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September, 10th 2014

Section 21(1) of UP Trade Tax Act, 1948 provides that if the assessing authority has reason to believe that the whole or any part of the turnover of a dealer, from any assessment year or part thereof, had escaped assessment of tax or has been under assessed or has been assessed to tax at a rate lower than that at which it is assessable under the Act, or any deductions or exemptions have been wrongly allowed in respect thereof, the Assessing Authority may, after issuing notice to the dealer and making such inquiry as it considers necessary, assess or reassess the dealer to tax according to law.

Section 21(2) provides that except as otherwise provided in Section 21, no order of any assessment or re-assessment under the Act for any assessment year shall be made after the expiration of two years from the end of such year. The proviso to this section empowers the Commissioner on his own or on the basis of the reasons recorded by the assessing authority to re-open an assessment notwithstanding that such assessment or re-assessment may involve a change of opinion.

The expression ‘reason to believe’ has been construed by the Supreme Court in interpreting Section 21 of UP Trade Tax, 1948 in The Commissioner of Sales Tax, U.P. Vs. Bhagwan Industries (P) Ltd., Lucknow reported in 1972 (10) TMI 90 - SUPREME COURT OF INDIA. In the opinion of Supreme Court these words convey that there must be rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the Assessing Authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to belief that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be cloth jurisdiction to take action under the section.

In ‘M/s Shikha Steel Co., V. State of UP and three others’ [ 2014 (1) TMI 1380 - ALLAHABAD HIGH COURT] the assessing authority completed the original assessment of the assessee on the basis that the assessee had effected sales in the total sum of ? 54,114 and purchases of ? 1.22 lakhs. During the search conducted in the premises M/s Parmarth Iron Private Limited, Bijnor it was found that the electronic records maintained by the said company indicated that the petitioner had engaged in the transactions of sales and purchase with the said company to the extent of ? 4.31 crores during the year 2004 – 05. Thereupon the Assessing Authority concerned issued on the assessee a notice under Section 21 of the Act for re-assessment.

The petitioner, in respect to the show cause notice submitted that it had no dealing of purchase and sales with M/s Parmarth Iron Private Limited and the latter being a manufacturing entity was solely responsible for payment of tax. Since the Authority has noted that there was reason to believe that there had been an escapement of tax, consequent upon which action for reassessment under Section 21 was warranted. In pursuance of the notice, a reassessment took place by which the turnover of sales/purchases was assessed at ? 10 crores and a demand of ? 40 lacs was levied. This order was admittedly passed ex-parte. A fresh notice has now been issued to the petitioner for reassessment for 2004-05 coupled with notices for regular assessment for 2005-06 and 2006-07.

The petitioner submits the following:

By virtue of an exemption notification which has been issued under Section 3A of the Trade Tax, tax is liable to be computed at the rate of 4% but the liability to bear the tax is that of manufacturer or as the case may be, of the importer
The expression ‘manufacturer’ is defined under Section 2(ee) as a dealer who makes the first sale of goods in the State after their manufacture;
the petitioner is neither an importer nor a manufacturer and hence no liability of tax can be fastened on the petitioner;
Therefore there could be ‘no reason to believe’ within the meaning of the proviso to Section 21(1) of the Act that any part of the turnover of the petitioner as a dealer had escaped assessment to tax or that it had been under assessed;
On a similar issue other petitions are pending before this court where an interim stay has been granted.
The High Court held that the expression ‘reason to believe’ postulates that there must be an objective basis for the authority to believe that the turnover of a dealer had escaped assessment or that it has been under assessed or has been assessed to tax at a rate lower than that at which it is assessable. The existence of ‘reason to believe’ means that the ground must be relevant and have a nexus with the formation of belief and should not be extraneous.

It is well settled that Section 21(2) provides that permission can be granted even there is change of opinion. The change of opinion may arise even if some material is brought on record after the assessment or there was lack of care or inadvertence of mistake. The order granting sanction need not contain reasons in details but it should show application of mind.

The High Court further held that in the present case, the Additional Commissioner while authorizing a reopening of the assessment has furnished a tangible basis upon which the formation of belief has been founded. The search which was conducted in M/s Parmarth Iron Private Limited resulting in recovery of data maintained in the electronic form indicated transactions of a value of ? 4.31 crores with the assessee for the relevant financial year. The assessee has undoubtedly disputed having had any transactions with the above said company, but this is not the matter which falls for consideration at this stage. The point to be noted, as is reflected in the original order of the assessment, is that for the year in question the assessee reflected total purchases of only ? 1.22 lakhs and sales of ? 54,114. On this material it cannot be held that the formation of belief was extraneous or that the grounds which weighed the Additional Commissioner have no nexus with the formation belief. The High Court, therefore, held that the re-opening of the assessment in this case was in accordance with the law.

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