Facts of the Case:

2009 TMI - 33418 - SUPREME COURT OF INDIA

M/s Green World Corporation is a partnership concern of Shri R.S. Gupta and his wife Smt. Sushila Gupta. They had set up two units for manufacturing exercise books, writing pads, etc. at Parwanoo in the State of Himachal Pradesh in the year 1995. The said purported units were established after declaration and enforcement of a policy for tax holiday for certain period specified in the Union Budget. They had also set up a third unit for manufacturing computer software. They started filing income tax returns from the Assessment Year 1996-97 showing huge profits. In the return for the Assessment Year 2000-01 they disclosed their total sales to the tune of Rs.1,51,69,515/- out of which a sum of Rs.74,69,314/- was shown as net profit. Thus, the profits bore a proportion of 49% to the gross sales. For the earlier assessment year, i.e. 1999-2000, the proportion of the net profit to the total sales was as high as 66% because out of the total sales of Rs. 2,97,12,106/- net profits were declared to be to the tune of Rs.1,96,77,631/-. For the subsequent three assessment years i.e. 2001-2002, 2002-2003 and 2003-2004, the proportionate net profits to the gross sales were 81%, 95% and 95% respectively.

It is furthermore stated that the total investment on plant and machinery for unit No. 1 was shown to be just Rs.1,25,000/- and a very small amount of money was shown to have been spent on plant and machinery for the second unit.

Assessment Proceedings and Assessment Order:

4. On or about 7.2.2000, the Assessing Officer (`AO') conducted a survey at the premises of the assessee in terms of Section 133-A of the Income Tax Act, 1961 (hereinafter referred to for the sake of brevity as, "the said Act") and verified for herself: (a) factum of the existence and actual working of Unit; (b) Installation of Plant and machinery working with the aid of power; (c) Presence of requisite number of workers, some of whose statement were records; (d) available of stock of raw, semi-finished and finished material prior to Assessment year 2000-2001.

On or about 19.12.2002, AO after completing the proceeding for assessment passed an order, which reads as under:

 "Return declaring nil income after deduction under Section 80IB on the profit of Rs.74,79,995/- was filed on 31.10.2000 which was processed under Section 143(1)(a) on 26.7.2001 at returned income by my predecessor.

Survey under Section 133A was conducted in the business premises of the assessee on 7.2.2000 by the then ITO. The case was selected under compulsory scrutiny. Detailed questionnaire along with statutory notices under Section 143(2)/142(1) was issued and in response to the same, Shri Surinder Babbar, CA attended the assessment proceedings from time to time. Various details/information called for were supplied which were verified. The case is discussed as under:

The assessee details in manufacturing of Exercise books and Writing pads. The firm has two partners namely Shri Radhey Shyam Gupta and Smt. Sushila Gupta. Two units were set up by the assessee for manufacturing of Exercise Books in Unit-I and that of Writing Pads in Unit-II. Separate books of account were maintained for both the units and 11 workers were found working at the time of survey. Certain discrepancies as per cash book to that of day book were found which could not explain by the Accountant at the time of survey which were reconciled by the counsel of the assessee during the course of assessment proceedings. On sale of Rs.88,55,592/- gross profit of Rs.57,28,980/- giving rate of 64.69% for unit - 1 and on sale of Rs.63,16,392/-, gross profit of Rs.19,12,565/- for Unit-II giving 30.29% has been declared by the assessee. Sales were made both on credit as well as cash basis. Confirmed copy of account of the creditors has been produced, which is placed on record.

Keeping in view the information supplied by the assessee and facts on file, the income returned by the assessee is hereby accepted."

In the said order of assessment, AO recorded a note, which reads as under:

"After receiving a call from Shimla on 3.12.2002, I visited the office of Worthy CIT, Shimla on 4.12.2002 along with all the assessment records and relevant documents of M/s Green World Corporation. The case was thoroughly discussed with (sic) records and relevant worthy CIT, Shimla in the presence of learned Addl. CIT, Solan Range, Solan. All the documents and queries raised and further reply submitted by the assessee was properly glanced through by the worthy CIT and after going through the questionnaire issued to the assessee on 18.10.2002 and reply submitted by the assessee in response to that on 7.11.2002, 13.11.2002 and 25.11.2002, worthy CIT has directed that since the reply submitted by the assessee is satisfactory and upto the mark, no more information is required to be called for and to assess the case as such. He, therefore, directed in presence of the learned Addl. CIT, Solan Range, Solan to incorporate that discussion in the body of the order sheet. Needful has been done as directed. A copy of the draft assessment order was sent to the Addl. CIT, Solan Range, Solan under the office letter No. ITO/PWN.2002/03/2127 dated 13.12.2002 for according necessary approval. Approval to complete the assessment was received through telephonic from the office of the Addl. Commissioner of Income Tax, Solan Range Solan and assessment has been completed and the assessment order has been served upon the assessee on 19.12.2002."

Action under section 263 and order of CIT

5. Indisputably, the Commissioner of Income Tax ("CIT", for short) on whose dictates the order of assessment dated 19.12.2002 purported to have been passed was transferred and his successor on or about 5.12.2003 issued notice to the assessee purported to be under Section 263 of the Act for the Assessment Year 2000-2001 only, inter alia on the premise that the said order of assessment dated 19.12.2002 was prejudicial to the interests of the Revenue.  Assessee filed its reply thereto on or about 16.3.2004.

6. He inter alia on account of his old age, ill-health, etc. also filed an application for transfer of its cases from CIT (Shimla) to CIT (Delhi) on 4.5.2004.

The CIT (Shimla) passed an order dated 12.7.2004 under Section 263 of the Act inter alia on the premise that the Assessing Officer while finalizing the Assessment had not examined the case properly. In the said order, the following directions were issued: "

16.3 Under the circumstances, I am left with no alternative but to decide the proceedings on the basis of material on record. In the assessment year under review, I estimate the assessee's income from Units at Parwanoo at 5% of the declared turnover. The income shown in excess of 5% amount is treated as undisclosed income from undisclosed sources. As the assessee does not fulfill many of the conditions for being entitled to deduction u/s 80IA/IB, no part of the total income, not even the one estimated @ 5% of the turnover at Parwanoo, would be entitled for deduction u/s 80IA/IB.

16.4 Charge interest u/s 234B/C for non-payment of advance tax. Penalty proceedings u/s 271(1)(c) are initiated separately for furnishing of in-accurate particulars of income assessed. The Assessing Officer is directed to calculate the tax and interest on this income and issue Demand Notice and Challan to the assessee firm.

17. Similar conditions i.e. non fulfillment of the prerequisite conditions for deduction u/s 80IA/IB and excessive declared profits prevailed in the preceding assessment years i.e. A.Y. 1996-97, 1997-98, 1998-99 and 1999-2000; and succeeding assessment years i.e. A.Y. 2001-02, 2002-03 and 2003- 04 also. It is thus obvious that either the whole or substantially the whole of income shown by the assessee in the aforementioned different assessment years could not be said to be income derived from the business of industrial undertaking and was therefore not entitled to deduction u/s 80IA/IB. Thus substantial taxable income for these assessment years have escaped assessment because of non fulfillment of the pre- requisite conditions for deduction u/s 80IA/80IB. The Assessing Officer is hereby directed to examine the case records for all the preceding assessment years including those for assessment year 1996-97 and initiate necessary proceedings u/s 148 within a week. The Assessing Officer is further directed to examine the succeeding assessment years also i.e. A.Y. 2001-02, 2002-03 and 2003-04 and initiate appropriate action u/s 148/143(2) as may be applicable, in a week's time."

Pursuant thereto or in furtherance thereof, notices under Section 148 of the Act were issued to the Assessee for the Assessment Years 1996-97 to 1999-2000, 2001-2002 and 2002-2003.

Consequential Appeals and Petitions

This underwent various stages of appeals and petitions before Income Tax Appellate Tribunal (ITAT), High Court and Supreme Court at various intervals for different reasons.

Finally, honorable Supreme Court has decided the issue after considering various issues including:

1. Jurisdiction after transfer of case from Shimla to Delhi in pursuance of order under section 127(2).
2. Validity of order of AO in pursuance of direction by the CIT

Order of the Apex Court:

We, therefore, in exercise of our jurisdiction under Article 142 of the Constitution of India direct that the assessment be reopened by the Commissioner of Income-tax, Delhi -VII.

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2009 TMI - 33418 - SUPREME COURT OF INDIA