Rajendra Kantibhai Patel vs Assistant Commissioner of Income Tax

Akil Abdul Hamid Kureshi, J.—Heard learned counsel for the parties for final disposal of the petition. The petitioner has challenged a notice dated October 4, 2012, issued by the respondent-Assessing Officer under section 148 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). Under such notice he seeks to reopen the assessment of the petitioner for the assessment year 2006-07, which was framed after scrutiny. The impugned notice is, thus, issued beyond a period of four years from the end of relevant assessment year.

At the request of the petitioner, the respondent supplied reasons recorded by him for issuing the impugned notice. Such reasons read as under:

"The assessee-firm was engaged in trading and manufacturing of jewellery and resale of jewellery and related items. A survey under section 133A of the Income-tax Act, 1961, was carried out on March 10, 2006, at the business premises of the assessee during which the assessee-firm had made a disclosure of Rs. 1,03,52,950 but returned undisclosed income of Rs. 1,29,36,304 which included undisclosed stock of Rs. 1,03,52,950.

The undisclosed stock has to be valued at the market price ruling as on the date of survey while include profit element also. Therefore, the deduction of 15 per cent. of profit considered for valuation of undisclosed stock is not correct.

In view of the above facts, I have reason to believe that the income chargeable to tax has escaped assessment for the assessment year 2006-07 within the meaning of section 147 of the Income-tax Act, 1961, in this case."

Armed with the reasons, the petitioner raised detailed objections to the reopening of the assessment under a communication dated January 21, 2014. In such objections, the petitioner primarily touched two aspects. Firstly, that there was no failure on the part of the petitioner to disclose truly and fully all material facts for assessment. Secondly, that while ascertaining unaccounted investment of the petitioner, the cost price of the undisclosed stock should be recalled. In other words, the petitioner questioned the very basis of the Assessing Officer''s belief that the income chargeable to tax had escaped the assessment.

The Assessing Officer, however, by his order dated March 7, 2014, rejected such objections. Hence, this petition.

Having heard the learned counsel for the parties and having perused the documents and report, in our opinion, the short question that calls for our consideration is whether there was failure on the part of the assessee to disclose truly and fully all material facts for assessment, only then would the Assessing Officer be authorised to issue notice for reopening, which was done in the present case beyond a period of four years from the assessment year under consideration. This question shall have to be examined in the context of reasons recorded by the Assessing Officer for issuing notice. Such reasons when summarised pertain to the Assessing Officer''s objections to the disclosure made by the assessee in the return filed after the survey operations. According to the Assessing Officer, the undisclosed stock of Rs. 1,03,53,956 which formed a part of the declared undisclosed income of Rs. 1,29,36,304, was not sufficient and full disclosure since the same represented the value of undisclosed stock sans 15 per cent. of the profit. According to him, such valuation had to include 15 per cent. profit and matching disclosure should have been made.

In the return that the assessee filed consequent to the survey operation, he had disclosed a sum of Rs. 1,29,36,304. When called upon to explain this disclosure during the assessment proceedings by the Assessing Officer, the petitioner in detail reply dated September 5, 2008, provided the reconciliation as under:

"(27) Reconciliation of disclosure made of Rs. 1,03,79,735.

As can be made out from question No. 11 of the statement of our karta Shri Rajendrabhai K. Patel recorded during survey on March 10, 2006, the sale value of the total physical stock found at our business premises was of Rs. 2,13,74,575 on the date of survey. As stated in the same question No. 11, the cost of stock as on the date of survey as per our books of account was Rs. 62,87,138.

As submitted before the survey party by our karta, out of the said physical stock found at our business premises on the date of survey of Rs. 2,13,74,575, the stock of loose diamonds having value of Rs. 17,98,000 belonged to our sister concern, M/s. Shri Sai Jewellers. After deducting the said stock belonging to the said sister concern of Rs. 17,98,000, the sale value of the physical stock found on the date of survey worked out to Rs. 1,95,76,575. Out of such sale value of the physical stock found on the date of survey, the reduction of profit element at the rate of 15 per cent. was made to arrive at the cost price of the physical stock belonging to us on the date of survey.

The above working was properly explained by our karta, vide his answer No. 11 on pages 17 and 18 of his statement recorded during survey on March 10, 2006.

With a view to submitting before your goodself as to how the cost price of the physical stock found on the date of survey was worked out, the below stated working of such cost price is submitted.

As submitted earlier, the book stock on the date of survey was of Rs. 62,87,139. Thus, on the date of survey excess stock of Rs. 1,03,52,949 was found (i.e., physical stock of Rs. 1,66,40,089 book stock of Rs. 61,87,139 = 1,03,52,949).

Kindly note that the cost of the above excess stock was admitted as additional income by us through our karta on the date of survey.

Similarly, as can be seen from questions Nos. 9 and 10 and answers Nos. 9 and 10 of the statement of our karta recorded during survey, on the date of survey the physical cash found was of Rs. 3,51,958 as per annexure CF. 1. As can be further made out from the said questions and answers, the cash as per the books of account on the date of survey was Rs. 3,25,173. This resulted into difference of Rs. 26,785 between the physical cash found on the date of survey and cash as per the books of account on the date of survey. We had, therefore, also admitted the disclosure of Rs. 26,785 on account of excess cash found on the date of survey.

However, we voluntarily increased the said admitted disclosure of Rs. 26,785 to Rs. 3,33,354 on account of excess cash found since it came to our notice that the further cash of Rs. 3,06,569 was also available with us in our business on the date of survey.

In addition to the above admitted disclosures on account of excess stock and cash found on the date of survey, we also voluntarily offered a sum of Rs. 22,50,000 on account of receivable not recorded in our books of account on the date of survey.

With a view to enabling your goodself to have the precise details of disclosures, the following table is submitted.

From the above details, your goodself will found that through our return of income we made disclosure of income of Rs. 1,29,36,304 as against the admitted disclosure of Rs. 1,03,79,735.

A statement indicating accounting entries made for the above disclosure is enclosed."

Thus, the entire modality of disclosing the undisclosed income of Rs. 1,29,36,304 was placed before the Assessing Officer during the proceedings of assessment itself. This included a sum of Rs. 1,03,79,735 as an amount admitted during the survey. It also included further sums of Rs. 3,33,354 of cash and Rs. 22,53,000 receivable, which did not form part of the proceedings during the survey.

If the Assessing Officer, therefore, had any doubt or dispute pertaining to valuation of the undisclosed stock and, consequently, about the disclosure of additional income by the assessee, he ought to have pursued the issue further during the assessment itself. By no stretch of imagination can it be, however, stated that the issue that the Assessing Officer now desires to raise for which the impugned notice for reopening has been issued, flows from failure on the part of the assessee to disclose necessary facts. To summarise, the assessee made a disclosure during the survey of Rs. 1,03,53,950 of unaccounted stock. He forwarded it by filing a return maintaining such disclosure giving shape of declared income. If the Assessing Officer felt that valuation of the stock was inaccurate and that, therefore, the disclosure was not full and he could as well have taxed the additional income, which in his opinion was not reflected by the assessee, certainly, it cannot be said that the income chargeable to tax had escaped the assessment due to failure on the part of the assessee to disclose truly and fully all material facts. In the result, the petition is allowed. The impugned notice is quashed. Rule is made absolute. There shall be, however, no order as to costs.