The Bombay High Court, Goa Bench has held that the requirement of KYC does not qualify as ‘information’ for income tax reassessment under section 148 of the Income Tax Act.
The bench of Justice M.S. Karnik and Justice Valmiki Menezes has observed that before concluding the assessment proceedings, the Assessing Officer could have always called upon the assessee to produce the KYC details of the forex purchasing party. The fact that unauthorised transactions of forex are made without requisite KYC of the forex purchasing party cannot be said to be a fresh fact which has come to light which was not previously disclosed or that it is an information with regard to the fact previously disclosed which tends to expose the untruthfulness of the fact.
The petitioner/assessee is a full-fledged money changer pursuant to a full-fledged money changer’s licence issued by the RBI under the Foreign Exchange Management Act, 1999. The assessee undertakes the sale and purchase of foreign currency and makes a profit only on the basis of the commission it earns.
The assessee filed income tax returns for the Assessment Year 2018-2019 disclosing the total taxable income of Rs.3,50,100. The department issued notice under Section 143(2) of the Income Tax Act to the assessee for complete scrutiny on 22.09.2019. The assessee also received notice under Section 142(1) calling upon the assessee to submit various documents and to answer various questions concerning the transactions. In the annexure to the notice under Section 142(1), it was mentioned that the complete scrutiny was initiated, major issue being high risk transactions. The assessee inter alia was called upon to explain the nature of source of cash deposits aggregating to an amount of Rs.52,55,50,000.
The assessee submitted all the details and answered all the queries vide communication dated 10.02.2021. The assessee relied upon a cash flow statement, register of sale of foreign currency, daily summary and balance book, register of purchase of foreign currency for public, register of sale of foreign currency to authorised dealers and money changers, summary of sale and purchase of foreign currency, cash register and RBI audit letter. The assessee indicated that the RBI had done a thorough audit relating to inspection of all books and records relating to FMMC transactions for Financial Year 2017-18.
A show cause notice under Section 148A (b) of the Act was issued calling the assessee to show cause as to why in view of details contained in Annexure – A, a notice under Section 148 of the Act should not be issued. The assessee responded to the show cause notice by his reply pointing out that on the earlier occasion the scrutiny was conducted under Section 143(2) of the Income Tax Act and that full information about cash deposit was submitted by the assessee and that the show cause notice was issued by respondent without verifying its own records.
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The department passed order under Section 148A(d) based on the report of the DDIT (INV) Unit -1 Panaji, which stated that the net profit declared by the assessee was 0.05% of the turnover and felt that in the line of business of forex dealers in Goa, the average gross profit would be 0.50% of the turnover. The report referred to NP/GP ratio. Simultaneously, Respondent No.3 issued notice under Section 148 on 31.03.2022 for assessment/reassessment of the income of the assessee for the Assessment Year 2018-19.
The assessee contended that for the assessee in challenge to the impugned notice submitted that in the absence of information, the issuance of the impugned order and notice dated 31.03.2022 is illegal and without satisfaction of the jurisdictional requirement. Assuming without admitting that the cash deposits would classify as information under (i) to Explanation 1 to Section 148 of the Act, in the absence of fresh tangible information, the re- opening sought to be carried out is in the nature of change of opinion and/or review. 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 Income Tax Act.
The department contended that the assessee company carries on the business of Forex Dealer and this business activity pertains to buying and selling of foreign currencies. The assessment proceedings under Section 143(3) read with Section 144B of the Act in respect of the petitioner/assessee were completed. The scope of scrutiny which was found at Para 3.1 of the order dated 12.05.2021 reveals suspicious transactions. The report highlighted the transaction carried out by the assessee with M/s Umami Forex and Holidays Pvt. Ltd. The assessee company agreed to the addition of Rs.91,800/- to its return of income as per the show cause notice issued to it. There was no other matter either scrutinised or assessed in the scrutiny assessment.
The court while allowing the petition held that there should be no difficulty for the assessee to produce KYC documents as in any case he will be given full opportunity to establish his case that the assessment proceedings were rightly concluded. Where the statutory authority has not even concluded the proceedings, the writ Court should not interfere at such a premature stage. It is also well settled that at this stage, the test to be applied is as to whether there was reason to believe that the income has escaped assessment and whether the Assessing Officer has sufficient reason for forming that belief. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on the fulfilment of certain preconditions and if the concept of “change of opinion” is removed, then, in the garb of reopening the assessment, review would take place.
Case Title: Sete Mares Global Forex Private Limited v. Union of India
Case No.: Writ Petition No. 194 Of 2022
Date: 28/08/2024
Counsel For Petitioner: Parag Rao
Counsel For Respondent: Amira Razaq
