KYC Not Done By Purchasing Party Is Not A New Fact To Reopen Proceedings: Bombay High Court Declines Reassessment

The Bombay High Court quashes reopening notice issued under Section 148 of the Income Tax Act, 1961 while emphasizing that unauthorized transactions are made without requisite KYC of the purchasing party cannot be said to be a fresh fact which has come to light which was not previously disclosed which tends to expose the untruthfulness of the fact. The Division Bench of Justices M.S. Karnik and Valmiki Menezes observed that “Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfilment of certain precondition and if the concept of “change of opinion” is removed, then, in the garb of reopening the assessment, review would take place.” Section 142(1) of the Income Tax Act grants the authorities the authority to issue a notice when additional information or further details are needed, particularly in cases where a tax return has been filed or in cases where it has not been filed, to compel the taxpayer to provide the necessary information in the prescribed format. Section 143(2) of the Income Tax Act provides that when a return has been filed under Section 139 or in response to a notice under Section 142(1), the Assessing Officer or the prescribed authority may serve a notice on the assessee if it is deemed necessary to ensure that the income is not understated, loss is not excessively computed, or tax is not underpaid. Section 148 of the Income Tax Act provides that before assessing or reassessing income under Section 147, the Assessing Officer must serve a notice to the assessee. This notice, which may include a copy of an order under Section 148A(d), requires the assessee to submit a return of their income or the income of another person for whom they are assessable for the relevant assessment year. Section 148A(b) of the Income Tax Act provides that the Assessing Officer must provide the assessee an opportunity to be heard by serving a notice to show cause within a specified period of not less than 7 days and not more than 30 days from the date of the notice. Facts of the case: The assessee/petitioner, a licensed money changer under the Foreign Exchange Management Act, 1999, operates by buying and selling foreign currency and earns profits solely from commissions. The assessee filed income tax returns for the Assessment Year 2018-2019 disclosing the total income of Rs. 3,50,100/-. The Assistant Commissioner of Income Tax/ Respondent No. 2 issued a notice under Section 143(2) of the Income Tax Act for a complete scrutiny. The assessee also received notice under Section 142(1) of the Act calling upon the assessee to submit various documents and to answer various questions concerning the transactions. In response to a subsequent notice under Section 142(1), the assessee submitted required documents. Assistant Commissioner of Income Tax/Respondent No. 2 after complete scrutiny passed an Assessment Order adding an income of Rs. 91,800/- to the income of the assessee on account of transaction of Rs. 45,90,000/- which was the amount advanced by the assessee to Umami Forex and Holidays Private Limited. A show-cause notice under Section 148A(b) of the Act was then issued, which the assessee contested, arguing that a detailed scrutiny had already been completed and all relevant information was provided earlier. However, based on a report from the DDIT (INV) Unit-1 Panaji suggesting a lower-than-expected profit ratio for forex dealers, the Income Tax Officer/Respondent No. 3 issued an order under Section 148A(d) of the Act and a notice under Section 148, proposing reassessment for AY 2018-19. The assessee has filed the writ petition before the Bombay High Court challenging the order passed under Section 148A(d) of the Act and notice issued under Section 148 of Income Tax Act, 1961. The assessee submitted that the Assistant Commissioner of Income Tax/Respondent No. 2 could not have taken resort to GP/NP ratio and in any case the approach adopted of going by GP/NP ratio was misconceived. The detailed reply filed by the assessee to the notice was not given any consideration or dealt with. The reference to absence of KYC never formed part of show cause notice under Section 148A(b) of the Act and therefore, the same cannot form part of the impugned order. The requirement of KYC does not qualify as 'information' under Explanation 1 to Section 148 of the Act. The department submitted that the issue in question was never examined nor was an opinion formed by the department regarding the same prior hereto. Even at the stage of notice under Section 148(b), the assessee was called upon to provide supporting records pertaining to the said cash deposits but has failed to do so. The issues highlighted in the impugned order were never inquired into nor any opinion formed thereon. As such, the same would not come within the ambit of change of opinion or review. At...

KYC Not Done By Purchasing Party Is Not A New Fact To Reopen Proceedings: Bombay High Court Declines Reassessment

Mehak Dhiman

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