thesame estimate my annual sales turnover will bearound Rs.8 crores.Q.9. Your sales voucher for 12.01.2018 weremapped with the corresponding purchase billsand it was estimated that your profit margincomes to around 25 percent and allowingexpenses for a overheads and other purposes,your net profit works out to 18.75%? Ans. As I have already mentioned that I havenot maintained books for substaining netprofit margin, I agree with the Departmentthat my net profit margin can be taken as18.75% on my sales turnover. 5. After the proceedings for survey, the petitioner filed aletter dated 24.01.2018 signed by the other partner in the firm,one, Mr.A.Singarajan, disavowing the statement recorded fromMr.Janakiraman in full. According to Mr.Singarajan, he wasinformed by Mr.Janakiraman that the statement had been preparedby the surveying officials who had simply obtained hissignatures on it. In any event, he would state that the firm hadtwo partners and hence a statement taken from one would not bindthe firm itself. Ans. As I have already mentioned that I havenot maintained books for substaining netprofit margin, I agree with the Departmentthat my net profit margin can be taken as18.75% on my sales turnover. 5. After the proceedings for survey, the petitioner filed aletter dated 24.01.2018 signed by the other partner in the firm,one, Mr.A.Singarajan, disavowing the statement recorded fromMr.Janakiraman in full. According to Mr.Singarajan, he wasinformed by Mr.Janakiraman that the statement had been preparedby the surveying officials who had simply obtained hissignatures on it. In any event, he would state that the firm hadtwo partners and hence a statement taken from one would not bindthe firm itself. 6. In the course of the survey, three cheques, post-dated to25.01.2018, 25.02.2018 and 25.03.2018, for amounts of Rs.15,00,000/- had been taken under duress from the petitioner bythe surveying officials towards advance tax liability. By letterdated 05.02.2018, the petitioner sought return of the chequessince, according to it, the computation of taxes as effected bythe petitioner was perfectly in order and the petitioner hadbeen regular in defraying its tax liability. There was thus nonecessity for the Department to have taken the cheques inadvance and even without an assessment or demand pending. 7. This was followed by issuance of notices under Section148 of the Income Tax Act dated 31.03.2018 on the ground thatthe assessing officer had reasons to believe that income hadescaped assessment for the three assessment years in questionand calling upon the petitioner to file returns of income withinthirty days from the date of receipt of the notice, offering thecorrect income to tax. 8. The petitioner, in response to the notices under section148, enclosed a copy of the returns already filed by it, beingof the view that there had been no escapement of income and theoriginal return reported its income truly and correctly. In linewith the judgment of the Supreme Court in the case of GKNDriveshafts (India) Ltd. Vs. ITO [(2003) 259 ITR 19], thepetitioner sought a copy of the reasons on the basis of whichthe assessments had been re-opened vide letter dated 30.04.2018.The reasons were furnished by the respondent on 28.05.2018 andread as follows: Ref: Your letter dated 25.04.2018. Asrequested by you the reason for reopening andissue notice under Section 148 of the IT Act 1961 for the Assessment Year 2014-15 is asfurnished below. A survey was conducted in this case on12.01.2018. During the course of survey itwas found that the assessee has notmaintained any books of account eitherphysically or in system. During the survey,the assessee has agreed with the departmentthat the net profit margin can be taken as18.75% on the sales turnover of the firm. Onperusal of the Return of Income filed for theAsst. year 2014-15 it is observed that thenet profit on the sales turnover as admittedby the assessee is only 0.55 on the salesturnover of Rs.2,27,14,446/- whereas in thesworn statement recorded during the course ofsurvey the partner of the firm has admittedfor the net profit margin @18.75%. In the circumstances, I have reason tobelieve that the income chargeable to tax hasescaped assessment for the Asst. Year 2014-15within the meaning of section 147 of theIncome Tax Act, 1961 and the case is reopenedfor assessment for the Asst year 2014-15 withthe prior approval of the appropriateAuthority. In the circumstances, I have reason tobelieve that the income chargeable to tax hasescaped assessment for the Asst. Year 2014-15within the meaning of section 147 of theIncome Tax Act, 1961 and the case is reopenedfor assessment for the Asst year 2014-15 withthe prior approval of the appropriateAuthority. 9. The reasons are identical for all three years. TheSupreme Court, in the case of GKN Driveshafts (supra) hasoutlined the procedure to be followed by the assessee as well asthe department in the matter of re-assessments and in line withthe same, preliminary objections to the notices under Section148 were filed by the petitioner on 09.07.2018. The broad basison which the notice was objected to was that (i) it was bereftof jurisdiction insofar as no approval had been obtained fromthe Joint Commissioner of Income Tax as required in terms ofSection 151(2) and (ii) that the sworn statements recorded fromthe partner could not form the sole basis of the re-assessments.The petitioner also documented the fact that the post-datedcheques taken in the course of survey proceedings on 12.01.2018had been returned by the Department to the petitioner only on07.02.2018. 10. In response to the objections the Assessing Authoritypassed the impugned orders dated 30.07.2018 rejecting theobjections. The orders are identical for all the three years. Areading of the same makes it amply clear that the re-assessmentis based solely and wholly on the statement recorded from Mr.Janakiraman. Paragraph no.4 of the impugned order makes thismore than clear, as extracted below: 'During the course of survey it is found thatthe assessee Firm has not maintained anyproper books of accounts. In statementrecorded from partner of the firm ShriT.Janakiraman he has stated that “firm has notmaintained any proper books of accounts inrespect of the turnover reported. But I havemaintained month-wise just sales summaryledger as. However individual bills werediscarded after making a turnover entry. HenceI am not in a position to provide theindividual bills/voucher day wise. Theassessee has agreed with the Department thatthe net profit margin can be taken as 18.75%on the sales turnover of the Firm. On perusalof the return of income filed for the Asst.year 2013-14, it is observed that the netprofit on the sales turnover as admitted bythe assessee is only 0.49% on the salesturnover of Rs.2,47,88,729/-whereas in thesworn statement recorded during the course ofsurvey, the partner of the Firm has admittedfor the net profit margin @18.75%.' 11. It is also relevant to note that Mr.Janakiraman hadhimself retracted his statement under cover of his communicationdated 24.01.2018. The letter states that Mr.Janakiraman was notfluent in English and he thus alleges that he was not aware ofthe contents of the statement that he was called upon to sign. 12. A counter has been filed by the Income Tax Departmentwherein, the first point agitated is that the writ petition isnot maintainable. Mr.Naveen Duraibabu, learned counsel appearingfor the Department states that due sanction has been obtainedfrom the concerned authority and as such the allegation that theproceedings were without jurisdiction was incorrect. There isreally no contest as far as this point is concerned and I thus,reject the contention that the proceedings are withoutjurisdiction on the ground of lack of sanction. 13. As far as the statement of Mr.Janakiraman is concerned,the Revenue contends that Mr.Janakiraman was well versed inEnglish and in fact, the income tax returns filed by the firmare signed only by him. Thus, they would brush away the argumentthat the statements were recorded without knowledge ofMr.Janakiraman of the contents. According to the revenue, theretraction of the statement was an afterthought and the contents https://hcservices.ecourts.gov.in/hcservices/ 13. As far as the statement of Mr.Janakiraman is concerned,the Revenue contends that Mr.Janakiraman was well versed inEnglish and in fact, the income tax returns filed by the firmare signed only by him. Thus, they would brush away the argumentthat the statements were recorded without knowledge ofMr.Janakiraman of the contents. According to the revenue, theretraction of the statement was an afterthought and the contents https://hcservices.ecourts.gov.in/hcservices/ of the statement make it very apparent that there wassignificant suppression of income by the petitioner. Whenconfronted, the partner of the petitioner firm had rightlycomputed the gross profit on the undisclosed income andundertaken to pay advance on the same. This, according to therevenue, is sufficient to establish the necessity as well asvalidity of the proceedings for re-opening of the assessments. 14. The issue that I am called upon to decide is whether anotice/ proceedings for re-assessment can be sustained wholly onthe basis of a sworn statement recorded in the course of surveyin the absence of any other tangible evidence available with theAssessing Officer. 15. The petitioner relies on the decision of the KarnatakaHigh Court in the case of Commissioner of Income Tax and AnotherVs. Dr.N.Thippa Setty (322 ITR 525) where an order of re-assessment based entirely on statements recorded under Section132(4) of the Act and subsequently retracted, was set aside bythe court. 16. The Central Board of Direct Taxes has also issued acircular in F.No.286/2/2003 dated 10.03.2003 to the followingeffect:'F.No.286/2/2003-IT(Inv) Govt.of India, Ministry of Finance & Company Affairs, Department of Revenue,Central Board of Direct Taxes, No.254/North Block, New Delhi10[th] March 2003 To All Chief Commissioner of Income Tax(Cadre Contra) &All Directors General of Income TaxInv. Sir, Subject: Confession of Additional incomeduring the course of search & seizure andsurvey operation-Regarding. Instances have come to the notice of the Boardwhere assessee have claimed that they havebeen forced to confess the undisclosed incomeduring the course of the search & seizure andsurvey operations. Such confessions, if notbased upon credible evidence, are laterretracted by the concerned assessee whilefiling returns of income. In thesecircumstances, on confessions during thecourse of search & seizure and surveyoperations do not serve any useful purpose. Itis, therefore, advised that there should befocus and concentration on collection ofevidence of income which leads to informationon what has not been disclosed or is notlikely to be disclosed before the Income TaxDepartments. Similarly, while recordingstatement during the course of search &Seizures and survey operations no attemptshould be made to obtain confession as to theundisclosed income. Any action on the contraryshall be viewed seriously. Further, in respect of pending asesssmentproceedings also, assessing officers shouldrely upon the evidences/materials gatheredduring the course of search/survey operationsor thereafter while framing the relevantassessment orders. Your faithfully Sd/-xxxx (S.R.Mahapatra)Under Secretary (Inv.II)' 17. The provisions of Sections 147 and 148 provide for there-opening of assessments and re-assessment of income in caseswhere the Assessing Officer has reason to believe that incomehas escaped assessment. It is trite to state that the reasonsrecorded by the Assessing Officer should be based on tangiblematerials that have come to his notice/are in his possession.This aspect of the matter has been long settled by a series ofjudgment of the Supreme court as well as the High Courtscommencing from ITO v. Lakhmani Mewal Das [(1976) 103 ITR 437] to the judgment of the Supreme Court in the case of CIT, DelhiVs. Kelvinator ltd. where the Bench states as follows: Your faithfully Sd/-xxxx (S.R.Mahapatra)Under Secretary (Inv.II)' 17. The provisions of Sections 147 and 148 provide for there-opening of assessments and re-assessment of income in caseswhere the Assessing Officer has reason to believe that incomehas escaped assessment. It is trite to state that the reasonsrecorded by the Assessing Officer should be based on tangiblematerials that have come to his notice/are in his possession.This aspect of the matter has been long settled by a series ofjudgment of the Supreme court as well as the High Courtscommencing from ITO v. Lakhmani Mewal Das [(1976) 103 ITR 437] to the judgment of the Supreme Court in the case of CIT, DelhiVs. Kelvinator ltd. where the Bench states as follows: '5. On going through the changes, quoted above,made to Section 147 of the Act, we find that, priorto the Direct Tax Laws (Amendment) Act, 1987,reopening could be done under the above twoconditions and fulfilment of the said conditionsalone conferred jurisdiction on the assessingofficer to make a back assessment, but in Section147 of the Act (with effect from April 1, 1989),they are given a go-by and only one condition hasremained, viz., that where the assessing officer hasreason to believe that income has escapedassessment, confers jurisdiction to reopen theassessment. Therefore, post April 1, 1989, power toreopen is much wider. However, one needs to give aschematic interpretation to the words 'reason tobelieve' failing which, we are afraid, Section 147would give arbitrary powers to the assessing officerto reopen assessments on the basis of 'mere changeof opinion', which cannot be per se reason toreopen.6. We must also keep in mind the conceptualdifference between power to review and power toreassess. The assessing officer has no power toreview; he has the power to reassess. Butreassessment has to be based on fulfilment ofcertain precondition and if the concept of 'changeof opinion' is removed, as contended on behalf ofthe Department, then, in the garb of reopening theassessment, review would take place.7. One must treat the concept of 'change ofopinion' as an in-built test to check abuse of powerby the assessing officer. Hence, after April 1,1989, the assessing officer has power to reopen,provided there is 'tangible material' to come to theconclusion that there is escapement of income fromassessment. Reasons must have a live link with theformation of the belief. Our view gets support fromthe changes made to Section 147 of the Act, asquoted hereinabove. Under the Direct Tax Laws(Amendment) Act, 1987, Parliament not only deletedthe words 'reason to believe' but also inserted theword 'opinion' in Section 147 of the Act. However,on receipt of representations from the companiesagainst omission of the words 'reason to believe',Parliament reintroduced the said expression anddeleted the word 'opinion' on the ground that it would vest arbitrary powers in the assessing officer...' 18. In the present case, there is no dispute on the positionthat the survey initiated by the Department on 12.01.2018 hasyielded no tangible incriminating material. In fact, theMahazarnama of even date reveals as much. Notwithstanding this,the Department has gone ahead with the impugned proceedingsbased solely upon the sworn statement recorded under Section133A from one of the partners. 19. A statement recorded under Section 133A in the course ofsurvey is different and distinct from a statement recorded underSection 132(4) recorded in the course of search and seizure andthe evidentiary value ascribed to the two is not the same. Theprovisions of Section 133A(3) sets out the limits of powerendowed upon an Income Tax Authority carrying out survey actionas follows: Power of Survey...133A-....(3) An income-tax authority acting under thissection may,- 19. A statement recorded under Section 133A in the course ofsurvey is different and distinct from a statement recorded underSection 132(4) recorded in the course of search and seizure andthe evidentiary value ascribed to the two is not the same. Theprovisions of Section 133A(3) sets out the limits of powerendowed upon an Income Tax Authority carrying out survey actionas follows: Power of Survey...133A-....(3) An income-tax authority acting under thissection may,- (i) if he so deems necessary, place marks ofidentification on the books of account orother documents inspected by him and make orcause to be made extracts or copies therefrom, (ii) impound and retain in his custody forsuch period as he thinks fit any books ofaccount or other documents inspected by him: Provided that such income-tax authorityshall not— (a) impound any books of account or otherdocuments except after recording his reasonsfor so doing; or 19[(b) retain in his custody any suchbooks of account or other documents for aperiod exceeding ten days (exclusive ofholidays) without obtaining the approval ofthe Chief Commissioner or Director Generaltherefor, as the case may be,]] (ii) make an inventory of any cash,stock or other valuable article or thingchecked or verified by him, (iii) record the statement of any personwhich may be useful for, or relevant to, anyproceeding under this Act. 20. Contradistinguish this with astatement recorded by the Assessing Officerunder Section 132(4) as follows: 132(4): The authorised officer may, during thecourse of the search or seizure, examine onoath any person who is found to be inpossession or control of any books of account,documents, money, bullion, jewellery or othervaluable article or thing and any statementmade by such person during such examinationmay thereafter be used in evidence in anyproceeding under the Indian Income-tax Act,1922 (11 of 1922), or under this Act. [Explanation.-For the removal of doubts, it ishereby declared that the examination of anyperson under this sub-section may be notmerely in respect of any books of account,other documents or assets found as a result ofthe search, but also in respect of all mattersrelevant for the purpose of any investigationconnected with any proceeding under the IndianIncome-tax Act, 1922 (11 of 1922), or underthis Act.] 21. Thus, where, under Section 132(4), the statementrecorded by the searching officer is specifically permitted tobe used as evidence in any proceeding under either the 1922 orthe present Act, there is no such sanctity conferred on astatement recorded under Section 133A(iii). The utility of astatement recorded in the course of survey is limited to theextent to which it is useful or relevant to any proceeding underthe Act. Thus, a statement recorded in the course of survey can,at best, support a proceeding for reassessment; that is, wherethe Assessing Officer has material in his possession, based onwhich he comes to the conclusion that there has been escapementof income, such material being concrete and having a live linkwith the reasons recorded for re-assessment, the aforesaidmaterial may find support from a statement recorded in thecourse of survey. Not so, in the case of a statement recorded in the course of search which, by itself, would from primaryevidence. 22. This issue has also been considered by a Division Benchof the Court in the case of CIT, Salem v. M/s.S.Khader Khan Son(2012) 254 CTR (SC) 228 : (2013) 352 ITR 480 (SC) : (2012) 210TAXMAN 248 (SC) wherein the Bench states thus: '7. From the foregoing discussion, the followingprinciples can be culled out: the course of search which, by itself, would from primaryevidence. 22. This issue has also been considered by a Division Benchof the Court in the case of CIT, Salem v. M/s.S.Khader Khan Son(2012) 254 CTR (SC) 228 : (2013) 352 ITR 480 (SC) : (2012) 210TAXMAN 248 (SC) wherein the Bench states thus: '7. From the foregoing discussion, the followingprinciples can be culled out: (i) An admission is extremely an important piece ofevidence but it cannot be said that it is conclusiveand it is open to the person who made the admissionto show that it is incorrect and that the assesseeshould be given a proper opportunity to show that thebooks of accounts do not correctly disclose thecorrect state of facts, vide decision of the ApexCourt in Pullangode Rubber Produce Co. Ltd. v. Stateof Kerala [1973]91ITR18(SC) ; (ii) In contradistinction to the power under Section133A, Section 132(4) of the Income Tax Act enablesthe authorised officer to examine a person on oathand any statement made by such person during suchexamination can also be used in evidence under theIncome Tax Act. On the other hand, whatever statementis recorded under Section 133A of the Income Tax Actit is not given any evidentiary value obviously forthe reason that the officer is not authorised toadminister oath and to take any sworn statement whichalone has evidentiary value as contemplated underlaw, vide Paul Mathews and Sons v. Commissioner ofIncome Tax [2003]263ITR101(Ker) ; (iii) The expression "such other materials orinformation as are available with the AssessingOfficer" contained in Section 158BB of the Income TaxAct, 1961, would include the materials gatheredduring the survey operation under Section 133A, videCommissioner of Income Tax v. G.K. Senniappan [2006]284ITR220(Mad) ]; (iv) The material or information found in the courseof survey proceeding could not be a basis for making any addition in the block assessment, vide decisionof this Court in T.C. (A) No. 2620 of 2006 betweenCommissioner of Income Tax v. S. Ajit Kumar; (v) Finally, the word "may" used in Section 133A(3)(iii) of the Act, viz., "record the statement of anyperson which may be useful for, or relevant to, anyproceeding under this Act, as already extractedabove, makes it clear that the materials collectedand the statement recorded during the survey underSection 133A are not conclusive piece of evidence byitself. 8. For all these reasons, particularly, when theCommissioner and the Tribunal followed the circularof the Central Board of Direct Taxes dated 10.3.2003,extracted above, for arriving at the conclusion thatthe materials collected and the statement obtainedunder Section 133A would not automatically bind uponthe assessee, we do not see any reason to interferewith the order of the Tribunal.' 23. In the light of the detailed discussion above, and inthe light of Circular F.No.286/2/2003 dated 10.03.2003 as wellas the admitted position that there is not a shread of materialapart from the statement recorded under Section 133A that formsthe basis of the proceedings for reassessment, I am of the viewthat the reasons dated 28.05.2018 have no legs to stand. Theimpugned notices dated 31.03.2018, which trace their existenceto the reasons dated 28.05.2018 must thus fail and I quash thesame as well as the impugned orders dated 30.07.2018 rejectingthe preliminary objections. 24. These writ petitions are allowed. The connectedmiscellaneous petitions are closed. No costs. Sd/- Assistant Registrar(CCC) //True Copy// ska Sub Assistant Registrar To The Income Tax Officer, Non-Corporate Ward 1(1), Chennai-600 034. +1 cc to Mr.B.Raveendran, Advocate SR.No.17429 +1 cc to M/s.Hema Muralikrishnan, Advocate SR.No.17432 Order in W.P.No.21919 to 21921 of 2018 and W.M.P.Nos.25719 , 25720, 25721 & 34931 of 2018 NRL(CO) CSL/09.04.2019