ADANI EXPORTS VS DEPUTY COMMISSIONER OF INCOME-TAX (ASSESSMENTS)
2001 P T D 3082
[240 I T R 224]
[Gujarat High Court (India)]
Before R. Balia and A.R. Dave, JJ
ADANI EXPORTS
Versus
DEPUTY COMMISS[ONER OF INCOME‑TAX (ASSESSMENTS)
Special Civil Application No. 10543 of 1998, decided on 29/12/1998.
(a) Income‑tax‑‑‑
‑‑‑‑Re‑assessment‑‑‑Condition precedent‑‑‑‑Assessing Officer must have reason to believe that income had escaped assessment‑‑‑Existence of such a belief is open to judicial review‑‑ ‑Indian Income Tax Act 1961, S.147.
Information that income had escaped assessment Opinion of audit party with regard to application or interpretation of law does not constitute information‑‑‑Assessing Officer computing special deduction under S.SOHHC‑‑‑Audit objection that there is mistake in allowing deduction under S.80HHC‑‑‑Assessing Officer stating that there was no mistake but if it is not accepted remedial action could be taken under S.147 or 263‑‑‑Direction by CBDT for taking action under S.147‑‑‑Direction was not valid‑‑‑No information that income had escaped assessment ‑‑‑Re assessment proceedings were not valid‑‑‑Indian Income Tax Act, 1961, S.147‑‑‑Constitution of India, Art. 226.
The satisfaction of the Assessing Officer for the purpose of re opening an assessment is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not op6n to scrutiny. However, it is always open to question the existence of such belief on the ground that what has been stated is not the correct state of affairs existing on record. In the fact of the record the burden lies on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the Assessing Officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected on paper is not belief held by him in fact, the exercise Of authority conferred on such person would be ultra vires the provisions of law and would be an abuse of such authority.
That part alone of the note of an audit party which mentions the law which escaped the notice of the Income‑tax Officer constitutes "information" within the meaning of section 147(b) of the Income Tax Act, 1961, the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income‑tax Officer. In every case the Income‑tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income had escaped assessment. The basis of his belief must be the law of which he has now become aware.
Held, that, in the instant case, the Assessing Officer did not hold any belief that income had escaped assessment on account of erroneous computation of benefit under section 80HHC. The mere fact that as a subordinate officer he added the suggestion that if his views were not accepted, remedial actions may be taken could not be said to be belief held by him. He had no authority to surrender or abdicate his function to his superiors or could the superiors arrogate to themselves such authority. Audit objections were raised but that would not amount to information within the meaning of section 147(b). The Board had directed remedial action under section 147(b) on the basis of the audit objections. The direction was not valid. The notice under section 147(b) was not valid and was liable to be quashed.
Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) applied.
CIT v. Canara Workshops (P.) Ltd. (1986) 161 ITR 320 (SC) ref.
S.N. Soparkar for Petitioner.
Pranav G. Desai for Manish R.
Bhatt for Respondent.
JUDGMENT
R. BALIA, J.‑‑‑Rule. Service of rule is waived by learned counsel for the respondent‑
The petitioner challenges notice issued by the respondent under section 148 on February 18, 1997, in respect of the assessment year 1993‑94. The reasons which are required to be recorded before issuing notice when demanded by the assessee Were disclosed to the assessee by letter, dated April 16, 1997, Annexure F, which reads as under:
"As per provision of section 147 of the Income‑tax Act, Explanation 2(c)(iv), deduction under section 80HHC claimed at Rs.7,07,64,720 has been wrongly claimed as you have not included an amount of Rs.142,62 crores of export turnover in respect of marine division as total turnover of business, while claiming deduction under section 80HHC of the Income‑tax Act, which is not as per provision of the Income‑tax Act."
The petitioner challenges the issuance of notice, inter alia, on the grounds that the reasons show that the impugned notice proceeds on mere change of opinion on re‑appreciation of evidence which is already on record. In respect of the Marine Division, the assessee has not claimed export benefit under section 80HHC of the Act, the erroneous calculation of which is considered to be the ground for re‑opening the completed assessment. Recourse to section 148 is not permissible to re‑open a concluded assessment merely because the authority takes a different view on the same facts which were already on record, and considered. Another contention which the petitioner raised is that the assessment has been re‑opened on the basis of the remarks of the Accountant‑General (Audit Wing). The remark of the Accountant‑General cannot be regarded as information enabling the respondent to re‑open the assessment in relation to the audit objection. It was further alleged that on receipt of a Guery from the Audit Wing of the Comptroller and Auditor‑General, the respondent called upon the petitioner to explain the stand of the petitioner from time to time. The matter rested there for some time, and therefore, the petitioner believed that audit objection has now been satisfied. It was further alleged that to the best of information of the petitioner at the time when the respondent issued the impugned notice, he did not have any reason to believe that income has escaped assessment and was only acting at the instance of the Audit Wing of the Comptroller and Auditor‑General which i&‑ another Department altogether. As a matter of fact the belief of the Assessing Officer was that the income has `not escaped assessment at all and to the petitioner's information on or around March 15, 1997, the respondent himself addressed a communication to the office of the Accountant‑General not accepting the correctness of the view of the audit wing on the interpretation of section 80HHC. In other words, when the impugned notices were issued, after considering the same, the‑respondent did not hold any belief that the income of the assessee has escaped assessment for any reason.
In the first instance, reply to the petition in the form of an affidavit of one Mr. M. K. Dubey, who is not the Assessing Officer who has issued impugned notices and the existence of whose belief is under challenge, was filed and nothing except urging that re‑opening can take place in pursuance of remarks by the Accountant‑General (Audit Wing) in view of change in section 147 was stated. When the petitioner was permitted to amend the petition in furtherance of his original assertion in the petition that before issuance of notice the assessee was called upon to explain the query and the assessee was given to believe that the audit objections have been satisfied, and that the Assessing Officer even after issuance of notice believed that there was no error in the original assessment order to believe, that income has escaped assessment, it raised a question mark about the very existence of belief in the mind of the respondent, about escapement of income from tax.
Thereafter, another affidavit of Mr. M.H. Pandav, the concerned officer who has recorded reasons for issuing notice under section 148 was filed. The record of the case was also produced before the Court for perusal. In the affidavit to the amended petition as well as in the earlier affidavit, it was admitted that the facts narrated by the petitioner in so far as they form part of the record are admitted. It was asserted in the affidavit by the respondent that, "my correspondence with the audit wing was for my seeking absolute clarity on the vexed issue and is not directly relevant to the matter and in any case does not detract from the fact that I had the necessary reason to believe that income had escaped assessment at the time of issuance of the notice." In the affidavit of Mr. M.H. Pandav, while it was admitted that there was correspondence between his office and the office of the audit wing and in the earlier correspondence he had put forward a possible point of view before the Audit Wing of the Department for clarity and asserted that at the time of issuing the notice he had arrived at the necessary independent satisfaction on receiving information about non‑disclosure of turnover from the Audit Department, he has kept silence about the averments made in the petition about again sticking to his earlier view about the non‑maintainability of the audit objection vide a letter on or about March 19, 1997.
Absence of any denial about the later correspondence still asserting the correctness of earlier assessment prompted us to go through the record of the proceedings for initiation of action under section 148. It revealed that, in the first instance, the concerned officer in his letter, dated March 4, 1996, in the report to the Commissioner of Income‑tax, Gujarat 3, in his four page note, after discussing at length the issue, expressed his view as under:
"In view of the above, the objection raised in respect of deduction under section 80HHC requires to be dropped, since there is no mistake in allowing deduction under section 80HHC.
If the above position is not acceptable, then the remedial action under section 147 or under section 263 can be taken for which time limit will be expiring on 31st March, 1997."
This letter reveals at least that as of March 4, 1996, the said officer did not hold any belief that income has escaped assessment because of erroneous computation under section 80HHC and it was left for the higher officer to conclude and decide if they still did not agree with the view taken by the Assessing Officer, then, in that event, remedial measure under section 147 by way of initiating re‑assessment proceedings or under section 263 by exercise of power by the Commissioner for setting aside the assessment year treating it to be erroneous and prejudicial to the interests of the Revenue can be resorted to that is to say, the remedial measures depended upon the satisfaction of superior officers but not on the belief of the Assessing Officer. In pursuance of this the Audit Department sought instructions whether to drop the proceedings or settle it otherwise.
On June 12, 1996, the Assessing Officer was informed by the Commissioner of Income‑tax about the remedial actions which are requires to be taken by him under the Board's Instruction No.828, dated February 24, 1975, and he was requested to send his report on the audit objection along with case records. He was also directed to suggest the most appropriate remedial action as required under the aforesaid instructions of the Board. In response to this letter, the Assessing Officer informed the Commissioner that report, dated March 4, 1996, has already been sent again suggesting remedial action under section 147 or under section 263 for which time limit expires on March 31, 1997, if revenue audit objection is not to be dropped. This letter, dated June 28, 1996, again reveals the state of mind of the Assessing Officer's suggestion to take remedial action depending on the dropping or sustaining of the audit objection by his superiors but not on his own. Thereafter, on February 18, 1997, notices have been issued. The proceedings before issuance of notice go to show that first a note has been submitted about there being approval of the action by the Commissioner of Income‑tax, as intimated by the Deputy Commissioner of Income‑tax (Audit) vide his letter, dated August 29, 1996, and notice under section 148 issued on February 18, 1987. The note was put for signature and thereafter the aforesaid reasons have been recorded. On February 18, 1997, this happens and on March 17, 1997, the very officer writes to the Commissioner of Income‑tax which is supposed to be in continuation of the earlier report, dated March 4, 1996, alongwith copy of his report. It is a longish document of about eight pages. The final conclusion recorded by the concerned officer in the last para. of the report reads:
"Considering the aforesaid analysis and effect of circular and considering the fact that divisions are separate and independent and there is no interlacing of finance and management and further taking into consideration the law pronounced by the Supreme Court in CIT v. Canara Workshops (P.) Ltd. (1986) 161 ITR 320, the claim put in by the assessee‑company and already assessed should be accepted."
Thus, from the record it is apparent that right from the date the respondent Assessing Officer was apprised of the audit objection, at no point of time up to March 18, 1997, he has betrayed any suggestion of holding any doubt about correctness of his earlier decision in the assessment proceedings about computation of benefit under section 80HHC in the case of the assessee. In spite of holding the view, he has been suggesting to the superior officers that if his view is not acceptable, recourse may be had to section 147 or section 263 that is to say depending upon the view taken by the superior authority.
The position of information contained in audit report vis‑a‑vis formation of belief by the Assessing Officer the existence of which is a condition precedent for initiating proceedings under section 147, even after amendment has been succinctly stated by their Lordships in Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) (headnote):
"Although an audit party does not possess the power to pronounce on the law, it nevertheless may draw the attention of the Income‑tax Officer to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communication of the law is carefully maintained, the confusion which often results in applying section 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose. That part alone of the note of an audit party which mentions the law which escaped the notice of the Income‑tax Officer constitutes 'information' within the meaning of section 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income‑tax Officer."
More importantly, the Court said (headnote):
" ....in every case, the Income‑tax Officer' must determine for himself what is the effect arid consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion rendered by the audit patty in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. The' true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income‑tax Officer."
The ratio fully governs the present case and the record illuminates the failure of the Assessing Officer to adhere to this principle while issuing notice under section 148 in the present case.
It is true that satisfaction of the Assessing Officer for the purpose of re‑opening is subjective in character and the scope of judicial review is limited. When the reasons recorded show a nexus between the formation of belief and the escapement of income, a further enquiry about the adequacy or sufficiency of the material to reach such belief is not open to be scrutinised. However, it is always open to question the existence of such belief on the ground that what has been stated is not the correct state of affairs existing on record. Undoubtedly, in the face of the record, the burden lies, and heavily lies, on the petitioner who challenges it. If the petitioner is able to demonstrate that in fact the Assessing Officer did not have any reason to believe or did not hold such belief in good faith or the belief which is projected in papers is not belief held by him in fact, the exercise of authority conferred on such person would be ultra vires the provisions of law and would be an abuse of such authority. As the aforesaid decision of the Supreme Court indicates though audit objection tray serve as information on the basis of which the Income‑tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income‑tax Officer on his own where such information is passed on to him by the audit that income has escaped assessment. In the present case, by scrupulously analysing the audit objection in great detail, the Assessing Officer has demonstrably shown to have held the belief prior to the issuance of notice as well as after the issuance of notice that the original assessment was not erroneous and so far as he was concerned, he did not believe at any time that income has escaped assessment on account of erroneous computation of benefit under section 80HHC. He has been consistent in his submission of his report to the superior officers. The mere fact that as a subordinate officer he added the suggestion that if his view is not accepted, remedial actions may be taken cannot be said to be belief held by him. He has no authority to surrender or abdicate his function to his superiors, nor the superiors can arrogate to themselves such authority. It needs hardly to be stated that in such circumstances the conclusion is irresistible that the belief that income has escaped assessment was not held at all by the officer having jurisdiction to issue notice and recording under the office note on February 8, 1997, that he has reason to believe is a mere pretence to give validity to the exercise of power. In other words, it was a colourable 'exercise of jurisdiction by the Assessing Officer by recording reasons for holding a belief which in fact demonstrably he did not hold that income of the assessee has escaped assessment due to erroneous computation of deduction under section 80HHC, for the reasons stated by the audit. The reason is not far to seek.
Notwithstanding this clear position of law emerging from the decision of the Supreme Court, the instructions of the Board still persisted that as soon as audit objections are raised, prompt remedial action in the nature of re‑assessment should be taken even if objection is not accepted by the I0come‑tax Officer. The instructions are being taken for remedial action viz., remedial action should invariably be initiated as a precautionary measure in respect of audit objections, even if the objection is not accepted by the Income‑tax Officer or without the assessing authority applying him mind to such information for reaching his own conclusion. Once the remedial action is initiated, it can be dropped with the approval of the Commissioner of Income‑tax if the objection raised is one of facts and the facts stated to the audit are found to be incorrect.
Thus, contrary to the decision of the Supreme Court, the instruction of the Board directs that merely on raising of audit objection remedial action by initiating proceedings of re‑assessment be taken, notwithstanding that the authority vested with power to exercise jurisdiction for issuing notice is not satisfied about existence of such circumstances which may warrant exercise of such power. To say the least, such ultra vires instructions cannot be pressed into service to save the initiation of proceedings under section 147, in the absence of holding of any belief by the Assessing Officer, by arrogating the power to itself by the Board by issuing such directions contrary to the provisions of law at the pain of subjecting‑ the officer to pain of exposing him to charge of insubordination.
As in the present case, we are satisfied, on the basis of the record made available to '.is, in the light of averments made in the petition, that the respondent did not hold the belief at any point of time that income of the assessee has escaped assessment on account of ‑ erroneous computation of benefit under section 80HHC, it cannot but be held that the reasons recorded on file are a mere pretence. The action, therefore, must fail.
Accordingly, this petition succeeds. The impugned notice, dated February 18, 1997, is quashed. Rule is made absolute. There shall be no order as to costs.
M.B.A./316/FCRule made absolute.