KAPADIA MONEY CHANGERS PVT. LTD V. THE ASST. COMMISSIONER OF INCOME TAX

SCA/15290/2018

AI Insights

The case involves Kapadia Money Changers Pvt. Ltd., which challenged a notice for reopening of assessment issued by the Assistant Commissioner of Income Tax under section 148 of the Income Tax Act, 1961. The notice was based on discrepancies found during a survey under section 133A of the Act, which led to allegations of inflated salary expenses. The petitioner argued that all relevant facts were disclosed during the original assessment, and the reopening was unjustified as it was based on the salary register of only one unit, ignoring the records of another unit. The court agreed with the petitioner, noting that the reopening was based on a mere change of opinion and incorrect facts, leading to the quashing of the notice.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 762377 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 30-04-2019
• Assessment Year: misc
• Other Referred Cases: GKN Driveshafts India Ltd. v. ITO, RENUSAGAR POWER CO. LTD vs. ITO, SRI KRISHNA PVT. LTD vs. ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: NIKUNT RAVAL; KALPANA RAVAL
• Assessee Lawyers: MANISH SHAH
• Keywords: Income Escapement; Income tax reassessment; Survey Proceedings; Salary Expenses Discrepancy
• Section: 148; 143(3); 143(2); 131; 133A

Judgement Text

"C/SCA/15290/2018 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 15290 of 2018 FOR APPROVAL AND SIGNATURE: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA ========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== KAPADIA MONEY CHANGERS PVT. LTD Versus THE ASST. COMMISSIONER OF INCOME TAX ========================================================== Appearance: MR MANISH J SHAH(1320) for the Petitioner(s) No. 1 MR NIKUNT RAVAL WITH MS KALPANA K RAVAL(1046) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANI and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 30/04/2019 ORAL JUDGMENT Page 1 of 16 C/SCA/15290/2018 JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Rule. Mr. Nikunt Raval, learned senior standing counsel waives service of notice of rule on behalf of the respondent. 2. Having regard to the controversy involved in the present case which lies in a very narrow compass, with the consent of the learned advocates for the respective parties, the matter is taken up for final hearing. 3. The petitioner has challenged a notice dated 28.03.2018 for reopening of assessment for the assessment year 2011­ 2012 issued by the respondent under section 148 of the Income Tax Act, 1961 (“the Act” for short). 4. Brief facts of the case are as under: 4.1 The petitioner is an authorised dealer of foreign exchange. For the Assessment Year (for short “A.Y”) 2011­2012, the petitioner submitted e­return of income declaring total income of Rs.4,37,543/­. During the course of the assessment proceedings, the petitioner submitted audit report and financial statement wherein in profit and loss account under the caption “Expenditure”, there was a debit of Rs.36,53,147/­ under the head “Administrative and Other Expenses”, the break­up of which was at Schedule­10, wherein salary and bonus was stated to be Rs.8,49,818/­. The notice dated 27.9.2012 under section 143 (2) of the Act and notice dated 31.7.2013 under section 143(2) of the Act were issued by the Page 2 of 16 C/SCA/15290/2018 JUDGMENT Assessing Officer with annexure thereto inquiring about 19 items mentioned there under. As per item No.16, the petitioner was asked to furnish ledger copy of salary and wages expenses along with other three items. The petitioner furnished the details sought for by the Assessing Officer. The Assessing Officer by letter dated 4.12.2013 called upon the petitioner to furnish further details which were supplied by the petitioner vide letter dated 12.12.2013, wherein copies of various expenditure accounts were submitted. The assessment order dated 31.1.2014 was passed under section 143(3) of the Act. 4.2 It is the case of the petitioner that after more than two years and nine months of framing assessment under section 143(3) of the Act, there were survey proceedings under section 133A of the Act on 14th and 15th September, 2016. Pursuant to said survey carried on by the department, impugned notice dated 28.3.2018 under section 148 of the Act was issued by the respondent for reopening the assessment for A.Y. 2011­2012 stating that he has reason to believe that income chargeable to tax had escaped assessment and called upon the petitioner to submit the return. The petitioner therefore, on 10.4.2018 submitted the same return which was filed under section 139 of the Act. The respondent along with letter dated 22.6.2018 supplied reasons recorded which are reproduced here­in­below : “1. In this case, the assessee filed its return of income Page 3 of 16 C/SCA/15290/2018 JUDGMENT on 19/09/2011 declaring total income at Rs.4,37,543/­ for the A. Y. 2011­12. Subsequently, the case was selected for the scrutiny and assessment proceedings were concluded on 31/01/2014. 2. A survey u/s. 133A of the IT Act was carried out in the case the assessee company on 14 & 15.09.2016. During the course of survey proceedings certain documents and books of account were found including salary registers for different years. During the course of survey proceedings, on verification of salary register for the F.Y. 2015­16, it was found that the amount of salary debited in the profit and loss account of the relevant year was much higher than the amount of salary payment recorded in the salary register. 2.1 Statement of Shri Chetanbhai A. Kapadia, director of the company, was recorded on oath during the course of survey. He was asked to give explanation and reasons in respect of the above discussed discrepancy i.e. the difference between amount of salary payment recorded in the salary register and the amount of salary debited in the profit and loss account. However, he failed to explain the same or to provide any reason for said discrepancy. 3. Fact remains that discrepancy found during the course of survey, as discussed above could not be explained by the director of the company. During the course of survey, all the salary registers found were impounded. Accordingly, salary register for the F.Y. 2010­ 11 was also found and impounded vide serial no. 25 of the inventory of books as per Annexure­A prepared during the course of survey. 4. The said salary register contains details of payment of salary for entire year. Separate page has been opened for each month in the salary register. On verification of the said salary register, it has been found that total amount of salary payment of Rs, 2,78,700/­ only has been recorded in it for entire twelve months. At the other hand, on verification the profit and loss account of the assessee, it has been found that the assessee has debited an amount of Rs.8,49,818/­ to the P& L account as salary and bonus (other than directors remunerations). 4.1 Case of the assessee for the A.Y. 2011­12 has been scrutinized and assessment order u/s 143 (3) of the Act Page 4 of 16 C/SCA/15290/2018 JUDGMENT was passed on 31.01.2014. During the scrutiny proceedings the assessee submitted the ledger amount of salary/bonus expenses. On verification it has been found that the amount of salary expenses claimed by the assessee is of Rs.7,81,100/­ (excluding bonus). As against this, evidence of payment of Rs.2,78,700/­ only has been found during the course of survey. 5. Thus, it has become very clear that the assessee has debited higher amount under the head 'salary expenses' as against the actual amount of payment of salary recorded in the salary register for the F.Y. 2010­11 relevant to the A.Y. 2011­12. To be specific, as against the amount of salary expenses of Rs.7,81,100/­ debited into the P&L account, evidence of actual payment of Rs.2,78,700/­ only has been found in the form of salary register. 6. The duty cast upon the assessee is not only to disclose the material facts fully but also truly. The word 'truly' indicates that the disclosure made must conform to the actual state of things. A statement cannot be said to be true if it does not explain things exactly as they are. The disclosure, therefore, should be hones, sincere and not fraudulent [RENUSAGAR POWER CO. LTD vs. ITO, 117 ITR 719 (ALL)]. Further, every disclosure is not and cannot be treated as a true and full disclosure, it could be a false one or true one. Similarly, it could be full disclosure or a partial disclosure. A partial disclosure may be misleading one and not enough to meet the standard of disclosure. What is required is full and true disclosure of all material facts necessary for making the assessment for the A.Y. Concerned. [SRI KRISHNA PVT. LTD. vs. ITO, 221 ITR 538, 546 (SC)]. 6.1 In this case, during the course of scrutiny proceedings and also at the time of filing return of income the assessee willfully claimed inflated expenses i.e. higher amount of salary expense than the actual amount. This truth has come to the light on account of salary proceedings carried out by the department. Such facts were not available at the time of passing the order u/s. 143 (3) of the IT Act dtd. 31.01.2014. Had the survey proceeding not carried out, the true facts would not have come to the light. 7. Thus, it has become crystal clear that while filing the return of income and during the assessment Page 5 of 16 C/SCA/15290/2018 JUDGMENT proceedings, the assessee had presented incorrect facts by showing inflated amount of salary expenses. By doing so, the assessee has suppressed its income to the extent discussed above. The said omission is on the part of the assessee as it has willfully presented incorrect facts. The correct details and fact have now come to light as discussed above. Thus, there is a failure on the part of the assessee in disclosing full details. 8. In view of the above facts, I have reason to believe that it is a failure on the part of the assessee, who has not disclosed fully and truly all material fact necessary for assessment of income for the A.Y. 2011­12, and the income of the assessee, to the extent of Rs.5,02,400/­ as discussed above, has escaped assessment within the meaning of section 147 of the IT Act. I am satisfied that the assessment has escaped income to the extent of Rs.5,02,400/­ for the reasons mentioned above and the case of the assessee is fit case for invoking the provisions of section 147 of the Income tax Act and issue of notice under Section 148 of the Income Tax Act. 9. Therefore, notice u/s. 148 of the I.T. Act is issued to the assessee.” 5. The petitioner filed the objections to the aforesaid reasons on 16.8.2018 contending inter­alia that the petitioner had two offices; one at Navsari and other at Bardoli with staff at both the places and the expenditure of Rs. 7,81,100/­ was the total of the salary register at Navsari and Bardoli; salary at Navsari unit was Rs. 2,78,700/­. It was pointed out that salary register of Navsari unit was impounded, but the salary register of Bardoli unit was not impounded and therefore, in the objections, the petitioner stated thus : “....If the reconciliation between the numbers had been sought, the assessee would have provided the same. However, a sheet it attached completely reconciling salary of Rs.2,78,700/­ as per salary register of Navsari unit with Rs. 7,81,100/­ debited to profit and loss account with reference evidences (Page No.27 to 48). Copies of salary registers of Navsari and Bardoli branch are also enclosed (Annexure­A & B). Page 6 of 16 C/SCA/15290/2018 JUDGMENT The justification chart is also summarily presented below with explanation. Particulars Amount (Rs.) Amount (Rs.) Page Referenc e Navsari Unit Add: As per salary register impounded by the IT Department during survey of Navsari Unit 2,78,700 Annexure A Salary paid to Doorkeeper cum Watchman 1. Rameshbhai ­ Rs. 3,900*12 months 2. Jayesh Rathod ­ Rs. 3,900* 1month 50700 30­41 Stipend paid to trainee, Dipti Gohi, for two months ( Rs. 3,900* 2months) 7800 42 Salary paid to Pinal C. Kapadia at Rs. 22,000*8 months paid by cheque No. 21483 drawn on IDBI Bank 1,76,600 43 Total Salary debited in P & L account of Navsari Unit 5,13,200 Bardoli Unit Add: As per salary register of Bardoli Unit (Not impounded by the IT Department during survey) 2,67,900 Annexure B Total salary debited in P & L account of Bardoli Unit 2,67,900 Total salary debited in P & L account by the assessee 7,81,100 (6) Given the above, even on merits, the entire salary debited to profit and loss account of Rs.7,81,100/­ has full support. What is primarily missed out at the time of reopening the assessment is salary particulars of Bardoli unit. The department did not undertake survey at Bardoli unit, recorded statement of employees at Bardoli unit during the course of survey but failed to consider that those employees would have been paid salaries. Therefore, with the complete reconciliation given above with reference evidences, there is no escapement of income whatsoever.” Page 7 of 16 C/SCA/15290/2018 JUDGMENT 6. The respondent however, rejected the objections by order dated 21.8.2018 without making any attempt to appreciate the contents of the objections. The petitioner therefore, has filed captioned petition under Article 226 of the Constitution of India challenging the impugned notice. 7. Learned advocate Mr. Manish Shah for the petitioner submitted that the impugned notice under section 148 of the Act and the order rejecting the objections are bad in law inasmuch as the condition precedent for reopening a scrutiny assessment beyond a period of four years as laid down by the proviso to section 147 of the Act is that the escapement of income from assessment must be by reason of omission or failure on part of the assessee to disclose fully and truly all material facts necessary for assessment. It was submitted that this condition is not fulfilled by the respondent on the facts of the case. The petitioner disclosed not only all facts pertaining to salary and wages during the course of assessment, by supplying the information when asked for by the Assessing Officer, but in fact, the respondent ought to have been convinced after reading the objections that the very foundation of the reasons recorded was the salary register of one unit, when in fact, the petitioner had two units and Rs. 7,81,100/­ was the sum total of the salary recorded in the salary register of two units situated at Navsari and Bardoli. It was submitted that the order rejecting the objections suffered from total non application of mind and is contrary to decision of the Supreme Court in case of GKN Driveshafts India Ltd. v. ITO reported in (2003) 259 ITR 19 inasmuch as the respondent did not follow the Supreme Court Page 8 of 16 C/SCA/15290/2018 JUDGMENT decision in true spirit and drop the proceedings inspite of explanation given in detail by the petitioner in the objections providing detail reconciliation between the reasons recorded and the facts on record to the effect that the very foundation of the reasons recorded with regard to the so­called discrepancy is not tenable, i.e. the difference between the amount of salary payment recorded in the salary register impounded and the amount of salary debited in the Profit and Loss account. By referring to the submissions of Shri Chetan Kapadia, director of the company during the course of survey conducted on 14th and 15th September, 2016, it was submitted that in para 3 of the reasons recorded by the respondent, false facts are recorded to the effect that “during the course of survey, all the salary registers found were impounded. Accordingly, salary register for the F.Y. 2010­11, was also found and impounded vide serial no.25 of the inventory of books as Annexure­A prepared during the course of survey.” The petitioner in the objections filed before the respondent has clarified and reconciled that the petitioner is having two units located at Navsari and Bardoli. It was categorically pointed out that the salary register of Navsari was impounded by the search party but the salary register of Bardoli unit was not impounded and therefore, taking into consideration the only salary register of Navsari for the purpose of reopening of the assessment on the ground that as per the salary register impounded, salary paid was only 2,78,700/­ and in profit and loss account, salary debited is Rs.7,81,100/, was not correct. It was therefore, submitted that the reconciliation justification chart narrated in the objections filed would show that the entire Page 9 of 16 C/SCA/15290/2018 JUDGMENT basis for reopening is bad in law. It was therefore, submitted that the respondent while rejecting the objections raised by the petitioner has brushed aside the justification given by the petitioner by merely reproducing what is stated in the impugned notice of reopening. The respondent while rejecting the objections of the petitioner has recorded as under : “3. The objections of the assessee have been considered and the same are not found to be tenable for the following reasons: 3.1 The reopening has been made after duly recording the reasons by the A.O. The facts suggest that the reopening of the assessment u/s147 has been done after following the due procedures of law and hence there is no illegality involved therein. Copies of impounded material and statements recorded have been supplied to the assessee company when a request received from its end. 3.2 In this case, an survey action u/s. 133 A of the I.T. Act, 1961 was carried out on 14/15.09.2018 wherefrom a salary register for F.Y. 2010­11 relevant to AY 2011­12 was found and impounded from the business premises of the assessee­company. As per the said salary register a payment of Rs. 2,78,700/­ has been recorded for whole FY 2010­11 whereas in the books of accounts the same has been debited to tune of Rs. 7,81,100/­ which reveals this fact salary expenses were bogus and inflated to the tune of Rs. 5,02,400/­. During the course of survey proceeding, Shri. Chetanbhai A. Kapadia, Director of the Company, was examined on oath and he failed to explanation the difference of salary recorded in the salary register impounded and debited to the profit and loss account. Since the assessee failed to substantiate the claim of salary expenses during the course of survey proceedings, which leads to divulge that highly inflated salary expenses have been debited to profit and loss account and it is a failure on the part of the assessee therefore the AO has the reason to believe that such expenses are inflated and assessee does not disclosed true and fair income to the extent of Page 10 of 16 C/SCA/15290/2018 JUDGMENT inflated salary expenses at the time of filing of return and during the course of scrutiny assessment in case of assessee company.” 8. It was submitted that the respondent has not dealt with the justification given by the petitioner and, therefore, instead of dropping the proceedings, the respondent has rejected the objections. 9. On the other hand, Mr. Nikunt Raval, learned advocate for Ms. Kalpana Raval, learned senior standing counsel for the respondent supported the impugned notice relying upon the averments made in the affidavit in reply contending inter­alia that when the opportunity was presented during the course of survey proceedings, no details/explanations were furnished and on the basis of unexplained impounded material and facts of case, reasons for reopening of assessment were recorded and due procedure was followed. It was further submitted that in case of survey action under section 133A of the Act, salary register was impounded for F.Y. 2010­2011 which says payment on account of salary was made to the tune of Rs. 2,78,700/­ only whereas salary expenses were claimed to the tune of Rs.7,81,100/­ as per books of accounts and the director of the company was examined on oath under section 131 of the Act but could not give any explanation and reasons in respect of discrepancy of actual salary expenses debited to the profit and loss account and recorded in the salary register and, therefore, the impugned notice under section 148 of the Act was issued on the basis of discrepancy arising out of impounded material. With regard to the submission of the petitioner that the objections were Page 11 of 16 C/SCA/15290/2018 JUDGMENT rejected without making attempt to appreciate the contents of objections, it was submitted that a speaking order was passed taking into consideration all the aspects raised by the petitioner in its letter dated 16.8.2018. It was therefore, submitted that in view of the discrepancy between the salary register impounded and expenses debited in profit and loss account, there is a failure on part of the petitioner to disclose truly and fully all material facts and, therefore, the impugned notice under section 148 of the Act is legal and valid. 10. This is a classic case of total non application of mind on behalf of the respondent while passing an order rejecting the objections filed by the petitioner pursuant to the issuance of notice under section 148 of the Act. The respondent has brushed aside the justification, explanation and reconciliation furnished by the petitioner in the objections to the effect that the impugned notice is issued only considering the salary register of Navsari unit and the salary register of Bardoli unit has not been taken into consideration. In view of reconciliation furnished by the petitioner in the objections, any prudent person would have dropped the reopening proceedings. In facts of the case, the respondent while rejecting the objections, without considering the justification and reconciliation provided by the petitioner, has rejected the same as empty formality. The Apex Court in case of GKN Driveshafts India Ltd. (supra), has devised a mechanism to give an opportunity to an assessee by filing objections to be considered by the department in its true spirit so that an assessee does not have to undergo the gamut of reassessment proceedings Page 12 of 16 C/SCA/15290/2018 JUDGMENT unnecessarily. In facts of the case, a bare perusal of the reasons recorded and the justification, explanation and reconciliation provided by the petitioner in the objections would clearly lead to a conclusion that there is no escapement of income, irrespective of the aspect that claim of salary was scrutinised or not scrutinised during the course of original assessment. It appears from the order dated 21.8.2018 disposing the objections raised by the petitioner that the respondent has adopted a pedantic robotic approach ignoring the objections raised by the assessee petitioner in toto with only one object of rejecting the objections. The Apex Court has not laid down the procedure for filing objections as a mere empty formality inasmuch as the very purpose of filing the objection is to see that an opportunity is given to an assessee to explain that there is no escapement of income and there is full and true disclosure by the assessee during the course of original assessment and, therefore, there is no need to reopen the assessment. The respondent is duty bound to consider and apply his mind to the objections raised. However, on perusal of the order dated 21.8.2018 whereby the objections raised by the petitioners are rejected, it transpires that reasons given for rejecting the objections are nothing but an eyewash as justification, explanation and reconciliation provided by the petitioner is not even referred to by the respondent. Such an approach of the respondent is required to be deprecated. 11. In view of above stated undisputed facts, reasons recorded by the assessing officer are based on incorrect facts in addition to the fact that the Assessing Officer Page 13 of 16 C/SCA/15290/2018 JUDGMENT during the course of original assessment has scrutinised the details of salary expenditure by issuing notices under section 142(1) of the Act and by calling for information and hence, it is evident that the assessment is sought to be reopened on a mere change of opinion, which is not permissible in law. It is evident from the letter dated 4.12.2013 issued by the Assessing Officer during the course of original assessment, wherein in paragraph no.2 therein, it is stated as under : “On verification of detailed furnished by you vide letter dated 18.08.2013, it is observed that: (i) You have balance with scheduled bank in fixed deposit to the tune of Rs.45,52,610/­ and you have shown interest income thereon of Rs.2,54,746/­. Further, you have obtained unsecured loans from Director of Rs.23,47,277/­ and interest paid thereon to the tune of Rs. 3,71,138/­. It is noted that the said payment is covered u/s. 40 A(2)(b) of the Act. Considering the above, you are requested to explain why the interest given on unsecured loan to Directors is restricted to 6% instead of 12% paid by you as you earned interest on fixed deposits hardly @ 6%. (ii) On verification of audit report, it is further observed that you have paid Director Remuneration of Rs. 5,78,400/­ to Smt. Sheetaben A. Kapadia and salary of Rs.1,76,000/­ to Mrs.Pinalben C. Kapadia. The payment given to these two lady is specified under section 40 A (2)(b) of the Act. Therefor, you are requested to furnish the details of qualification and natures of work/duty performed by these two ladies and justify you claim.” 12. The petitioner furnished information with regard to the payments made by way of salary of Rs. 1,76,000 paid to Pinalben Kapadia, spouse of director Chetan Kapadia in its reply dated 16.12.2013 as under : Page 14 of 16 C/SCA/15290/2018 JUDGMENT “a) Payment made to Pinalben Kapadia (Spouce of director Mr. Chetan A.Kapaida) of Rs. 1.76 Lakh Mrs. Pinalben C. Kapadia is holding degree of Bachelor of Business Administration (BBA) with first class. She is providing her services to the company for the administration of the day to day business, attending customers, services of the public relationship work and others office work. She is getting only Rs.14666/­ per month. If she worked with any other entity, she would deservedly received more than this. So it is justifiable the payment made to Mrs. Pinalben C. Kapadia for her service to the company.” 13. From the above, it is clear that during the course of original assessment, the Assessing Officer has considered the claim of the petitioner with respect to the salary expenditure and, therefore, when the petitioner filed the objections to the impugned notice which is based only upon the salary register of Navsari unit impounded during the course of survey conducted in the year 2016, the respondent ought to have dropped the reopening proceedings. 14. In view of the aforesaid facts emerging from the record, the impugned notice issued under section 148 of the Act which is based on a mere change of opinion is without any jurisdiction and is therefore, liable to be quashed and set aside as the petitioner has disclosed all material facts fully and truly necessary for the assessment and there is no suppression of any income or omission on part of the assessee or any willful presentation of incorrect facts by the petitioner. The reasons recorded are based on incorrect facts and therefore, there is no escapement of Page 15 of 16 C/SCA/15290/2018 JUDGMENT income in the year under consideration. 15. For the foregoing reasons, the petition succeeds and is allowed. The impugned notice issued under section 148 of the Act is quashed and set aside. Rule is made absolute accordingly with no order as to costs. (HARSHA DEVANI, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 16 of 16 "