High Court Sets Aside Order in Tax Assessment Case

Case Law Name:

Excel Commodity and Derivative Pvt. Ltd. versus Union of India and Others

Key Takeaways:

1. Importance of providing reasoned orders in tax assessment proceedings.
2. Emphasis on proper verification and due process before initiating proceedings under Section 148 (of Income Tax Act, 1961)/147 of the Income Tax Act.
3. The term “information” in Explanation-1 under Section 148 (of Income Tax Act, 1961) cannot be lightly resorted to for reopening assessment.
4. The need for thorough consideration of the facts and contentions raised by the taxpayers before passing orders.

Synopsis:

This judgment from the High Court at Calcutta, specifically from the Civil Appellate Jurisdiction, Original Side. The case involves Excel Commodity and Derivative Pvt. Ltd. versus Union of India and others. The judgment was delivered by The Hon’ble Justice T.S. Sivagnanam and The Hon’ble Justice Hiranmay Bhattacharyya on 29th August, 2022.

The case revolves around an appeal against an order dated 30th June, 2022 in WPO/2298/2022. The writ petition was disposed of by setting aside the order dated 7th April, 2022 under Section 148A(d) (of Income Tax Act, 1961). The appellant, Excel Commodity and Derivative Pvt. Ltd., was aggrieved by the direction issued by the learned Single Bench remanding the matter back to the assessing officer.

The appellant was issued a notice under Section 148A(b) (of Income Tax Act, 1961) dated 22nd March, 2022, alleging fictitious derivative transactions with M/s. Blueview Tradecom Pvt. Ltd. The appellant submitted a detailed reply to the notice, enclosing all relevant documents in support of their claim that they had not engaged in any fictitious derivative transaction. However, the assessing officer passed an order under Section 148A(d) (of Income Tax Act, 1961) dated 7th April, 2022, which the High Court found to be devoid of reasons and without any discussion on the contentions raised by the petitioner in their objections to the notice.

The High Court also took note of a Circular issued by the Central Board of Direct Taxes (CBDT) dated 22nd August, 2022, which emphasized the need for due verification and giving an opportunity of being heard to the taxpayers before initiating proceedings under Section 148 (of Income Tax Act, 1961)/147 of the Act. The Court found that proper verification was not done on the information available with the assessing officer at the time of issuance of the notice, leading to an erroneous order being passed.

In its judgment, the High Court referred to the case of Divya Capital One (P.) Ltd. vs. Assistant Commissioner of Income Tax and highlighted that the term “information” in Explanation-1 under Section 148 (of Income Tax Act, 1961) cannot be lightly resorted to so as to reopen assessment, and this information cannot be a ground to give unbridled power to the revenue.

As a result, the High Court allowed the appeal filed by the assessee and set aside the order dated 7th April, 2022 under Section 148A (of Income Tax Act, 1961), along with the direction issued by the learned Single Bench remanding the matter to the assessing officer. Consequently, no further action can be taken by the department against the appellant/assessee on the subject issue.

This judgment highlights the importance of proper verification and due process in tax assessment proceedings, and the need for reasoned orders based on thorough consideration of the facts and contentions raised by the taxpayers.

FAQ:

Q1. What was the outcome of the appeal?

A1 The High Court allowed the appeal filed by the assessee and set aside the order dated 7th April, 2022 under Section 148A (of Income Tax Act, 1961), along with the direction issued by the learned Single Bench remanding the matter to the assessing officer.

Q2. What was the basis for setting aside the order?

A2. The order was found to be devoid of reasons and without any discussion on the contentions raised by the petitioner in their objections to the notice. Additionally, proper verification was not done on the information available with the assessing officer at the time of issuance of the notice, leading to an erroneous order being passed.

Q3. What are the key considerations highlighted in the judgment?

A3. The judgment emphasizes the importance of providing reasoned orders in tax assessment proceedings, proper verification, and due process before initiating proceedings under Section 148 (of Income Tax Act, 1961)/147 of the Income Tax Act.

This intra-Court appeal by the writ petitioner is directed against the order dated 30th June, 2022 in WPO/2298/2022.

The writ petition was disposed of by setting aside the

order impugned therein dated 7th April, 2022 under Section 148A(d) (of Income Tax Act, 1961)

of the Income Tax Act, 1961. The learned Single Bench held that

the said order dated 7th April, 2022 is devoid of reasons and

without any discussion on the contentions raised by the petitioner

in their objections dated 28th March, 2022 to the notice issued by

the assessing officer under Section 148A(b) (of Income Tax Act, 1961). After

having held so and quashing the order dated 7th April, 2022, the

learned Single Bench remanded the matter back to the assessing

officer to pass a fresh speaking order. Aggrieved by such

direction the appellant is before us by way of this appeal.

We have elaborately heard Mr. Subash Agarwal, learned

counsel for the appellant and Mr. Tilak Mitra, learned standing

counsel appearing for the respondent/revenue. So far as the first

portion of the order passed by the learned Single Bench is

concerned, the appellant/assessee has no quarrel as the order

impugned in the writ petition has been quashed. The assessee is

only aggrieved by the direction issued by the learned Single Bench

remanding the matter back to the assessing officer. The issue is

whether in the facts and circumstances of the case, such an order

of remand was justified and called for.

The appellant/assessee was issued notice under Section

148A(b) of the Act dated 22nd March, 2022. The sum and substance

of the allegation in the notice was that the appellant/assessee

has done fictitious derivative transactions with M/s. Blueview

Tradecom Pvt. Ltd. The assessee submitted their detailed reply

to the said notice enclosing all relevant documents in support of

their claim to justify that they have not indulged in any

fictitious derivative transaction. The procedure contemplated

under Section 148A (of Income Tax Act, 1961) requires the assessing officer to consider the

reply and thereafter pass a reasoned order, if in opinion of the

assessing officer, the information furnished by the assessee in

their reply is satisfactory, then nothing more requires to be

done. On the other hand, if the assessing officer is of the view

that the reply furnished by the assessee is not acceptable, then

he is to pass a speaking order in terms of clause (d) of Section

148A of the Act. In the instant case, the assessing officer has

passed the order under Section 148A(d) (of Income Tax Act, 1961) dated 7th April, 2022. On a

reading of the said order, we find that the assessing officer has

indirectly accepted the explanation given by the

appellant/assessee that they have not indulged in fictitious

derivative transaction. We say so because in the order dated 7th

April, 2022 in paragraph 4 therein, the assessing officer alleges

that prima facie the appellant/assessee has taken accommodation

entry by way of fund transfer from M/s. Brightmoon Suppliers Pvt.

Ltd. which is a different company. Thus, the order passed under

Clause (d) of Section 148A (of Income Tax Act, 1961) is not based on the reason

for which notice dated 22nd March, 2022 was issued under Section

148A(b) of the Act. Therefore, the order dated 7th April, 2022 is

illegal and has to be held to be wholly unsustainable. In such

factual position, the necessity to remand the matter back to the

assessing officer does not arise.

Further, we take note of the Circular issued by the

Central Board of Direct Taxes (CBDT) dated 22nd August, 2022 giving

instruction to the departmental officers with regard to the

uploading of data on functionality/portal of the Income Tax

Department. This circular emphasises the earlier circular dated

1st August, 2022 and in paragraph 3 therein, it has been stated as

follows:

“3). Further, it is re-emphasized that –

i) Before initiating proceedings under section 148 (of Income Tax Act, 1961)/147 of the

Act, any information available on data-base/portal of the

Income Tax Department shall be verified before drawing any

adverse inference again the taxpayers. It is not out of place

to mention here that the information made available/data

uploaded by the reporting entities may not be fully accurate

due to inter alia, error of human nature technical nature,

etc. Therefore, due verification may be carried out and

opportunity of being heard be given to the taxpayer before

initiating proceedings under Section 148 (of Income Tax Act, 1961)/147 of the Act.

ii) The supervisory authorities are hereby advised to keep an

effective supervision so as to ensure that all extant

Instructions/Guidelines/Circulars/SOPs are duly followed by

the Assessing Officers in their charge.”

From the above it is clear that it has come to the notice

of CBDT that in several cases information made available/data

uploaded by the reporting entries are not fully accurate due to

error of human nature, technical nature etc. Therefore, the

department was advised to effect due verification and opportunity

of being heard given to the tax payers before initiating

proceedings under Section 148 (of Income Tax Act, 1961)/147 of the Act. Thus, in the

preceding paragraph we have pointed out the factual position in

the case on hand and it appears that proper verification was not

done on the information which was available with the assessing

officer at the time of issuance of notice under Section 148A(b) (of Income Tax Act, 1961) of

the Act which has led to an erroneous order dated 7th April, 2022

being passed.

In Divya Capital One (P.) Ltd. vs. Assistant Commissioner

of Income Tax reported in [2002] 139 taxmann.com 461 (Delhi), the

Court had considered the new re-assessment claim and held as

follows:

“7. This Court is of the view that the new re-assessment

scheme (vide amended sections 147 to 151 of the Act) was

introduced by the Finance Act, 2021 with the intent of reducing

litigation and to promote ease of doing business. In fact, the

legislature brought in safeguards in the amended re-assessment

scheme in accordance with the judgment of the Supreme Court in

GKN Driveshafts (India) Ltd. v. ITO [2002] 125 Taxman 963/[2003]

259 ITR 19 before any exercise of jurisdiction to initiate re-

assessment proceedings under section 148 (of Income Tax Act, 1961).

8. This Court is further of the view that under the amended

provisions, the term “information” in Explanation 1 to section

148 cannot be lightly resorted to so as to re-open assessment.

This information cannot be a ground to give unbridled powers to

the Revenue. Whether it is “information to suggest” under

amended law or “reason to believe” under erstwhile law the

benchmark of “escapement of income chargeable to tax” still

remains the primary condition to be satisfied before invoking

powers under section 147 (of Income Tax Act, 1961). Merely because the Revenue-

respondent classifies a fact already on record as “information”

may vest it with the power to issue a notice of re-assessment

under section 148A(b) (of Income Tax Act, 1961) but would certainly not vest it with the

power to issue a re-assessment notice under section 148 (of Income Tax Act, 1961) post an

order under section 148A(d) (of Income Tax Act, 1961).”

As pointed out in the aforesaid mentioned decision, the

term “information” in Explanation-1 under Section 148 (of Income Tax Act, 1961) cannot be

lightly resorted to so as to reopen assessment and this

information cannot be a ground to give unbridled power to the

revenue. In fact, in the case on hand, the information has been

lightly used which resulted in issuance of notice. As pointed out

earlier, the assessee had submitted the explanation to the notice

along with documents in support of their claim. The assessing

officer has given up the said allegation which formed the basis of

the notice and proceeded on a fresh ground for alleging that the

transaction with some other company was an accommodation entry.

Therefore, on that score also the order dated 7th April, 2022 is

liable to be set aside in its entirety without giving any

opportunity to reopen the matter on a different issue.

For the above reasons, the appeal filed by the assessee

(APOT/132/2022) is allowed and the order dated 7th April, 2022

under Section 148A (of Income Tax Act, 1961) is set aside and the direction

issued by the learned Single Bench remanding the matter to the

assessing officer is also set aside. Consequently, no further

action can be taken by the department against the

appellant/assessee on the subject issue.

In the result, the connected application for stay (IA

No.GA/1/2022) also stands disposed of.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)