No Reason To Believe Income Chargeable To Tax Escaped Assessment: Gujarat High Court Quashes Income Tax Notice

Justice Biren Vaishnav and Bhargav D Karia observed, “Perusal of the reasons would indicate that except making a statement that the petitioner had an access with Shri Kamal Zaveri and that the tainted concerns, namely, Jay Traders and Shubham Enterprise were conduits for securing unsecured loans. No material came forth in terms of any statement or details to pin-point a live link or a nexus of the petitioner with the transaction in question.”

“Apparently, the reasons were suggesting that it was a case where the revenue merely entered into a roving and fishing inquiry without any material on record. It was merely based on suspicion, especially when the exercise has been undertaken in light of the scrutiny assessment so done. There was no tangible material so as to come to a conclusion or “reason to believe that the income chargeable to tax has escaped assessment”,” the bench added.

Furthermore, the court expressed that the actions of the revenue respondent indicated an attempt to conduct a broad and unrestricted inquiry under the guise of reopening the assessment, a practice deemed impermissible under Section 148 of the Income-Tax Act.

The ruling came in response to a petition filed by Bhagwati Polyfill Pvt. Ltd., challenging the validity of a notice issued under Section 148 of the Income-Tax Act, 1961, for the Assessment Year 2012-13.

The petitioner, a manufacturing firm specializing in sizing yarn, received unsecured loans during the 2011-12 financial year, some of which remained outstanding at the close of the relevant year for the Assessment Year 2012-13.

The petitioner submitted its income tax return on 30.09.2012, and the case underwent scrutiny assessment. A notice under sec.142(1) of the Act, dated 20.10.2014, was issued, requesting various details, including information on the refund of unsecured loans. The petitioner responded with detailed submissions on 5.11.2014 and 25.02.2015. The Assessment Order, issued on 16.03.2015, did not include any additions concerning unsecured loans.

Upon receiving a notice dated 30.03.2019 under Sec.148 of the Act, the petitioner filed the income tax return on 29.04.2019. On 03.07.2019, the petitioner raised objections to the reopening. The objections were addressed through an order dated 27.08.2019, which provided justifications for the reopening.

Having perused the material on record, what the Court found apparent was that the assessment was sought to be reopened by a notice dated 30.03.2019 for the year 2012- 13, and it was, therefore, a case of reopening beyond a period of four years. The revenue, therefore the Court opined, had the burden to show that there was no full and true disclosure of income by the assessee.

The court observed that the Income Tax Department's grounds for reopening the case were rooted in suspicion rather than substantiated evidence. Although the petitioner's association with Shri Kamal Zaveri and entities like Jay Traders and Shubham Enterprise was mentioned, the department failed to present material proof establishing a clear link between the petitioner and the transactions under scrutiny.

Highlighting the prerequisite for a valid reason to believe that taxable income had escaped assessment to justify reopening, the court pointed out the absence of such a basis in this instance. It criticized the department's approach, characterizing it as a speculative and exploratory inquiry lacking solid evidence.

Moreover, since the reopening occurred beyond the four-year period, the onus was on the Income Tax Department to prove the petitioner's failure to fully and accurately disclose income. Contrary to the department's claim, the court determined that the petitioner had sufficiently disclosed information pertaining to unsecured loans.

The court said, “What is therefore evident from perusal of the material and the disclosure of income and the questions which were asked and respondend to by the petitioner in the scrutiny assessment would indicate that there was ample justification brought out by the petitioner in the context of unsecured loans.”

The department failed to provide prima facie material to justify reopening the assessment. While they referred to a survey action involving Shri Kamal Zaveri, no concrete link was established between the petitioner and the alleged accommodation entries.

“For the aforesaid reasons, the notice dated 30.04.2019 issued under Section 148 of the Income-Tax Act, 1961 for the Assessment Year 2012-13, is hereby quashed and set aside. The petition is allowed, accordingly. Rule is made absolute accordingly,” the Court concluded.

Appearance: Mr. Tushar Hemani, Senior Counsel With Ms Vaibhavi K Parikh(3238) For The Petitioner(S) No. 1 Mr. Karan Sanghani, Standing Counsel For Mrs Kalpana K Raval(1046) For The Respondent(S) No. 1

LL Citation: 2023 LiveLaw (Guj) 192

Case Title: Bhagwati Polyfill Pvt. Ltd. Versus The Assistant Commissioner Of Income Tax

Case No.: R/Special Civil Application No. 17669 Of 2019

Click Here To Read The Order / Judgement