By TIOL News Service

AHMEDABAD, MAY 19, 2018: THE ISSUE BEFORE THE COURT IS - Whether reopening of assessment beyond 4 years on issue of huge cash purchases of cotton from farmers, which has been examined during original scrutiny assessment, without proving successfully lack of true and full disclosure by assessee, is invalid. YES IS THE VERDICT.

Facts of the case:

The assessee company used to purchase raw cotton directly from the cultivators farmers. Such cotton was either sold by the company directly as part of its trading activity or consumed in its ginning and processing activity. The assessee had filed return of income for relevant AY. During scrutiny assessment proceedings, the AO examined the assessee's purchases of cotton directly from farmers, for which, payments in cash were made even though the purchases exceeded Rs. 20,000/. The assessee replied to the queries raised by the AO in this regard with supporting materials. The AO passed the order of assessment, accepting assessee's return.

Subsequently, the assessee was subjected to survey operation. During such survey, the Revenue authorities raised various queries regarding purchase of cotton directly from farmers, for which, cash payments were made. Multiple details called from the assessee included the verification of the farmer producers, their land holdings and their confirmation of sale of the produce to the assessee. The assessee supplied such information to the extent possible.

The Investigation Wing of the department contacted the State Government Revenue authorities and tried to match the election card details or Aadhar Card details of the farmers as the case may be, as well as their land holdings and crop patterns. An extensive report was prepared which was presented before the AO. On the basis of such materials, the AO recorded his reasons for forming a belief that income chargeable to tax had escaped assessment. He issued the notice for reopening the assessment, beyond the period of four years from the relevant AY. The assessee raised objections to the reopening notice. Such objections were however rejected by AO. Aggrieved assessee filed petition in the High Court.

High Court held that,

++ the original assessment was completed after scrutiny. In such scrutiny assessment, the assessee's purchases of cotton directly from farmers, for which, cash payments were made, did attract the attention of the AO. This issue was examined by the AO during the original assessment proceedings. If on the basis of the same material, the AO desired to take a relook or reassess the income after 4 years, it would undoubtedly be a case of change of opinion. Hence reopening of the assessment not be permissible; beyond a period of four years;

++ the reasons why the AO desires to reopen the assessment and formed a belief that income chargeable to tax has escaped assessment was that during survey, the assessee could not produce documentary evidence to prove that the sellers were the cultivators, the assessee could not produce a single farmer before the authority, the election card details of the farmers did not match with the Government's official record in some cases, net profit ratio of the assessee was very low and in large number of cases, the records were not verifiable. The assessee could not satisfy these discrepancies. The assessee contended that the reasons cited by the AO were not valid. The assessee could not be expected to present the producers or growers of the cotton before the authorities several years after the purchases were made. Evidence shows that majority of the purchasers were owning lands. In some cases, the lands were in the names of the family members, that by itself, would not mean that the person from whom such produce was purchased was not a genuine producer. In India, the agricultural operations are often carried out by persons who may not be owning the lands. The assessee in making profit higher than other entities engaged in the same business;

++ purchases were made several years before from thousands of individual agriculturists who were the growers of the crop. The fact that the assessee could not produce documentary evidence to prove that the sellers were the cultivators during the survey can therefore hardly be a factor which could weigh while judging that income chargeable to tax has escaped assessment. The agriculturists who had sold the crop to the assessee at the relevant time, would be reluctant to come before the Revenue authorities and this therefore, by itself, may also not be a relevant factor. In some cases, it may happen that the producer may not own the land. However, merely not owing the land does not mean that he is not cultivating the land. Being enrolled in some other village as a voter also would not be conclusive since it is not uncommon that in case of migrating population, the name may be shown as a voter in the native place whereas the person may have settled for work or occupation at a different place. The income from agriculture being exempt, the assessee cannot be blamed if PAN or returns of sellers were not produced. In totality, the AO has referred to some bids and pieces of material to form a belief that the purchases were not genuine. During the course of original assessment, the AO may be well within its rights to carry out minute possible detailed inquiry with respect to all such sales and purchases. However, one such inquiry was over. Scrutiny assessment framed, during which, these transactions came up for pointed consideration, reopening of assessment cannot be permitted on mere surmises, conjectures, suspicion or for further inquiry. The added element of the notice being issued beyond the period of four years from the end of relevant assessment year is also relevant. In the result, impugned notice is quashed. Petition is allowed and disposed of.

(See 2018-TIOL-933-HC-AHM-IT)