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Emphasizing the importance of “tangible” material in reassessment proceedings and protecting taxpayers’ rights: Bombay High Court

The High Court of Bombay passed a judgement on 04 May 2023, addressing the validity of a reassessment notice issued by the Income Tax Department. The petitioner sought to challenge the notice, which proposed to reopen the assessment for the Assessment Year 2014-15. The case of CHANCHAL BHAGWATILAL GOKHRU VS. UNION OF INDIA & ANR.  IN WRIT PETITION NO. 2014 OF 2022 which was passed by the division bench comprising of HONOURABLE SHRI JUSTICE DHIRAJ SINGH THAKUR & HONOURABLE JUSTICE G. S. KULKARNI, KAMAL KHATA.

Facts

The petitioner had filed her income tax return for AY 2014-15 on 28th July 2014. The Assessing Officer (AO) subsequently passed an order under section 143(3) of the Income Tax Act, 1961, on 18th November 2016. This order added a specific amount to the petitioner’s total income based on the withdrawal of exemption claimed under section 10(38) of the Act. The petitioner paid the tax on the additional amount as directed by the AO. Furthermore, the petitioner was granted a waiver of penalty for AY 2014-15 on 31st January 2018, based on an application made under section 273A of the Act.

However, to the petitioner’s surprise, a notice under section 148 of the Act was issued on 26th March 2021, proposing to reopen the assessment for AY 2014-15. This notice was issued after a significant gap of four years. In response, the petitioner filed a return of income on 14th April 2021, followed by notices under sections 143(2) and 142(1) on 10th November 2021 and 15th November 2021, respectively. The petitioner provided the requested details and expressed objections to the reassessment through a communication dated 28th January 2022. The objections were disposed of on 11th February 2022. Another notice was issued on 25th February 2022, leading to the filing of the present petition.

Judgment

The court meticulously examined the reasons recorded by the AO for reopening the assessment. The AO primarily relied on the claim made by the petitioner regarding the purchase and sale of shares of penny stock scrips. The AO concluded that the long-term capital gain should be considered as unexplained investment/income from other sources rather than a capital gain, suggesting that the transactions were merely an accommodation entry designed to generate unexplained investment and bogus profits.

However, the court found no indication of the petitioner’s failure to disclose any material facts. It noted that the AO had already considered these transactions during the original assessment proceedings and had added the corresponding amount to the petitioner’s total income. The petitioner had duly paid the tax on this additional income. The court, therefore, found no substance in the AO’s claim that income chargeable to tax had escaped assessment. It emphasized that the mere change of opinion regarding the calculation of tax payable did not provide a valid basis for reopening the assessment. The court reiterated the well-established principle that reassessment proceedings require fresh “tangible material” to justify their validity.

Considering the settled legal position and the facts of the case, the court delivered the following order:

The impugned notice dated 26th March 2021, issued by Respondent No. 2 for AY 2014-15, was quashed, and set aside. All actions taken in furtherance of the notice were prohibited.

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JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

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In our opinion the order passed by the Tribunal warrants no interference. No substantial questions of law arise in the present appeal: Bombay High court

The High Court of Bombay passed a judgement on 04 May 2023, in a recent legal battle under the Income Tax Act. The case of PR. COMMISSIONER OF INCOME TAX-19 VS. VISHWASHAKTI CONSTRUCTION IN INCOME TAX APPEAL NO. 1016 OF 2018 WITH INCOME TAX APPEAL NO. 1026 OF 2018 two appeals were filed challenging an order passed by the Income Tax Appellate Tribunal (ITAT) in Mumbai. The appeals were related to the assessment years 2009-10 and 2010-11 and were brought forth by a partnership firm engaged in road repairs and construction as a contractor for the Municipal Corporation of Greater Mumbai.

FACTS

The appellant, a partnership firm, filed a return of income for the assessment year 2009-10, declaring a total income of Rs. 37,04,810. During the assessment proceedings, the assessing officer (A.O.) noticed that the firm had claimed purchases totalling Rs. 88,53,059 from various entities. However, suspicions arose when the Sales Tax Department provided information about certain bogus parties, whose TIN matched with those from whom the purchases were allegedly made.

The A.O. issued notices under Section 133(6) of the Act to the parties involved, but there was no compliance. The firm also failed to produce the said parties, and as a result, the A.O. treated the amount of Rs. 88,53,059 as bogus purchases and added it back to the total income. The CIT(A) concurred with the A.O. on the bogus purchases but held that only the profit element embedded in the disputed purchases should be assessed as income, estimating it at 12.5%. The ITAT upheld the CIT(A)’s view and decision.

LAWS INVOLVED

The appeals were preferred under Section 260A of the Income Tax Act, 1961, which allows for appeals against orders of the ITAT. The case involved the interpretation and application of various provisions of the Act, including Section 143(3) and Section 147, which pertain to the assessment of income and reopening of assessments, respectively. Additionally, the decision of the CIT(A) was relied upon, along with the judgment of the Gujarat High Court in CIT v. Bholanath Poly Fab Private. Limited., which formed the basis for the ITAT’s decision.

ARGUMENTS

Two appeals were filed under Section 260A of the Income Tax Act, challenging the order passed by the Income Tax Appellate Tribunal. The appellant, claimed purchases from various entities, which were later flagged as bogus by the assessing officer. The firm argued that the completion of assigned projects for the Municipal Corporation of Greater Mumbai would have been impossible without genuine purchases. The Commissioner of Income Tax (Appeals) agreed partially with the assessing officer’s decision. The ITAT upheld the CIT(A)’s view, treating the purchases as bogus but retaining a portion of the addition. Similar cases were referenced to support the decision. The tribunal found no substantial questions of law and dismissed both appeals.

CONCLUSION

The case discussed highlights the legal implications and complexities surrounding the assessment of purchases made by businesses. While the court acknowledged the presence of bogus purchases, it also considered the practicality of completing assigned works if all purchases were deemed non-genuine. The decision emphasizes the need for a balanced approach when determining the tax implications of disputed purchases. Under Section 260A of the Income Tax Act, both appeals were dismissed, and the ITAT’s decision was upheld.

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

JUDGEMENT REVIEWED BY VETHIKA D PORWAL, BMS COLLEGE OF LAW

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