THE issues before the Bench are - Whether AO has the authority
to reopen assessment after expiry of four years, on receipt of complaint of
siphoning of funds, filed by one of the Directors of the assessee company;
Whether the fact that such complaint has been filed before a statutory authority
like Company Law Board can have any material relevance to ascertain its
credibility; Whether when the complaint can constitute tangible material for
reopening the assessments, it can equally constitute tangible material giving
rise to the belief that the income had escaped assessment and Whether there is
no duty of the assessee to disclose all relevant information at the time of
original assessment, merely because the AO has not asked for it. And the verdict
goes against the assessee.
Facts of the
case
The
petitioner-hotel is a private limited company incorporated on 15.7.1972 and
regularly assessed to income tax from the AY 1974-75. It is engaged in the
business of running hotels consisting of five independent units i.e. Rambagh
plants, the Sawai Madhopur Lodge, the Rambagh Lodge, the Airport Cafeteria and
SMS Hotel. The petitioner had filed a return of income declaring of loss, which
was initially processed and accepted u/s 143. A scrutiny was done and the
assessment order was passed.
Later
on, a complaint was filed against the assessee company by Shri Raj Kumar Devraj,
one of the Directors vide which it has been pointed out that more than Rs. 100
crores of rupees has been siphoned by Maharaja Prithvi Raj & Maharaja Jai
Singh out of the companies accounts which require the proper investigation &
scrutiny of accounts of the company for the last 6 years. It has further been
alleged by the complainant before the company law board in petition that
Maharaja Prithviraj and Maharaja Jai Singh in the year 2002-03, 2003-04,
2004-05, 2006-07, 2007-08 and 2008-09 had debited of Rs. 50 crores approx. under
the head repairs and maintenance of building and Rs. 50 crores approx. towards
addition to the fixed assets and this sum has been withdrawn and siphoned by
illegal withdrawals with the connivance of the contractors. Further, it has been
alleged that under the head traveling conveyance from the year 2002-03 to
2007-08, a sum of approx. Rs. 5 crores has been illegally withdrawn and siphoned
out of company fund. These expense are not related to the business of the
company as the company is not procuring any business from outside India & as
per terms of the operational agreement with Indian Hotel company Ltd. (chain of
Taj group hotels) company do not have to incur any expenditure for foreign
tourist because all the expenses relating to business operation of the company
is being looked after by Indian Hotel Company Ltd.
In
pursuant to this, notice for reopening of assessment u/s 148 for five different
AYs were issued to the assessee. Several objections were filed by the assessee
that it had furnished all the necessary details at the time of original
assessment and the notice for reopening was without jurisdiction. The assessee
also contended that the reassessment was based merely on the allegations of an
individual. However, all the objections were rejected by the AO. Hence,
aggrieved, the assessee filed 3 writ petitions and one each by Maharaja Jai
Singh and Maharaja Prithviraj Singh before the High Court, challenging the
jurisdiction of the AO to reopen the assessment.
A. WRIT PETITIONS FILED BY
ASSESSEE
Assessment Year
2003-04
The
petitioner submitted before the Court that all the details and information
required by the AO were submitted at the time of the original assessment
proceedings including information regarding the expenses under the heads,
repairs and maintenance, additions to fixed assets etc. and there was no failure
to furnish full and true particulars. The contention of the petitioner was that
since the assessment is sought to be reopened after the lapse of four years from
the end of the AY, it was the duty of the AO to show that the petitioner had
failed to furnish primary facts fully and truly at the time of the original
assessment and that this duty has not been discharged by him. It was contended
that the complaint made by Raj Kumar Devraj which formed the basis of the
reopening of the assessment was only a bundle of allegations of irregularities
and there was no finding that such irregularities have actually been committed
by the petitioner. Accordingly, it is contended that the complaint cannot
constitute tangible material for reopening the assessment.
The
assessee also submitted that all details in the forms of Annexures, Schedules,
Profit and Loss Account, Balance Sheet were produced before the AO at the time
of assessment which clearly provided information on the heads of repairs and
maintenance of building, machinery, assets, etc,. Separate letters were provided
to the AO to furnish details in respect of repairs and maintenance in excess of
Rs 1,000.
Assessment year
2004-05
Similar objections were raised
before the AO, which were rejected. Also, similar submissions were raised before
the High Court by the assessee. The assessee was served a questionnaire to
which, the petitioner submitted a reply which included details of
additions/deletions to the fixed assets along with the name of the party,
address, description of assets, bill number and date etc., bifurcation of the
fixed assets. By letter dated 31.10.2006 the petitioner submitted, details of
repairs and maintenance expenses of building, machinery and other assets as well
as the details of the foreign travel expenses of the directors and staff and
stated that the foreign travel was undertaken for the purpose of business and
out of commercial expediency. This letter was followed up by another letter
dated 22.11.2006 in which it was stated that the copies of the resolutions
passed in the board meeting authorizing the foreign travel for the purpose of
the business and approving the incurring of the expenses were being
submitted.
Assessment year
2005-06
The
AO recorded reasons for reopening the assessment that was huge unreasonable
expenses incurred on the head of repairs, maintenance, foreign traveling, etc.
Also it was recorded that despite the hotel is run professionally by the TAJ
group, however, the NP to turnover ratio is very skewed on the contrary which
makes the allegations of the complainants bonafide and reasonable especially
when the allegations are made by the close family relative. The AO rejected the
objections raised by the assessee for reopening the assessment, and thus
reopening was upheld.
B. WRIT PETITIONS FILED BY
MAHARAJA JAI SINGH AND MAHARAJA PRITHVIRAJ SINGH
These
petitions were filed respectively questioning the validity of the reopening
notices. There was no material difference between the facts of the two writ
petitions. The objections filed by the petitioners to the reassessment notices
were rejected in both the cases and aggrieved, the present petitions have been
filed.
Having heard the parties,
the High Court held that,
A. ++ Assessment Year 2003-04:
since a perusal of the reasons recorded showed that one of the
allegations in the complaint was that the petitioner had siphoned off monies as
travelling and conveyance from the years 2002-03 to 2007-08 and that such
expenses were not related to the petitioner’s business because as per the terms
of the operational agreement with the Taj Group of Hotels, the petitioner does
not have to incur any expense on foreign tours. We called upon the counsel for
the petitioner to show the disclosure relating to the foreign travelling expense
incurred by the petitioner for the year ended 31.3.2003. It was stated by him
that no particulars about the foreign travel expenses were called for by the
assessing officer and therefore no particulars were filed except those required
to be filed under the head “expenditure in foreign currency”. Such expenditure
was shown as note No.11 under the head “significant accounting policies and
notes to accounts” in schedule “O”. These details are at page 125. Item “b”
under note 11 shows that expenditure on foreign currency for foreign travel
amounted to Rs. 12.58 lakhs. No other details were filed by the petitioner in
respect of the foreign travel expenses at the time of the original
assessment;
++
the above narration of the facts and the submissions would show that at least in
respect of the foreign travel expenses, no details were furnished by the
assessee at the time of the original assessment, except a bare noting that a
part of such expenditure was incurred in foreign currency. No details of the
place visited and the purpose of the visit and how the visit was connected to
the business of the petitioner were furnished. The assessee was under a duty to
disclose these particulars fully and truly at the time of the original
assessment; this is particularly so because under the arrangement with the Taj
Group of Hotels it would appear that the petitioner was not under any obligation
to incur the expenditure. Our attention was not drawn by the counsel for the
petitioner to any particular document or record in which the full and true
particulars of the foreign travel expenses were submitted by the petitioner at
the time of the original assessment; nor was it disputed that there was such a
clause in the agreement with Taj group. There was thus a failure on the part of
the petitioner which would attract the first proviso to Section 147 of the Act.
The contention that the reopening was prompted by a mere allegation of
irregularities without any tangible material or finding is not acceptable. The
complaint has been filed by Raj Kumar Devraj-one of the directors-before the
Company Law Board and some credibility has to be accorded to the same as it was
filed before a statutory authority competent to deal with the complaint; it must
be taken to have been filed with some responsibility. There is also mention in
the reasons recorded to an agreement between the petitioner and the Taj Group of
Hotels under which the responsibility of incurring foreign travel expenses is
with the Taj Group. It is also a fact that the petitioner did not furnish any
particulars relating to the foreign tours and their connection with the
business. In these circumstances, we are not able to say that the reopening of
the assessment is without jurisdiction;
++
Assessment Year 2003-04: the notice under Section 148
was issued on 30.3.2011 i.e., beyond the period of four years. This is therefore
a case of the first proviso to Section 147. Therefore, action for reopening the
assessment can be taken only if there was failure on the part of the assessee to
disclose fully and truly all material facts necessary for the assessment. The
reasons for reopening as recorded by the assessing officer are identical to
those recorded in respect of the assessment year 2003-04 in WP(C) No.7023/2010.
One of the reasons recorded was that expenditure was debited under the head
“repairs and maintenance of building and additions to fixed assets”, but the
amounts were actually siphoned off by illegal withdrawals with the connivance of
the contractors appointed in consultation and for the personal benefit of
Maharaja Prithviraj Singh and Maharaja Jai Singh. However, the particulars
relating to the additions to the assets for the year ended 31.3.2004 are found
given under cover of the letter dated 16.10.2006 written by the petitioner in
response to the queries raised by the respondent;
++ it
is thus seen that in respect of the assessment year 2004-05, not only did the
petitioner furnish all the relevant details relating to the purchase of fixed
assets, repairs and maintenance of buildings but also the details relating to
the foreign travel expenses. The proceedings relating to the original assessment
also show that the assessing officer had raised queries regarding repairs and
maintenance of building, plant and furniture which were answered by the
petitioner. No query would appear to have been raised in relation to the foreign
travel expenses in regard to which the petitioner had furnished the relevant
details. In these circumstances, it cannot be said that there was any failure on
the part of the petitioner to submit full and true particulars at the time of
the original assessment. It was for the assessing officer to examine the details
and draw the appropriate inferences. The notice under Section 148 issued for the
assessment year 2004-05 is therefore without jurisdiction;
++
Assessment Year 2005-06: after carefully considering the
rival submissions, we are of the view that the assessing officer has properly
assumed jurisdiction to reopen the assessment. There was no scrutiny assessment
under Section 143(3) in the first instance; the return filed by the petitioner
was merely processed under Section 143(1). Even so, it is necessary that the
assessing officer must have “reasons to believe” that income chargeable to tax
had escaped assessment. There must be tangible material before him on the basis
of which he could form the belief, bona fide and in good faith, that there was
escapement of income. The material must have a live link or nexus with the
formation of the belief. The belief cannot be a mere pretence. These are the
most basic and indispensable requirements for the validity of the notice under
Section 148. These requirements are satisfied in the present case. There was a
complaint filed by one of the directors i.e. Raj Kumar Devraj, before the Common
Law Board alleging irregularities such as illegal siphoning off of the company’s
funds by the other two directors in the guise of fixed assets, repairs and
maintenances, travelling expenses etc. This complaint constitutes tangible
material on the basis of which action to reopen the assessment can be taken in
good faith; the belief entertained by the assessing officer on the basis of the
complaint which has been filed with some responsibility by one of the directors
of the petitioner, cannot be said to be a mere pretence nor can the belief be
said to be divorced from the material. The complaint constitutes relevant
material for the belief. In these circumstances, we are not able to say that the
notice issued under Section 148 was without jurisdiction. The fact that the
petitioner submitted all the details to the assessing officer along with the
return of income is not relevant where only an intimation under Section 143(1)
is issued after merely processing the return without any scrutiny. There should
however be reason to belief that income had escaped assessment and this
condition has been satisfied in respect of the assessment year 2005-06. In these
circumstances, we uphold the notice issued under Section 148;
B. ++ we have no
hesitation in upholding the jurisdiction of the respondent in issuing the
notices under Section 148. We have already held in the writ petitions filed by
M/s Rambagh Palace Hotels Pvt. Ltd. that the complaint filed by one of the
directors of the hotel, i.e. Raj Kumar Devraj in the Company Law Board alleging
irregularities in the accounts of the hotel constitutes tangible and valid
material on the basis of which the assessing officer can reasonably form a prima
facie belief that income chargeable to tax had escaped assessment. One of the
allegations in the complaint is that funds of the hotel were being siphoned off
by the present petitioners in the guise of purchase of fixed assets, repairs and
maintenance expenses and foreign travel expenses. The reasons recorded referred
to the allegations in the complaint from which the respondent has arrived at a
tentative belief that 50% of the amounts allegedly siphoned off by the
petitioners have to be treated as income that has escaped assessment in each of
their assessments. If the complaint can constitute tangible material for
reopening the assessments of the hotel, it can equally constitute tangible
material giving rise to the belief that the amounts allegedly siphoned off by
the present petitioners from the hotel had escaped assessment in their hands. It
must be remembered that we are not at this stage concerned with the merits of
the matter. We are at this stage concerned only with the question whether a
prima facie belief regarding escapement of income can be entertained by the
respondent on the basis of the complaint filed by the Company Law Board by Raj
Kumar Devraj, one of the directors of the hotel. Our answer is in the
affirmative. Accordingly, we uphold jurisdiction of the respondent to reopen the
assessments of the petitioners.
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