Supreme Court Upholds Reassessment Notice: M.R. Shah Logistics Case (2022)

Introduction

Date of the Judgment: 28 March 2022

Citation: 2022 INSC 213

Judges: Uday Umesh Lalit J., S. Ravindra Bhat J. (authored the judgment)

Can a tax authority reopen an assessment if they find evidence of undisclosed income, even if that income was declared under a government scheme by a third party? The Supreme Court of India recently tackled this complex question in a case involving M.R. Shah Logistics Pvt. Ltd. The court examined whether the Income Tax Department could issue a reassessment notice based on information suggesting that the company had routed unaccounted income through share capital, despite a related declaration under the Income Declaration Scheme (IDS) by another entity, Garg Logistics Pvt. Ltd. The bench comprised of Justice Uday Umesh Lalit and Justice S. Ravindra Bhat, with Justice Bhat authoring the judgment.

Case Background

The case revolves around a reassessment notice issued to M.R. Shah Logistics Pvt. Ltd. (hereafter referred to as “the assessee”). In 2013, the Income Tax Department conducted search proceedings at the premises of Shirish Chandrakant Shah in Mumbai. During this search, authorities seized documents that suggested Shirish Shah was providing accommodation entries through various companies. The department suspected that the assessee was a beneficiary of these accommodation entries. This suspicion arose from the fact that several companies that invested in the assessee’s share capital at high premiums were also controlled by Shirish Shah.

The Assessing Officer (AO) believed that the assessee had received unaccounted income through these bogus share capital investments. Consequently, a notice was issued on March 31, 2017, to reassess the assessee’s income for the assessment year 2010-11. The assessee had originally filed its income tax return on September 25, 2010, which was accepted without scrutiny under Section 143(1) of the Income Tax Act.

The “reasons to believe” for reopening the assessment stated that during previous searches in the case of Shirish Chandrakant Shah, it was found that large amounts of unaccounted money from promoters/directors were introduced into closely held companies of the assessee’s group. Further, the chairman of M.R. Shah Group, during a statement recorded under Section 132(4) of the Income Tax Act on November 18, 2016, disclosed that M/s. Garg Logistics Pvt. Ltd. had declared ₹6.36 crores as undisclosed cash used for investment in the assessee’s share capital. The AO compared the investments made by the assessee’s chairman with the records of the Registrar of Companies and found discrepancies.

Timeline

Course of Proceedings

The assessee challenged the reassessment notice in the High Court of Gujarat. The High Court quashed the notice, stating that the AO had no concrete evidence to conclude that the disclosure by Garg Logistics was not from its own funds, but was actually the assessee’s unaccounted income. The High Court observed that the AO shifted the burden onto the assessee to prove that the share application money received was not its own unaccounted income. Further, the High Court reasoned that the Income Declaration Scheme (IDS) provided immunity to declarants, and thus the AO could not rely on Garg Logistics’ declaration to conclude that the assessee had undisclosed income. The High Court also referred to a circular from the Central Board of Direct Taxes (CBDT) dated 01.09.2016, particularly the answer to Query no. 10, to support its view.

Legal Framework

The core legal provisions at play in this case are Sections 147 and 148 of the Income Tax Act, 1961. Section 147 allows the Assessing Officer to reassess income if it has escaped assessment. Section 148 outlines the conditions for reopening assessments, including the requirement of having “information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment.”

Section 147 of the Income Tax Act, 1961 states:

“If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).
Explanation. –For the purposes of assessment or reassessment or recomputation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.”

Section 148 of the Income Tax Act, 1961 states:

“Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.”

Additionally, Section 192 of the Finance Act, 2016, which deals with the Income Declaration Scheme (IDS), provides limited immunity to declarants. It states:

“Notwithstanding anything contained in any other law for the time being in force, nothing contained in any declaration made under section 183 shall be admissible in evidence against the declarant for the purpose of any proceeding relating to imposition of penalty, other than the penalty leviable under section 185, or for the purposes of prosecution under the Income-tax Act or the Wealth-tax Act, 1957.”

Arguments

Revenue’s Arguments:

• The revenue argued that the High Court’s judgment was unsustainable. There was tangible material justifying the reopening of the assessment.
• The AO had traced the assessee’s history, its association with Pradeep Birewar, and the routing of income as bogus share capital.
• The declaration by Garg Logistics under IDS did not automatically negate the AO’s reasons to believe that the assessee had undisclosed income.
• Garg Logistics had not directly invested in the assessee; the investing companies were paper fronts.
• The AO’s belief was based on information from search/seizure actions, not solely on the IDS declaration of Garg Logistics.
• The assessee failed to link the IDS disclosure by Garg Logistics with the investments made by the companies applying for shares in the assessee.
• The AO’s opinion was based on objective material, and the sufficiency of that material is not subject to judicial review.

Assessee’s Arguments:

• The assessee contended that the information of ₹6.25 crores share investment by Garg Logistics was made in its IDS declaration.
• The AO could not have concluded that the investment was not from Garg Logistics’ funds but was the assessee’s unaccounted income.
• The AO wrongly placed the burden on the assessee to prove it was not routing its own cash through these investments.
• The reasons recorded for reopening lacked validity and were based on surmises and conjectures.
• The reassessment was opened on self-contradictory grounds and was impermissible.
• The discrepancies noted by the AO were explained and did not affect the quantification of escaped income.
• No incriminating material was available to reopen the assessment, and there was no link connecting the source of investment to the assessee.
• The amount had already been declared by Garg Logistics, and reassessment would lead to double taxation.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the reassessment notice issued under Section 147 of the Income Tax Act, 1961, was valid, given the assessee’s claim that the income in question was declared under the Income Declaration Scheme (IDS) by Garg Logistics Pvt. Ltd.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• Calcutta Discount Company Ltd v Income Tax officer [1961 (2) SCR 241]: This case underscored the obligation of every assessee to make a true and full disclosure of all primary facts relevant to the decision of the assessing authority.
  
  Ratio: The duty of disclosing all primary facts lies on the assessee, and once that duty is discharged, it is up to the assessing officer to inquire further.
• Income Tax Officer, Calcutta & Ors. vs. Lakhmani Mewal Das [1976 (3) SCR 956]: This case clarified that “reasons to believe” must be based on objective materials and a reasonable view.
  
  Ratio: The reasons to believe must have a material bearing on the question of escapement of income, and the existence of the belief can be challenged by the assessee, but not the sufficiency of reasons for the belief.
• Phool Chand Bajrang Lal & Ors. vs. Income Tax Officer & Ors [1993 Supp (1) SCR 28]: This case held that facts disclosed in the return, if later found to be false, can be the basis for reopening an assessment.
  
  Ratio: An assessee cannot get away with making a false statement at the time of original assessment.
• Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd [2010 (1) SCR 768]: This case stated that the power to reopen assessment is wider post-1st April 1989, but it must be based on “tangible material” and not a “mere change of opinion.”
  
  Ratio: Reassessment must be based on fulfillment of certain pre-conditions and must have a live link with the formation of the belief.
• Commissioner of Income Tax v. Rajesh Jhaveri Stock Broker Ltd [2007 (7) SCR 765]: This case held that an intimation under Section 143(1)(a) cannot be treated as an order of assessment.
  
  Ratio: An intimation under Section 143(1)(a) is not an assessment order, but a mere intimation of acceptance of the return.
• Deputy Commissioner of Income Tax v Zuari Estate Development and Investment Company Ltd [2015 (15) SCC 248]: This case followed the principle laid down in Rajesh Jhaveri Stock Broker Ltd.
  
  Ratio: An intimation under Section 143(1)(a) is not an assessment order.
• State, CBI vs. Sashi Balasubramanian & Ors [2006 Supp (8) SCR 914]: This case held that immunity granted under one act does not extend to other acts.
  
  Ratio: Immunity granted under a tax amnesty scheme does not extend to offenses under other acts.
• Tanna & Modi v Commissioner of Income Tax, Mumbai XXV & Ors [2007 (8) SCR 233]: This case held that immunity granted for one purpose cannot be extended for another.
  
  Ratio: Immunity granted under a voluntary taxation scheme does not lead to total immunity.
• Tekchand & Ors. vs. Competent Authority [1993 (2) SCR 864]: This case held that immunity granted by a tax amnesty scheme does not protect against action under other laws.
  
  Ratio: Immunity granted by a tax amnesty scheme in respect of liabilities under some enactments, did not afford protection against action under other enactments or laws.

Legal Provisions:

• Section 147, Income Tax Act, 1961: Allows reassessment of income that has escaped assessment.
• Section 148, Income Tax Act, 1961: Outlines the conditions for reopening assessments.
• Section 192, Finance Act, 2016: Grants limited immunity to declarants under the Income Declaration Scheme (IDS).

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Calcutta Discount Company Ltd v Income Tax officer [1961 (2) SCR 241]*: The court relied on this case to emphasize the assessee’s duty to make full and true disclosure of all primary facts.
• Income Tax Officer, Calcutta & Ors. vs. Lakhmani Mewal Das [1976 (3) SCR 956]*: The court used this case to reiterate that “reasons to believe” must be based on objective materials and a reasonable view.
• Phool Chand Bajrang Lal & Ors. vs. Income Tax Officer & Ors [1993 Supp (1) SCR 28]*: This authority was used to support the view that false statements in the original return can be grounds for reopening.
• Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd [2010 (1) SCR 768]*: The court cited this case to emphasize that reassessment must be based on “tangible material,” not a mere change of opinion.
• Commissioner of Income Tax v. Rajesh Jhaveri Stock Broker Ltd [2007 (7) SCR 765]*: The court used this case to highlight that an intimation under Section 143(1)(a) is not an order of assessment.
• State, CBI vs. Sashi Balasubramanian & Ors [2006 Supp (8) SCR 914]*: The court relied on this case to show that immunity under one act does not extend to other acts.
• Tanna & Modi v Commissioner of Income Tax, Mumbai XXV & Ors [2007 (8) SCR 233]*: The court cited this case to reiterate that immunity granted for one purpose cannot be extended for another.
• Tekchand & Ors. vs. Competent Authority [1993 (2) SCR 864]*: This authority was used to show that immunity under a tax amnesty scheme does not protect against action under other laws.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the presence of tangible material that suggested the assessee’s income had escaped assessment. The court emphasized that the reassessment notice was not solely based on the declaration made by Garg Logistics under the Income Declaration Scheme (IDS), but on a combination of factors, including seized documents, discrepancies in the assessee’s records, and the assessee’s failure to prove the genuineness of the share capital transactions. The court also underscored that the immunity provided by the IDS was limited to the declarant and did not extend to other parties. The court’s reasoning was also influenced by the fact that the original assessment was not done under scrutiny, but under Section 143(1) of the Income Tax Act, which gives it a weak status.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

The court’s decision was more influenced by the factual aspects of the case, such as the seized documents and discrepancies in the assessee’s records, than by legal principles. However, the court also considered the legal implications of the IDS and the scope of reassessment under the Income Tax Act.

Logical Reasoning

Judgment Analysis

The Supreme Court overturned the High Court’s decision, holding that the reassessment notice was valid. The court emphasized that the Assessing Officer (AO) had tangible material, including documents seized during searches, to form a belief that the assessee’s income had escaped assessment. The court clarified that the reassessment was not solely based on the Income Declaration Scheme (IDS) declaration made by Garg Logistics Pvt. Ltd., but on other evidence gathered during searches and inquiries. The court also noted that the original assessment was done under Section 143(1) of the Income Tax Act, which is not a scrutiny assessment, and thus the principle of “change of opinion” did not apply.

The court stated that “the basis for reopening of assessment was not that Garg Logistics Pvt Ltd had declared ₹ 6,36,00,000/- as undisclosed cash utilized for investment in the assessee’s share capital.” The court also noted that “the assessee’s contention that reopening was done based on the disclosure made by Garg Logistics is therefore, not correct.”

The court further reasoned that the immunity provided by the IDS under Section 192 of the Finance Act, 2016, was limited to the declarant (Garg Logistics) and did not extend to the assessee. The court stated that “the protectionprovided by the scheme is only to the declarant and not to any other person.” The court also emphasized that the AO had sufficient grounds to believe that the assessee had routed its unaccounted income through share capital. The court relied on the principle that the assessee has a duty to make a full and true disclosure of all primary facts, and the AO is not bound to accept the assessee’s version of the facts if there are reasons to believe that the income has escaped assessment.

The Supreme Court’s decision reinforces the principle that tax authorities can reassess income if there is tangible material to believe that income has escaped assessment, even if a third party has made a declaration under a government scheme. The court also clarified that immunity provided by such schemes is limited to the declarant and does not extend to other parties. This judgment is significant as it sets a precedent for cases where tax authorities suspect that unaccounted income has been routed through various entities, and it underscores that tax authorities are not bound by declarations made by third parties if there is evidence to suggest that income has escaped assessment.

Final Verdict

The Supreme Court set aside the judgment of the High Court of Gujarat and upheld the reassessment notice issued to M.R. Shah Logistics Pvt. Ltd. The court held that the Assessing Officer had sufficient material to believe that the assessee’s income had escaped assessment and that the Income Declaration Scheme (IDS) declaration by Garg Logistics Pvt. Ltd. did not provide immunity to the assessee. The court’s decision reinforces the principle that tax authorities can reassess income if they have tangible material to suggest income has escaped assessment, even if a third party has made a declaration under a government scheme. The court emphasized that the immunity provided by such schemes is limited to the declarant and does not extend to other parties.

Key Takeaways

• Tangible Material Required for Reassessment: The Supreme Court emphasized that reassessment notices must be based on tangible material that indicates income has escaped assessment. A mere change of opinion is not sufficient.
• Limited Immunity Under IDS: The immunity provided by the Income Declaration Scheme (IDS) is limited to the declarant and does not extend to other parties.
• Duty of Full Disclosure: Assessees have a duty to make a full and true disclosure of all primary facts relevant to their income.
• Reassessment Based on Multiple Sources: Reassessment can be based on multiple sources of information, not just a single declaration under a government scheme.
• Section 143(1) Intimation is not an Assessment Order: An intimation under Section 143(1) of the Income Tax Act is not an assessment order, and thus the principle of “change of opinion” does not apply.
• No Immunity for Non-Declarants: Non-declarants cannot claim immunity based on declarations made by others under government schemes.
• Reassessment is Not Double Taxation: Reassessment of income, where the assessee is not the declarant under a scheme, does not amount to double taxation.
• Burden of Proof: The assessee has the burden to prove the genuineness of share capital transactions, especially when there is suspicion of unaccounted income.