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2010 DIGILAW 514 (GUJ)

Desai Brothers v. Income Tax Officer

2010-10-19

HARSHA DEVANI, K.A.PUJ

body2010
JUDGMENT K.A. PUJ, J. 1. SINCE common issue is involved in both these petitions and since they are heard together, they are being disposed of by this common judgment and order. 2. SPECIAL Civil Application No. 1795 of 2000 is filed by M/s. Desai Brothers and Associates challenging the notice of reopening issued under Section 148 of the Income Tax Act, 1961 on 10th February, 2000, for assessment year 1992-93. Special Civil Application No. 1796 of 2000 is filed by M/s. Desai Brothers and Mahadevia Associatess challenging the notice of reopening issued under Section 148 of the Income Tax Act, 1961 for assessment year 1992-93 on 10th February, 2000. 3. INITIALLY, notice was issued by this Court on 22nd March, 2000 and ad- interim relief was granted in terms of para 16(C) whereby status quo was granted and the respondent was directed not to proceed further in pursuance of the impugned notice. The petitions were admitted thereafter on 01st May, 2000 and ad-interim relief granted earlier was ordered to be continued till the final disposal of the petitions. For the sake of brevity and convenience, the facts are taken from Special Civil Application No. 1795 of 2000. 4. THE petitioner filed its return of income for the assessment year 1992- 93, disclosing a total income of Rs.34,33,953/-, as per the statement of income. Search and seizure proceedings were initiated on 27th March, 1992 and during the course of search, certain documents were seized. THE petitioner and other concerns of the same group made a disclosure of income of Rs.1 crore 50 lakhs and the expenditure of Rs.33.65 lakhs. All these events have taken place prior to filing of the return of income for the year under consideration. The petitioner has given effect to this disclosure in the books of accounts and the expenditure was also debited in the books of accounts. Out of this expenditure, an amount of Rs.28.65 lakhs was disclosed in the case of the petitioner. Out of the disclosure of income at Rs.1 crore 50 lakhs, the amount of Rs.1 crore was disclosed by the petitioner. 5. DURING the course of original assessment proceedings, the respondent specifically raised the question regarding deductibility of the above expenditure of Rs.28.65 lakhs and other points. Out of the disclosure of income at Rs.1 crore 50 lakhs, the amount of Rs.1 crore was disclosed by the petitioner. 5. DURING the course of original assessment proceedings, the respondent specifically raised the question regarding deductibility of the above expenditure of Rs.28.65 lakhs and other points. The petitioner clarified this issue vide its letter dated 05th February, 1994 inter alia stating that as the said expenditure was incurred outside the books of accounts and it represents the part of disclosure, the expenditure of Rs.33.65 lakhs was bifurcated into two firms, namely Rs.28.65 lakhs in Desai Brothers and Associates whereas Rs.5 lakhs in the case of Desai Brothers and Mahadevia Associates for assessment year 1992-93. The petitioner has also given the details of disclosure in reply to question No. 46 of the statement recorded under Section 132(4) of the Act. The details of expenses were also given in the register which was produced during the course of assessment proceedings. 6. DURING the course of assessment proceedings, a further question was raised as to why construction expenses should be allowed as deduction since the assessee firm is a developer firm. The expenditure incurred out of cash was also to be treated as expenditure of developer firm. Certain other correspondence was also exchanged pursuant to the queries raised by the Assessing Officer during the course of assessment proceedings. On change of incumbent, certain further queries were raised by the new Assessing Officer on 27th October, 1994 which were also duly replied to by the petitioner vide its letter dated 14th December, 1994. After making all these inquiries, the respondent passed an assessment order under Section 143(3) on 28th February, 1995 assessing the total income of Rs.43,73,950/-. After a period of about 5 years from the date of assessment, the respondent issued a notice under Section 148 on 10th February, 2000 stating inter alia that he had reasons to believe that the income for the assessment year 1992-93 has escaped assessment within the meaning of Section 147 of the Act and hence, he proposes to reassess the same. It is this notice under Section 148 which is under challenge in the present petition. 7. MR. It is this notice under Section 148 which is under challenge in the present petition. 7. MR. J.P. Shah, learned Advocate appearing for the petitioner has raised inter alia, the contention which goes to the root of the matter that the notice issued by the Assessing Officer on 10th February, 2000 is prior to the date of recording of reasons and hence, the said notice on the face of it, is unsustainable in the eye of law. He submits that these facts are brought to his notice when the respondent filed affidavit-in-reply on 28th March, 2000, along with which he produced the copy of reasons recorded. The said letter bears the date as 14th February, 2000. He, therefore, submitted that the same is in violation of the provisions contained in the Act. It is a mandatory requirement that prior to the issuance of the notice, the Assessing Officer must record his satisfaction that he has reason to believe that the income has escaped assessment and after recording reasons for that satisfaction, notice is required to be issued. He has submitted that admittedly the date of notice of reopening is 10th February, 2000 whereas reasons were recorded on 14th February, 2000. He, therefore, submitted that the notice be quashed and set aside only on this ground. 8. MR. Shah further submitted that the assessment order in question is for Assessment Year 1992-93 and admittedly the notice for reopening was issued on 10th February, 2000. Hence, it is beyond the period of four years from the end of assessment year. He has further submitted that the original assessment was framed after making inquiries in the matter and the petitioner has disclosed all facts truly and fully. There is no omission or failure on me part of the petitioner, hence, it is not open for the Assessing Officer to reopen the assessment under Section 147 of the Act especially when the notice was issued after a period of four years. He has, therefore, submitted that on both these grounds, the notice challenged, is required to be quashed and set aside. Mr. B.B. Naik, the learned Senior Counsel appearing for the revenue in both these petitions has submitted that it was merely a bonafide mistake that the date was wrongly mentioned as 10th February, 2000 in the notice. He has, therefore, submitted that on both these grounds, the notice challenged, is required to be quashed and set aside. Mr. B.B. Naik, the learned Senior Counsel appearing for the revenue in both these petitions has submitted that it was merely a bonafide mistake that the date was wrongly mentioned as 10th February, 2000 in the notice. In fact, notice was issued on 14th February, 2000, the date on which the reasons were recorded by the respondent. He has, therefore, submitted that on this genuine and bonafide mistake, the notice cannot be quashed and set aside. He has further submitted that the respondent has filed further affidavit-in-reply on 24th April, 2000 clarifying the fact that the reasons for reopening were recorded on 14th February, 2000 and the notice was also issued on the same date and served on 17th February, 2000. It was further stated by him in the affidavit that due to typographical error, in the notice the date is stated as 10th February, 2000, which is clearly a mistake. He has, therefore, submitted that the recording of reasons preceded the issuance and service of notice. 9. MR. Naik further submitted that the petition is filed at a premature stage inasmuch as only notice under Section 148 is issued. The petitioner has an alternative remedy by way of filing an appeal, in the event it is aggrieved by the decision that may be taken in the reassessment proceedings. He has further submitted that during the course of inspection, the assessee firm admitted in its return of income of Rs.71,62,571/- against the disclosure made by the petitioner and it has also claimed expenditure of Rs.28,65,000/-. He has further submitted that the petitioner has shown booking amount of Rs.99,23,307/- received from the members as liabilities on the balance sheet of the above assessment year. Neither any receipt in respect of sale of property nor work-in-progress was shown in the balance sheet. The payment received from the members is shown as liability. The expenditure of Rs.28,65,000/- incurred on construction work should have been shown as work-in-progress and not as revenue expenditure which has resulted in under assessment of Rs.28,65,000/-. He has further submitted that Section 40A(3) of the Act does not permit the petitioner to make payment exceeding Rs. 10,000/- otherwise than a crossed cheque or crossed bank draft. The expenditure of Rs.28,65,000/- incurred on construction work should have been shown as work-in-progress and not as revenue expenditure which has resulted in under assessment of Rs.28,65,000/-. He has further submitted that Section 40A(3) of the Act does not permit the petitioner to make payment exceeding Rs. 10,000/- otherwise than a crossed cheque or crossed bank draft. Since the mode of payment of Rs.28,65,000/- was not supported by any evidence, the question of allowing such expenditure does not arise. He has, therefore, submitted that income to such extent as escaped to be assessed. He has also relied on the provisions contained in Section 147 first proviso which carves out an exception and states that if the petitioner fails to disclose all material facts truly and necessary for the assessment year in question, in that case, the assessment can be reopened even beyond the period of 4 "years. Based on this provision, he emphatically states that challenge to the notice of reopening on the ground that it is issued beyond four years is not proper. He has, therefore, submitted that the petition deserves to dismissed on this ground. 10. SINCE the facts are identical in both the petitions, it is not necessary to narrate the facts in detail of Special Civil Application No. 1796 of 2000. Having heard the learned Counsel for the parties and having considered the rival submissions in light of the documents produced before the Court and the pleadings made by them and also having considered the statutory provisions on the issue of reopening of assessment, we are of the view that the first challenge made to the notice of reopening does stand on sound footing. We find sufficient merit in the said challenge. The notice served on the petitioner bears the date 10th February, 2000. All blanks filled in by the respondent are handwritten. It is not a typed notice. It is true that the petitioner has produced along with the petition a typed notice and the petitioner has raised this issue in its affidavit-in- rejoinder. The petitioner has received a copy of the reasons recorded along with affidavit-in-reply and after considering the said reasons recorded, the issue was raised by the petitioner. Section 148(2) specifically states that the Assessing Officer shall, before issuing any notice under this Section, record his reason for doing so. The petitioner has received a copy of the reasons recorded along with affidavit-in-reply and after considering the said reasons recorded, the issue was raised by the petitioner. Section 148(2) specifically states that the Assessing Officer shall, before issuing any notice under this Section, record his reason for doing so. Accordingly, the reasons ought to have been recorded on or before 10th February, 2000. The facts on record reveal that the reasons were recorded on 14th February, 2000 i.e. after issuing the notice. The reasons recorded further indicates that the entire basis of the notice is inspection of the records of the petitioner and, therefore, it is not the case of the Assessing Officer coming to know a new, undisclosed and suppressed fact from, outside the record which is a condition precedent under the proviso to Section 147, after a period of four years. It is true that the Assessing Officer has filed further affidavit denying the fact that reasons were recorded after the issuance of notice. However, a close scrutiny of the said affidavit clearly reveals that what he has stated in the further affidavit is that due to typographical error, the notice was dated as 10th February, 2000. However, as stated earlier, the notice was not a typed notice. It is a handwritten notice. It is only because the petitioner has produced the typed version of the notice, the Assessing Officer has picked up the words "due to typographical error", It, therefore, appears that the affidavit-in-reply filed by the Assessing Officer does not appear to be correct affidavit and it does not inspire the confidence of the Court that the reasons were recorded prior to the issuance of the notice. The Court is, therefore, convinced that the notice is issued on 10th February, 2000 and reasons were recorded on 14th February, 2000. Thus, it is in violation of the provisions of Section 148(2), the compliance of which is mandatory; Since these mandatory provisions are not complied with before issuance of the notice, on this ground itself, the notice has to be quashed and set aside. 11. ONE more issue on which the notice of reopening "would not be sustainable is that it is issued beyond a period of four years. The reasons recorded clearly indicate that on the basis of inspection carried out subsequent to the assessment proceedings, the notice of reopening was issued. 11. ONE more issue on which the notice of reopening "would not be sustainable is that it is issued beyond a period of four years. The reasons recorded clearly indicate that on the basis of inspection carried out subsequent to the assessment proceedings, the notice of reopening was issued. Thus, it is not the case of the Assessing Officer that there is an omission or failure on the part of the petitioner to disclose all material facts truly or fully which led him to issue the notice for reopening. The reliance placed by Mr. Naik on the first proviso to Section 147 is contrary to the facts on record and also to the reasons recorded by the respondent. It is also found from the record that before making the original assessment, the Assessing Officer had made all necessary inquiries, issued notice, called for details and after making all detailed inquiries, he has framed the assessment. Thus, it cannot be said that the petitioner has not disclosed any material facts truly and fully. Hence, on this ground, the notice of reopening is not sustainable. 12. IN view of the above discussion, we are of the view that the reopening of assessment is not justified. The condition precedent enumerated in the provision for reopening of assessment is not satisfied. We, therefore, quash and set aside the notice of reopening issued on the petitioner in both these petitions and allow the petitions. Rule is made absolute accordingly in each of these two petitions with no order as to costs. No order as to costs.