Court affirms Assessing Officer’s authority to reopen tax assessments based on new information about bogus transactions.

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Case Name:

Navnidhi Dyeing and Printing Mills Pvt. Ltd. Thru. Director of Mayank Mahesh Kumar Malpani Vs Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 17786 of 2018

Date: 16th March 2021

Key Takeaways

• The court confirmed that the AO can reopen assessments under Section 147 of the Income Tax Act if new, reliable information suggests income has escaped assessment.
• The ruling emphasizes that the AO’s belief must be based on credible evidence, not just a change of opinion.
• The case highlights the importance of full and true disclosure of facts by the assessee during the original assessment.

Issue

Can the Assessing Officer reopen a tax assessment under Section 147 of the Income Tax Act based on new information indicating that income chargeable to tax has escaped assessment?

Facts

• The assessee, NAVNIDHI DYEING AND PRINTING MILLS PVT. LTD., filed a return for the assessment year 2011-12, which was processed under Section 143(1) without scrutiny.
• The AO later discovered that the company had received substantial share capital from Kolkata-based shell companies, which were identified as providing accommodation entries.
• The AO believed that the income had escaped assessment due to the failure of the assessee to disclose the true nature of these transactions.

Arguments

• For the Assessee: The company argued that it had not received any funds from the alleged shell companies during the year in question and that the amounts were received in a previous year. They claimed the AO’s basis for reopening the assessment was factually incorrect and lacked proper verification.
• For the Revenue: The AO contended that the substantial increase in share capital from shell companies warranted reopening the assessment. The AO argued that the information obtained was specific, reliable, and indicated that the income had escaped assessment.

Key Legal Precedents

• The court referenced Phool Chand Bajrang Lal vs. Income-tax Officer, reported in 203 ITR 456 (SC), which established that if a transaction is later found to be bogus, the mere disclosure of that transaction during the original assessment does not constitute a full and true disclosure of facts.
• The court also cited the necessity for the AO to have a valid belief based on new information, not merely a change of opinion, to justify reopening an assessment under Section 147.

Judgement

The court upheld the AO’s decision to reopen the assessment, stating that the AO had sufficient reasons to believe that income had escaped assessment based on new, credible information regarding the bogus nature of the transactions. The court emphasized that the AO’s jurisdiction to act under Section 147 was not diminished by the failure to complete the original assessment proceedings. The writ application by the assessee was dismissed, allowing the AO to proceed with the reassessment.

FAQs

Q1: What does this ruling mean for taxpayers?

A: This ruling reinforces the authority of tax officers to reopen assessments if they find credible new information suggesting that income has escaped assessment.

Q2: Can the AO reopen an assessment without new evidence?

A: No, the AO must have new, reliable information that indicates income has escaped assessment; a mere change of opinion is insufficient.

Q3: What should taxpayers ensure during their assessments?

A: Taxpayers should ensure full and true disclosure of all relevant facts to avoid complications in future assessments.

Q4: What happens next for the assessee?

A: The assessee can challenge the final assessment order in an appeal before the Commissioner of Income Tax (Appeals) if they wish to contest the findings.

1. By this writ-application under Article 226 of the Constitution of India, the writ-application has prayed for the following reliefs :

“(A) Issue a writ of certiorari and/or a writ of mandamus and/or any other writ, direction or order to quash and set aside the impugned notice dated 30.3.2018 under section 148 of the Income-tax Act, 1961 annexed hereto at

Annexure-B along with preliminary order dated 23.10.2018 annexed hereto at Annexure-F for proceeding and completing reassessment proceedings.

(B) Pending admission, hearing and disposal of this petition, ad-interim relief be granted and the respondent be ordered to restrain from enforcing compliance of the impugned notice dated 30.3.2018 at Annexure-B and/or

taking any other steps in this regard including reassessment order or implementation of preliminary order dated 23.10.2018 at Annexure-F and further notices issued for purpose of reassessment.

(B1) Your Lordships may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction for quashing and setting aside the impugned assessment order dated 24.12.2018 under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 at Annexure-G collectively.

(B2) Pending admission, hearing and final disposal of the present petition, be pleased to stay the implementation, operation and execution of the impugned assessment order dated 24.12.2018 under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 at Annexure-G collectively.

(C) Award the cost of this petition.

(D) Grant such other and further reliefs as this Hon'ble Court deems fit.”

2. The subject matter of challenge in the present litigation is to the notice of re-opening issued under Section 148 of the Income Tax Act, 1961 (for short, 'the Act') for the Assessment Year 2011-12 in a case where the return of income was processed for the relevant year under Section 143(1) of the Act. Otherwise, the re-opening is beyond the period of four years. The

reasons assigned by the Assessing Officer for re-opening are as under :

“The assessee company filed its return of income for A.Y. 2011-12 on 26.09.2011 declaring total income of Rs.19,38,960/-. In this case, there is no assessment as stipulated u/s.2(40) of the Act was made and the return of

income was only processed u/s.143(1) of the Act.

2. In this case, during the year under consideration, there was a huge increase in share capital & premium of the assessee company. As per the details available, the assessee has received share capital and share premium

from the following Kolkata based companies which were proved shell companies by income tax department during the various survey/search proceedings.

Thus, the assessee company has received total share capital money of Rs.40,00,000/- from Kolkata based shell companies during the year under consideration.

Sr. No. Name of the Investor Company Number of Equity Share Share Capital (In Rs.) Share Premium (In Rs.) Total Share Capital Money (In Rs.)

1 Prima Vyapaar Pvt. Ltd. 20000 2,00,000 18,00,000 20,00,000

2 Asha Apartments Pvt. Ltd. 20000 2,00,000 18,00,000 20,00,000

Total 40,00,000

3. In the recent past, it is noticed that many companies

all over India has introduced share capital and share

premium in their books of accounts from the various entities,

which proven to be bogus and was engaged in the providing

of accommodation entries. In such connection, in recent

year, through various search & seizure operations/ survey

operations/ investigations/ inquiries/ other related action

on shell companies operated throughout India by the

Income-tax department as well as other Government

agencies (via Enforcement Directorate/ CBI/ SFIO etc.)

based on which data base of such shell companies are

prepared from time to time. Further in course of such action

statement of many shell company operators/ dummy

directors/ either related person have been recorded which

admitted, confirmed the modus operandi implied in all these

shell companies for rotation of funds for providing of

accommodation entries of share capital/ loan/ purchased &

sale bill etc. to the various beneficiaries as per their

requirement.

4. The above mentioned company has invested amount

as per above – table towards the share capital and premium

thereupon in the assessee company during the year under

consideration. It has been noticed that the aforesaid

company is managed and controlled by one Kolkata based

accommodation entry provider namely Shri Manoharlal

Nangalia. A statement on oath of Shri Manoharlal Nangalia

has been recorded on oath by the DDIT (Inv.), Kolkata in

which he has categorically accepted the fact that his main

business is providing accommodation entries through

“Jama-Khaarchi/Shell” companies to various beneficiaries

in lieu of commission and also describe/ accepted the

modus operandi implied in providing of entry of funds.

5. On such observation & facts and looking to

considerable increase in the shareholders fund in the hand

of the assessee in the year under consideration in this case,

necessary permission has been taken from the Pr. CIT-1,

Surat to issue letter u/s.133(6) of the I.T. Act. After receiving

of permission, to provide an opportunity to the assessee to

explain the above transactions, a letter u/s.133(6) of the I.T.

Act was issued to the assessee on 12.03.2018 with a

request to furnish the reply/ details in respect of

shareholders fund received during the year. In response to

the said letter, the assessee has not filed any reply/

explanation in the above matter. The above information/

details as well as details of list of shell companies from the

available database prepared from time to time available in

this office have been perused. From the details, it is seen

that the assessee has received shareholders funds from

above mentioned Kolkata based shell companies.

6. In view of the above findings, the credentials of

investor companies is also got cross verified from the

available details/records. As per database of such shell

companies prepared from time to time through various

search & seizures operations/ survey operations/

investigations/ inquiries/ other related action on shell

companies operated throughout India by the Income-tax

department as well as other Government agencies (via

Enforcement Directorate/ CBI/ SFIO etc.), in which name of

investore company M/s Prime Vyapaar Pvt. Ltd. And M/s

Asha Apartments Pvt. Ltd. Have been found, which has

been investigated by the Income-tax department and proved

to be one of the bogus concerns of Kolkata based entry

operator Shri Manoharlal Nangalia. The said entry provider

has categorically accepted the fact that his main business is

providing accommodation entries through “Jama-Khaarchi/

Shell” companies to various beneficiaries in lieu of

commission. In view of these facts, the investment made

from the said concern in the assessee company cannot be

held as genuine as being routed through shell companies of

the entry provider.

From above discussed facts of the case, it can concluded

that the fund received in the nature of shareholders funds

by the assessee company in the year under consideration

are nothing but in the nature of accommodation entries

being layered through various shell companies operated by

entry operators based in Kolkata, though these investor

company have no financial credentials on its own. Mere

money routed through banking channel and filing of return

may not be sufficient when surrounding and attending facts

predicate a cover up. These facts indicate and reflect proper

paper work of documentation but genuineness,

creditworthiness, identity are deeper and obtrusive and

such basic ingredients could not found explained in this

case in connection with receiving of shareholders fund by

the assessee company.

7. In view of above facts/ material available on record

and further analyzing the same, I have reasons to believe

that income of the assessee to the extent of Rs.40,00,000/-

has escaped assessment for A.Y. 2011-12 within the

meaning of section 147 of the I.T. Act.

8. In this case a return of income was filed for the year

under consideration but no scrutiny assessment u/s.143(3)

of the Act was made. Accordingly, in this case, the only

requirement to initiate proceedings u/s.147 is reason to

believe which has been recorded above refer paragraphs 2

to 7)

It is pertinent to mention here that in this case the assessee

has filed return of income for the year under consideration

but no assessment as stipulated u/s.2(40) of the Act was

made and the return of income was only processed

u/s.143(1) of the Act. In view of the above, provisions of

clause (b) of explanation-2 to section 147 are applicable to

facts of this case and the assessment year under

consideration is deemed to be a case where income

chargeable to tax has escaped assessment.”

3. To the aforesaid reasons, the writ-applicant lodged his

objections in details. The objections are as under :

“(1) Our case has been re-opened by recording the reasons

that we have received share capital and share premium

from 1) Prime Vyapaar Pvt. Ltd. (Rs.20,00,000/-), and 2)

Asha Apartments Pvt. Ltd. (Rs.20,00,000/-) [total

Rs.40,00,000/-] during the year under consideration, which,

as per the reasons recorded, are Kolkata based shell

companies and the sums received from them are

accommodation entries, which has escaped assessment for

A.Y. 2011-12. In this regard, we humbly beg to submit that

we have not received any amount from above mentioned

companies during the year under consideration. Thus, the

very basis/reason for re-opening of our case is factually

incorrect. We have not received any amount from above

mentioned companies during the year under consideration

i.e. F.Y. 2010-11 (A.Y. 2011-12).

We have received share application money from above

named companies in last year i.e. F.Y. 2009-10 (A.Y. 2010-

11) as under :

i) PRIME VYAPAAR PVT. LTD. Rs.10,00,000/-

ii) ASHA APARTMENTS PVT. LTD. Rs.10,00,000/-

Thus, we have not received any amount from above

companies during the year under consideration (i.e. A.Y.

2011-12). Further, amount of share application money

received from them in the last year i.e. F.Y. 2009-10 was

Rs.10,00,000/- each (total Rs.20,00,000/- from both

companies) and not Rs.20,00,000/- each (total

Rs.40,00,000/- from both) as mentioned in the reasons

recorded. We enclose herewith copies of the share

applications and A/c confirmations received from them for

both years proving the above fact. We also enclose herewith

copy of relevant extract of our Bank statement evidencing

that the sums were received from them in last year and not

in the year under consideration. Thus, the sums were

received from them in last year against which allotment was

made in this year. But no amount was received from them in

the year under consideration. Thus, the very basic reason

and consequent belief of escapement of income arrived at is

factually incorrect.

Further, we may also mention that our last year's (A.Y.

2010-11) case was scrutiny assessment u/s 143(3) and the

share application money received from above companies

has been accepted as genuine after due verification in

scrutiny assessment of last year (i.e. A.Y. 2010-11), in

which these amounts were received. We enclose herewith

copy of scrutiny assessment order of A.Y. 2010-11.

2. Further, Your Honour has not provided us copies of the

material relied in the reasons recorded such as

basis/reasons for inclusion of above companies in database

of shell companies, report of the DDIT (Inv), Kolkata, and

statement of so-called entry provider namely Manoharlal

Nangalia. It is simply mentioned that the names of above

mentioned companies are there in the database of shell

companies. However, in the absence of relevant material for

terming them as shell companies, we are unable to know as

to for what reasons/basis and when their names were

included in this database, as they are very old companies.

We, therefore, request Your Honour to kindly provide us

copies of all such material on the basis of which reasons

have been recorded and our case has been re-opened

including copy of the report of DDIT (Inv), Kolkata, and

statement of so-called entry provider Manoharlal Nangalia.

We also request Your Honour to kindly provide us

opportunity of his cross examination. We may mention that

as per our information he was neither director nor

shareholder of above companies. It is, therefore, not clear as

to how his statement is relevant in our case. We reserve our

right to make further objections after receipt of above

material and opportunity.

3. Further and without prejudice to above, we humbly

beg to point out that both these companies are 'very old

companies' 'regularly assessed under the income tax since

their incorporation' and having 'active' status as per R.O.C.

Both of them are registered as NBFC with the RBI and are

subject to constant monitoring and supervision by RBI. This

is evident from following chart :

Name Date of Incorporation PAN NBFC Regn. No. with RBI

Prime Vyapaar Pvt. Ltd. 10.12.1993 AABCP5505F B.05.04669 Dt.28.11.2001

Asha Apartment Pvt. Ltd. 22.12.1995 AACCA2027J B.05.04309 Dt.27.08.2001

We enclose herewith copies of their R.O.C. Master Data.

Both are very old companies, having 'active status' as per

ROC. Both have been regularly assessed under the income

tax since their incorporation. There is no mention of any

adverse finding by their AOs about their genuineness or

genuineness of their business/activities. In such a situation,

to say them as shell companies is not correct. On what

basis, they have been termed as shell company is not

mentioned in the reasons. On above facts, the reasons

recorded and consequent belief of escapement of income

arrived at are not only incorrect but are also invalid and

contrary to the law laid down by Hon'ble jurisdictional High

Court in the case of RANCHHOD JIVABHAI NAKHWA, 208

Taxmann 35 (Guj).

4. Further and without prejudice to above, our case has

been re-opened just on the basis of generalized database

and statement of a third person (who is not relevant person)

without independent verification, inquiries and satisfaction

by our Ld. AO himself. Thus, this is a case of 'borrowed

satisfaction' and not satisfaction of our Ld. AO. The very fact

that we have not received any amount from above

mentioned companies during the year proves this fact.

Further, the reasons recorded by Ld. AO are not 'reasons to

believe' but are mere 'reasons to suspect' and whole of the

proceeding is merely based on suspicion.”

4. The aforesaid objections came to be disposed of by the

Assessing Officer vide communication dated 23rd October 2018

as under :

“8. The contention raised by the assessee that there is no

issue of share on premium to above mentioned companies

and has not received any share premium amount of

Rs.20,00,000/- from each Prime Vyapaar Pvt. Ltd. and Asha

Apartment Pvt. Ltd. Company. The data submitted by the

assessee in support of his contention does not substantiate.

Here it should be noted that the assessee has accepted to

have received amount of Rs.10,00,000/- each from Prime

Vyapaar Pvt. Ltd. and Asha Apartment Pvt. Ltd. in F.Y.

2009-10 the companies which have been seem as bogus

Kolkata based companies. This has been further verified by

this office from report of Kolkata I.T.O. (Inv.) office. This has

clearly indicated that the said company is not performing

any genuine business and is shell company. Thus, the

transaction done by issuing share to any such company

required to be verified in depth. Here it should be noted that

provision of section 147 clearly indicated that when there is

reason to believe that there is escapement of income by the

assessee the AO can very well reopen the case.

9. Further the other contention of the assessee that the

amount has been received during F.Y. 2009-10 and not

during F.Y. 2010-11 does not stand valid as it has been

found from the website of MCA that the allotment of share

has been done during the F.Y. 2010-11 to companies Prime

Vyapaar Pvt. Ltd. and Asha Apartment Pvt. Ltd. which are

seem as shell companies. The amount could have been

received during F.Y. 2009-10 but the actual purpose of

transaction is revealed in A.Y. 2010-11 when amount was

transferred for allotment of share. However, here it is

necessary to be mentioned that merely reopening the case

should not be considered as the final outcome, here it

should be noted that the sufficient opportunity under the

law will be available to the assessee to prove themselves.

Keeping in view of the above the objection of the assessee

are disposed off.

10. Hence, in view of the above facts involved for re-

opening, it is clear that this is a matter to be examined with

reference to the books of accounts and banking transactions

of the assessee and therefore as per provisions of the Act

and in the nature of justice, an opportunity of being heard is

necessary in your case. So it is necessary to pass an order

in this year after you being heard. Till then, it is not open to

challenge the re-opening merely on the ground that the

assessee has shown all full and true details in his ITR of

respective year and there is no escapement of income.”

5. Being dissatisfied with the aforesaid, the writ-applicant is

here before this Court with the present writ-application.

SUBMISSIONS ON BEHALF OF THE WRIT-APPLICANT :

6. Mr.Darshan Patel, the learned counsel appearing for the

assessee, vehemently submitted that there is no material to

come to the conclusion that the income in the case of the

assessee has escaped assessment. He would further submit that

the Assessing Officer has proceeded entirely on the basis of the

various search and seizure operations undertaken by the

department with respect to the shell companies alleged to be

operating across the country. Based on the same, the Assessing

Officer has come to the conclusion that the assessee herein has

received shareholders' funds from the Kolkata based shell

companies. According to Mr.Patel, the Assessing Officer has just

proceeded on the borrowed satisfaction. Mr.Patel would submit

that the Assessing Officer wishes to make a fishing inquiry.

7. In the last, Mr.Patel submitted that while according

sanction under Section 151 of the Act for the purpose of issue of

notice under Section 148 of the Act, the sanctioning authority

has, without any proper application of mind, recorded a

mechanical satisfaction for the purpose of permitting the

Assessing Officer to proceed with the re-opening of the

assessment.

8. In such circumstances referred to above, Mr.Patel prays

that there being merit in his writ-application, the same be

allowed and the impugned notice along with the final order of

assessment passed under Section 143(3) of the Act be quashed

and set-aside.

SUBMISSIONS ON BEHALF OF THE RESPONDENT :

9. On the other hand, this writ-application has been

vehemently opposed by Mrs.Kalpana K.Raval, the learned senior

standing counsel appearing for the Revenue. Mrs.Raval would

submit that the return filed by the assessee was accepted

without scrutiny. Since there was no scrutiny assessment, the

Assessing Officer had no occasion to form any opinion on any of

the issues arising out of the return filed by the assessee.

Mrs.Raval would submit that the concept of change of opinion

would, therefore, have no application in the present case. It is

also submitted that at the stage of re-opening of the assessment,

the Court may not minutely examine the possible additions

which the Assessing Officer wishes to make. It is also argued

that the scrutiny at that stage would be limited to examine

whether the Assessing Officer had formed a valid belief on the

basis of the materials available with him that the income

chargeable to tax had escaped assessment.

10. In such circumstances referred to above, the learned

standing counsel prays that there being no merit in this writ-

application, the same be rejected.

ANALYSIS :

11. Having heard the learned counsel appearing for the parties

and having gone through the materials on record, the only

question that falls for our consideration is, whether the notice of

re-opening issued under Section 148 of the Act should be

quashed and set-aside.

12. At the time of issuing the notice, a Coordinate Bench of

this Court passed the following order dated 27th November 2018 :

“1. Mr. Darshan Patel, learned advocate for the petitioner

invited attention to the reasons recorded for reopening the

assessment to submit that the assessment for the year

2011-12 is sought to be reopened on the ground that the

assessee has received total share capital of Rs.40,00,000/-

from two Kolkata based shell companies viz. Prime Vyapar

Private Limited and Asha Apartment Private Limited. It was

pointed out that, in the objections against the reasons

recorded, the petitioner has specifically stated that it has

not received any amount from the aforesaid two companies

in the year under consideration and that they had received

share capital money from the said companies in the last

year, that is, financial year 2009-10 corresponding to

assessment year 2010-11. It is further pointed out that the

amounts received from both the companies was

Rs.10,00,000/- each and not Rs.20,00,000/-. It was also

pointed out that in assessment year 2010-11 there was

scrutiny assessment under section 143 (3) of the Income Tax

Act, 1961 and the share application money received from

the said companies has been accepted as genuine after due

verification in scrutiny assessment of the year in which

these amounts were received. It was submitted that

therefore the assessing officer has proceeded on a factually

incorrect premise and that on the basis of the reasons

recorded, the assessing officer could not have formed the

requisite belief that income chargeable to the tax has

escaped assessment for the year under consideration. It

was submitted that therefore, in the absence of the

assessing officer having formed a requisite belief, the

assumption of jurisdiction under section 147 of the Act is

without authority of law.

2. Having regard to the submissions advanced by the

learned advocate for the petitioner, issue NOTICE returnable

on 7.1.2019. By way of ad-interim relief, the respondent is

permitted to proceed further pursuant to the impugned

notice; he, however, shall not pass the final order without

the permission of this Court.”

13. It appears that after the aforesaid order came to be passed,

the final order of assessment under Section 143(3) of the Act

came to be passed by the Assessing Officer. In such

circumstances, the writ-applicant brought a draft amendment

which was allowed vide order dated 9th January 2019. By way of

a draft amendment, the writ-applicant also seeks to challenge

the legality and validity of the final assessment order passed by

the Assessing Officer pursuant to the impugned notice.

14. In such circumstances referred to above, vide order dated

17th January 2019, a Coordinate Bench of this Court, by way of

an ad-interim relief, restrained the Revenue from making any

coercive recovery pursuant to the impugned assessment order.

15. We shall confine our adjudication only so far as the legality

and validity of the notice of re-opening is concerned.

16. The return filed by the assessee was accepted without

scrutiny. Since there was no scrutiny assessment, the Assessing

Officer had no occasion to form any opinion on any of the issues

arising out of the return filed by assessee. The concept of change

of opinion would, therefore, have no application. It is equally well

settled that at the stage of reopening of the assessment, the

court would not minutely examine the possible additions which

the Assessing Officer wishes to make. The scrutiny at that stage

would be limited to examine whether the Assessing Officer had

formed a valid belief, on the basis of the materials available with

him, that the income chargeable to tax had escaped assessment.

Both these aspects have been examined by the Supreme Court

in Assistant Commissioner of Income Tax vs. Rajesh Jhaveri

Stock Brokers P. Ltd. [(2007) 291 ITR 500 (SC)] of which

following observations may be noted:

“13. One thing further to be noticed is that intimation under

section 143(1)(a) is given without prejudice to the provisions

of section 143(2). Though technically the intimation issued

was deemed to be a demand notice issued under section

156, that did not per se preclude the right of the Assessing

Officer to proceed under section 143(2). That right is

preserved and is not taken away. Between the period from

April 1, 1989 to March 31, 1998, the second proviso to

section 143(1)(a), required that where adjustments were

made under the first proviso to section 143(1)(a), an

intimation had to be sent to the assessee notwithstanding

that no tax or refund was due from him after making such

adjustments. With effect from April 1, 1998, the second

proviso to section 143(1)(a) was substituted by the Finance

Act, 1997, which was operative till June 1, 1999. The

requirement was that an intimation was to be sent to the

assessee whether or not any adjustment had been made

under the first proviso to section 143(1) and notwithstanding

that no tax or interest was found due from the assessee

concerned. Between April 1, 1998 and May 31, 1999,

sending of an intimation under section 143(1)(a) was

mandatory. Thus, the legislative intent is very clear from the

use of the word intimation as substituted for assessment

that two different concepts emerged. While making an

assessment, the Assessing Officer is free to make any

addition after grant of opportunity to the assessee. By

making adjustments under the first proviso to section 143(1)

(a), no addition which is impermissible by the information

given in the return could be made by the Assessing Officer.

The reason is that under section 143(1)(a) no opportunity is

granted to the assessee and the Assessing Officer proceeds

on his opinion on the basis of the return filed by the

assessee. The very fact that no opportunity of being heard is

given under section 143(1)(a) indicates that the Assessing

Officer has to proceed accepting the return and making the

permissible adjustments only. As a result of insertion of the

Explanation to section 143 by the Finance (No. 2) Act of

1991 with effect from October 1, 1991, and subsequently

with effect from June 1, 1994, by the Finance Act, 1994,

and ultimately omitted with effect from June 1, 1999, by

the Explanation as introduced by the Finance (No. 2) Act of

1991 an intimation sent to the assessee under section

143(1) (a) was deemed to be an order for the purposes of

section 246 between June 1, 1994, to May 31, 1999, and

under section 264 between October 1, 1991, and May 31,

1999. It is to be noted that the expressions intimation and

assessment order have been used at different places. The

contextual difference between the two expressions has to be

understood in the context the expressions are used.

Assessment is used as meaning sometimes the computation

of income, sometimes the determination of the amount of tax

payable and sometimes the whole procedure laid down in

the Act for imposing liability upon the tax payer. In the

scheme of things, as noted above, the intimation under

section 143(1)(a) cannot be treated to be an order of

assessment. The distinction is also well brought out by the

statutory provisions as they stood at different points of time.

Page 19 of 27

Under section 143(1)(a) as it stood prior to April 1, 1989, the

Assessing Officer had to pass an assessment order if he

decided to accept the return, but under the amended

provision, the requirement of passing of an assessment

order has been dispensed with and instead an intimation is

required to be sent. Various circulars sent by the Central

Board of Direct Taxes spell out the intent of the Legislature,

i.e., to minimize the departmental work to scrutinize each

and every return and to concentrate on selective scrutiny of

returns. These aspects were highlighted by one of us (D. K.

Jain J) in Apogee International Limited v. Union of India

[(1996) 220 ITR 248]. It may be noted above that under the

first proviso to the newly substituted section 143(1), with

effect from June 1, 1999, except as provided in the provision

itself, the acknowledgment of the return shall be deemed to

be an intimation under section 143(1) where (a) either no

sum is payable by the assessee, or (b) no refund is due to

him. It is significant that the acknowledgment is not done by

any Assessing Officer, but mostly by ministerial staff. Can it

be said that any assessment is done by them? The reply is

an emphatic no. The intimation under section 143(1)(a) was

deemed to be a notice of demand under section 156, for the

apparent purpose of making machinery provisions relating

to recovery of tax applicable. By such application only

recovery indicated to be payable in the intimation became

permissible. And nothing more can be inferred from the

deeming provision. Therefore, there being no assessment

under section 143(1)(a), the question of change of opinion, as

contended, does not arise.

16. Section 147 authorises and permits the Assessing

Officer to assess or reassess income chargeable to tax if he

has reason to believe that income for any assessment year

has escaped assessment. The word reason in the phrase

reason to believe would mean cause or justification. If the

Assessing Officer has cause or justification to know or

suppose that income had escaped assessment, it can be

said to have reason to believe that an income had escaped

assessment. The expression cannot be read to mean that

the Assessing Officer should have finally ascertained the

fact by legal evidence or conclusion. The function of the

Assessing Officer is to administer the statute with solicitude

for the public exchequer with an inbuilt idea of fairness to

taxpayers. As observed by the Delhi High Court in Central

Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR

662], for initiation of action under section 147(a) (as the

provision stood at the relevant time) fulfillment of the two

requisite conditions in that regard is essential. At that stage,

the final outcome of the proceeding is not relevant. In other

words, at the initiation stage, what is required is reason to

believe, but not the established fact of escapement of

income. At the stage of issue of notice, the only question is

whether there was relevant material on which a reasonable

person could have formed a requisite belief. Whether the

materials would conclusively prove the escapement is not

the concern at that stage. This is so because the formation of

belief by the Assessing Officer is within the realm of

subjective satisfaction (see ITO v. Selected Dalurband Coal

Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woolen Mills

Ltd. v. ITO [1999 (236) ITR 34 (SC)].”

17. The aforesaid aspects have also been reiterated by the

Supreme Court in the later judgment in the case of Deputy

Commissioner of Income Tax and another vs. Zuari Estate

Development and Investment Company Limited [(2015) 373

ITR 661 (SC)].

18. In the present case, the Assessing Officer has considered

the materials on record which would, prima facie, suggest that

during the year under consideration there was a huge hike in the

amount of the share capital and share premium of the assessee

company. The assessee received the amount of share capital and

share premium from the Kolkata based shell companies, namely,

Prime Vyapaar Pvt. Ltd. and Asha Apartments Pvt. Ltd.

respectively. The Assessing Officer, prima facie found, based on

the materials on record and the information received, that total

share capital of Rs.40 lakh was received during the year under

consideration. On verification of the details of the investors

companies, it was found, prima facie, that the same was

controlled by one Kolkata based accommodation entry provider,

namely Manoharlal Nangalia. In a statement recorded by the

department, Manoharlal Nangalia is said to have admitted to the

fact that his main business is to provide accommodation entries

through shell companies to various beneficiaries in lieu of

commission.

19. In the judgment in the case of Principal Commissioner of

Income Tax, Rajkot-3 vs. Gokul Ceramics [Taxman Vol. 241

(2016) 241], the Division Bench of this Court had examined the

contention of the Assessing Officer proceeded on the basis of the

information supplied by the department, and after referring to

the several judgments, made the following observations in para 9

which read thus:

“It can thus be seen that the entire material collected by the

DGCEI during the search, which included incriminating

documents and other such relevant materials, was along

with report and show cause notice placed at the disposal of

the Assessing Officer. These materials prima facie

suggested suppression of sale consideration of the tiles

manufactured by the assessee to evade excise duty. On the

basis of such material, the Assessing Officer also formed a

belief that income chargeable to tax had also escaped

assessment. When thus the Assessing Officer had such

material available with him which he perused, considered,

applied his mind and recorded the finding of belief that

income chargeable to tax had escaped assessment, the

reopening could not and should not have been declared as

invalid, on the ground that he proceeded on the show-cause

notice issued by the Excise Department which had yet not

culminated into final order. At this stage the Assessing

Officer was not required to hold conclusively that additions

invariably be made. He truly had to form a bona fide belief

that income had escaped assessment. In this context, we

may refer to various decisions cited by the counsel for the

Revenue.”

20. The case on hand is not a case where the Income Tax

Officer seeks to draw any fresh inference which could have been

raised at the time of the original assessment on the basis of the

materials placed before him by the assessee as regards the

receipt of the share capital and share premium from the two

Kolkata based shell companies referred to above. Acquiring fresh

information, specific in nature and reliable in character, relating

to the concluded assessment, which goes to accept the falsity of

the statement made by the assessee at the time of original

assessment, is different from drawing a fresh inference from the

same facts and materials which were available with the Income

Tax Officer at the time of original assessment proceedings. Thus,

where the transaction itself, on the basis of the subsequent

information, is found to be bogus transaction, the mere

disclosure of that transaction at the time of original assessment

proceedings cannot be said to be disclosure of the 'true' and 'full'

facts in the case and the Income Tax Officer would have the

jurisdiction to re-open the concluded assessment in such a case.

It is correct that the Assessing Officer could have deferred the

completion of the original assessment proceedings for further

inquiry and investigation into the genuineness to the

transaction, but, in our opinion, his failure to do so and

complete the original assessment proceedings would not take

away his jurisdiction to act under Section 147 of the Act, on

receipt of the information subsequently. The subsequent

information, on the basis of which the Income Tax Officer

acquired reasons to believe that the income chargeable to tax

had escaped assessment on account of the omission of the

assessee to make a full and true disclosure of the primary facts,

was relevant, reliable and specific. It was not at all vague or non-

specific.

21. We are conscious of the fact that it is well-settled through

series of judgments of this Court that re-assessment, even in a

case where the return was not scrutinized before acceptance

originally cannot be resorted to unless the Assessing Officer has

a reason to believe that the income chargeable to tax had

escaped assessment. In other words, for mere verification or for a

fishing inquiry re-opening of the assessment is not permissible.

However, such is not the case on hand. It cannot be said to be a

fishing inquiry. There is some tangible material as on date in the

hands of the Assessing Officer, and the Assessing Officer, after

due application of mind, has recorded a satisfaction of his own

that the income has escaped the assessment.

22. From the various judicial pronouncement on the subject,

over a period of time, the following principles can be culled out:

To confer jurisdiction to the Assessing Officer to reopen the

assessment under Section 147 of the Income Tax Act

beyond four years from the end of an Assessment Year, the

following two conditions must be satisfied:

[a] that the Assessing Officer must have reason to

believe that the income chargeable to tax has escaped

assessment; and that

[b] the same occasioned, on account of either

failure on the part of the assessee to make a return of

his income for that Assessment Year, or to disclose

fully and truly all material facts necessary for the

assessment of that year.

23. As held by the Supreme Court in Phool Chand Bajrang

Lal vs. Income-tax Officer, reported in 203 ITR 456 (SC), where

transaction itself, on the basis of subsequent information, is

found to be a bogus transaction, the Court held that mere

disclosure of such transaction at the time of original assessment

proceedings cannot be said to be a disclosure of ‘full’ and ‘true’

facts and the Assessing Officer surely would have the

jurisdiction to re-open a concluded assessment in such a case.

The Supreme Court had also observed in the said case that the

Assessing Officer may start reassessment proceedings either

because some fresh facts come to light which were not previously

disclosed, or some information with regard to the facts

previously disclosed comes into his possession which tends to

expose the untruthfulness of those facts. In such situations, it is

not a case of mere change of opinion or drawing of a different

inference from the same facts as were earlier available but acting

on fresh information. Since the belief is that of the Income Tax

Officer, the sufficiency of reasons for forming the belief is not for

the Court to judge but it is open to an assessee to establish that

there, in fact, existed no belief or that the belief was not at all a

bona fide one or was based on vague, irrelevant and non-specific

information. To that limited extent, the Court may look the

conclusion arrived at by the Income Tax Officer and examine

whether there was any material available on the record from

which the requisite belief could be formed by him and further

whether that material had any rational connection or a live link

with the formation of the requisite belief.

24. The issue of sanction under Section 151 of the Act raised

by the writ-applicant is without any foundation. This aspect has

been dealt with by the Revenue in the affidavit-in-reply, more

particularly, in paragraph-11.

25. In the overall view of the matter, we are convinced that we

should not interfere with the impugned notice.

26. In the result, this writ-application fails and is hereby

rejected. However, so far as the final order of assessment is

concerned, it shall be open for the writ-applicant to challenge the

same by filing an appeal before the CIT(A), in accordance with

law.

27. We have not gone into the merits of the impugned

assessment order. If any appeal is preferred by the writ-

applicant, then the appellate authority shall decide the same on

its own merits without being influenced in any manner by any of

the observations made by this Court.

28. Notice stands discharged. Ad-interim relief earlier granted

stands vacated.