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Gateway Leasing Pvt. Ltd vs. ACIT (Bombay High Court)
July, 14th 2020

S. 147 Reopening for bogus capital gains from penny stocks: The Dept's argument that though the assessee disclosed details of the transactions pertaining to purchase and sale of shares, it did not disclose the real colour / true character of the transactions and, therefore, did not make a full and true disclosure of all material facts which was also overlooked by the AO, is not correct. The assessee disclosed the primary facts to the AO & also explained the queries put by the AO. It cannot be said that the assessee did not disclose fully and truly all material facts necessary for the assessment

1 Heard Mr. Madhur Agarwal, learned counsel
for the Petitioner and Mr. Suresh Kumar, learned
standing counsel, Revenue, for the Respondents.
2 By filing this petition under Article 226 of the
Constitution of India, Petitioner seeks quashing of
notice dated 31.03.2019 issued under section 148 of
the Income Tax Act, 1961 by the Assistant Commissioner
of Income Tax, Circle 1(1)(2), Mumbai i.e. Respondent
No.1 as well as the order dated 26.08.2019 passed by
the Deputy Commissioner of Income Tax, Circle 1(1)(2),
Mumbai i.e. Respondent No. 2, rejecting the objections
raised by the Petitioner to re-opening of assessment
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under section 147 of the Income Tax Act, 1961 (briefly
“the Act”, hereinafter).
3 Case of the Petitioner is that it is a company
registered under the Companies Act, 1956, engaged in
the business of financing and investing activities, as a
non-banking financial company registered with the
Reserve Bank of India. It is an assessee under the Act.
4 For the assessment year 2012-13, Petitioner
filed return of income on 20.09.2012 declaring total
income of Rs. 90,630.00. Initially, the return of income
was processed under section 143(1) of the Act.
Petitioner’s case was however selected for scrutiny
pursuant to which notices under section 143 (2) as well
as under section 142(1) were issued alongwith
questionnaire. During the course of assessment
proceedings, details of income, expenditure, assets and
liabilities were called for and examined. Following reply
submitted by the Petitioner pursuant to such notices and
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after examination of the details filed, Assessing Officer
computed the total income of the Petitioner at Rs.
90,630.00, vide the assessment order dated 28.03.2015
passed under section 143(3) of the Act.
5 On 31.03.2019 Respondent No. 1, who was in
the meanwhile conferred jurisdiction to assess the
Petitioner’s income, issued notice to the Petitioner under
section 148 of the Act stating that he had reasons to
believe that Petitioner’s income chargeable to tax for
the assessment year 2012-13 had escaped assessment
within the meaning of section 147 of the Act.
Proceeding to assess/re-assess the income for the said
assessment year, Respondent No. 1 called upon the
Petitioner to submit return in the prescribed form for
the said assessment year. It was further mentioned
that said notice was issued after obtaining necessary
satisfaction of the Principal Commissioner of Income
Tax-1, Mumbai.
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6 Petitioner sought for the reasons for issuing
notice under section 148 of the Act vide letter dated
09.04.2019, referring to the decision of the Supreme
Court in the case GKN Driveshafts (India) Ltd., vs.
I.T.O., 259 ITR 19. Petitioner also filed return of
income under section 148 of the Act, returning the
income at Rs. 90,630.00 as originally assessed by the
Assessing Officer under section 143(3) of the Act.
7 By letter dated 31.05.2019, Respondent No. 2
furnished the reasons for re-opening of the assessment.
It was stated that information was received from the
Investigation Wing of the Income Tax Department that a
search and seizure action was carried out in the
premises of one Shri Naresh Jain which revealed that a
syndicate of persons were acting in collusion and
managing transactions in the stock exchange, thereby
generating bogus long-term capital gains/ bogus shortterm
capital loss and bogus business loss entries for
various beneficiaries.
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8 From the materials gathered in the course of
the said search and seizure action, it was alleged that
Petitioner had traded in the shares of M/s. Scan Steel
Ltd. and was in receipt of Rs. 23,98,014.00 which the
Assessing Officer believed had escaped assessment
within the meaning of section 147 of the Act. It was
also alleged that Petitioner had failed to disclose fully
and truly all material facts necessary for its
assessment for the assessment year 2012-13 for which
notice under section 148 of the Act was issued.
9 Petitioner submitted objections to reopening
of assessment proceedings on 26.06.2019. Referring to
the reasons recorded and furnished, it was contended on
behalf of the Petitioner that the original assessment
was completed under section 143(3) of the Act where
all the details of purchase and sale of shares of M/s.
Scan Steels Ltd., also known as Clarus Infrastructure
Realties Ltd. (earlier known as Mittal Securities Finance
Ltd.), were disclosed. While denying that the Petitioner
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had any dealing with the parties whose names cropped
up during the search and seizure action, it was stated
that purchase and sale of shares were done by the
petitioner through registered broker of Bombay Stock
Exchange. Payment for the purchase of shares were
made by cheque through the Bombay Stock Exchange,
the price being as per prevailing market price. Thus
there was no apparent reason to classify the receipt of
Rs. 23,98,014.00 as having escaped assessment.
Therefore, it was contended that the decision to reopen
assessment was nothing but change of opinion, which
was not permissible in law. That apart, it was
contended that the impugned notice under section 148
of the Act was issued on 31.03.2019 and was received
by the Petitioner on 04.04.2019 i.e. beyond
31.03.2019. The notice was posted on 02.04.2019. On
that basis it was contended that though the notice was
dated 31.03.2019 but the same was posted after
closure of financial year and thus was barred by
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limitation being beyond six years. Other grounds were
also raised by the Petitioner.
10 Respondent No. 2 by his letter dated
26.08.2019 informed the Petitioner that its objections to
issuance of notice under section 148 of the Act was duly
considered but on the grounds and reasons mentioned
therein, the same was rejected.
11 Aggrieved, present writ petition has been
filed, seeking the reliefs as indicated above.
12 This Court by order dated 01.10.2019, prima
facie, took the view that the impugned notice was
dispatched after 31.03.2019 which made the impugned
notice beyond the statutory period of six years and
thus without jurisdiction. While granting time to
Respondents to file reply affidavit, interim stay was
granted to the impugned notice dated 31.03.2019.
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13 Respondents have filed affidavit-in-reply
controverting the averments made in the writ petition.
It is stated that the impugned notice was issued after
recording reasons under section 148 (2) of the Act and
after obtaining sanction of the Principal Commissioner
of Income Tax-I, Mumbai, as required under section
151(1) of the Act. It is stated that in response to the
notice under section 148 Petitioner had furnished return
of income on 09.04.2019, declaring total income of Rs.
90,630.00 wherein Petitioner claimed TDS credit of Rs.
34,05,533.00 and sought refund of a sum of Rs.
34,05,533.00. It is stated that on scrutiny of the
computation made by the Assessing Officer, it was
found that Petitioner had received refund of Rs.
26,13,268.00 with interest of Rs. 2,87,463.00 which was
reduced while determining the tax liability. In the
return of income tax filed, Petitioner did not reduce the
amount of refund received by him which prima facie
resulted in excess claim of refund to the tune of Rs.
26,13,268.00, which refund was already granted. It is
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stated that furnishing of the details of purchase and
sale of shares of Mittal Securities Ltd., (Scan Steels
Ltd.) did not amount to full and true disclosure of
material facts before the Assessing Officer, who in his
assessment order totally relied upon the submissions
of the Petitioner and had accepted the same without
cross verification. It is further stated that the challenge
to the impugned notice is untenable. Besides, the Act
provides for a host of remedial measures in the form of
appeals and revisions.
13.1 Regarding issuance of the impugned notice,
as alleged by the Petitioner to be beyond 31.03.2019, it
is stated that the notice was handed over to the postal
authorities on 31.03.2019. The postal receipts to that
effect have been annexed.
13.2 Finally, Respondents have justified issuance
of the impugned notice and re-opening of the
assessment and in this connection a reference has
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been made to the report of the Investigation Wing as
per which the Petitioner had diluted its income by
adopting manufactured and pre-arranged transactions
which were never disclosed to the Assessing Officer.
Such an action was nothing but a failure on the part of
the Petitioner to make a full and true disclosure of all
material facts. Petitioner’s contention that all primary
facts were disclosed by it have been disputed. That
apart, it is contended that Principal Commissioner of
Income Tax-1 had applied his mind and thereafter,
granted approval to the issuance of notice under
section 148 of the Act.
14 Petitioner has filed rejoinder affidavit. It is
stated that in the return of income filed pursuant to
the impugned notice dated 31.03.2019, petitioner
could not reduce the amount of refund already received
as the online ITBA system did not provide for any
separate column for reduction of the said amount
already refunded. In any event, the said amount of
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Rs. 26,13,268.00 and interest were not the reasons for
reopening assessment. All details about the purchase
and sale of shares of Mittal Securities Ltd., were
furnished; Assessing Officer was not required to give
findings on each issue raised during the course of the
assessment proceedings. Assessing Officer had
applied his mind and granted relief to the petitioner in
the assessment order. Normally when submission of
assessee is accepted, no finding is given in the
assessment order.
15 In the course of hearing, Mr. Agarwal, learned
counsel for the Petitioner referred to the postal receipts
which indicate that the impugned notice was delivered
by Income Tax Department to the Petitioner through the
post office on 31.03.2019 at 3.34 p.m.. Therefore, he
submits that Petitioner would not press upon this
ground as raised in the writ petition.
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15.1. Primary contention of Mr. Agarwal is that the
reasons given for re-opening assessment do not make
out a case for invoking jurisdiction under section 147 of
the Act. The so called information allegedly received
by the Respondents were in-fact furnished by the
Petitioner in the course of the original assessment. It
is another matter that Assessing Officer did not refer
to all the primary facts placed before him by the
Petitioner in the assessment order but that cannot be a
ground for re-opening assessment. He therefore
submits that at the most it can be construed to be reappreciation
of the materials already on record and in
the circumstances, it would be a case of change of
opinion which is not permissible for re-opening of a
concluded assessment. His further submission is that
grounds as furnished by the Respondents for reopening
of the assessment and the averments made in
the affidavit by the Respondents, justifying the reopening
of assessment, are at variance. His contention
is that the reasons given for re-opening of the
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assessment cannot be enlarged and improved upon by
way of affidavit filed subsequently. That apart, it is
contended that Principal Commissioner of Income Tax-1
had mechanically granted approval to Respondent
No.1 to re-open the assessment which has vitiated the
impugned notice.
16 On the other hand Mr. Suresh Kumar, learned
standing counsel, Revenue, for the Respondents
submits that not only the impugned notice was
handed over to the Petitioner by the Income Tax
Department on 31.03.2019 at about 3.34 p.m. but a
copy of the same was served upon the Petitioner
before end of the day on 31.03.2019. He further
submits that the reasons furnished are good grounds
to justify re-opening of the assessment of the
Petitioner. Writ petition is premature inasmuch as it has
assailed the impugned notice; whereas the Act
provides for a host of alternative remedies to the
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Petitioner which are adequate and efficacious.
Therefore, the writ petition should be dismissed.
17 Submissions made by learned counsel for the
parties have been considered. We have also perused
the materials on record.
18 At the outset, we may advert to the reasons
furnished by Respondent No.2 for re-opening of the
assessment. As already noticed above, reasons were
furnished to the Petitioner vide letter dated
31.05.2019. The reasons furnished are extracted
hereunder :
“The return of income for the year, declaring
total income of Rs.90,630.00 was filed by the
assessee on 20.09.2012. The assessment was
completed on 28.03.2015 by accepting the
returned income.
An information has been received from
the Investigation Wing that a search and seizure
action was carried out on Shri Naresh Jain and
his associates by the DIT (Inv.)-2, Mumbai on
19.03.2019 which was concluded on
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21.03.2019. The search action covered the
syndicate of persons who were acting in
collusion and executing managed transactions
in the stock exchange thus generating bogus
long-term capital gains/ bogus short-term
capital loss/ bogus business loss entries for
various beneficiaries. This search action
unraveled the workings of the syndicate and
brought on record the make-believe nature of
paper work that is manufactured in order to
show the arranged transactions as legitimate
market transactions. Statement of Shri Shirish
Shah, recorded during the course of search
action u/s 132 (4) of the Act in which he had
admitted under oath that with the help of
various people, manipulated the share prices
of various scrips in order to provide bogus
entries of long term capital gain, short term
capital loss and business loss. Evidence has
also been gathered during the search action
establishing the links between Naresh Jain –
the operator, promoters of various scrips,
share brokers, exit providers and intermediaries
who acted in collusion in order to facilitate the
transactions on the exchanges. During the
year, relevant to the A.Y. 2012-13, Shri Jain used
the following scrips to provide bogus entries,
which are as under :
Sr.No. Scrip Code Name
1. 504378 NYSSA Corporation Ltd.
2. 505343 Monotype India Ltd.
3. 508860 Diamant Infrastructure Ltd.
4. 511672 Scan Steels Ltd.
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5. 523810 Divine Multimedia (I) Ltd.
6. 531866 Aagam Capital Ltd.
7. 533427 VMS Industries Ltd.
Shri Jain had also admitted that he had helped
Shri Bhavesh Pabri and Hemant Sheth for front
running in the scrip of M/s. Scan Steels Ltd.. The
brokers who helped him for this are M/s. Arcadia
Shares and Stock Brokers P. Ltd., M/s. SSJ Finance
& Securities P. Ltd., and M/s. S.P. Jain Securities
P. Ltd. Perusal of information furnished shows
that the assessee had traded in this share and
was in receipt of Rs. 23,98,014/-. Therefore, I
have a reason to believe that this income had
escaped assessment within the meaning of
section 147 of the Act.
It is, therefore, inferred from the above
discussion that the assessee has failed to
disclose fully and truly all material facts
necessary for its assessment for the A.Y.2012-13.
Therefore, the issue could not be verified by the
A.O. during the course of assessment
proceedings. Even otherwise, it is pertinent to
mention that Explanation-1 to section 147
provides that production before the Assessing
Officer of account books or other evidence from
which material evidence could with due diligence
have been discovered by the Assessing Officer
will not necessarily amount to disclosure within
the meaning of the proviso to the said section.
In view of the above discussion, I have reason to
believe that income chargeable to tax
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amounting to Rs. 23,98,014/- has escaped
assessment within the meaning of section 147 of
the Act read with the provisos thereto. Notice
u/s. 148 of the Income Tax Act, 1961, is therefore,
issued to assess such income and also any
other income chargeable to tax which has
escaped assessment and which may come to
notice subsequently in the course of the
proceedings under this section.”
19 From the above, it is seen that according to
Respondent No. 2 information was received from the
Investigation Wing about search and seizure action
carried out in the premises of Shri Naresh Jain on
19.03.2019 which concluded on 21.03.2019. The
search action revealed that a syndicate of persons were
acting in collusion and had managed transactions in the
stock exchange, thereby generating bogus long-term
capital gains, bogus short term capital gains and bogus
business loss entries for various beneficiaries. The
search action unraveled the workings of the syndicate
and brought on record the make believe nature of
paper work that is manufactured in order to show the
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arranged transactions as legitimate market
transactions. Statements of various persons were
recorded in the course of the search action. In his
statement Shri Naresh Jain stated that during the
assessment year 2012-13, he had used scrips of seven
entities to provide bogus entries which included the
scrip of M/s. Scan Steels Ltd.. Further, information
revealed that the Petitioner had traded in the shares of
M/s. Scan Steels Ltd., and was in receipt of Rs.
23,98,014/-. Therefore, Respondent No. 2 stated that
he had reasons to believe that this income had
escaped assessment within the meaning of section 147
of the Act.
20 Thus what is discernible is that the main
ground on which assessment is sought to be re-opened
is that Petitioner had traded in the shares of Scan Steels
Ltd., and was in receipt of Rs. 23,98,014/-, which the
Petitioner failed to disclose fully and truly before the
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Assessing Officer and which Respondent No.2 believed
had escaped assessment.
21 Before adverting to the initial assessment
order passed under section 143(3) of the Act dated
28.03.2015, it would be apposite to advert to the
averments made by the Respondents in the affidavit in
reply, more particularly the reasons given to justify reopening
of the assessment. In para 3.3 of the
affidavit in reply, it is stated that the Petitioner had
disclosed TDS credit of Rs. 34,05,533.00 and claimed
refund of the said amount. On perusal of the tax
assessment form prepared and issued by the Assessing
Officer alongwith the assessment order, it was noticed
that Petitioner was issued a refund of Rs. 26,13,268.00
alongwith interest of Rs. 2,87,463.00 which was
reduced while determining the tax liability which
thereafter stood at ‘NIL’. But in the return filed,
Petitioner had not reduced the amount of refund
already received by him, which prima facie, resulted in
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excess claim of refund to the tune of Rs. 26,13,268.00
being refund already granted. However, this was not
the ground for reopening the assessment as per the
reasons furnished to the Petitioner on 31.05.2019 viz.,
that petitioner had traded in the shares of M/s. Scan
Steels Ltd. and was in receipt of Rs. 23,98,014.00 which
Respondent No. 2 stated that he had reasons to believe
had escaped assessment. Thus, this contention of the
Respondents is beyond the reasons furnished for reopening
of the assessment.
22 In para 3.4 of the affidavit in reply it is stated
that though the Petitioner had furnished details
relating to purchase and sale of shares of Mittal
Securities Ltd., (now Scan Steels Ltd.,), but that did not
amount to full and true disclosure of all material facts
unless true and real facts are disclosed before the
Assessing Officer. Assessing Officer had not discussed
in the assessment order about the genuineness or
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camouflage nature of the transactions of purchase and
sale of shares of Mittal Securities Ltd. by the Petitioner.
23 From the above, it is seen that what
Respondent No. 2 contends is that though Petitioner
had disclosed details of the transactions pertaining to
purchase and sale of shares of Mittal Securities Ltd.,
(now Scan Steels Ltd.), Petitioner did not disclose the
real colour / true character of such transactions and
therefore, he did not make a full and true disclosure of
all material facts which was also overlooked by the
Assessing Officer.
24 Reverting back to the original assessment
proceeding, we find from the materials on record that
after the Petitioner had filed the initial return of income
on 20.09.2012, Assessing Officer had issued notice to
the Petitioner under section 142(1) of the Act dated
07.08.2013, calling upon the Petitioner to produce the
following documents :-
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“1. Reasonably detailed note on the nature of
business including details of addresses, phone
number of all premises – Office, Branch,
Godown, Workshop etc..
2. Complete set of audited accounts, Tax
Audit Report u/s. 44AB with all schedules,
computation of income and income tax and hard
copies of returns.
3. Any other details and /or documents for
the purpose of assessment.”
24.1 By another notice of even date, Petitioner
was informed by the Assessing Officer that there were
certain points in connection with the return of income
submitted by the Petitioner about which he would like
some further information. Accordingly, Petitioner was
asked to appear before the Assessing Officer and to
produce any documents, accounts and any other
evidence on which it relied upon in support of the
return filed.
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25 On 10.06.2014 Assessing Officer issued
another notice under section 142(1) of the Act, calling
upon the Petitioner to submit the particulars mentioned
therein including the details regarding increased
authorized share capital with the list of the shareholders
and details of purchase of equity shares of Rs.
7,04,92,390.44 with details of payment. Petitioner has
stated that in response to such notice, all relevant
details were furnished to the Assessing Officer. Finally,
Assessing Officer issued another notice under section
142 (1) of the Act on 19.03.2015, calling upon the
Petitioner to furnish in writing the details party-wise
with name, address and PAN with supporting evidence
who had subscribed for security premium reserve or
how it was created and details of statement /
transactions mentioned at serial no. 2 which stated that
in case of capital gain/ loss, it should provide a
comprehensive chart with regard to sale and purchase
of securities/shares quoted/ unquoted as well as
dividend received. It was further stated that in case of
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capital loss whether the loss was adjusted after
dividends in terms of section 94(7) of the Act. In his
response, Petitioner informed the Assessing Officer on
19.03.2015 itself that there was no increase in the
security premium reserve during the said assessment
year. No capital gains were earned during the said
year by the Petitioner. It had not received any
dividend income during the said year too. Hence,
question of applicability of section 94(7) did not arise.
Petitioner did not make any investment nor was there
any inventory of shares; no dividend was earned during
the year. Alongwith the said letter relevant
documentary evidence in respect of the concerned
transactions were enclosed.
26 Thereafter, assessment order was passed on
28.03.2015, wherein Assessing Officer had noted that
during the course of scrutiny details of income,
expenditure, assets and liabilities were called for,
examined and placed on record. After perusing all
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details and after examination of those and upon
discussion, total income was computed in terms of the
return filed by the Petitioner. As already noted above,
the assessment order was passed under section 143(3)
of the Act. It was mentioned therein that representative
of the Petitioner had attended the assessment
proceedings from time to time and had filed details
with explanations.
27 At this stage, we may briefly refer to the
relevant legal provisions.
28 Section 147 of the Act deals with “income
escaping assessment”. Section 147 says that if the
Assessing Officer has reason to believe that any
income chargeable to tax has escaped assessment
for any assessment year, he may, subject to the
provisions of sections 148 to 153, assess or reassess
such income and also any other income chargeable to
tax which has escaped assessment and which comes to
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his notice subsequently in the course of the
proceedings under section 147 of the Act.
28.1 The first proviso to section 147 is important.
As per this proviso, where an assessment under subsection
(3) of section 143 or section 147 has been
made for the relevant assessment year, no action shall
be taken under section 147 after the expiry of four
years from the end of the relevant assessment year,
unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the
failure on the part of the assessee to make a return
under section 139 or in response to a notice issued
under sub-section (1) of section 142 or section 148 or to
disclose fully and truly all material facts necessary for
his assessment, for that assessment year.
28.2 Section 149 deals with time limit for notice
under section 148. As per clause (a) of sub-section (1),
no notice under section 148 shall be issued for the
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relevant assessment year, if four years have
elapsed from the end of the relevant assessment year
unless the case falls under clause (b) or clause (c).
Clause (b) says that no notice shall be issued if four
years have elapsed but not more than six years have
elapsed from the end of the relevant assessment year
unless the income chargeable to tax which has
escaped assessment amounts to or is likely to amount
to one lakh rupees or more for that year. Clause (c)
deals with a situation where limitation is extended
upto sixteen years but the escaped income must
relate to any asset located outside India.
29 Insofar the present case is concerned, the
assessment year is 2012-13. The assessment year ends
on 31.03.2013. In this case impugned notice under
section 148 of the Act was issued on 31.03.2019.
Therefore, it is a case of re-opening of assessment under
section 149 (1) (b) of the Act after expiry of four years
but before expiry of six years.
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29.1. Of course the limitation point though pleaded
in the writ petition, has been given up by the Petitioner
following filing of affidavit by the Respondents which
clearly shows that the re-opening notice was issued
within the limitation period of six years.
30 In such a case, the first condition for invoking
section 147 is that the Assessing Officer must have
reason to believe that income chargeable to tax has
escaped assessment for the relevant assessment year.
The second condition is that the Assessing Officer must
arrive at the satisfaction that income chargeable to tax
has escaped assessment for the said assessment year
by reason of the failure on the part of the assessee to
make a return under section 139 or to respond to a
notice under section 142(1) or section 148 or due to the
failure on the part of the assessee to disclose fully and
truly all material facts necessary for his assessment for
that assessment year.
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31 The key or crucial expressions appearing in
section 147 are “reason to believe” and “failure to
disclose fully and truly all material facts necessary for
assessment”.
31.1 Before dilating on these two expressions, it
would be apposite to refer to section 148 of the Act,
which deals with issue of notice where income has
escaped assessment. As per sub-section (1), before
making the assessment, re-assessment or recomputation
under section 147, a notice in the
prescribed form is required to be served upon the
assessee by the Assessing Officer, calling upon him to
file return of income in terms of such notice within the
period specified and in such event the return so filed
would be construed to be a return filed under section
139. As per sub-section (2) of the said section, the
Assessing Officer shall before issuing any notice under
section 148, record his reasons for doing so.
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31.2 In GKN Driveshafts (India) Ltd. (supra),
Supreme Court held that when a notice under section
148 of the Act is issued, the proper course of action for
the assessee is to file the return and if he so desires,
to seek the reasons for issuing the notice. If sought for,
Assessing Officer is bound to furnish the reasons
within a reasonable time. On receipt of reasons, the
noticee is entitled to file objections to the notice in
which event the Assessing Officer would be under an
obligation to dispose off the same by passing a
speaking order.
32 Reverting back to the two expressions as
noticed above, we may mention that these two
expressions were examined and interpreted in great
detail by the Supreme Court in Income Tax Officer
vs. Lakhmani Mewal Das, reported in 103 ITR 437.
That was also a case where notice under section 148
of the Act was put to challenge. Though provisions of
section 147 of the Act as it existed then have since
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been reconstructed and have undergone change, the
two key expressions continue to retain their relevance
in so far section 147 of the Act is concerned. It may
further be noticed that in Lakhmani Mewal Das
(supra), Supreme Court was considering validity of
notice under Section 148 in respect of an assessment
beyond the period of four years but within a period of
eight years from the end of the relevant year. Supreme
Court observed that in such a case, two conditions
would have to be satisfied before an Income Tax Officer
acquires jurisdiction to issue notice. These two
conditions are –
1. He must have reason to believe that income
chargeable to tax has escaped assessment; and
2. He must have reason to believe that such
income has escaped assessment by reason of the
omission or failure on the part of the assessee to
make a return under section 139 for the asessment
year under consideration or to disclose fully and
truly all material facts necessary for his
assessment for that year.
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32.1 Both the two conditions must co-exist in
order to confer jurisdiction on the Income Tax Officer.
Supreme Court observed that duty is cast upon the
assessee to make a true and full disclosure of the
primary facts at the time of the original assessment.
Production before the Income Tax Officer the books of
accounts or other evidence from which material
evidence with due diligence could have been
discovered by the Income Tax Officer will not
necessarily amount to disclosure contemplated by law
but the duty of the assessee in any case does not
extend beyond making a true and full disclosure of
primary facts. Once he has done that, his duty ends.
It is for the Income Tax Officer to draw the correct
inference from the primary facts. If the Income Tax
Officer draws an inference, which appears
subsequently to be erroneous, it would amount to
change of opinion and mere change of opinion with
regard to that inference would not justify initiation of
action for re-opening assessment.
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32.2 The grounds or reasons which led to
formation of the belief that income chargeable to tax
has escaped assessment must have a material bearing
on the question of escapement of income of the
assessee from assessment because of his failure or
omission to disclose fully and truly all material facts.
Once there exists reasonable grounds for the Income
Tax Officer to form the above belief that would be
sufficient to clothe him with jurisdiction to issue notice.
However, sufficiency of the grounds is not
justiceable. The expression “reason to believe” does
not mean a purely subjective satisfaction on the part
of the Income Tax Officer. The reason must be held in
good faith. It cannot be merely a pretence. It is open
to the court to examine whether the reasons for the
formation of the belief have a rational connection
with or a relevant bearing on the formation of the
belief and are not extraneous or irrelevant. To this
limited extent, initiation of proceedings in respect of
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income escaping assessment is open to challenge in
a court of law.
32.3 Dilating further, Supreme Court held that
reasons for formation of the belief must have a
rational connection with or relevant bearing on the
formation of the belief. Rational connection postulates
that there must be a direct nexus or live link between
the material coming to the notice of the Income Tax
Officer and the formation of his belief that there has
been escapement of the income of the assessee from
assessment in the particular year because of his
failure to disclose fully and truly all material facts. But
it has to be borne in mind that it is not any and every
material howsoever vague and indefinite or distant,
remote and far-fetched which would warrant formation
of the belief relating to escapement of income.
Moreover, 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
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to suspect”. Reopening of assessment after the lapse
of many years is a serious matter.
33 It may be mentioned here that the
proposition of law enunciated in Lakhmani Mewal
Das (supra) has withstood the test of time and is
being consistently applied while examining challenge
to a notice issued under section 148 of the Act.


34 In Prashant S. Joshi -vs- ITO, 324 ITR
154, this Court observed that the basic postulate which
underlines section 147 is formation of the belief by the
Assessing Officer that any income chargeable to tax has
escaped assessment for any assessment year. In other
words, the Assessing Officer must have reason to
believe that income chargeable to tax for a particular
assessment year has escaped assessment for the
relevant assessment year before he proceeds to issue
notice under section 148. The reasons which are
recorded by the Assessing Officer for re-opening an
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assessment are the only reasons which can be
considered when the formation of the belief is
impugned. Recording of reasons distinguishes an
objective from a subjective exercise of power and is a
check against arbitrary exercise of power. The reasons
which are recorded cannot be supplemented
subsequently by affidavits. The question as to whether
there was reason to believe within the meaning of
section 147 that income has escaped assessment must
be determined with reference to the reasons recorded
by the Assessing Officer. Even in a case where only an
intimation is issued under section 143(1), the touchstone
to be applied is as to whether there was reason to
believe that income had escaped assessment.
35 Having discussed the above, we may once
again revert back to the reasons furnished by
Respondent No. 2 for re-opening of assessment under
section 147 of the Act. After referring to the information
received following search and seizure action carried out
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in the premises of Shri Naresh Jain, it was stated that
information showed that Petitioner had traded in the
shares of M/s. Scan Steels Ltd., and was in receipt of
Rs. 23,98,014.00 and therefore, Respondent No. 2
concluded that he had reasons to believe that this
amount had escaped assessment within the meaning
of section 147 of the Act.
36 First of all it would be evident from the
materials on record that Petitioner had disclosed the
above information to the Assessing Officer in the
course of the assessment proceedings. All related
details and information sought for by the Assessing
Officer were furnished by the petitioner. Several
hearings took place in this regard where-after the
Assessing Officer had concluded the assessment
proceedings by passing assessment order under section
143 (3) of the Act. Thus it would appear that Petitioner
had disclosed the primary facts at its disposal to the
Assessing Officer for the purpose of assessment. He
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had also explained whatever queries were put by the
Assessing Officer with regard to the primary facts
during the hearings.
37 In such circumstances, it cannot be said that
Petitioner did not disclose fully and truly all material
facts necessary for the assessment. Consequently,
Respondent No. 2 could not have arrived at the
satisfaction that he had reasons to believe that income
chargeable to tax had escaped assessment. In the
absence of the same, Respondent No. 2 could not have
assumed jurisdiction and issued the impugned notice
under section 148 of the Act.
38 That apart, Respondents have tried to
traverse beyond the disclosed reasons in their
affidavit which is not permissible. The same cannot be
taken into consideration, while examining validity of
notice under section 148. As has been held in
Prashant S. Joshi (supra), the reasons which are
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recorded by the Assessing Officer for re-opening an
assessment are the only reasons which can be
considered when the formation of the belief is
impugned; such reasons cannot be supplemented
subsequently by affidavit (s).
39 Therefore, in the light of the discussions made
above, we are of the view that the attempt made by
Respondent No.2 to reopen the concluded assessment
is not at all justified and consequently the impugned
notice cannot be sustained.
40 Accordingly, we allow the Writ Petition by
setting aside the impugned notice dated 31.03.2019
issued under section 148 of the Act and also the
impugned order dated 26.08.2019. However, there
shall be no order as to costs.

1 Heard Mr. Madhur Agarwal, learned counsel
for the Petitioner and Mr. Suresh Kumar, learned
standing counsel, Revenue, for the Respondents.
2 By filing this petition under Article 226 of the
Constitution of India, Petitioner seeks quashing of
notice dated 31.03.2019 issued under section 148 of
the Income Tax Act, 1961 by the Assistant Commissioner
of Income Tax, Circle 1(1)(2), Mumbai i.e. Respondent
No.1 as well as the order dated 26.08.2019 passed by
the Deputy Commissioner of Income Tax, Circle 1(1)(2),
Mumbai i.e. Respondent No. 2, rejecting the objections
raised by the Petitioner to re-opening of assessment
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under section 147 of the Income Tax Act, 1961 (briefly
“the Act”, hereinafter).
3 Case of the Petitioner is that it is a company
registered under the Companies Act, 1956, engaged in
the business of financing and investing activities, as a
non-banking financial company registered with the
Reserve Bank of India. It is an assessee under the Act.
4 For the assessment year 2012-13, Petitioner
filed return of income on 20.09.2012 declaring total
income of Rs. 90,630.00. Initially, the return of income
was processed under section 143(1) of the Act.
Petitioner’s case was however selected for scrutiny
pursuant to which notices under section 143 (2) as well
as under section 142(1) were issued alongwith
questionnaire. During the course of assessment
proceedings, details of income, expenditure, assets and
liabilities were called for and examined. Following reply
submitted by the Petitioner pursuant to such notices and
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after examination of the details filed, Assessing Officer
computed the total income of the Petitioner at Rs.
90,630.00, vide the assessment order dated 28.03.2015
passed under section 143(3) of the Act.
5 On 31.03.2019 Respondent No. 1, who was in
the meanwhile conferred jurisdiction to assess the
Petitioner’s income, issued notice to the Petitioner under
section 148 of the Act stating that he had reasons to
believe that Petitioner’s income chargeable to tax for
the assessment year 2012-13 had escaped assessment
within the meaning of section 147 of the Act.
Proceeding to assess/re-assess the income for the said
assessment year, Respondent No. 1 called upon the
Petitioner to submit return in the prescribed form for
the said assessment year. It was further mentioned
that said notice was issued after obtaining necessary
satisfaction of the Principal Commissioner of Income
Tax-1, Mumbai.
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6 Petitioner sought for the reasons for issuing
notice under section 148 of the Act vide letter dated
09.04.2019, referring to the decision of the Supreme
Court in the case GKN Driveshafts (India) Ltd., vs.
I.T.O., 259 ITR 19. Petitioner also filed return of
income under section 148 of the Act, returning the
income at Rs. 90,630.00 as originally assessed by the
Assessing Officer under section 143(3) of the Act.
7 By letter dated 31.05.2019, Respondent No. 2
furnished the reasons for re-opening of the assessment.
It was stated that information was received from the
Investigation Wing of the Income Tax Department that a
search and seizure action was carried out in the
premises of one Shri Naresh Jain which revealed that a
syndicate of persons were acting in collusion and
managing transactions in the stock exchange, thereby
generating bogus long-term capital gains/ bogus shortterm
capital loss and bogus business loss entries for
various beneficiaries.
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8 From the materials gathered in the course of
the said search and seizure action, it was alleged that
Petitioner had traded in the shares of M/s. Scan Steel
Ltd. and was in receipt of Rs. 23,98,014.00 which the
Assessing Officer believed had escaped assessment
within the meaning of section 147 of the Act. It was
also alleged that Petitioner had failed to disclose fully
and truly all material facts necessary for its
assessment for the assessment year 2012-13 for which
notice under section 148 of the Act was issued.
9 Petitioner submitted objections to reopening
of assessment proceedings on 26.06.2019. Referring to
the reasons recorded and furnished, it was contended on
behalf of the Petitioner that the original assessment
was completed under section 143(3) of the Act where
all the details of purchase and sale of shares of M/s.
Scan Steels Ltd., also known as Clarus Infrastructure
Realties Ltd. (earlier known as Mittal Securities Finance
Ltd.), were disclosed. While denying that the Petitioner
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had any dealing with the parties whose names cropped
up during the search and seizure action, it was stated
that purchase and sale of shares were done by the
petitioner through registered broker of Bombay Stock
Exchange. Payment for the purchase of shares were
made by cheque through the Bombay Stock Exchange,
the price being as per prevailing market price. Thus
there was no apparent reason to classify the receipt of
Rs. 23,98,014.00 as having escaped assessment.
Therefore, it was contended that the decision to reopen
assessment was nothing but change of opinion, which
was not permissible in law. That apart, it was
contended that the impugned notice under section 148
of the Act was issued on 31.03.2019 and was received
by the Petitioner on 04.04.2019 i.e. beyond
31.03.2019. The notice was posted on 02.04.2019. On
that basis it was contended that though the notice was
dated 31.03.2019 but the same was posted after
closure of financial year and thus was barred by
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limitation being beyond six years. Other grounds were
also raised by the Petitioner.
10 Respondent No. 2 by his letter dated
26.08.2019 informed the Petitioner that its objections to
issuance of notice under section 148 of the Act was duly
considered but on the grounds and reasons mentioned
therein, the same was rejected.
11 Aggrieved, present writ petition has been
filed, seeking the reliefs as indicated above.
12 This Court by order dated 01.10.2019, prima
facie, took the view that the impugned notice was
dispatched after 31.03.2019 which made the impugned
notice beyond the statutory period of six years and
thus without jurisdiction. While granting time to
Respondents to file reply affidavit, interim stay was
granted to the impugned notice dated 31.03.2019.
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13 Respondents have filed affidavit-in-reply
controverting the averments made in the writ petition.
It is stated that the impugned notice was issued after
recording reasons under section 148 (2) of the Act and
after obtaining sanction of the Principal Commissioner
of Income Tax-I, Mumbai, as required under section
151(1) of the Act. It is stated that in response to the
notice under section 148 Petitioner had furnished return
of income on 09.04.2019, declaring total income of Rs.
90,630.00 wherein Petitioner claimed TDS credit of Rs.
34,05,533.00 and sought refund of a sum of Rs.
34,05,533.00. It is stated that on scrutiny of the
computation made by the Assessing Officer, it was
found that Petitioner had received refund of Rs.
26,13,268.00 with interest of Rs. 2,87,463.00 which was
reduced while determining the tax liability. In the
return of income tax filed, Petitioner did not reduce the
amount of refund received by him which prima facie
resulted in excess claim of refund to the tune of Rs.
26,13,268.00, which refund was already granted. It is
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stated that furnishing of the details of purchase and
sale of shares of Mittal Securities Ltd., (Scan Steels
Ltd.) did not amount to full and true disclosure of
material facts before the Assessing Officer, who in his
assessment order totally relied upon the submissions
of the Petitioner and had accepted the same without
cross verification. It is further stated that the challenge
to the impugned notice is untenable. Besides, the Act
provides for a host of remedial measures in the form of
appeals and revisions.
13.1 Regarding issuance of the impugned notice,
as alleged by the Petitioner to be beyond 31.03.2019, it
is stated that the notice was handed over to the postal
authorities on 31.03.2019. The postal receipts to that
effect have been annexed.
13.2 Finally, Respondents have justified issuance
of the impugned notice and re-opening of the
assessment and in this connection a reference has
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been made to the report of the Investigation Wing as
per which the Petitioner had diluted its income by
adopting manufactured and pre-arranged transactions
which were never disclosed to the Assessing Officer.
Such an action was nothing but a failure on the part of
the Petitioner to make a full and true disclosure of all
material facts. Petitioner’s contention that all primary
facts were disclosed by it have been disputed. That
apart, it is contended that Principal Commissioner of
Income Tax-1 had applied his mind and thereafter,
granted approval to the issuance of notice under
section 148 of the Act.
14 Petitioner has filed rejoinder affidavit. It is
stated that in the return of income filed pursuant to
the impugned notice dated 31.03.2019, petitioner
could not reduce the amount of refund already received
as the online ITBA system did not provide for any
separate column for reduction of the said amount
already refunded. In any event, the said amount of
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Rs. 26,13,268.00 and interest were not the reasons for
reopening assessment. All details about the purchase
and sale of shares of Mittal Securities Ltd., were
furnished; Assessing Officer was not required to give
findings on each issue raised during the course of the
assessment proceedings. Assessing Officer had
applied his mind and granted relief to the petitioner in
the assessment order. Normally when submission of
assessee is accepted, no finding is given in the
assessment order.
15 In the course of hearing, Mr. Agarwal, learned
counsel for the Petitioner referred to the postal receipts
which indicate that the impugned notice was delivered
by Income Tax Department to the Petitioner through the
post office on 31.03.2019 at 3.34 p.m.. Therefore, he
submits that Petitioner would not press upon this
ground as raised in the writ petition.
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15.1. Primary contention of Mr. Agarwal is that the
reasons given for re-opening assessment do not make
out a case for invoking jurisdiction under section 147 of
the Act. The so called information allegedly received
by the Respondents were in-fact furnished by the
Petitioner in the course of the original assessment. It
is another matter that Assessing Officer did not refer
to all the primary facts placed before him by the
Petitioner in the assessment order but that cannot be a
ground for re-opening assessment. He therefore
submits that at the most it can be construed to be reappreciation
of the materials already on record and in
the circumstances, it would be a case of change of
opinion which is not permissible for re-opening of a
concluded assessment. His further submission is that
grounds as furnished by the Respondents for reopening
of the assessment and the averments made in
the affidavit by the Respondents, justifying the reopening
of assessment, are at variance. His contention
is that the reasons given for re-opening of the
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assessment cannot be enlarged and improved upon by
way of affidavit filed subsequently. That apart, it is
contended that Principal Commissioner of Income Tax-1
had mechanically granted approval to Respondent
No.1 to re-open the assessment which has vitiated the
impugned notice.
16 On the other hand Mr. Suresh Kumar, learned
standing counsel, Revenue, for the Respondents
submits that not only the impugned notice was
handed over to the Petitioner by the Income Tax
Department on 31.03.2019 at about 3.34 p.m. but a
copy of the same was served upon the Petitioner
before end of the day on 31.03.2019. He further
submits that the reasons furnished are good grounds
to justify re-opening of the assessment of the
Petitioner. Writ petition is premature inasmuch as it has
assailed the impugned notice; whereas the Act
provides for a host of alternative remedies to the
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Petitioner which are adequate and efficacious.
Therefore, the writ petition should be dismissed.
17 Submissions made by learned counsel for the
parties have been considered. We have also perused
the materials on record.
18 At the outset, we may advert to the reasons
furnished by Respondent No.2 for re-opening of the
assessment. As already noticed above, reasons were
furnished to the Petitioner vide letter dated
31.05.2019. The reasons furnished are extracted
hereunder :
“The return of income for the year, declaring
total income of Rs.90,630.00 was filed by the
assessee on 20.09.2012. The assessment was
completed on 28.03.2015 by accepting the
returned income.
An information has been received from
the Investigation Wing that a search and seizure
action was carried out on Shri Naresh Jain and
his associates by the DIT (Inv.)-2, Mumbai on
19.03.2019 which was concluded on
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21.03.2019. The search action covered the
syndicate of persons who were acting in
collusion and executing managed transactions
in the stock exchange thus generating bogus
long-term capital gains/ bogus short-term
capital loss/ bogus business loss entries for
various beneficiaries. This search action
unraveled the workings of the syndicate and
brought on record the make-believe nature of
paper work that is manufactured in order to
show the arranged transactions as legitimate
market transactions. Statement of Shri Shirish
Shah, recorded during the course of search
action u/s 132 (4) of the Act in which he had
admitted under oath that with the help of
various people, manipulated the share prices
of various scrips in order to provide bogus
entries of long term capital gain, short term
capital loss and business loss. Evidence has
also been gathered during the search action
establishing the links between Naresh Jain –
the operator, promoters of various scrips,
share brokers, exit providers and intermediaries
who acted in collusion in order to facilitate the
transactions on the exchanges. During the
year, relevant to the A.Y. 2012-13, Shri Jain used
the following scrips to provide bogus entries,
which are as under :
Sr.No. Scrip Code Name
1. 504378 NYSSA Corporation Ltd.
2. 505343 Monotype India Ltd.
3. 508860 Diamant Infrastructure Ltd.
4. 511672 Scan Steels Ltd.
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5. 523810 Divine Multimedia (I) Ltd.
6. 531866 Aagam Capital Ltd.
7. 533427 VMS Industries Ltd.
Shri Jain had also admitted that he had helped
Shri Bhavesh Pabri and Hemant Sheth for front
running in the scrip of M/s. Scan Steels Ltd.. The
brokers who helped him for this are M/s. Arcadia
Shares and Stock Brokers P. Ltd., M/s. SSJ Finance
& Securities P. Ltd., and M/s. S.P. Jain Securities
P. Ltd. Perusal of information furnished shows
that the assessee had traded in this share and
was in receipt of Rs. 23,98,014/-. Therefore, I
have a reason to believe that this income had
escaped assessment within the meaning of
section 147 of the Act.
It is, therefore, inferred from the above
discussion that the assessee has failed to
disclose fully and truly all material facts
necessary for its assessment for the A.Y.2012-13.
Therefore, the issue could not be verified by the
A.O. during the course of assessment
proceedings. Even otherwise, it is pertinent to
mention that Explanation-1 to section 147
provides that production before the Assessing
Officer of account books or other evidence from
which material evidence could with due diligence
have been discovered by the Assessing Officer
will not necessarily amount to disclosure within
the meaning of the proviso to the said section.
In view of the above discussion, I have reason to
believe that income chargeable to tax
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amounting to Rs. 23,98,014/- has escaped
assessment within the meaning of section 147 of
the Act read with the provisos thereto. Notice
u/s. 148 of the Income Tax Act, 1961, is therefore,
issued to assess such income and also any
other income chargeable to tax which has
escaped assessment and which may come to
notice subsequently in the course of the
proceedings under this section.”
19 From the above, it is seen that according to
Respondent No. 2 information was received from the
Investigation Wing about search and seizure action
carried out in the premises of Shri Naresh Jain on
19.03.2019 which concluded on 21.03.2019. The
search action revealed that a syndicate of persons were
acting in collusion and had managed transactions in the
stock exchange, thereby generating bogus long-term
capital gains, bogus short term capital gains and bogus
business loss entries for various beneficiaries. The
search action unraveled the workings of the syndicate
and brought on record the make believe nature of
paper work that is manufactured in order to show the
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arranged transactions as legitimate market
transactions. Statements of various persons were
recorded in the course of the search action. In his
statement Shri Naresh Jain stated that during the
assessment year 2012-13, he had used scrips of seven
entities to provide bogus entries which included the
scrip of M/s. Scan Steels Ltd.. Further, information
revealed that the Petitioner had traded in the shares of
M/s. Scan Steels Ltd., and was in receipt of Rs.
23,98,014/-. Therefore, Respondent No. 2 stated that
he had reasons to believe that this income had
escaped assessment within the meaning of section 147
of the Act.
20 Thus what is discernible is that the main
ground on which assessment is sought to be re-opened
is that Petitioner had traded in the shares of Scan Steels
Ltd., and was in receipt of Rs. 23,98,014/-, which the
Petitioner failed to disclose fully and truly before the
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Assessing Officer and which Respondent No.2 believed
had escaped assessment.
21 Before adverting to the initial assessment
order passed under section 143(3) of the Act dated
28.03.2015, it would be apposite to advert to the
averments made by the Respondents in the affidavit in
reply, more particularly the reasons given to justify reopening
of the assessment. In para 3.3 of the
affidavit in reply, it is stated that the Petitioner had
disclosed TDS credit of Rs. 34,05,533.00 and claimed
refund of the said amount. On perusal of the tax
assessment form prepared and issued by the Assessing
Officer alongwith the assessment order, it was noticed
that Petitioner was issued a refund of Rs. 26,13,268.00
alongwith interest of Rs. 2,87,463.00 which was
reduced while determining the tax liability which
thereafter stood at ‘NIL’. But in the return filed,
Petitioner had not reduced the amount of refund
already received by him, which prima facie, resulted in
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excess claim of refund to the tune of Rs. 26,13,268.00
being refund already granted. However, this was not
the ground for reopening the assessment as per the
reasons furnished to the Petitioner on 31.05.2019 viz.,
that petitioner had traded in the shares of M/s. Scan
Steels Ltd. and was in receipt of Rs. 23,98,014.00 which
Respondent No. 2 stated that he had reasons to believe
had escaped assessment. Thus, this contention of the
Respondents is beyond the reasons furnished for reopening
of the assessment.
22 In para 3.4 of the affidavit in reply it is stated
that though the Petitioner had furnished details
relating to purchase and sale of shares of Mittal
Securities Ltd., (now Scan Steels Ltd.,), but that did not
amount to full and true disclosure of all material facts
unless true and real facts are disclosed before the
Assessing Officer. Assessing Officer had not discussed
in the assessment order about the genuineness or
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camouflage nature of the transactions of purchase and
sale of shares of Mittal Securities Ltd. by the Petitioner.
23 From the above, it is seen that what
Respondent No. 2 contends is that though Petitioner
had disclosed details of the transactions pertaining to
purchase and sale of shares of Mittal Securities Ltd.,
(now Scan Steels Ltd.), Petitioner did not disclose the
real colour / true character of such transactions and
therefore, he did not make a full and true disclosure of
all material facts which was also overlooked by the
Assessing Officer.
24 Reverting back to the original assessment
proceeding, we find from the materials on record that
after the Petitioner had filed the initial return of income
on 20.09.2012, Assessing Officer had issued notice to
the Petitioner under section 142(1) of the Act dated
07.08.2013, calling upon the Petitioner to produce the
following documents :-
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“1. Reasonably detailed note on the nature of
business including details of addresses, phone
number of all premises – Office, Branch,
Godown, Workshop etc..
2. Complete set of audited accounts, Tax
Audit Report u/s. 44AB with all schedules,
computation of income and income tax and hard
copies of returns.
3. Any other details and /or documents for
the purpose of assessment.”
24.1 By another notice of even date, Petitioner
was informed by the Assessing Officer that there were
certain points in connection with the return of income
submitted by the Petitioner about which he would like
some further information. Accordingly, Petitioner was
asked to appear before the Assessing Officer and to
produce any documents, accounts and any other
evidence on which it relied upon in support of the
return filed.
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25 On 10.06.2014 Assessing Officer issued
another notice under section 142(1) of the Act, calling
upon the Petitioner to submit the particulars mentioned
therein including the details regarding increased
authorized share capital with the list of the shareholders
and details of purchase of equity shares of Rs.
7,04,92,390.44 with details of payment. Petitioner has
stated that in response to such notice, all relevant
details were furnished to the Assessing Officer. Finally,
Assessing Officer issued another notice under section
142 (1) of the Act on 19.03.2015, calling upon the
Petitioner to furnish in writing the details party-wise
with name, address and PAN with supporting evidence
who had subscribed for security premium reserve or
how it was created and details of statement /
transactions mentioned at serial no. 2 which stated that
in case of capital gain/ loss, it should provide a
comprehensive chart with regard to sale and purchase
of securities/shares quoted/ unquoted as well as
dividend received. It was further stated that in case of
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capital loss whether the loss was adjusted after
dividends in terms of section 94(7) of the Act. In his
response, Petitioner informed the Assessing Officer on
19.03.2015 itself that there was no increase in the
security premium reserve during the said assessment
year. No capital gains were earned during the said
year by the Petitioner. It had not received any
dividend income during the said year too. Hence,
question of applicability of section 94(7) did not arise.
Petitioner did not make any investment nor was there
any inventory of shares; no dividend was earned during
the year. Alongwith the said letter relevant
documentary evidence in respect of the concerned
transactions were enclosed.
26 Thereafter, assessment order was passed on
28.03.2015, wherein Assessing Officer had noted that
during the course of scrutiny details of income,
expenditure, assets and liabilities were called for,
examined and placed on record. After perusing all
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details and after examination of those and upon
discussion, total income was computed in terms of the
return filed by the Petitioner. As already noted above,
the assessment order was passed under section 143(3)
of the Act. It was mentioned therein that representative
of the Petitioner had attended the assessment
proceedings from time to time and had filed details
with explanations.
27 At this stage, we may briefly refer to the
relevant legal provisions.
28 Section 147 of the Act deals with “income
escaping assessment”. Section 147 says that if the
Assessing Officer has reason to believe that any
income chargeable to tax has escaped assessment
for any assessment year, he may, subject to the
provisions of sections 148 to 153, assess or reassess
such income and also any other income chargeable to
tax which has escaped assessment and which comes to
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his notice subsequently in the course of the
proceedings under section 147 of the Act.
28.1 The first proviso to section 147 is important.
As per this proviso, where an assessment under subsection
(3) of section 143 or section 147 has been
made for the relevant assessment year, no action shall
be taken under section 147 after the expiry of four
years from the end of the relevant assessment year,
unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the
failure on the part of the assessee to make a return
under section 139 or in response to a notice issued
under sub-section (1) of section 142 or section 148 or to
disclose fully and truly all material facts necessary for
his assessment, for that assessment year.
28.2 Section 149 deals with time limit for notice
under section 148. As per clause (a) of sub-section (1),
no notice under section 148 shall be issued for the
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relevant assessment year, if four years have
elapsed from the end of the relevant assessment year
unless the case falls under clause (b) or clause (c).
Clause (b) says that no notice shall be issued if four
years have elapsed but not more than six years have
elapsed from the end of the relevant assessment year
unless the income chargeable to tax which has
escaped assessment amounts to or is likely to amount
to one lakh rupees or more for that year. Clause (c)
deals with a situation where limitation is extended
upto sixteen years but the escaped income must
relate to any asset located outside India.
29 Insofar the present case is concerned, the
assessment year is 2012-13. The assessment year ends
on 31.03.2013. In this case impugned notice under
section 148 of the Act was issued on 31.03.2019.
Therefore, it is a case of re-opening of assessment under
section 149 (1) (b) of the Act after expiry of four years
but before expiry of six years.
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29.1. Of course the limitation point though pleaded
in the writ petition, has been given up by the Petitioner
following filing of affidavit by the Respondents which
clearly shows that the re-opening notice was issued
within the limitation period of six years.
30 In such a case, the first condition for invoking
section 147 is that the Assessing Officer must have
reason to believe that income chargeable to tax has
escaped assessment for the relevant assessment year.
The second condition is that the Assessing Officer must
arrive at the satisfaction that income chargeable to tax
has escaped assessment for the said assessment year
by reason of the failure on the part of the assessee to
make a return under section 139 or to respond to a
notice under section 142(1) or section 148 or due to the
failure on the part of the assessee to disclose fully and
truly all material facts necessary for his assessment for
that assessment year.
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31 The key or crucial expressions appearing in
section 147 are “reason to believe” and “failure to
disclose fully and truly all material facts necessary for
assessment”.
31.1 Before dilating on these two expressions, it
would be apposite to refer to section 148 of the Act,
which deals with issue of notice where income has
escaped assessment. As per sub-section (1), before
making the assessment, re-assessment or recomputation
under section 147, a notice in the
prescribed form is required to be served upon the
assessee by the Assessing Officer, calling upon him to
file return of income in terms of such notice within the
period specified and in such event the return so filed
would be construed to be a return filed under section
139. As per sub-section (2) of the said section, the
Assessing Officer shall before issuing any notice under
section 148, record his reasons for doing so.
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31.2 In GKN Driveshafts (India) Ltd. (supra),
Supreme Court held that when a notice under section
148 of the Act is issued, the proper course of action for
the assessee is to file the return and if he so desires,
to seek the reasons for issuing the notice. If sought for,
Assessing Officer is bound to furnish the reasons
within a reasonable time. On receipt of reasons, the
noticee is entitled to file objections to the notice in
which event the Assessing Officer would be under an
obligation to dispose off the same by passing a
speaking order.
32 Reverting back to the two expressions as
noticed above, we may mention that these two
expressions were examined and interpreted in great
detail by the Supreme Court in Income Tax Officer
vs. Lakhmani Mewal Das, reported in 103 ITR 437.
That was also a case where notice under section 148
of the Act was put to challenge. Though provisions of
section 147 of the Act as it existed then have since
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been reconstructed and have undergone change, the
two key expressions continue to retain their relevance
in so far section 147 of the Act is concerned. It may
further be noticed that in Lakhmani Mewal Das
(supra), Supreme Court was considering validity of
notice under Section 148 in respect of an assessment
beyond the period of four years but within a period of
eight years from the end of the relevant year. Supreme
Court observed that in such a case, two conditions
would have to be satisfied before an Income Tax Officer
acquires jurisdiction to issue notice. These two
conditions are –
1. He must have reason to believe that income
chargeable to tax has escaped assessment; and
2. He must have reason to believe that such
income has escaped assessment by reason of the
omission or failure on the part of the assessee to
make a return under section 139 for the asessment
year under consideration or to disclose fully and
truly all material facts necessary for his
assessment for that year.
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32.1 Both the two conditions must co-exist in
order to confer jurisdiction on the Income Tax Officer.
Supreme Court observed that duty is cast upon the
assessee to make a true and full disclosure of the
primary facts at the time of the original assessment.
Production before the Income Tax Officer the books of
accounts or other evidence from which material
evidence with due diligence could have been
discovered by the Income Tax Officer will not
necessarily amount to disclosure contemplated by law
but the duty of the assessee in any case does not
extend beyond making a true and full disclosure of
primary facts. Once he has done that, his duty ends.
It is for the Income Tax Officer to draw the correct
inference from the primary facts. If the Income Tax
Officer draws an inference, which appears
subsequently to be erroneous, it would amount to
change of opinion and mere change of opinion with
regard to that inference would not justify initiation of
action for re-opening assessment.
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32.2 The grounds or reasons which led to
formation of the belief that income chargeable to tax
has escaped assessment must have a material bearing
on the question of escapement of income of the
assessee from assessment because of his failure or
omission to disclose fully and truly all material facts.
Once there exists reasonable grounds for the Income
Tax Officer to form the above belief that would be
sufficient to clothe him with jurisdiction to issue notice.
However, sufficiency of the grounds is not
justiceable. The expression “reason to believe” does
not mean a purely subjective satisfaction on the part
of the Income Tax Officer. The reason must be held in
good faith. It cannot be merely a pretence. It is open
to the court to examine whether the reasons for the
formation of the belief have a rational connection
with or a relevant bearing on the formation of the
belief and are not extraneous or irrelevant. To this
limited extent, initiation of proceedings in respect of
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income escaping assessment is open to challenge in
a court of law.
32.3 Dilating further, Supreme Court held that
reasons for formation of the belief must have a
rational connection with or relevant bearing on the
formation of the belief. Rational connection postulates
that there must be a direct nexus or live link between
the material coming to the notice of the Income Tax
Officer and the formation of his belief that there has
been escapement of the income of the assessee from
assessment in the particular year because of his
failure to disclose fully and truly all material facts. But
it has to be borne in mind that it is not any and every
material howsoever vague and indefinite or distant,
remote and far-fetched which would warrant formation
of the belief relating to escapement of income.
Moreover, 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
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to suspect”. Reopening of assessment after the lapse
of many years is a serious matter.
33 It may be mentioned here that the
proposition of law enunciated in Lakhmani Mewal
Das (supra) has withstood the test of time and is
being consistently applied while examining challenge
to a notice issued under section 148 of the Act.
34 In Prashant S. Joshi -vs- ITO, 324 ITR
154, this Court observed that the basic postulate which
underlines section 147 is formation of the belief by the
Assessing Officer that any income chargeable to tax has
escaped assessment for any assessment year. In other
words, the Assessing Officer must have reason to
believe that income chargeable to tax for a particular
assessment year has escaped assessment for the
relevant assessment year before he proceeds to issue
notice under section 148. The reasons which are
recorded by the Assessing Officer for re-opening an
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assessment are the only reasons which can be
considered when the formation of the belief is
impugned. Recording of reasons distinguishes an
objective from a subjective exercise of power and is a
check against arbitrary exercise of power. The reasons
which are recorded cannot be supplemented
subsequently by affidavits. The question as to whether
there was reason to believe within the meaning of
section 147 that income has escaped assessment must
be determined with reference to the reasons recorded
by the Assessing Officer. Even in a case where only an
intimation is issued under section 143(1), the touchstone
to be applied is as to whether there was reason to
believe that income had escaped assessment.
35 Having discussed the above, we may once
again revert back to the reasons furnished by
Respondent No. 2 for re-opening of assessment under
section 147 of the Act. After referring to the information
received following search and seizure action carried out
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in the premises of Shri Naresh Jain, it was stated that
information showed that Petitioner had traded in the
shares of M/s. Scan Steels Ltd., and was in receipt of
Rs. 23,98,014.00 and therefore, Respondent No. 2
concluded that he had reasons to believe that this
amount had escaped assessment within the meaning
of section 147 of the Act.
36 First of all it would be evident from the
materials on record that Petitioner had disclosed the
above information to the Assessing Officer in the
course of the assessment proceedings. All related
details and information sought for by the Assessing
Officer were furnished by the petitioner. Several
hearings took place in this regard where-after the
Assessing Officer had concluded the assessment
proceedings by passing assessment order under section
143 (3) of the Act. Thus it would appear that Petitioner
had disclosed the primary facts at its disposal to the
Assessing Officer for the purpose of assessment. He
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had also explained whatever queries were put by the
Assessing Officer with regard to the primary facts
during the hearings.
37 In such circumstances, it cannot be said that
Petitioner did not disclose fully and truly all material
facts necessary for the assessment. Consequently,
Respondent No. 2 could not have arrived at the
satisfaction that he had reasons to believe that income
chargeable to tax had escaped assessment. In the
absence of the same, Respondent No. 2 could not have
assumed jurisdiction and issued the impugned notice
under section 148 of the Act.
38 That apart, Respondents have tried to
traverse beyond the disclosed reasons in their
affidavit which is not permissible. The same cannot be
taken into consideration, while examining validity of
notice under section 148. As has been held in
Prashant S. Joshi (supra), the reasons which are
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recorded by the Assessing Officer for re-opening an
assessment are the only reasons which can be
considered when the formation of the belief is
impugned; such reasons cannot be supplemented
subsequently by affidavit (s).
39 Therefore, in the light of the discussions made
above, we are of the view that the attempt made by
Respondent No.2 to reopen the concluded assessment
is not at all justified and consequently the impugned
notice cannot be sustained.
40 Accordingly, we allow the Writ Petition by
setting aside the impugned notice dated 31.03.2019
issued under section 148 of the Act and also the
impugned order dated 26.08.2019. However, there
shall be no order as to costs.

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