In the recent judgment, the Delhi High Court held that the Assessing Officer (AO) lacked concrete evidence on record to substantiate the formation of a belief that income, otherwise subject to taxation, had evaded assessment. Justices Rajiv Shakdher and Girish Kathpalia presiding over the bench observed a lack of diligence on the part of the AO when initiating reassessment proceedings against the petitioner or assessee.
Brief Facts:
Saraswati Petrochem Pvt. Ltd. challenged the initiation of assessment/reassessment proceedings under Section 148 of the Income-tax Act, 1961. The proceedings were triggered by a notice dated March 31, 2018, issued by the Income Tax Officer concerning the Assessment Year (hereinafter referred to as “AY”) 2011-12. The petitioner originally filed its Return on Income (thereafter “ROI”) for the aforementioned AY on July 1, 2011, which was duly processed under Section 143(1) of the Act. The impugned notice, issued nearly seven years later, alleged that income chargeable to tax had escaped assessment. The central contention put forth by Saraswati Petrochem Pvt. Ltd. revolved around the lack of crucial information provided by the Assessing Officer (hereinafter referred to as “AO”). The petitioner argued that the AO failed to furnish key documents forming the basis for initiating reassessment proceedings, including a communication dated March 12, 2018, from the Income Tax Officer, and an FIR and chargesheet filed by the Central Bureau of Investigation (hereinafter referred to as “CBI”). The petitioner contended that the absence of these documents hindered their ability to effectively respond to the allegations.
Furthermore, the petitioner asserted that the AO's actions amounted to a case of "borrowed satisfaction." It contended that the AO should have independently verified the information and material that led to the belief that income had escaped assessment.
The Income Tax Officer, represented by Mr. Prashant Meharchandani, countered these contentions by emphasizing that the petitioner had received significant amounts in two bank accounts from Para Impex Chem. The contention was that there was a substantial increase in the 'source of funds' for AY 2011-12 compared to the preceding year. The AO, in response to non-compliance, issued a notice on March 20, 2018, calling for explanations on financial transactions with Mr. Ram Singh of Para Impex Chem. The AO argued that the petitioner's failure to respond necessitated the issuance of the impugned notice, aligning with the provisions of Sections 147 and 148 of the Income Tax Act.
Observations by the Court:
The Delhi High Court, comprised of Hon'ble Justice Rajiv Shakdher and Hon'ble Justice Girish Kathpalia, noted that the AO's actions lacked diligence and adherence to established legal principles. One critical lacuna identified was the failure of the AO to furnish essential information forming the basis for the initiation of reassessment proceedings. This included the non-disclosure of a communication dated March 12, 2018, from the Income Tax Officer (Nahan), along with an FIR and chargesheet filed by the CBI. The court underscored that the petitioner was entitled to access this information for an effective and informed response.
Furthermore, the court highlighted the concept of "borrowed satisfaction" in the AO's decision-making process. It emphasized that the AO should have independently verified the information and material that led to the belief that income had escaped assessment, rather than relying solely on external sources. The court observed a misalignment in the timelines mentioned in the 'reason to believe,' as the transactions referred to pertained to the financial year 2009-10, not the relevant assessment year of 2011-12.
“It is evident that the AO had, perhaps, no tangible material available with him to form a belief that income, otherwise chargeable to tax, had escaped assessment. The phraseology used by the AO reveals that he „suspected‟ that income chargeable to tax had escaped assessment. Therefore, according to us, this approach of the AO breached the other well-established principle of law that suspicion and conjecture cannot form the basis for triggering reassessment proceedings qua an assessee.”
The judgment emphasized that a mere increase in the 'source of funds' without corroborating evidence could not serve as a sufficient basis for believing that income chargeable to tax had escaped assessment. The court held that the AO did not possess tangible material to support his belief and, notably, used language that indicated suspicion rather than a concrete basis for initiating reassessment proceedings.
The decision of the Court:
In conclusion, the Delhi High Court held that the AO lacked the requisite tangible material to form a belief that income had escaped assessment. Consequently, the court quashed the impugned notice issued under Section 148 of the Income Tax Act, disposing of the writ petition in favour of Saraswati Petrochem Pvt. Ltd. The parties were directed to bear their respective costs in the matter.
Case Name: Saraswati Petrochem Pvt. Ltd. Vs Income Tax Officer
Coram: Hon’ble Mr. Justice Rajiv Shakdher and Hon’ble Mr. Justice Girish Kathpalia
Case No.: W.P.(C) 10802/2018
Advocates of the Petitioner: Ms Rano Jain, Advocate with Mr Venketesh Chaurasia, Ms Ipsita Gupta and Ms Renu Arora, Advocates.
Advocates of the Respondent: Mr Prashant Meharchandani, Sr. Standing Counsel with Mr Akshat Singh, Jr. Standing Counsel with Ms Ritika Vohra, Adv.
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