* THE HON’BLE SRI JUSTICE V.V.S.RAO AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITION No.27817, 28515, 28530, 28542, 28640, 28870, 29334, 29356, 29374 of 2009 % Dated 26-04-2011 # M/s. G.V.K. Gautami Power Ltd. …. Petitioner Vs. $ Asst. Commissioner of Income Tax And another …. Respondents ! Counsel for the Petitioners: Sri C.Kodandaram ^ Counsel for respondents : Sri J.V. Prasad, Sr. S.C. for Income Tax <GIST: > HEAD NOTE: ? Citations: 1) AIR 1961 SC 372 2) AIR 1967 SC 295 3) (1972) 3 SCC 234 4) (1981) 3 SCC 143 5) (2007) 289 ITR 341 (SC) 6) (2008) 14 SCC 58 7) (2008) 14 SCC 208 8) (2010) 329 ITR 110 (Delhi) 9) (2009) 308 ITR 38 (Delhi) 10) 2010) 195 Taxman 117 (Bombay) 11) (2003) 1 SCC 72 12) (1979) 2 SCC 455 13) (1991) 188 ITR 247 (SC) 14) (1991) 189 ITR 285 (SC) 15) (1991) 191 ITR 661 (SC) 16) (1991) 191 ITR 662 (SC) 17) (1993) 203 ITR 456 (SC) 18) (1996) 217 ITR 597 (SC) 19) (1996) 221 ITR 538 (SC) 20) (1997) 224 ITR 560 (SC) 21) (1999) 236 ITR 34 (SC) 22) (2010) 320 ITR 561 (SC) 23) (1971) 79 ITR 603) (SC) 24) (2007) 1 SCC 732 25) (2007)8 SCC 559 26) (1988) 174 ITR 714 (Calcutta) 27) (1991) Vol. 188 ITR 247 (SC) 28) (1985) 1 SCC 345 29) (2004) 6 SCC 186 30) 1951 AC 737 31) (1970) 2 ALL.E.R 294 32) 1971 (1) WLR 1062 33) 1972 (2) WLR 537 34) AIR 1968 SC 647 35) 1901 AC 495 36) 2004(5) ALD 180 (DB) 37) (1971) 3 SCC 20 38) (1994) 2 SCC 481 39) AIR 1955 S.C.425 40) AIR 1987 SC 2235 41) AIR 1987 SC 1972 42) 1954 SCR 738 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION No.27817, 28515, 28530, 28542, 28640, 28870, 29334, 29356, 29374 of 2009 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) INTRODUCTION: The “Satyam Scam”, allegedly running into a few thousand crores, came to light on a letter of confession dated 7.1.2009 being addressed to the Board of Directors of Satyam Computer Services Limited (“SCSL” for short) by Sri B. Ramalinga Raju, the then Chairman. This was followed by his alleged confession in prison on 23.2.2009 to the effect that the books of accounts had been fudged; Rs.1230 crores was arranged to SCSL to run their operations; and money was raised by pledging the shares of M/s Maytas Infra Limited, apart from the shares of SCSL. Several agencies, including the Income Tax department, caused investigation into different aspects of the “Scam”. According to the Income Tax Department, more than 370 companies were promoted by Sri B. Ramalinga Raju and his immediate family members. Commencing March, 2009 assessments, finalized for the year 2002-03, of several of these companies were sought to be reopened, and notices under Section 148 of the Income Tax Act (“Act” for brevity) were issued calling upon them to show cause why the assessments should not be reopened under Section 147 of the Act. Several of these companies invoked the extra-ordinary jurisdiction of this Court under Article 226 of the Constitution of India and filed W.P. No.28300 of 2009 & batch. Either before Writ Petitions were filed, or during the period they were pending before this Court, the assessing authority passed re-assessment orders aggrieved by which some of these companies preferred appeals before the Commissioner of Income Tax (Appeals) (“CIT(A)” for brevity). Fifty eight Writ Petitions filed before this Court, (in W.P. No.28300 of 2009 & batch) by companies against whom reassessment orders were passed, were dismissed as infructuous by the order of this Court dated 02.02.2011 giving them liberty to raise all questions, including on the jurisdiction of assessing authority to reopen assessment, before the CIT (A). Nine Writ Petitions, wherein reassessment orders have not yet been passed as a result of the interim stay granted by this Court, were heard elaborately, and are now being disposed of by this common order. FACTS IN BRIEF: 2. The facts in W.P.No.27817 of 2009 may be taken as illustrative of all the cases in this batch of Writ Petitions. The notice issued under Section 148 of the Act dated 26.3.2009, seeking to reopen assessment of the year 2002-03, and the notice issued under Section 142(2A) of the Act dated 15.12.2009, for the assessment years 2002-03 and 2007-08, are under challenge by the petitioner - a company engaged in setting up plants for generation of power. As stated in the affidavit, filed in support of the said Writ Petition, the petitioner was originally one amongst the Satyam Group of companies. After July, 2003, the petitioner – Gautami Power Limited - was taken over by the GVK group of companies. The name of the petitioner company was, subsequently, changed to GVK Gauthami Power Limited. 3. For the assessment year 2002-03 the petitioner filed its return of Income on 28.3.2003. It is their case that during the accounting year, relevant to the assessment year 2002-03, they were in the process of setting up a power plant and, therefore, did not submit any profit and loss account. The 1st respondent completed assessment, and passed the assessment order dated 21.3.2005 under Section 143(3) of the Act. The petitioner claims to have paid the tax levied without prejudice to their remedies under the Act. They also filed a return of income on 23.10.2007 for the assessment year 2007-08. It is their case that, during the accounting year relevant to the assessment year 2007-08, they had not commenced business and, therefore, did not submit their profit and loss account. The 2nd respondent assessed the returns filed by the petitioner, under Section 143(1) of the Act, and granted refund of tax. 4. Thereafter, in exercise of his powers under Section 148 of the Act, the 2nd respondent issued notice dated 26.3.2009 informing the petitioner that, since their income for the assessment year 2002-03 had escaped assessment, he proposed to reopen the assessment after obtaining sanction of the Commissioner of Income Tax (Central), Hyderabad(CIT). The petitioner was called upon to file their return in the prescribed form. In reply thereto the petitioner vide letter dated 26.5.2009, while enclosing their return for the assessment year 2002- 03, requested that the reasons for reopening the assessment be furnished to them as the notice dated 26.3.2009 was bereft of reasons. An order under Section 281-B of the Act was passed vide proceedings dated 13.8.2009, and the property of the petitioner was attached. The 1st respondent, vide proceedings dated 17.8.2009, called for various records and information relating to the assessment year 2002-03. On 14.9.2009 the 2nd respondent furnished to the petitioner the reasons for issuance of the notice under Section 148 of the Act for the assessment year 2002-03 which, amongst others, records that he had reason to believe that income chargeable to tax, which had escaped assessment, was more than Rs.1.00 lakh in terms of Section 149 read with Section 148 of the Act. The petitioner, vide letter dated 22.9.2009, filed their reply and objections to the assessment for the year 2002-03 being reopened. The 1st respondent, vide proceedings dated 9.12.2009, informed the petitioner that their objections were not acceptable. A notice dated 15.12.2009 was issued under Section 142(2A) calling upon the petitioner to submit their comments on the proposal to refer their case for audit. Aggrieved thereby, this Writ Petition was filed. CONTENTIONS: 5. Sri C. Kodandaram, Learned Senior Counsel appearing on behalf of the petitioner, would submit that, in the absence of specific information available with the department that the petitioner had either concealed their income or had furnished inaccurate particulars of income and as the reasons recorded were general and vague, the 2nd respondent was not justified in issuing notice under Section 148 of the Act; the impugned notice was based on the mere suspicion that the petitioner’s income may have escaped assessment since M/s Maytas Infra Limited, a company of the Satyam Group, had made substantial investment towards the equity capital of the petitioner company; invocation of Section 142 (2A) was only to harass the petitioner; the notice issued under Section 148 of the Act on 26.03.2009 is bereft of reasons; the reasons furnished by the assessing authority on 14.09.2009, (at the petitioner’s request), merely referred to the confessional statements of Sri B. Ramalinga Raju dated 07.01.2009 and 21.02.2009 which related only to the books of accounts of SCSL, and not to the petitioner company; merely because the petitioner was originally incorporated by Sri B. Ramalinga Raju, his confession cannot form the basis for reopening assessment of the petitioner; the petitioner has no direct nexus with the alleged fraud committed by Sri B. Ramalinga Raju; its management was taken over by the GVK group way back in the year 2003; during the said period the father of Sri B. Ramalinga Raju was the director of the petitioner company; the petitioner’s case falls within the proviso to Section 147; while suspicion may be the initial trigger for exercising jurisdiction under Sections 147 and 148, the reason to believe that income has escaped assessment must be based on the material on record and should be certain; no fishing expedition or a roving enquiry is permissible; the “reasons to believe” should be relatable to non-disclosure, fully and truly, of all material facts; the impugned notice under Section 148 suffers from non-application of mind; there is no material on which the assessing authority could have arrived at his subjective satisfaction that income of the petitioner had escaped assessment; the reasons assigned in the proceedings dated 26.03.2009, and in the subsequent note dated 09.12.2009, are at variance with each other; at the stage of issuance of notice under Section 148, “reason to believe” should be capable of being co-related with the averments in the counter-affidavit filed by the assessing authority; and the reasons now furnished to this Court, in the counter-affidavits filed by the assessing authority, has no connection with the reasons which were furnished earlier. Learned Senior Counsel would rely on Calcutta Discount Company Limited v. Income-tax Officer, Companies District-I, Calcutta[1]; Barium Chemicals v Company Law Board[2]; Sheonathsingh v. Commissioner of Income Tax Calcutta[3]; S Ganga Saran and Sons Private Limited Calcutta v. Income Tax Officer[4]; Manish Maheshwari v. Asst. CIT[5]; Ramesh Chandra Sankla v. Vikram Cement[6]; Asst. CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd[7]; Sarthak Securities Co. P. Ltd. v. ITO[8]; Haryana Acrylic Manufacturing Co. v. Commissioner of Income-tax[9]; The Commissioner of Income-tax v. Jet Airways (I) Limited[10]. 6. Ms. K. Mamatha, Learned Counsel appearing for some of the petitioners, would submit that, in as much as the assessing authority did not have reason to believe that income had escaped assessment, the petitioner cannot be subjected to the needless ordeal of having to appear before him in reassessment proceedings; the confession of Sri B. Ramalinga Raju, as recorded in the subsequent assessment order of Maytas Infra-tec Private Limited, was false; as the earlier notice issued on 26.03.2009 was not accompanied by reasons it is not a notice in the eye of law; the reasons for reopening must be furnished within a reasonable time; the reasons were, however, furnished more than six months after the notice dated 26.3.2009 was issued, and just before the time limit for passing the reassessment order was drawing to a close; and by the time the reasons were furnished, at the petitioner’s request on 14.09.2009, the limitation of six years for reopening the assessment had elapsed. Learned Counsel would rely on Haryana Acrylic9; GKN Driveshafts India Limited v. Income Tax Officer[11]; Income Tax Officer v. M/s. Madnani Engineering Works Ltd, Calcutta[12]. 7. Sri J.V. Prasad, Learned Senior Standing Counsel for Income- tax, would submit that the petitioner company was incorporated by Sri B. Ramalinga Raju; their admission that the GVK group had taken over the petitioner company in July, 2003 meant that they were part of the Satyam Group of companies for the year 2001-2002; they were under the influence and control of Sri B. Ramalinga Raju who had set up as many as 370 companies including the petitioner; in the light of the “scam” in SCSL necessary steps to protect the interests of the revenue were required to be taken; when Sri B. Ramalinga Raju confessed to have fudged accounts, the completed proceedings under Section 143(3) of the Act was required to be looked into again; reopening of the assessment was on the basis of information gathered by the department after the confession of Sri B. Ramalinga Raju on 7.1.2009; the authorized officer had caused investigation at his end, and had taken the decision to reopen assessment of the petitioner for the assessment year 2002-03; the assessing officer had recorded his reasons and satisfaction which was endorsed by the Additional Commissioner, and the CIT; the assessing officer had applied his mind and had caused due verification; the satisfaction recorded for reopening the assessment cannot be said to be arbitrary as there was material based on which the assessing officer had reason to believe that there was escapement of income; at the stage of issue of notice it would suffice if prima facie material is available with the assessing officer; the assessing officer is not required to conclusively establish that there was escapement of income; as the petitioner did not reply to the show cause notice dated 15.12.2009, proposals for special audit were sent to the CIT for approval; after due approval the company was directed to get its accounts audited as its financial results were in doubt because of their inter-relationship with SCSL, and the influence of Sri B. Ramalinga Raju over the affairs of the petitioner; having regard to the complexity and the circumstances it was the considered opinion of the assessing officer that, in the interest of revenue, the veracity of the accounts could only be ascertained by carrying out an audit under Section 142(2A) of the Act; the petitioner had not made out any case for interference by this Court under Article 226; larger public interest required reopening of the assessment; the mere fact that the notice dated 26.03.2009 does not disclose all the reasons would not render the proceedings initiated under Section 147 invalid as it is evident from the material on record that the assessing officer had reason to believe that income had escaped assessment; the sufficiency or adequacy of such reasons are not matters which would be examined by this Court, more so as no order of re-assessment has as yet been passed; the petitioners have a remedy under the Act to appear before the ITO and, in case they suffer an adverse order, to carry the matter in appeal to the CIT(A) before whom they can raise all questions including on the jurisdiction of the ITO to reopen assessment under Section 147 of the Act; and, in the light of the massive fraud committed by Sri B. Ramalinga Raju and as the petitioner is one of the several companies floated by him to evade tax, this Court should refrain from exercising its discretion under Article 226 as any finding recorded by this Court, on the question of jurisdiction, would effect the appeals pending before the CIT (A). Learned Senior Standing Counsel would place reliance on M/s. Calcutta Discount Co. Ltd.1; Bhimraj Pannalal v. CIT Bihar & Orissa[13]; A.L.A. Firm v. CIT[14]; Inspecting Asst. CIT v. V.I.P. Industries Ltd[15]; Central Provinces Manganese Ore Co. Ltd v. ITO, Nagpur[16]; Phoolchand Bagranglal v. ITO[17]; ITO v. Selected Dalurband Coal Co. Pvt. Ltd[18]; Srikrishna Pvt. Ltd v. ITO[19]; Associated Stone Industries Ltd. v. CIT[20]; Raymond Woolen Mills Ltd. v. ITO[21]; Rajesh Jhaveri7. MATERIAL ON RECORD: 8. The records placed before us, in so far as they relate to the petitioner in W.P. No.27817 of 2009, contain copies of the shareholders agreement executed on 2.7.2003 between Maytas Infra Limited, M/s IJM Corporation, Malaysia and M/s Nagarjuna Construction Co. Ltd on the one hand and G.V.K. companies on the other. The said agreement shows that M/s. Maytas Infra Ltd, M/s IJM Corporation, Malaysia and M/s. Nagarjuna construction Co. Ltd, together with their affiliates, held 100% of the equity share capital of the petitioner company and, with effect from the effective date, while M/s Maytas Infra Limited and M/s IJM Corporation were to reduce their holding to 20% each of the petitioner’s equity capital, M/s Nagarjuna Construction Company Limited was to hold 10% and the remaining 50% of the equity capital of the petitioner company was to be held by the GVK companies. The shareholders agreement was signed on behalf of Maytas Infra Ltd by its Director Sri B. Teja Raju. (son of Sri B. Ramalinga Raju). The shareholders agreement was amended initially on 11.6.2004, and later on 23.10.2006, and the share holding of M/s Maytas Infra Ltd was reduced to 19.50% of the petitioner’s equity capital. The record also contains the Director’s report, for the financial year ending 31.3.2002, which reveals that Sri B. Rama Raju S/o. Sri B. Ramalinga Raju was then the Vice-Chairman and Managing Director of the petitioner company. The record contains several other letters which, for reasons stated hereinafter, need not be referred to in this order. SECTIONS 147 TO 149 OF THE ACT: ITS SCOPE AND AMBIT: 9. Before considering the question, whether this Court should exercise discretion to adjudicate upon the jurisdiction of the ITO to issue notice under Section 147, it is useful to examine the scope and purport of Sections 147 to 149 of the Act, and cull out the principles laid down in this regard by various judicial pronouncements of the Supreme Court. 10. Section 34 of the Income Tax Act, 1922 related to income escaping assessment. In Calcutta Discount Co. Ltd.1 the Supreme Court held that, in order to confer jurisdiction under Section 34 to issue notice in respect of assessments beyond four years from the end of the relevant year, two conditions must be satisfied (i) the ITO should have reason to believe that there has been under-assessment, and (ii) he should have reason to believe that such under-assessment has resulted from non-disclosure of material facts; and both these requirements were conditions precedent to be satisfied before the ITO would have jurisdiction to issue the notice. 11. Section 147 of the Income Tax Act, 1961 as it originally stood was similar to Section 34 of the Income Tax Act, 1922. Section 147 was amended firstly by the Direct Tax Laws Amendment Act, 1987, and later by the Amending Act, 1989. It is useful to read Section 147 of the Income Tax Act, 1961 as it originally stood, after it was amended by the Direct Tax Laws Amendment Act, 1987, and later by the Amending Act, 1989, in juxta-position with each other. Prior to Direct Tax Laws (Amendment) Act, 1987, Section 147 read as under: 1 4 7 . I n c o m e escaping assessment:- If- [a] the Income-tax Officer h a s reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or [ b ] notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income- tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he m a y , subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 After enactment of Direct Tax Laws (Amendment) Act, 1987, i.e., prior to 1st April, 1989, Section 147 of the Act, read as under: 1 4 7 . I n c o m e escaping assessment:- If the Assessing Officer, for reasons to be recorded by him in writing, is of the opinion that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income a n d also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year). After the Amending Act, 1989, Section 147 read as under: 1 4 7 . I n c o m e escaping assessment: 1 4 7 . If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income a n d also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year). Provided that where an assessment under sub-section (3) of Section 143 or this Section has been made for the relevant assessment year, no action shall be taken under this Section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for referred to as the relevant assessment year). such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. 12. Under Section 147 of the Income-tax Act, 1961, as it originally stood, an assessment could be reopened only if the ITO had reason to believe that income chargeable to tax had escaped assessment under two situations i.e., (i) omission or failure on the part of the assessee to make a return under Section 139 for any assessment year; or (ii) disclose fully and truly all material facts necessary for his assessment. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. But in Section 147 of the Act, with effect from 1st April, 1989, the twin conditions of the pre-amended Section 147 were given a go-by and only one condition remained viz., where the Assessing Officer had reason to believe that income has escaped assessment. Post-1st April, 1989, the power to re-open assessment under Section 147 is much wider. (Commissioner of Income Tax v. Kelvinator of India Ltd[22]). The scope and effect of Section 147 as substituted with effect from 1-4-1989, and Sections 148 to 152, are substantially different from the provisions as they stood prior to such substitution. Under the substituted Section 147 if the assessing officer, for whatever reason, has reason to believe that income has escaped assessment, he has the jurisdiction to reopen the assessment. (Rajesh Jhaveri7). 13. It is only in cases where an assessment under Section 143(3) or Section 147 has been made for the