$~11
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Judgment: 8th January, 2018
+ W.P.(C) 9800/2015
SCAN HOLDING P LTD. ..... Petitioner
Through Mr. S. Krishnan, Advocate
Versus
ASSISTANT COMMISSIONER OF
INCOME TAX & ANR. ..... Respondents
Through Mr. Ruchir Bhatia and Mr. Puneet
Rai, Standing Counsel for the
Income Tax
Mr. Zoheb Hossain, Sr. Standing
Counsel for Revenue
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J. (ORAL)
1. We have heard counsel for the parties, and with their consent taken
the writ petition for final hearing. We have also perused the departmental
records which has been produced by the counsel for the respondents.
2. The petitioner, Scan Holding (P) Ltd., has challenged initiation of
proceedings under Section 147 read with 148 of the Income Tax Act, 1961
(Act, for short) vide notice dated 31.03.2015 for the Assessment Year
(AY) 2008-09.
3. It is accepted and admitted that the original return filed by the
petitioner for the AY 2008-09 was not subjected to scrutiny assessment
W.P.(C) 9800/2015 Page 1 of 14
and was processed under Section 143 (1) of the Act. Thus, this is not a
case of change of opinion.
4. Reasons to believe, for initiation of proceedings for the AY 2008-09,
read :-
"Income Tax Return for the A.Y. 2008·09 was filed by the
assessee on 28.09.2008 declaring income of 3,64,26,780/-.
1. Commission on sales received:
In the case, information in the form of complaint of Tax
evasion dated 10.12.2014 &12.03.2015 has been received in
this office. As per the information received, the company is
stated to be involved in money laundering. The company has
tried to convert its black money into legitimate business
income. The modus operandi of the case is that a company i.e.
M/s Ball Corporation (a listed company on NYSE) has
incorporated a wholly owned subsidiary in India namely M/s
Ball Packaging India Pvt Ltd with the object of installation of
beverage can manufacturing amount to the assessee company
as bribe to get the various clearances/licences/permission
from govt departments. The Ball Corporation has made a
payment of Rs. 1,26,20,250/- and Rs. 2,19,71,126/- as
commission on sales. The total amount of commission
declared was received by a singly cheque by M/s Scan
Holdings Pvt Ltd who has also declared this amount as
commission of Rs. 1,26,20,250/- in FY 2007-08 pertaining to
AY 2008-09 but in fact, no commission has been paid by M/s
Ball Corporation. Further the payment is received in foreign
currency but shown in Indian currency. As per the complaint,
there are no legitimate business activity between two parties
which looks like a sham transaction. It could be an
accommodation entry transactions which needs to be
examined/verified deeply to know the source of income/funds.
2. Income escaped from Investment of Rs. 2,65,734/- in
Joint Venture in Singapore;
On perusal of the Balance Sheet of the company it is noticed
that the company has invested Rs. 2,65,734/- in joint Venture
of Scan Holdings Ltd. Singapore. On perusal of P&L A/c of
W.P.(C) 9800/2015 Page 2 of 14
the company, it revealed that no income from the above
investments has been shown by the company resulting in
escapement of income. The Escapement of Income cannot be
quantified at this juncture but I have reason to believe that
some Income has Escapement Assessment
3. Escapement of Income u/s 14A read with Rule 8D:
On perusal of assessee company's computation of
income, it is revealed that the assessee had shown exempt
dividend income amounting to Rs.2,27,600/- whereas the
assessee had not disclosed the expenditure to earn this
exempt income as per section 14A read with Rule 8D
resulting in
escapement of income.
4. Bogus and Personal expenses:
Information has also been received that the assessee has
claimed bogus and personal expenses as business expenses to
suppress the income and therefore lowering or avoiding the
payment of tax. The same issue was also raised in the
AY2007-08. However, the amount cannot be quantified at this
point of time but I have reason to believe that this issue needs
to be
scrutinized and this type of expenses is liable to be
disallowed,
5. Expenditure on account of Foreign Travelling
It is noticed from perusal of P&L Account that the company
has debited Rs.3465948/- as Foreign Travelling in its P&L
A/C. The same issue was also raised in the AY2007-08.
However, the amount cannot be quantified at this point of
time but I have reason to believe that this issue needs to be
scrutinized and this type of expenses is liable to be
disallowed.
6.Rent to Director
It is stated by the complainant that the rent paid to directors
is just an adjustment entries as there no rent agreement and
W.P.(C) 9800/2015 Page 3 of 14
even though the same has not been paid on monthly basis.
Further, the company office is lying vacant still rent is paid
for the office related to directors.
7. Deprecation on Office:
The assessee has claimed depreciation on investment in office
which includes cost of land also. The company has claimed
depreciation on entire consideration paid for this which is
liable to be disallowed.
8. Therefore, I have reason to believe that during the
assessment year 2008-09, certain amount has escaped
assessment which cannot be quantified at
this stage.
9. It is important to refer herein the Auditor's report (3CD
Report) for AY 2007-8. According to notes 6 of Schedule 13 of
Balance Sheet as on 31,03.2008, the auditor has indicated
that no external supporting document for any financial
transaction were made available and the auditor only relied
upon the entries appearing in the books of account and
explanation given the management of the company.
Further, as per records, no scrutiny assessment u/s 143(3)
was undertaken and only summary assessment u/s 143(1) was
completed. Therefore, the books of accounts and details of
expenses have not been verified and the detail verification of
issues can be done only during the re-assessment
Proceedings.
9 In view of the above mentioned issues and facts from Point
No.1 to 6, it has been observed that a quantified income of Rs
1,26,20,250/- and further an un quantified income as has
escaped assessment on account of various issues as per the
details, given above by reasons of failure on the part of
assessee by not disclosing" the true and correct particulars of
lncome for the A.Y. 2008·09. Hence, I have reasons to
believe that income in the case of assessee has escaped
assessment as the assessee has not offered in its case honestly
within the meaning of section 147 (C) of the I. T. Act 1961
W.P.(C) 9800/2015 Page 4 of 14
10. Since 4 years has lapsed and the case falls under section
151 of the I. T.
Act, 1961, therefore the reason are put along with case
recorded before Addl. CIT, Range-22, New Delhi for
necessary approval."
5. The petitioner/assessee, upon receipt of reasons to believe, had filed
detailed objections dated 10.06.2015, which has been enclosed with the
present petition as Annexure P-10. The objections are legal and also deny
each and every factual assertion as mere assumption and imagination. The
reasons to believe, it is asserted merely refer to the complaint made by the
former statutory auditor, a Chartered Accountant. The complaint was
reproduced in the reason to believe without ascertaining and examining
whether there was any basis and substance in the allegations, or they are
vague and biased insinuations, which were nothing more than gossip and
canards. We are not reproducing the entire letter, but would like to
reproduce some portion of the objection letter:-
"5. PRELIMINARY OBJECTION 2 - WHETHER THE
CONTENTS OF THE COMPLAINTS AS BROUGHT INTO
THE REASONS RECORDED LEAD TO ANY BELIEF AS TO
ESCAPEMENT OF INCOME - Since we are not privy to the
complaints themselves, these submissions are being made on a
perusal of the Reasons recorded, requesting for leave to make
further submissions if required after receipt of copies thereof:
Two points are noteworthy from the contents of the Reasons:
a. If the Complainant is the Assessee's erstwhile auditor as
referred to at Para 2 above, it is interesting that he has helped
write the Assessee's books of account, then conducted audit
and certified them to be true and fair, then had the Assessee's
return for the subject year filed, and finally, when there were
issues as to increased audit fee demanded by him, started to
write and shoot of complaints with regard to the very same
accounts. ANNEXURE-g to this letter contains document after
document wherein the Assessee's accounts have been certified
to be true and fair by the same individual. Doubtless, while
W.P.(C) 9800/2015 Page 5 of 14
applying your mind to the allegations made by him, your kind
self would have referred to the Assessee's annual accounts and
found this contradiction to exist. At the worst therefore, at the
time of recording' reasons, your kind self had on the very same
file, a set of allegations and a set of certifications by the very
same person as to the very same annual accounts. At worst,
such a singular coincidence would lead to the logical
conclusion that one of the two acts o the complainant is false.
But no such process of reasoning or verification is gleaned
from a perusal of the Reasons Recorded. There is therefore
nothing on record to tip the scales and hold that the
complaints are correct and the certifications are erroneous.
That clearly amounts to no material.
b. The observations made in respect of each of the seven issues
listed have been tabulated at Para 3(c) above, shows that all of
the seven allegations either have no nexus with escapement of
income, or are so far-fetched, that no reasonable person would
find them even noteworthy. The issue with regard to
commission on sales is a case in point.
XXX XXX XXX
10. Therefore, the proposed reopening of the assessment
appears mechanical and non-reasoned for as many as three
issues:
a. ALLEGATIONS ARE FALSE & MOTIVATED - The factual
sequence of events as listed in the complaint are motivated,
and do not lead to any belief as to escapement of income.
Despite this, and without any verification or substantiation,
they have been lifted into reasons recorded. It may be the say
of the Revenue that in many cases, they receive complaints that
require verification, but in such cases, there should be some
testing of the waters before Reasons are recorded and notices
are shot off.
b. ALLEGATIONS THEMSELVES DO NOT DEMONSTRATE
ESCAPEMENT OF INCOME - Even forming the worst
possible
W.P.(C) 9800/2015 Page 6 of 14
conclusion from the allegations listed, they do not lead to any
conclusions to escapement of income; as has been pointed out
at Para5(c) above.
c. NO OBSERVATION AS TO ESCAPEMENT OF INCOME
No observation or finding-in this regard appears in the
Reasons Recorded either, as pointed out at Para 8 above. The
belief as to escapement of income is to be formed by your kind
self alone, and such belief must resonate from the Reasons
Recorded. As the Assessing Officer, your kind self has to
demonstrate that as per provisions of the Income-tax Act 1961,
there is escapement of income. In the subject case though, the
Reasons only indicate allegations and probabilities. The
phrase '1 have reason to believe' is not a magic wand. It needs
to be tested by its vicinity. The vicinity only comprises of
unsubstantiated allegations and non-allegations. That being
the case, the existence of the belief must be held to be a fiction,
So it is prayed."
6. We have not reproduced paragraph 3 of the objections to avoid
prolixity, albeit the petitioner had asserted that the allegation were
conjunctures and imaginations and not worthy of being treated as cogent
reasons. The petitioner had stated :-
[1] Commission received from Ball Corporation has been
declared and taxed. Ball Corporation is a third and unrelated party with
whom the assessee has arms length, albeit long business relations. The
allegations of money laundering, sham transaction converting black money
into legitimate income are bald allegation and completely illogical. There is
not even a remotest ground or reason to support the assertion.
[2] Investment of Rs.2,65,734/- in a joint venture in Singapore
was made in assessment year 2007-08, but no income from the said
investment was earned in the year by the assessee. The assertion that the
income must have been earned is ex-facie flawed and mere guess work. No
such assumption could be made.
W.P.(C) 9800/2015 Page 7 of 14
[3] Allegation of bogus and personal expenses being booked
business expenses have been made without any details and particulars.
[4] Alleged non-disclosure of expenditure incurred to earn
exempt dividend income, is based upon surmises and conjectures without
specific detail as to what expenditure was incurred.
[5] There cannot be any assumption that foreign travel was not for
business purpose. Substantial purchases as well as sales of the assessee
were from foreign trading.
[6] Allegation with regard to rent and depreciation were also
without basis and elucidation. The accommodation was used for business
activities and was also its registered address. There was no basis or reason
to assume or alleged that the premises was not used for business activities.
The petitioner had disclosed income of over Rs.3.64 crores and the
turnover of more than Rs.28.55 crores.
[7] Depreciation was charged on the cost of the assets purchased
as per Rules.
7. The Assessing Officer by order dated 11.09.2015 rejected the
objections filed by the petitioner to initiation of proceedings under sections
147/148 of the Act. This order after reproducing the reasons, in a cryptic
and cursory manner refers to the objections raised and thereafter rejects
them without much examination and elucidation, in the following words:-
"III. In response to reasons, the assessee vide letter dated
10/06/2015 filed written submission regarding its objections to
there-opening of assessment u/s 147 of the Act, on the
following grounds:
· The contents of complaint on the basis of which the case was
reopened cannot be treated as material for reopening the
case.
· The contents of complaint on the basis of which the case was
reopened cannot lead to any belief as to escapement of
income.
W.P.(C) 9800/2015 Page 8 of 14
· The reopening appears to be mechanical and is non
reasoned.
· commission income earned from M/s. Ball Packaging has
been duly offered to tax
· No disallowance can be made on account of Section I4A,
Bogus expenses and Foreign Travel expenditure, rent paid to
directors or depreciation on office premises."
IV. The submission made by the assessee have been
considered. but found not acceptable. In the present case as
the case for the relevant assessment year-was not assessed u/s
143(3) of the Act and six years have not elapsed for the
relevant assessment year, prior approval as per Act was taken
from the Competent Authority before .issuing the notice
u/s,JA8. Hence the notice u/s 148 of the Act for assessment of
the assessee Company's case is valid and as per law.
Thereafter, the order quotes case laws on the question of initiation of
proceedings under Sections 147 and 148 of the Act. It is recorded in
paragraph IV.2 that the contention of the petitioner that there was no
"tangible" material or new information, was not correct and rather it was
supported by facts, without setting out the "tangible" material and meeting
the submission that the complaint was nothing but false-hood, unsupported
and vapid.
8. On the issue of initiation of proceedings under sections 147/148 of
the Act, distinction is drawn between ,,reasons to believe and ,,reasons to
suspect for the statute permits re-opening in the former case and not in the
latter case. In Income Tax Officer, Calcutta and Others versus Lakhmani
Mewal Das, (1976) 103 ITR 437 (SC), it was held as under:-
"The powers of the Income-tax Officer to reopen
assessment though wide are not plenary. The words
of the statute are "reason to believe" and not "reason
to suspect". The reopening of the assessment after the
lapse of many years is a serious matter. The Act, no
doubt, contemplates the reopening of the assessment
W.P.(C) 9800/2015 Page 9 of 14
if grounds exist for believing that income of the
assessee has escaped assessment. The underlying
reason for that is that instances of concealed income
or other income escaping assessment in a large
number of cases come to the notice of the income-tax
authorities after the assessment has been completed.
The provisions of the Act in this respect depart from
the normal rule that there should be, subject to right of
appeal and revision, finality about orders made in
judicial and quasi-judicial proceedings. It is,
therefore, essential that before such action is taken the
requirements of the law should be satisfied."
9. In Calcutta Discount Company Limited versus Income Tax Officer,
Companies District I Calcutta and Another, (1961) 41 ITR 191(SC), it
was observed as under:
"37. The notices issued by the Income Tax
Officer in the case before us undoubtedly fulfil
conditions (2) and (3). Notices of reassessment were
served before the expiry of eight years of the end of
the relevant years of assessment. The Income Tax
Officer also recorded his reasons in the reports
submitted by him to the Commissioner and the
Commissioner was satisfied that they were fit cases
for the issue of such notices. The dispute in the
appeal relates merely to the fulfilment of the two
branches of the first condition and that immediately
raises the question about the true import of the
expression "has reason to believe" in Section
34(1)(a). The expression "reason to believe"
postulates belief and the existence of reasons for that
belief. The belief must be held in good faith: it
cannot be merely a pretence. The expression does not
mean a purely subjective satisfaction of the Income
Tax Officer: the forum of decision as to the existence
of reasons and the belief is not in the mind of the
Income Tax Officer. If it be asserted that the Income
Tax Officer had reason to believe that income had
been under-assessed by reason of failure to disclose
fully and truly the facts material for assessment, the
existence of the belief and the reasons for the belief,
W.P.(C) 9800/2015 Page 10 of 14
but not the sufficiency of the reasons, will be
justiciable. The expression therefore predicates that
the Income Tax Officer holds the belief induced by
the existence of reasons for holding such belief. It
contemplates existence of reasons on which the
belief is founded, and not merely a belief in the
existence of reasons inducing the belief; in other
words, the Income Tax Officer must on information
at his disposal believe that income has been under-
assessed by reason of failure fully and truly to
disclose all material facts necessary for assessment.
Such a belief, be it said, may not be based on mere
suspicion: it must be founded upon information."
10. More direct and appropriate is the reasoning given in Sheo Nath
Singh versus Appellate Assistant Commissioner of Income Tax, Calcutta,
(1972) 3 SCC 234, wherein it has been held as under:-
"10. In our judgment, the law laid down by this
Court in the above case is fully applicable to the
facts of the present case. There can be no manner of
doubt that the words "reason to believe" suggest that
the belief must be that of an honest and reasonable
person based upon reasonable grounds and that the
Income Tax Officer may act on direct or
circumstantial evidence but not on mere suspicion,
gossip or rumour. The Income Tax Officer would be
acting without jurisdiction if the reason for his belief
that the conditions are satisfied does not exist or is
not material or relevant to the belief required by the
section. The Court can always examine this aspect
though the declaration or sufficiency of the reasons
for the belief cannot be investigated by the Court."
We wish to clarify, least there be any doubt and debate. At the stage
of issue of notice what is required and necessary is that the information
must be "definite", i.e, it should not be mere guess, gossip or rumour. In
the context of the two Sections "definite" does not mean conclusion of
certainty at the stage of notice for there is clear distinction between receipt
W.P.(C) 9800/2015 Page 11 of 14
of information as a consequence of which the Assessing Officer forms an
honest belief and notice is issued, and the final determination, which takes
place when the assessment order is passed. Once the Assessing Officer has
formed a bona fide and honest belief upon materials, which reasonably
support such belief, issue of notice would be valid as held and observed in
A.N. Lakshman Shenoy versus ITO, Ernakulam and Another, (1958) 34
ITR 275 (SC).
11. The aforesaid discussion means that a complaint or information from
a third party before the Assessing Officer, when it is "definite" information
as explained in A.N. Lakshman Shenoy (supra), and not mere gossip or
guess or rumour, can certainly be a ground for issue of notice under Section
147/148 of the Act, albeit the Assessing Officer must form an honest belief
upon some material, and basis, which supports such belief.
12. The petitioner has pointed out that similar complaints were made by
the same Chartered Accountant for Assessment Years 2006-07, 2007-08
and for subsequent Assessment Years, i.e., 2010-11 onwards. Complaints
were also made against the individual directors, namely, Vijay Aggarwal,
Rajiv Aggarwal and Juhi Dixit. The individual directors had filed writ
petitions in this Court, which have been allowed. Similarly, for the
Assessment Year 2007-08, the petitioner had participated in the assessment
proceedings under Section 147/148 of the Act and some additions in the
scrutiny assessment were made, but these additions have been deleted in
the first appeal. We are not giving any firm or affirmative opinion, but
would require the Assessing Officer to consider the aforesaid aspects and
pass a reasoned and a speaking order dealing with the contentions of the
assessee.
13. This is a case wherein there was no assessment and in case Assessing
Officer felt that there was nexus between the grounds and the facts stated
W.P.(C) 9800/2015 Page 12 of 14
and available which have basis and foundation to form the ,,reasons to
believe that income has escaped assessment, it is open to him to say so and
thereafter continue with the proceedings under sections 147/148 of the Act.
However, the findings of the Assessing Officer must be honest and cogent,
based upon some material available on record, to support the prima facie
finding and not predicated on mere assumption and guess work. A
complaint or information may merit examination and consideration, but
every complaint does not merit reopening or proceeding under sections
147/148 of the Act. The Assessing Officer must examine and ascertain
whether or not allegation made are mere guess work, surmise and rumour,
or has some basis to make it the basis for detailed final determination.
14. The procedure for filing of objections and a speaking order by the
Assessing Officer dealing with the objections, came to be adopted in terms
of the decision of the Supreme Court in GKN Driveshafts (India) Limited
versus ITO, (2003) 259 ITR 19 (SC), the relevant portion of which reads as
under:-
"5. We see no justifiable reason to interfere with the order
under challenge. However, we clarify that when a notice under
Section 148 of the Income Tax Act is issued, the proper course
of action for the noticee is to file return and if he so desires, to
seek reasons for issuing notices. The assessing officer is bound
to furnish reasons within a reasonable time. On receipt of
reasons, the noticee is entitled to file objections to issuance of
notice and the assessing officer is bound to dispose of the same
by passing a speaking order. In the instant case, as the reasons
have been disclosed in these proceedings, the assessing officer
has to dispose of the objections, if filed, by passing a speaking
order, before proceeding with the assessment in respect of the
above said five assessment years."
15. In the facts of the present matter, we feel that the Assessing Officer
has merely observed and recorded that the objections raised by the assessee
were untenable and wrong, without elucidating and dealing with the
W.P.(C) 9800/2015 Page 13 of 14
contentions and issues raised in the objection letter dated 10 th June, 2015.
The Assessing Officer has not applied his mind to the assertions and
contentions raised by the petitioner and the core issue to be examined and
considered.
16. Accordingly, we set aside the order dated 11th September, 2015 with
a direction of remand to the Assessing Officer to pass a fresh order after
hearing the petitioner or its authorised representative, without being
influenced by the earlier order dated 11th September,2015 or by this order.
We have not formed any firm opinion on merits.
17. To cut short delay, the petitioner/authorised representative will visit
the office of the Assessing Officer on 31st January, 2018 at 2.30 P.M., when
a date of hearing will be fixed.
18. The writ petition is disposed of in the aforesaid terms, without any
order as to costs.
SANJIV KHANNA, J.
CHANDER SHEKHAR, J.
JANUARY 08, 2018
b/VKR
W.P.(C) 9800/2015 Page 14 of 14
|
