SPECIAL CIVIL APPLICATION NO. 12303 of 2014

MS. HARSHA DEVANI AND MR. A.G.URAIZEE, JJ.

FOR THE PETITIONER : MR RK PATEL, ADVOCATE
FOR THE RESPONDENT : MR NITIN K MEHTA, ADVOCATE

JUDGMENT

MS.JUSTICE HARSHA DEVANI- This petition under Articles 226 and 227 of the Constitution of India is directed against the notice dated 28th March, 2014 issued by the second respondent under section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), reopening the assessment of the petitioner for assessment year 2007-08.

2. The petitioner, a firm, filed its return of income for assessment year 2007-08 on 17.10.2007, which came to be processed under section 143(1) of the Act. The second respondent has thereafter issued the impugned notice under section 148 of the Act seeking to reopen the assessment of the petitioner for assessment year 2007-08. In response to the notice, the petitioner requested the respondent Assessing Officer to furnish the reasons recorded for reopening the assessment. Such reasons came to be furnished along with a letter dated 28.07.2014. The petitioner filed its objections to the re-assessment proceedings by a communication dated 19.08.2014. By an order dated 25.08.2014, the first respondent has rejected the objections raised by the petitioner. Being aggrieved, the petitioner has filed the present petition.

3. Mr. R. K. Patel, learned advocate for the petitioner invited the attention of the court to the reasons recorded for reopening the assessment to submit that the sole basis for reopening the assessment is the report of the Departmental Valuation Officer (DVO) and hence, the reopening of assessment is bad in law. Reliance was placed upon the decision of this court in the case of Vinayak Builders v. BD Garsar (or) Successor, (2012) 346 ITR 39 (Guj.), wherein, the court in the facts of the said case had recorded that from the reasons recorded, it was apparent that the sole ground for reopening the assessment was that the Valuation Officer had determined the cost of construction at a higher rate than that shown by the assessee in its books of account. The court observed that the reasons recorded did not reflect that the Assessing Officer had applied his mind to the facts of the case to ascertain as to whether in fact the assessee had expended more amount towards construction as stated in the valuation report. The court, accordingly, held that the case was squarely governed by the ratio laid down by the apex court in the case of Assistant Commissioner of Income Tax v. Dhariya Construction Co., (2010) 328 ITR 515, wherein the court in the facts of the said case, had found that the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer. The court observed that the opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Act. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. Adverting to the facts of this case it was submitted that apart from the DVO’s report, there is no application of mind reflected in the reasons recorded by the Assessing Officer for reopening the assessment. It was, accordingly, urged that on the reasons recorded, it cannot be said that the Assessing Officer could have formed the belief that income chargeable to tax has escaped assessment and hence, the assumption of jurisdiction on the part of the Assessing Officer by issuance of notice under section 148 of the Act is without authority of law. Reliance was also placed upon the decision of the Supreme Court in the case of Sargam Cinema v. Commissioner of Income Tax, (2010) 328 ITR 513 (SC), wherein the court held that the Tribunal decided the matter rightly in favour of the assessee, inasmuch as, the Tribunal came to the conclusion that the assessing authority could not have referred the matter to the Departmental Valuation Officer without the books of account being rejected. The court noted that in the facts of the said case, a categorical finding was recorded by the Tribunal that the books were never rejected. The court, accordingly, held that the reliance placed upon the report of the DVO was misconceived. It was submitted that in the facts of the present case, the Assessing Officer has referred the matter to the DVO without rejecting the books of account and hence also, no reliance can be placed upon such report of the DVO.

4. Vehemently opposing the petition, Mr. Nitin Mehta, learned Senior Standing Counsel for the respondents, submitted that in this case, there is no scrutiny assessment under section 143(3) of the Act and hence, this is not a case of change of opinion. It was submitted that apart from the Departmental Valuation Officer’s report which reveals that the assessee has suppressed the cost of construction for the year under consideration, the reasons recorded clearly reveal that the reopening is not based merely on the DVO’s report and that there is an application of mind on the part of the Assessing Officer. It was further pointed out that this is not the assessment year in which the matter has been referred to the DVO and hence, there is no question of rejecting the books of account prior to referring the matter for valuation to the DVO. It was submitted that therefore, the judgments on which reliance has been placed on behalf of the petitioner have no applicability to the facts of the present case as there is no reference to the DVO in the year under consideration. It was submitted that since there is no reference to the books of account of the petitioner, for the purpose of referring the matter to the DVO, there is no question of rejection of the books.

4.1 In support of his submissions, the learned counsel placed reliance upon the decision of the Allahabad High Court in the case of Sunder Carpet Industries v. Income Tax Officer and another, (2010) 324 ITR 417 (All.), wherein the court had held that it is a settled principle of law that under Article 226 of the Constitution of India, the High Court can only examine whether there was any material on the basis of which a belief of escaped assessment could be formed. The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable and based on reasons, which are relevant. It must be in good faith and not in mere pretence, should have a rational connection and relevant bearing on the formation of the belief, and should not be extraneous or irrelevant. The material should be relating to the particular year for which the assessment is sought to be reopened. It is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of income. The belief must be formed on the basis of the material, which has a nexus to the escaped income. The High Court cannot examine the sufficiency of the material. On facts, the court was of the opinion that the reference made to the Departmental Valuation Cell for the purposes of determination of the investment in the construction of building cannot be said to be without the authority of law. The valuation report disclosed higher investments in the constructions which had not been disclosed in the books of account. Thus, there was escaped assessment. The court was of the opinion that the Departmental Valuer’s report constitutes material for entertaining a belief of escaped income in the years under consideration. Reliance was placed upon the decision of the Delhi High Court in the case of Bawa Abhai Singh v. Deputy Commissioner of Income Tax, (2002) 253 ITR 83, wherein, it was held that the report of the District Valuation Officer constitutes the reasons for entertaining a belief about escapement of an income. The court held that there was material on record to form the belief that there was escaped assessment for the assessment years under consideration. It was submitted that the above decision would be squarely applicable to the facts of the present case and therefore, the notice issued under section 148 of the Act cannot be said to be based on no material. It was submitted that as held in the above decision, whether the Departmental Valuer has valued the investment properly or not is a question of fact and can be considered only in the assessment proceedings. It was, accordingly, urged that there is no merit in the petition and that the same, therefore, deserves to be dismissed.

5. At the outset it may be noted that in the present case there is no scrutiny assessment under section 143(3) of the Act, therefore, the scope of inquiry by this court into the validity of the impugned notice is very narrow. As held by the Supreme Court in Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Borkers P. Ltd., (2007) 291 ITR 500 (SC), to confer jurisdiction on the Assessing Officer under section 147 of the Act in a case wherein only an intimation under section 143(1) has been given, the only condition which is required to be satisfied is that the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. Therefore, the only inquiry which has to be made in the present case is whether on the material on record the Assessing Officer could have formed by the belief that income chargeable to tax has escaped assessment.

6. Before adverting to the merits of the case, reference may be made to the reasons recorded by the Assessing Officer for reopening the assessment, which read thus :

“In this case, during the course of assessment proceedings u/s. 143(3) of the Act for A.Y. 2011-12, it was noticed that the assessee has shown very high net profit of 56% from the activity of developing and constructing residential housing scheme by name of “Anand Vihar”. It was seen that cost of construction claimed by assessee for the project was Rs. 4662/- per sq. yard, which appeared to be very less in comparison to other similar projects run by other assessee. Thereafter, reference was made to District Valuation Officer (DVO) for determining the cost of construction the project of the assessee. From the valuation report vide letter No.2(3)/DVO/2013-14/1001 dated 13.03.2014, the DVO has determined the cost of construction as Rs. 30,68,87,047/- in place of Rs. 27,73,76,009/- claimed by the assessee. Therefore, there is difference of Rs. 2,95,11,038/- in total cost of construction as claimed by assessee and as estimated by DVO. As per DVO”s report yearwise cost of construction is as follows:

Assessee has submitted that it has incurred expenses of Rs. 1,12,99,370/- during the F.Y. 2006-07. It is seen from the return of income for A.Y. 2007-08 that no expenses have been debited in the P & L Account by the assessee. Also in the balance sheet part of the return of income, no inventory or stock in progress is seen.

Therefore, in the F.Y. 2006-07 relevant to A.Y. 2007-08, the assessee has under reported the cost of investment made by it by Rs. 22,76,698/- in the on-going project and artificially inflated the profit from the project as it is getting benefit of deduction u/s. 80IB(10) of the Act.

In view of the above, I have reason to believe that the income chargeable to tax of Rs. 22,76,698/- has escaped assessment within the meaning of proviso to section 147 of the I. T. Act in case of the assessee firm for A.Y. 2007-08 and this is fit case for issue of notice u/s 148 of the I. T. Act.”

7. A perusal of the reasons recorded shows that the Assessing Officer, in the assessment proceedings in relation to the assessment year 2011-12, noticed that the cost of construction claimed by the petitioner for the project in question was Rs. 4,662/- per square yard, which appeared to be less in comparison to other similar projects run by other assessees. He, therefore, made a reference to the DVO for determining the cost of construction of the project of the assessee and pursuant thereto, the DVO determined the cost of construction of the entire project of the assessee at Rs. 30,68,87,047/- as against Rs. 27,73,76,009/- as declared by the assessee. On the basis of the aforesaid report of the DVO, the Assessing Officer has noticed that in the return of income filed by the assessee for assessment year 2007-08, no expenses had been debited to the profit and loss account of the assessee and also in the balance sheet part of the return of income, no inventory or stock in process was seen. Accordingly, the Assessing officer formed the belief that the assessee has under reported the cost of investment made by it by Rs. 22,76,698/- in the on-going project and artificially inflated the profit from the project as it was getting benefit of deduction under section 80IB(10) of the Act. From the reasons recorded, it is manifest that the Assessing Officer, in relation to the assessment year 2011-12, had referred the matter to the DVO for determining the cost of construction of the project of the assessee. Based upon the report of the DVO, the Assessing Officer has sought to reopen the assessment for the year under consideration on the ground that the assessee has under reported the cost of investment to the tune of the difference between the cost of investment as declared by the assessee and as estimated by the DVO’s office. It is the case of the learned counsel for the respondents that the Assessing Officer has duly applied his mind by referring to the return of income and noting that no expenses have been debited in the profit and loss account and also that the balance sheet or the return of income does not indicate any inventory or stock in process. Therefore, there is application of mind on the part of the Assessing Officer to the report of the DVO warranting assumption of jurisdiction under section 147 of the Act.
8. The record of the case reveals that for the year under consideration, the petitioner had not claimed any deduction under section 80IB (10) of the Act and therefore as there was no profit, the same was not indicated in the profit and loss account for the year under consideration. While the assessment is sought to be reopened on the ground that the petitioner has under reported the cost of construction, from the reasons recorded, there is nothing to indicate that the Assessing Officer has independently applied his mind to the record of the case to ascertain as to whether the cost of investment as declared by the assessee was in fact under reported as recorded therein. The entire basis for reopening the assessment is the report of the DVO and the difference of cost as computed by him, which according to the Assessing Officer is the extent of income which has escaped assessment.

9. This court in the case of Vinayak Builders v. BD Garsar (or) Successor (supra) had in the facts of that case observed that the sole ground for reopening the assessment was that the Valuation Officer had determined the cost of construction at a higher rate than that shown by the assessee in its books of account. The reasons recorded did not reflect that the Assessing Officer had applied his mind to the facts of the case to ascertain as to whether in fact the assessee had expended more amount towards construction as stated in the valuation report. Reverting to the facts of the present case, the Assessing Officer, except for referring to the profit and loss account, which as noted hereinabove, would not reflect any profit as the assessee had not claimed any profit, and to the balance sheet part of the return of income, the Assessing Officer has made no effort to ascertain as to whether, in fact, the assessee has expended more amount than disclosed in the return of income. In the opinion of this court, while the report of the DVO may form the foundation for reopening the assessment, there must still be some reasons which warrant holding the belief that income chargeable to tax has escaped assessment so as to necessitate issuance of a notice under section 148 of the Act. The facts reveal that the entire basis for reopening the assessment of the petitioner for the year under consideration is the report of the DVO without verification of any facts to support such conclusion. The Assessing Officer has not recorded any satisfaction about the correctness or otherwise of the contents of the report of the DVO.

10. In the aforesaid premises, the court is of the view that considering the material before the Assessing Officer and the nature of inquiry made by him, except for the report of the DVO, there was no tangible material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. As held by the Supreme Court in the case of Assistant Commissioner of Income Tax v. Dhariya Construction Co. (supra), the opinion of the DVOper se is not an information for the purposes of reopening assessment under section 147 of the Act. The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon.

11. In the light of the above discussion, this court is of the view that on the reasons recorded by the Assessing Officer, he could not have formed the belief that the income chargeable to tax has escaped assessment. Under the circumstances, the very assumption of jurisdiction under section 147 of the Act on the part of the Assessing Officer by issuing the impugned notice under section 148 of the Act is without authority of law, and hence, the impugned notice cannot be sustained.