Whether existence of belief can be challenged by assessee but not sufficiency of reasons for belief - HC rules against assessee

THE issues before the Bench are - Whether an assessment order can be declared as void in case it does not mention any detail about the core issue to be adjudicated; Whether an assessing officer is only an adjudicator or it is an investigator also; Whether the existence of belief can be challenged by the assessee but not sufficiency of reasons for belief; Whether at the time of issue of notice u/s 147, mere ‘reasons to belief’ that an income has escaped assessment are sufficient
and Whether failure to give reasons amounts to denial of justice. And the writ is dismissed.

Facts of the case

Assessee, a trust, has challenged the legality and validity of notice issued u/s 148 as also sought a writ in the nature of certiorari for quashing the order whereby the objection against the aforesaid notice had been dismissed. A further writ of mandamus directing the Addl. CIT to drop the reassessment proceedings against the petitioner for the AY 2006-2007 had been sought for. It was claimed that assessee is a charitable trust formed on 26th of October, 1980 and registered as public charitable trust with aim object to impart education in medical, dental, para medical sciences etc. by providing educational institutions, running of hospital for providing medical relief to the needy, to receive and give donation from/to any institution or individual for fulfillment of object of the trust. For the AY 2006- 2007 it had filed its ROI on 31st of October, 2006 disclosing the donations received as Rs.5,23,00,000/-. The taxable income was declared Nil. The petitioner had alleged that as many as five show cause notices were issued by the AO which were duly replied. Thereafter, the assessment was completed. During assessment, petitioner had revised its ROI. The further allegation was that the proceedings u/s 12A for cancellation of registration of the petitioner as charitable trust was also undertaken by the CIT who subsequently by an order dropped it. Thereafter, the petitioner was served with the impugned notice dated 19th of April, 2010 along with the reasons for issuing notice u/s 148. Challenging the same, the present writ petition has been filed. It was submitted by the Revenue officer that the petitioner had equally efficacious remedy of appeal, if any, assessment order is finally passed against it. On merits, the submission was that there was sufficient material in possession of the department to hold that the income of the petitioner had escaped the assessment. The assessment order was passed without taking into consideration the full facts. The AO had failed to make the necessary inquiries with regard to the source of corpus receipt by the petitioner as donation. The donor trust M/s. Nav Jyoti Vikas Sansthan who was alleged to had given donation to the petitioner assessee had no financial capacity to make such a huge donation. This fact came into surface during the assessment proceedings of one M/s. Bankey Bihari Educational Trust. The Addl. CIT noticed that M/s. Nov Jyoti Vikas Sansthan paid a sum of Rs.15 Lakhs as donation to M/s. Bankey Bihari Educational Trust. On inquiry, it was noticed that M/s. Nav Jyoti Vikas Sansthan had no financial capacity to make any donation. The transaction was in the nature of accommodation entries and the donation given by M/s. Nav Jyoti Vikas Sansthan was not genuine. After conducting a detailed inquiry, it was found that the income of the petitioner had escaped assessment. The reassessment proceedings against the petitioner was set to motion on the basis of the relevant material and the said material had a nexus to the escapement of the income of the petitioner.

Before HC, the assessee’s counsel had submitted that in view of the fact that the proceedings for cancellation of registration granted u/s 12A having been dropped and that the assessment was completed u/s 143(3), there was no justification for serving the impugned notice u/s 148. Elaborating the argument, it was submitted that before completing the assessment as many as five notices were served by the AO which were duly replied. The submission was that AO was apparently satisfied with the reply filed by the petitioner, there was no need to discuss them in the assessment order. These queries raised by the AO related to the donation of Rs.1,55,00,000/- received by the assessee from Nav Jyoti Vikas Sansthan. The donation was received through bank cheques and on the asking of the AO, the office bearers of the said NJVS were also examined and they filed affidavits confirming the donations. It was also argued that in view of the proviso to section 147, the proceeding was barred. Notice for reassessment could have been given within 4 years from the end of the AY 2006-2007. While it was given on 19th of April, 2010. It was also submitted that the reassessment proceeding cannot be initiated on the mere change of opinion of the Assessing Authority. On the other hand, Revenue’s counsel had submitted that it is a case of total fraud. The department after conclusion of the assessment proceedings came in possession of the material to show that NJVS had no financial capacity to make such a huge donation. It was only a conduit pipe. The search took place at the premises of M/s. D.N. Cansal Securities Private Limited whose Director had accepted for providing bogus entries and he offered his commission income in lieu of entry charges. At any rate, even the AO of the petitioner did not examine the credit worthiness of NJVS. Besides the fact that the petitioner had an alternative remedy if the reassessment order was passed, by way of statutory remedy, sufficiency of material cannot be gone into in these proceedings.

Held that,

++ the main thrust of the petitioner's counsel is that all the facts relating to donation by NJVS were disclosed during the assessment proceedings. The donations were received through cheques, a fact which is not disputed even in the reasons recorded for issuing notice u/s 148. The argument proceeds on the footing that nothing was concealed by the petitioner. The Court was taken through the various notices issued by the AO raising queries and their replies to impress upon the Court that the assessee filed the details of the corpus fund along with their complete names and addresses. The donations were received through bank transaction. Secretary of NJVS was produced to confirm the payment of donations. The affidavit on behalf of NJVS was also filed. The submission is that everything was disclosed to the Assessing Authority. The assessment order though has been passed u/s 143(3), but it contains hardly any discussion on the relevant issues. It does not deal with any relevant issue, such as from whom the donor (NJVS) received such a huge donation. It is shocking to note that as a matter of fact, the said assessment order is no assessment order in the eyes of law. There is not even a whisper with regard to the receipt of donation from NJVS amounting to Rs.1,57,00,000/-. It is really not understandable under what circumstances the said assessment order came into existence. The assessment order is bereft of any discussion with regard to the genuineness of the donation given by NJVS or the creditworthiness of NJVS to part with such a huge amount as donation. It is no assessment order in the eyes of law. It lacks any discussion with regard to the material facts and issues which were required to be addressed by the Assessing Authority. The Assessing Authority having failed to express any opinion accepting the genuineness of the donations it is difficult to accept the submission of the petitioner that the reassessment notice has been given on the basis of the change of opinion. An Assessing Officer is not only an adjudicator but is also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry;

++ time and again, it has been laid down that the existence of belief can be challenged by the assessee but not sufficiency of reasons for belief. In S. Narayanappa and others Versus CIT, (1967) 63 ITR 219 (SC), and Ganga Saran and Sons Private Limited Versus ITO (1981) 130 ITR 1 SC, it has been laid down that in considering all questions of existence of material for the belief of the AO that the income had escaped the assessment, the Court can go into the question whether the material are relevant or irrelevant. In the case on hand, the financial capacity of NJVS to donate a sum of Rs.1,55,00,000/- to the petitioner is material and relevant. Noticeably, the said issue was not taken into consideration by the AO while framing the assessment order. It appears that the AO had made superficial or cosmetic inquiry by deputing an inspector to find out the bank transaction. No attempt was made by the AO to make inquiry with regard to the financial soundness of NJVS. Nor the NJVS was asked to produce the account books or the documents in support of its financial capacity to give donations in question. The department on making inquiries got material on the above issue against the assessee. It cannot be said that the material received by the department on the basis of inquiry has no nexus or is not relevant to the dispute as to whether the income of the petitioner has escaped the assessment or not;

++ in the case of ACIT Versus Rajesh Jhaveri Stock Brokers Pvt. Limited (2007-TIOL-95-SC-IT), SC has noted the difference in between the pre-existing section 147 prior to 1st of April, 1989 and its substitution thereafter. It has also considered that at the stage of notice as the case here is what is required is "reason to believe" but not the established fact of escapement of income. At this stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether the materials would conclusively prove the escapement is not concerned at that stage. This is so because the formation of the belief by the AO is in the realm of subjective satisfaction. The SC has made reference of its earlier judgments in the case of RTO Vs. Selected Dalurband Coal Pvt. Ltd., (1996) 217 ITR 597, and Raymond Woolen Mills Limited Vs. ITO (2002-TIOL-864-SC-IT). It also compared the existing section 147 after amendment with the old section 147 and has held that under old section 147 (a) two conditions were required to be satisfied; firstly the AO must have reason to believe that the income, profit or gains, chargeable income tax have escaped assessment; secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose full or all the material facts necessary for that assessment year. In view of the latest pronouncement by the SC, the existence of reason to believe that the income of the assessee has escaped the assessment is sufficient. In the case on hand, the AO has recorded the reasons in great detail and portion of the reasons have already been reproduced above. It cannot be said even for a moment that the satisfaction recorded by the AO that the income has escaped the assessment in any manner is not in accordance with law;

++ in Asian Paints Limited Vs. DCIT (2008-TIOL-698-HC-MUM-IT), the action of the AO to reopen the assessment on the ground that some material which was available on record while the assessment was made was inadvertently excluded from the consideration. It was held that it amounts to reopening of assessment merely on the basis of the change of opinion which is not permissible under law. In this case the finding was that the company had made a full and true disclosure of the material facts for computation of the income. In this case a decision of Full Bench of Delhi HC has been relied upon wherein it has been held that if the AO has failed to apply his mind to the relevant material in making the assessment order, he cannot take advantage of his own wrong and reopen the assessment by taking recourse to the provisions of section 147. A bare perusal of this judgment would show that the binding precedents of the SC were not brought to the notice of the HC. The SC in the case of Rajesh Jhaveri Stock Brokers Private Limited has held that at the initial stage i.e. at the stage of notice, the only thing which is required to be seen is 'reason to believe', but not the established facts of escapement of income. In the case on hand, the assessment order as noticed herein above is stereotype order lacks material discussion on relevant issues. As a matter of fact, the assessment order is no order in the eyes of law. When the amount of taxable income and of tax payable thereon were not ascertained at all by the AO, then, obviously it cannot be said that the AO has formed any opinion with regard to the taxable income and of the tax payable and consequently, there would not arise any question of mere change of opinion. For the same reasons, the other decisions relied upon by the counsel for the petitioner are distinguishable on facts and are not applicable to the facts of the present case;

++ in CIT Versus CFIL Stock Broking Limited, 233 CTR 69. Delhi HC held that as there is no material to show that the AO has applied his mind to the formation and independently arrived at a belief on the basis of the material before him that the income had escaped assessment, is no ground to reopen the assessment. In this case, decision was rendered on the peculiar facts of that case. It was found that the AO there had not applied his mind to the opinion nor independently arrived at a belief that on the basis of the material which he had before him that the income had escaped assessment. In the case on hand, on inquiry made by the Addl. CIT, it was unearthed that prima facie the donation given by the NJVS to the petitioner is in the nature of accommodation entries and fictitious. Thereafter, the petitioner's AO has recorded his satisfaction that the income of the assessee has escaped assessment. By no stretch of imagination, the said inquiry can be said to have no nexus with the escapement of the petitioner's income;

++ the order of cancellation of registration u/s 12A, being bereft of any reason cannot be treated an order in the eyes of law. One fails to understand what impelled him to do so. The order being bereft of any reason is no order in the eyes of law and is liable to be ignored being illegal and void. The petitioner's counsel was put to notice to support the order. The only reply he could give is that in the present petition the order dated 25.1.2008 is not in issue. We are not at all impressed by the said argument. When there as a transaction of Rs.1,57,00,000/- a speaking order even dropping the proceeding at least was required. We, therefore, hold that the petitioner cannot derive any advantage from the aforesaid order. There is another reason for ignoring the aforesaid order, dropping the cancellation proceeding of registration. The said order does not contain any reason. Reasons introduce clarity in an order. Reason is the heart beat of every conclusion and without the same it becomes lifeless;

++ failure to give reasons amounts to denial of justice. Reasons are live links between the mind of the decision - taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx, it can, by its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out. The "inscrutable face of the sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance.” A feeble argument was advanced that the CIT being higher in hierarchy than Addl. CIT, the initiation of the proceedings at the instance of Addl. CIT is bad. In view of our above conclusion that the order dropping the proceeding u/s 12A was not a valid action on the part of the CIT, the said argument is rejected;

++ having regard to what has been said above, we find that it is a case where the then AO, the Addl. CIT and CIT who passed the order dated 25.1.2008 have abdicated their duties. The Court in the exercise of supervisory jurisdiction under Articles 226 and 227 of the Constitution of India cannot be a mute spectator. Such actions on the part of the department not only bring disrepute to the department but also encourages the dishonest assessees and promotes the nefarious activities which not only causes loss to revenue but also promotes dishonestly. An honest tax payer feels cheated. Let the matter be examined by the Chief Commissioner of Income Tax and appropriate departmental proceedings may be taken out against the erring officials. A copy of this judgment may also be sent to the Chairman of the Central Board of Direct Taxes for an appropriate action. Since in earlier part of the judgment, we have held that the order of Commissioner dropping proceeding u/s 12AA (3), being bereft of reasons, is no order in the eyes of law and therefore it is liable to be ignored. The CIT is directed to pass fresh reasoned order after hearing the petitioner. The petitioner is directed to appear along with a certified copy of this order before the CIT within a period of one month before the CIT who will fix a date for further proceeding in the matter and will pass a speaking order giving reasons in accordance with law. Having regard to what has been said above, we do not find any merit in the writ petition. The writ petition is dismissed. The stay order is vacated. The petitioner is directed to appear before the Assessing Authority within a period of one month along with the certified copy of this judgment and shall co-operate with the Assessing Officer to complete the reassessment proceedings without any further delay.