Case Name**: HINDUSTAN DORR OLIVER LTD. VS P. K. KEDIA, DEPUTY COMMISSIONER OF INCOME TAX & ORS. (HIGH COURT) **Key Takeaways**: 1. The Income Tax Department must have valid, material reasons to issue a reassessment notice under Section 148 of the Income Tax Act. 2. Statements from third parties without corroborating evidence are insufficient to form a "reason to believe" for reassessment. 3. The court emphasized the importance of substantial evidence in initiating reassessment proceedings. **Issue**: Did the Income Tax Department have a valid "reason to believe" that income had escaped assessment to justify issuing a notice under Section 148 of the Income Tax Act for reassessment? **Facts**: 1. Hindustan Dorr Oliver Ltd. is involved in designing, engineering, supplying, and installing plants/structures for various industries. 2. The company procured steel from Steel Authority of India Ltd. (SAIL) at concessional rates using Essentiality Certificates provided by their customers. 3. The company appointed agents to procure and store steel due to lack of storage facilities. 4. The Income Tax Department issued a notice under Section 148 on 30.3.1990 for reassessment of the company's income for the assessment year 1982-83. 5. The department's action was based on statements suggesting that the company sold steel procured from SAIL in the open market at a premium. **Arguments**: Petitioner (Hindustan Dorr Oliver Ltd.): - The ingredients of Section 143 have not been satisfied, making the notice invalid. - They have sufficient records to establish the quantity of steel actually used in fabricating equipment at clients' sites. Respondent (Income Tax Department): - The petitioner failed to establish with proof that the steel supplied by SAIL was used for its intended purpose. - Incriminating documents seized during a search operation indicated that goods procured from SAIL were sold in the open market at a premium. **Key Legal Precedents**: The judgment doesn't explicitly mention any specific legal precedents. However, it refers to Sections 143, 147, and 148 of the Income Tax Act, which deal with assessment and reassessment procedures. **Judgement**: 1. The court ruled in favor of the petitioner, quashing the reassessment notice. 2. The court found that there was no substantial evidence to support the department's "reason to believe" that income had escaped assessment. 3. The statements provided by third parties (J.M. Sanghvi and Jayesh Joshi) did not conclusively prove that the petitioner had sold steel procured from SAIL in the open market. 4. The court emphasized that the notice was based on non-existing or insufficient material, making the formation of "reasons to believe" invalid. **FAQs**: Q1: What is the significance of "reason to believe" in this case? A: "Reason to believe" is a crucial element for issuing a reassessment notice under Section 148 of the Income Tax Act. The court emphasized that this reason must be based on substantial evidence, not mere suspicion or third-party statements without corroboration. Q2: Why did the court quash the reassessment notice? A: The court quashed the notice because the Income Tax Department failed to provide sufficient material evidence to support their claim that income had escaped assessment. The department relied mainly on third-party statements that did not conclusively prove any wrongdoing by the petitioner. Q3: What lesson can tax authorities learn from this case? A: Tax authorities should ensure they have substantial, concrete evidence before issuing reassessment notices. Relying solely on uncorroborated third-party statements may not be sufficient to justify reopening an assessment. Q4: How does this judgment impact taxpayers? A: This judgment reinforces taxpayers' rights against arbitrary reassessment proceedings. It emphasizes that tax authorities must have valid, material reasons to reopen assessments, providing a safeguard against potential harassment. Q5: What sections of the Income Tax Act were relevant in this case? A: The case primarily dealt with Sections 147 and 148 of the Income Tax Act, which pertain to income escaping assessment and issuing notice for reassessment, respectively. Section 143, which deals with assessment procedures, was also mentioned.

1. It is the case of the petitioners that they are involved with the work of designing, engineering, supplying and installing plants/structures for various industries. 70% of their customers were public sector undertakings and/or Government/Semi-Government bodies. In the case of these customers, large quantities of steel was involved and these customers used to provide Essentiality Certificates to enable the petitioners to procure steel from the Steel Authority of India Ltd., This certificate enables the petitioners easily to procure the requisite quantity of steel at lower or concessional rates. The certificates issued are based on requirement of steel on the basis of drawings and designs submitted by the petitioners to the customers. The quotations to these parties include a change for steel at the controlled/concessional rates. The petitioners placed orders on its vendors for supply of steel equipment. As the petitioners did not have any manufacturing or storage facilities and did not have the space for storage of raw materials such as steel, they have appointed certain parties as its agents for the purposes of procuring steel from SAIL and storing the same till it is necessary for despatch to the destination. Sometimes there was time gap between the procurement of steel and its utilisation at the projects. During this intervening period steel was kept in the custody of the agent and depending upon the petitioners’ requirements, the agent released, from time to time, the required quantity of steel by despatching the same to the site. According to the petitioners there is sufficient record to establish the quantity of steel actually used in fabricating the equipment at its clients’ site either during the particular year or subsequent years, which is equal to the total quantity of steel procured from SAIL. Petitioner also contends that it may not be possible for the petitioners to establish that the steel used was the same which had been procured by it from SAIL for the purpose of a particular contract because the goods were stored with the agents, who may mix up the same with similar goods belonging to him or the other parties but stored in their godown.

2. The petitioners filed their returns for the assessment year 1982-83. During the course of assessment proceeding, notice was issued under Section 143(2). By letter dated 11.10.1984, respondent no.1 called upon the petitioners to furnish details in respect of the various items. This included the details of purchase from SAIL. Respondent no.1 after careful scrutiny, by order dated 20.3.1985 completed petitioners’ assessment under Section 143(3) of the Act for the assessment year 1982-83. Aggrieved by the order, the petitioners preferred an appeal.

3. Notice under Section 148 was served on the petitioners on or about 30.3.1990 stating therein that they had reason to believe that the petitioners’ income chargeable to tax for the assessment year 1982-83 had escaped assessment within the meaning of Section 147 of the Act and that they proposed to re-assess the petitioners’ income for that assessment year. The petitioners filed their return and subsequently this petition to challenge the said notice. It is the case of the petitioners that ingredients of section 143 have not been satisfied and consequently, notice is liable to be quashed and set aside.

4. Reply was filed by one P.K.Kedia, Deputy Commissioner of Income-tax, Special Range-24. It was contended that some type of accounts were maintained by the petitioners. Even as per their own admissions the petitioners have not established with proof that the steel supplied by the SAIL has been used for the particular purpose for which it was intended and that substantial evidence available from the numerous incriminating documents seized in the search operation indicated that the goods procured by the petitioners from the SAIL allegedly for actual consumption of the petitioners’ clients were sold by the petitioners in the open market at a premium. Based on this material, it is submitted that the assessing officer had reason to believe that income had escaped assessment. Alongwith the reply, a notice issued containing the reasons, is annexed. It is set out therein that the raw material procured from the SAIL for actual use was sold in cash in open market in unaccounted terms. This is based on the statement recorded and the details gathered by the Investigation Wing. It is set out that total quantity of goods thus alleged to have been sold outside the books of accounts is 158.440 metric tonnes of steel plates worth Rs.5,51,004/-.

5. At the hearing of this petition on behalf of the petitioners, we had called on learned Counsel to place on record the material based on which the notice under Section 147 was issued and the material based upon which the officer come to the conclusion that he has reasons to believe.

6. An additional affidavit was filed by one Anu Krishna, to which some documents including the statement recorded of one J.M.Sanghvi has been annexed. From the statement of J.M.Sanghvi it has come on record that he was instrumental in helping one Girish Joshi and his brother Pravin A.Joshi and Jayesh A.Joshi in setting up two bogus firms for the purpose of selling steel from various parties. The statements of the Joshi brothers were not placed. The two bogus concerns were M/s.J.Sanghvi & Co. and M/s.Lilly Enterprises. At today’s hearing the matter was posted for orders today when learned Counsel has produced the statement of Shri Jayesh Joshi. In the English statement recorded on 5.4.1989 in so far as the petitioners are concerned, this is what is recorded :-

" M/s.Hindustan Dorr Laser : We had done their liason work for the matters of this concern we were dealing with Mr.Shanbaug and Mr.P.G.Baxi. In addition to above we had exchanged on some occasions M/s.Special Steel Ltd., Hindustan Dorr Lever Ltd."

From this statement there is nothing on record to show that the petitioners had allowed the two bogus firms run by the Joshis’ to sell the steel procured by them and thereby earned any income based on which the notice under Section 147 could have been issued.

There is no other material to show on what basis the authority had formed the belief that ‘there are reasons to believe’.

7. Considering the above discussion as the notice itself is not based on any material and or on non-existing material, the formation of opinion or ‘reasons to believe’ is based on no material, must be quashed and set aside. Consequently, petition made absolute in terms of prayer clause-(a). There shall be no order as to costs.

(R.S.Mohite,J) (F.I.Rebello,J)