Gujarat High Court
Rajesh Jhaveri Stock Brokers Pvt. Ltd. vs Assistant Commissioner Of Income Tax on 23 March, 2005
Equivalent citations: (2005)196CTR(GUJ)105, [2006]284ITR593(GUJ)
JUDGMENT D.A. Mehta, J.
1. Heard Ms. Vaibhavi Parikh with Mrs. Swati Soparkar on behalf of the petitioner and Mrs. M.M. Bhatt, learned Standing Counsel on behalf of the respondent.
2. Rule.
Mrs. Bhatt appears and waives services of Rule on behalf of the respondent. Taking into consideration the admitted facts which have come on record, the petition is taken up for hearing and final disposal today.
3. The petitioner, a Private Limited Company filed its return of income for Assessment Year 2001-2002 on 30th October,2001 declaring total loss of Rs.2,70,85,105/-. The said return was processed under Section 143(1) of the Income Tax Act, 1961 (the Act) accepting the loss returned by the petitioner. On 12th May, 2004 the respondent issued impugned notice under Section 148 of the Act. On 31st May, 2004 a return of income declaring the loss at the same figure, as declared in the original return, was filed by the petitioner under protest. After writing to the respondent a couple of times a copy of the reasons recorded was furnished by the respondent some time in November, 2004. The petitioner raised various objections, both on jurisdiction and merits of the subject matter recorded in the reasons. On 4th February, 2005 the respondent disposed of the objections holding that the initiation of reassessment proceedings was valid and the respondent had jurisdiction to undertake such an exercise. It is in the aforesaid back-drop of facts that the impugned notice under Section 148 of the Act dated 12th May, 2004 has been challenged.
4. The learned Advocate for the petitioner invited attention to paragraph No.3.2 of the petition which reads as under:
"3.2 The petitioner submits that it has come to the knowledge of the petitioner that audit party has taken some objections and instructed the assessing officer to reopen the completed assessment and therefore the impugned notice came to be issued. It has further come to the knowledge of the petitioner that the respondent has, even after issuance of the impugned notice, not accepted the objections taken by the audit party and ask them to withdraw the same and reiterated that he still has no reason to believe that some income has escaped the assessment. In other words, when the impugned notice was issued the respondent did not hold any belief that the income of the petitioner has escaped assessment for any reason. Legally it is well settled that in case of reopening 'the reason to believe' must be that of an assessing officer and it cannot be substituted with anyone else's belief, be it the superior authority of the assessing officer".
It was submitted that despite the aforesaid categorical averment on oath in the petition the respondent has failed to respond to the same even though affidavit-in-reply dated 21st March,2005 has been tendered.
5. In light of the aforesaid position the learned Standing Counsel was directed by the Court on 22nd March, 2005 to produce the original record. The same has been placed for perusal before the Court today.
6. On going through the record the following facts emerged:
[a] On 16th October,2003 Senior Audit Officer has raised an objection to the effect that in the profit and loss account the assessee had debited a sum of Rs.1285.72 lacs as bad debt out of total expenditure of Rs.1307.64 lacs. However, total loans and advance outstanding at the end of accounting year 1999-2000 was only Rs.98,93,336/(should be Rs.9,89,33,336/-). According to the said audit objection conditions under Section 36(1)(vii) read with Section 36(2) of the Act were not fulfilled and hence no disallowance of bad debt had resulted in under assessment of income of Rs.1014.59 lacs. The Assessing Officer was therefore called upon to offer his remarks.
[b] Accordingly the Assessing Officer offered his remarks which was received by audit cell on 20th October,2003. However, it is necessary to note that in the office copy of the remarks of the Assessing Officer at the bottom an endorsement is made which reads 'put-up the proposal for reopening the case'.
[c] Thereafter, on 11th November,2004 the Assessing Officer wrote to the Deputy Accountant General (ITRFA) objecting to the audit note and stated that 'under the circumstances, the audit objection is not acceptable and needs to be dropped'.
[d] The aforesaid objection was submitted through the Addl. CIT, who vide his letter dated 7th December,2004 endorsed the view of the Assessing Officer objecting to the audit note in the following words :
"Keeping in view of the facts stated by the ACIT, it is seen that the audit objection raised in the case of the above named assessee on the issue involved is not acceptable as the return of income for A.Y.2001-02 was processed u/s.143(1) of the Act. Further, it is also seen that the objection raised by the revenue audit is beyond their purview, for which detailed reasons have been given by the A.O. in his report. The scheme of processing of returns was a deliberate shift on the part of government from the scheme of scrutiny of all cases, knowing fully well the possible leakage of revenue, which might be caused, by this scheme. This is evident from the Board's Circular No.176 bearing F.No.RA/1/86-87/DIT dtd.16/8/1987 of the DIT(Audit), New Delhi, wherein the Member (R&A) is quoted as under:
'No remedial action is necessary in Summary Assessment cases as the revenue loss, if any, is consciously suffered by the Government to utilize resources for scrutiny and investigations of larger cases. In such cases, CIT should lonely inform Audit that the cases are completed under the Summary Assessment Scheme'.
The above observation of Member (R&A) reflects the views of the Board on the subject. Thus, the objection raised by the Audit is against the letter and spirit of instruction No. 1902 issued by the Board. Thus, I am also in agreement with the views of the A.O. and, therefore, recommend that the objection raised in this case deserves to be dropped".
[e] It appears that despite the aforesaid correspondence the office of the Accountant General (Audit)-II, Gujarat, insisted to initiate remedial action under Section 147 under intimation to audit as per communication dated 17th January,2005.
7. The reasons which have been recorded on 12th May,2004 are as under :
"Reasons recorded for re-opening of the assessment.
Dt: 12-05-04 The assessee is a share broker filed its Return of income for A.Y.2001-02 on 30-10-2001 declaring total loss at Rs.2,70,85,105/-. The return was processed u/s.143(1) on 26-11-2002 on the same loss as shown at Rs.2,70,85,105/-.
On verification of assessment records of the assessee it is seen that the assessee has debited to P&L A/c. Bad debt of Rs.1285.72 lacs. The total loans and advances and sundry debtors outstanding for the accounting year 1999-2000 were Rs.989.33 lacs only (sundry debtors Rs.963.21 lacs and loans and advances, members security deposit Rs.26.12 lacs). It is therefore prima facie not possible to write of a bad debt of Rs.1285.72 lacs during the year under consideration.
Further the assessee by virtue of its business nature would not be debiting the amount claimed as bad debt in the credit side of the P&L A/c. Under such scenario, such amount shall not be eligible for deduction u/s.36(1)(vii) r.w.s. 36(2) of the I.T. Act.
In view of the above facts of the case, I have reason to believe that income assessable to tax has been escaped assessment by accepting the return of income u/s.143(1) of the I.T. Act".
8. In the circumstances, it is apparent that the reasons recorded by the respondent did not reflect factually that the respondent had any reason to believe or that he held such belief in good faith. To the contrary, taking into consideration the correspondence entered into by the respondent as well as the Additional Commissioner of Income Tax, even after the reasons were recorded, would go to show that the belief which is projected on paper is not the belief held by the respondent in fact; there is no nexus between the formation of the belief and the reasons recorded. This Court in the case of Adani Exports v. Deputy Commissioner of Income Tax (Assessment) (1999) 240 ITR 224, while dealing with almost similar situation has opined in the following terms :
"It is true that satisfaction of the Assessing Officer for the purpose of reopening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question the existence of such belief on the ground that what has been stated is not the correct state of affairs existing on record. Undoubtedly, in the face of the record, the burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the Assessing Officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be an abuse of such authority. As the aforesaid decision of the Supreme Court indicates though audit objection may serve as information on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own where such information is passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the Assessing Officer has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit under section 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances the conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on February 8,1997, that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable exercise of jurisdiction by the Assessing Officer by recording reasons for holding a belief which in fact demonstrably he did not hold that income of the assessee has escaped assessment due to erroneous computation of deduction under section 80HHC, for the reasons stated by the audit. The reason is not far to seek".
9. In the aforesaid decision the Court has also taken note of the instruction of the Board that as soon as the audit objections are raised, prompt remedial action in the nature of reassessment should be taken even if objection is not accepted by the Income Tax Officer. The Court has gone further and stated that such instructions are ultravires, and cannot be pressed into service by the revenue to save initiation of proceedings under Section 147 of the Act, in absence of holding of any belief by Assessing Officer.
10. In the present case also, as the facts demonstrate, despite recording of reasons the respondent has sustained his objection to the proposal made by the audit department and the objection raised by the respondent has been endorsed by the Additional Commissioner of Income Tax. Therefore, it is abundantly clear that the respondent did not hold the belief at any point of time, either before or after recording reasons, that income of the assessee has escaped assessment on account of erroneous computation of loss and it is required to be held that the exercise of recording reasons on the file is a mere pretence to give validity to the exercise of power for assuming jurisdiction. In other words, it was a colourable exercise of jurisdiction and cannot be sustained in law.
11. In the result, the impugned notice dated 12th May, 2004 issued under Section 148 of the Act (Annexure-A) is quashed and set aside. The petition is allowed accordingly. Rule made absolute. There shall be no order as to costs.