Catalysts vs State Of U.P. And Others
2014 Latest Caselaw 3955 ALL

HIGH COURT OF JUDICATURE AT ALLAHABAD
 
 

AFR
 
Reserved
 
Court No.33
 

 
Civil Misc. Writ Petition (Tax) No.704 of 2010
 

 
Catalysts						   ........    Petitioner
 

 
Vs.
 

 
State of U.P. and others			   ........    Respondent
 

 
With
 

 
Civil Misc. Writ Petition (Tax) No.705 of 2010
 

 
Catalysts						   ........    Petitioner
 

 
Vs.
 

 
State of U.P. and others			   ........    Respondent
 

 
With 
 

 
Civil Misc. Writ Petition (Tax) No.706 of 2010
 

 
Catalysts						   ........    Petitioner
 

 
Vs.
 

 
State of U.P. and others			   ........    Respondent
 

 

 
******************
 

 
Hon'ble Tarun Agarwala, J.

Hon'ble Dr. Satish Chandra, J.

(Per: Tarun Agarwala, J.)

(Delivered on 4th August, 2014)

The petitioner is carrying on the business of trading of Bio-chemicals. One such project, which the petitioner is selling is known as enzymes. For the assessment year 2003-04, 2004-05 and 2005-06 under U.P. Trade Tax Act and Central Sales Tax Act, the books of account of the petitioner was accepted. The Assessing Officer also accepted the disclosed sales of enzymes and assessed the same at the rate of 4% presumably under Notification No.1084 dated 25th February, 2003, which specified that chemicals of all kinds would be taxed at the rate of 4% in the hands of importer or manufacturer. Subsequently, a notice dated 24th February, 2010 was issued under Section 21(2) of the Act to the petitioner to show cause as to why reassessment proceedings under Section 21 of the Act should not be reopened on the ground that enzymes was not a chemical since it only acts as a catalyst and, therefore, is taxable at the rate of 10% as an unclassified item. The notice alleged that it was a case of under assessment and, therefore, required the petitioner to show cause as to why proceedings should not be reopened.

The petitioner submitted his reply contending that enzymes is nothing else but a kind of chemical and, therefore, is covered under Notification No.1084, which requires that chemicals of all kinds would be taxable at the rate of 4%. It was also brought to the knowledge of the authority that for the assessment year 2006-07, the Assessing Officer had not treated enzymes as a chemical in the assessment order but in appeal the appellate authority held that enzymes was a chemical and was liable to be taxed at the rate of 4%. The petitioner also enclosed a certificate issued from Micro Small and Medium Enterprises, which is a Government of India concern certifying that enzymes sold by the petitioner falls under the category of chemicals. Inspite of this reply being given, the competent authority granted permission to the Assessing Officer to issue a notice under Section 21 of the Act for reopening the assessment proceedings for the assessment year 2003-04, 2004-05 and 2005-06 under the U.P. and Central Sales Tax Act.

The petitioner, being aggrieved by the sanction order as well as by the notice, has filed Writ Petition No.704 of 2010 for its quashing in the aforesaid assessment years. The petitioner has also filed Writ Petition No.705 of 2010, which relates to the assessment year 2006-07 under the Central Sales Tax Act and Writ Petition No.706 of 2010, which relates to the assessment year 2006-07 under the U.P. Trade Tax Act.

The contention of the petitioner is, that the reply of the petitioner was not considered and that no reason has been given by the authority while granting approval to the Assessing Officer to reopen the assessment proceedings under Section 21 of the Act. The order granting permission is without any application of mind and, consequently, on this ground the order is liable to be quashed. The consequential order issuing notice under Section 21 of the Act was also liable to be quashed accordingly.

The learned counsel submitted that there was no material before the authority to come to a conclusion that income had been underassessed or had escaped assessment and, consequently, in the absence of fresh material, proceedings under Section 21 could not be initiated. The learned counsel further contended that since there was no fresh material, satisfaction of the authority that income had escaped assessment was nothing else but a change of opinion.

With regard to the order of the competent authority granting permission under Central Sales Tax Act for the assessment year 2003-04, the learned counsel submitted that no reason has been given in the impugned order and, in any case, the petitioner had made interstate sales without Form-C and that in the original assessment order, these interstate sales were subjected to tax at the rate of 10% and, consequently, granting permission to reopen the assessment proceedings for this assessment year under the Central Sales Tax Act on the ground that enzymes should be treated as an unclassified item indicates non application of mind, especially when nothing was brought on record to show that any turnover had escaped assessment or assessed at a lower rate of tax. The learned counsel further submitted that for the assessment year 2004-05 and 2005-06 under the Central Sales Tax Act, the notice indicated that delivery of enzymes had been taken by the petitioner himself, hence exemption under Section 6(2) of the Central Sales Tax Act had wrongly been granted. The learned counsel submitted that at the time of the original assessment, detailed scrutiny of Form-C and corresponding Form-E1 along with other documents such as GR/RR indicating transfer of documents of title during movement of goods from one State or other was examined by the Assessing Officer and only after being satisfied that the Assessing Officer had granted exemption. Consequently, initiation of reassessment proceedings for the aforesaid assessment years under the Central Sales Tax Act was wholly illegal and was liable to be quashed.

In Writ Petition No.706 of 2010, the learned counsel submitted that the Assessing Officer treated enzymes as a unclassified item and taxed the same at the rate of 10% for the assessment year 2006-07 under the U.P. Trade Tax Act. The petitioner preferred an appeal, which was allowed and the matter was remanded back to the Assessing Officer for fresh assessment. During the pendency of assessment proceedings before the Assessing Officer pursuant to the remand order of the appellate authority reassessment proceedings were initiated under Section 21 of the Act. The learned counsel submitted that during the pendency of original assessment proceedings the question of escaped assessment does not arise and, therefore, question of issuance of notice under Section 21 of the Act was wholly illegal and had been issued without any application of mind and was liable to be quashed. In support of his submission, the learned counsel has placed reliance on various decisions, which will referred hereinafter.

On the other hand, the learned counsel for the State Sri C.B. Tripathi submitted that the scope of reopening the assessment proceedings under Section 21 is much wider than that under Section 147 of the Income Tax Act. The learned counsel for the State submitted that even though there is a change of opinion, assessment proceedings can be reopened if one finds that a case of under assessment or escaped assessment is made out or that there was sufficient reasons to believe that tax was not assessed in accordance with law. The learned counsel submitted that in the instant case, from a perusal of the assessment order it was apparently clear that there has been no discussion as to whether enzyme is a chemical or not and that the Assessing Officer had mechanically and without any application of mind under some belief presumed that enzyme was a chemical and, accordingly, taxed it at the rate of 4%. The learned counsel submitted that it is necessary to get a finding on the question as to whether enzyme is a chemical or not and, therefore, reassessment proceedings have been initiated under Section 21 of the Act so that a logical conclusion is arrived at on the issue as to whether enzyme is a chemical or not. In support of his submission the learned counsel has placed reliance on various decisions, which will be considered hereinafter.

In M/s Manaktala Chemicals Pvt. Ltd. Vs. State of U.P. and others, 2006 UPTC 1128 it was held that where reasons recorded while granting permission was not rational, genuine or relevant, such permission so granted would be illegal since it was not making out a case for reassessment. The Court held that reasons for being satisfied that it was just and expedient to reopen assessment while granting sanction for reopening the assessment proceedings has to be recorded and if reasons are not recorded the order sanctioning would be wholly illegal.

In M/s S.K. Traders, Modi Nagar, Ghaziabad Vs. Additional Commissioner, Grade-I, Trade Tax, Zone Ghaziabad and another, 2008 UPTC 392 a Division Bench held:

"The words "has reason to believe" are stronger than the words "is satisfied". The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material as held by the Apex Court in Ganga Saran & Sons P. Ltd. v. Income Tax Officer, (1981) 130 ITR 1 (SC) .

The expression "reason to believe" in Section 147 does not mean purely subjective satisfaction on the pan of the Assessing Officer The belief must be held in good faith; it cannot be merely a pretence. It f open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceedings under Section 147 is open to challenge in a Court of law as held in S. Narayanappa v. Commissioner of Income Tax, (1967) 63 ITR 219 (SC); Kantamani Venkata Narayana and Sons Vs. Additional Income Tax Officer, (1967) 63 ITR 638 (SC), Madhya Pradesh Industries Ltd. v. Income Tax Officer, (1970) 77 ITR 268 (SC); Sowdagar Ahmed Khan v. Income Tax Officer, (1968) 70 ITR 79 (SC), Income Tax Officer v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC); Income Tax Officer v. Nawab Mir Barkat Ali Khan Bahadur, (1974) 97 ITR 239 (SC); Commissioner of Sales Tax v. Bhagwan Industries (P) Ltd., (1973) 31 STC 293 (SC) and State of Punjab v. Balbir Singh (1994) 3 SCC 2999.

The formation of the required opinion and belief by the Assessing Officer is a condition precedent. Without such formation, he will not have jurisdiction to initiate proceedings under Section 147. The fulfillment of this condition is not a mere formality but it is mandatory. The failure to fulfill that condition would vitiate the entire proceedings as held by the Apex Court in the case of Johrilal v. Commissioner of Income Tax, (1973) 88 ITR 439 (SC) and Sheo Nath Singh v. Appellate Assistant Commissioner, (1971) 82 ITR 147 (SC) . The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of income of the assessee from assessment, as held by the Hon'ble Supreme Court in the Case of Income Tax Officer v. Lakhmani Mewal Das, (1976) 103 ITR 437. If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Assessing officer could not have reason to belief. In such a case, the notice issued by him would be liable to be struck down as invalid as held in the case of Ganga Saran & Sons P. Ltd. v. Income Tax Officer, (1981) 130 ITR 1 (SC)."

In M/s Geeta Industries Pvt. Ltd. Vs. State of U.P. and others, 2014 UPTC 789 a Division Bench of this Court held:-

"Under sub-section (1) of Section 21, a power of reassessment is conferred upon the Assessing Authority it if has reason to believe that the whole or any part of the turnover of the dealer, from any assessment year or part thereof, had escaped assessment to tax or has been under assessed or has been assessed to tax at a rate lower than at which it is assessable or a deduction or exemption has been wrongly allowed. The foundational requirement of sub-section (1) is that there must be reason to believe.........................................................................

However, the section equally does not authorize reassessment proceedings on the basis of a mere change in opinion. There has to be some tangible material before the Commissioner on the basis of which he makes an authorization in terms of the proviso. The nature of tangible material must be such as would warrant an inference that the turnover of the dealer has escaped the assessment to tax or that it has been under assessed or has been assessed at a lower rate or that deductions or exemptions have been wrongly allowed."

In M/s Vikrant Tyres Limited Vs. State of U.P. and others, 2005 UPTC 501 a Division Bench of this Court held:-

"14. Re-assessment on the same material by same authority, if permitted, for no valid reason, will open flood gate for arbitrary action exposing one to unending process, permitting uncertainty, re-opening of closed chapters without assigning good reason, depending upon whims of individuals and in the end precipitating anomalous situations.

15. It, therefore, naturally follows that there has to be some valid ground viz. Some relevant document or material having escaped notice or there has been wrong calculation due to human error bona fide committed, or ignorance of correct and complete facts due to mistake or ignorance of fraud/mis-representation (but not mere change of opinion on same material)."

In M/s Radico Khaitan Limited, Bareilly Road, Rampur Vs. State of U.P. and others, 2010 NTN (42) 240 a Division Bench of this Court held:-

"In view of the above, we are of the view that the proceedings under Section 21 of the Act have been initiated merely on account of change of opinion on the basis of the same material which were in existence and considered at the time of the original assessment proceedings and there is no material on record on the basis of which a belief of escaped assessment would be formed. Therefore, the initiation of proceedings are patently illegal and liable to be set aside."

There is no quarrel with the aforesaid proposition. The reason to believe does not mean purely subjective satisfaction on the part of the Assessing Officer. It means that the belief must be held on good faith. Further, the formation of the opinion and belief is a condition precedent without which the Assessing Officer will not have jurisdiction to initiate proceedings for reassessment. The reasons for the formation of the belief must have a rational connection, which is germane to the issue and must have a direct nexus. Normally, there must be some fresh material, which would give rise to the formation of the belief that income had escaped assessment and, therefore, the fresh material, which comes to the notice of the Assessing Officer has to have a direct nexus or a live link with the formation of the belief that there has been an escapement of income. The foundational requirement of sub-section (1) of Section 21 of the Act for reopening the assessment is, that there must be a reason to believe that income had escaped assessment. There has to be some tangible material on the basis of which a reason to belief can be formed that some income had escaped assessment.

The contention that no reassessment proceedings can be made on the same material is incorrect. Reassessment on the same material can be permitted for valid reasons. In the instant case, we find that in the original assessment proceedings there has been no discussion nor any finding has been given as to whether enzyme is a chemical or not. Unless and until a discussion is made or a finding is given by the Assessing Officer that enzyme is a chemical, only then, it could be taxed under the entry "chemical of all kinds". In the absence of any finding being recorded by the Assessing Officer on this aspect, we are of the opinion that the respondents were justified in reopening the assessment so that a conclusive finding is given as to whether enzyme is a chemical or not and, consequently, whether it is liable to be taxed at the rate of 4% or as an unclassified item at the rate of 10%.

In M/s Elpee Electricals Vidya Peeth Road, Varanasi Vs. State of U.P. and others in Writ Petition No.688 of 2006 decided on 27th November, 2012 notice under Section 21(2) of the Act was issued, which was challenged before the Court. The Court refused to interfere in the notice on the ground that the Court found that there was no discussion made by the Assessing Officer as to whether the inverters were electronic goods or not and, consequently, whether it was taxable as an electronic good or not.

In M/s Shree Bhawani Paper Mills Ltd. Vs. State of U.P. and others, 2012 NTN (48) 99 a Division Bench of this Court held:-

"We do not find that Section 21(1) necessarily refers to any new material, which may be discovered or which may have been brought to the notice of the competent authority, as a pre-condition for initiating proceeding for re-assessment. Even if the material has been disclosed at the time of assessment, if the assessing authority has reason to believe that such material having connection with assessment, was not considered as a result of which the whole or any part of the turn over has escaped assessment to tax, or has been under-assessed or has been assessed to tax at a lower rate or any deductions or exemptions have been wrongly allowed, the proceedings for reassessment may be initiated."

There is another aspect. The first proviso to sub-section (2) of Section 21 of the Act empowers the authority to initiate proceedings for reassessment even in the case when there is a change of opinion. The change of opinion may arise if some material has been brought on record after assessment has been completed or it may be because of lack of care or inadvertance on the part of the Assessing Officer or non-consideration of the relevant material already on the record.

In the instant case, we find that there has been no discussion in the original assessment order as to whether enzyme is a chemical or not. In the absence of any finding being given by the Assessing Officer on this aspect, the issue as to whether enzyme is a chemical or not has not been determined. When there is an application of mind and an opinion is formed, in that case reopening the assessment proceedings could be held to be illegal as it would amount to a change of opinion but, in the instant case, we find that there has been no determination as to whether enzyme is a chemical or not. No finding has been given by the Assessing Officer. Consequently, no opinion has been formed. We are of the view that in the instant case, it does not fall within the purview of change of opinion.

In Commissioner of Sales Tax, U.P. Vs. Bhagwan Industries (P) Ltd., Lucknow, AIR 1973 SC 370 a Full Bench of the Supreme Court held:-

"....... Question in the circumstances arises as to what is, the import of the words "reason to believe", as used in the section. In our opinion, these words convey that there, must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this Court, for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence."

In the light of the aforesaid, we are of the opinion that in the absence of determination of a vital issue as to whether enzyme is a chemical or not, the competent authority was justified in granting permission to the Assessing Officer to reopen the assessment. The word "reasons to believe" would mean cause or justification. The Assessing Officer was justified in forming an opinion that there has been an under assessment. The expression "reason to believe" cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The same principle applies to the competent authority while granting permission. Only a limited reason is required to be given by the competent authority while granting permission to reopen the assessment. The contention that no reasons has been given by the competent authority while granting permission is patently erroneous. The Court finds that there was sufficient application of mind in coming to a conclusion that it was a case of under assessment and that a finding is required to be given as to whether enzyme is a chemical or not.

Consequently, for the reasons stated aforesaid, we are not inclined to interfere in the order passed by the competent authority granting permission for initiation of proceedings under Section 21 nor we are inclined to interfere in the notice issued by the Assessing Officer under Section 21 of the Act. It would be open to the petitioner to file necessary evidence indicating that enzyme is a chemical, which would be duly considered by the Assessing Officer.

Consequently, for the reasons stated aforesaid, Writ Petition Nos.704 of 2010 and 705 of 2010 are dismissed.

With regard to Writ Petition No.706 of 2010, we find that the Assessing Officer had treated enzyme as an unclassified item and had taxed it at the rate of 10% for the assessment year 2006-07 under the U.P. Trade Tax Act. The petitioner filed an appeal, which was allowed and the assessment order was set aside and the matter was remitted to the Assessing Officer to pass a fresh assessment order. During reconsideration of the matter reassessment proceedings was initiated under Section 21 of the Act.

In M/s Harbilas Prabhu Dayal Vs. Commissioner of Sales Tax, 1979 UPTC 999 a Full Bench of this Court held that once proceedings are remanded by the appellate authority, the entire matter is at large.

We are of the opinion that reassessment proceedings can only take place when there is an assessment order and there is reason to believe that there has been a case of under assessment or escaped assessment. In the event, there is no assessment order there can be no reassessment proceedings.

Consequently, initiation of proceedings under Section 21 of the Act when there is no assessment order is a clear case of non application of mind. Consequently, the order of the competent authority granting permission to reopen the assessment proceedings under Section 21 (2) of the Act as well as the consequential notice issued by the Assessing Officer under Section 21 of the Act for the assessment year 2006-07 under U.P. Trade Tax Act was wholly illegal and is quashed. The Writ Petition No.706 of 2010 is allowed.

 
Date:4.8.2014
 
Bhaskar
 

 
(Dr. Satish Chandra, J.)      (Tarun Agarwala, J.)