Income Tax Officer cannot reopen assessments under sections 147/148 without independently forming reasons to believe

The Bombay HC quashed reopening notices under sections 147/148 of the Income Tax Act, ruling that the Assessing Officer failed to independently form reasons to believe for reopening assessments. The court held that material borrowed from DRI authorities and Justice M.B. Shah Commission report without independent application of mind cannot constitute valid grounds for reopening. Regarding mining activities post-2007, the court noted that until the SC's 2014 decision declaring mining leases illegal, assessees had no knowledge of illegality when filing 2009-10 returns, as they continued paying royalty and customs duty with government acceptance. The twin conditions for valid reopening were not satisfied.

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Issues Involved:
1. Legality of the re-opening of assessments u/s 147 of the Income Tax Act.
2. Validity of the reasons for re-opening based on Justice M.B. Shah Commission Report.
3. Validity of the reasons for re-opening based on information from the Directorate of Revenue Intelligence (DRI), Mumbai.
4. Whether the assessee failed to disclose fully and truly all material facts necessary for assessment.

Summary:

Issue 1: Legality of the re-opening of assessments u/s 147 of the Income Tax Act
The court examined whether the re-opening of assessments for various assessment years was legally justified. The re-opening was based on notices issued u/s 148 of the Income Tax Act, claiming that income chargeable to tax had escaped assessment. The court emphasized that for re-opening beyond four years, two conditions must be met: the Income Tax Officer must have reason to believe that income had escaped assessment, and this escapement was due to the assessee's failure to disclose fully and truly all material facts. The court found that these conditions were not satisfied in the present cases.

Issue 2: Validity of the reasons for re-opening based on Justice M.B. Shah Commission Report
The court noted that the reasons for re-opening were largely based on the Justice M.B. Shah Commission Report, which highlighted under-invoicing of exports and illegal mining activities beyond 22.11.2007. However, it was observed that the report merely expressed opinions without finality or authoritativeness. The court held that reliance solely on the Shah Commission Report, without independent application of mind by the Assessing Officer, could not justify the re-opening of assessments.

Issue 3: Validity of the reasons for re-opening based on information from the Directorate of Revenue Intelligence (DRI), Mumbai
The court scrutinized the reasons for re-opening based on information from the DRI, which indicated under-invoicing of exports and commission paid to foreign agents. It was found that the Assessing Officer did not conduct an independent inquiry and merely borrowed information from the DRI. The court ruled that such borrowed material, without independent reasoning, could not be considered as tangible material for re-opening assessments.

Issue 4: Whether the assessee failed to disclose fully and truly all material facts necessary for assessment
The court examined whether the assessee had failed to disclose material facts, particularly regarding the legality of mining activities beyond 22.11.2007. It was noted that the Supreme Court's decision declaring mining leases beyond 2007 illegal was made in 2014, and the assessee could not have known this at the time of filing returns. The court held that the assessee could not be faulted for not disclosing facts that were not known or declared illegal at the time of filing returns.

Conclusion:
The court concluded that the re-opening notices and the orders rejecting the objections lacked legal basis. The reasons for re-opening were either borrowed from other reports without independent application of mind or based on facts not known to the assessee at the time of filing returns. Consequently, the court quashed and set aside the re-opening notices and the orders rejecting the objections filed by the petitioners. The petitions were allowed, and the rule was made absolute with no orders as to cost.

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