Two PANs, one firm: Patna High Court lets reassessment notice on the surrendered number stand

Justices Rajeev Ranjan Prasad and Sunil Dutta Mishra decline to quash a Section 148 notice issued on a duplicate PAN the jeweller had asked to cancel in 2021.

A Patna jewellery firm that holds two permanent account numbers, and applied in January 2021 to give one up, has failed to get a reassessment notice issued on the surrendered number quashed. The firm's case was that the notice was addressed to a non-existent entity. The Department's answer was that the number is still live precisely because the firm went on using it — opening bank accounts and depositing cash under it in two later assessment years — so its application to cancel was never accepted. A Division Bench of Justices Rajeev Ranjan Prasad and Sunil Dutta Mishra held that the sufficiency of the assessing officer's reasons lies in his sole domain, and dismissed the writ petition.

A proprietorship becomes a firm, and gets two numbers

The proprietorship concern of one of the firm's partners was converted into a partnership by a deed executed on 1 March 2020, and the partnership took effect on 1 April 2020 as M/s Ratnalaya Jewellers, with three partners.

Two permanent account numbers were then allotted to it: the first on 21 June 2020, and the second on 3 July 2020. The firm's position is that the first is the correct one and the second was issued in error, and on 27 January 2021 it applied to the Assistant Commissioner of Income Tax for cancellation of the second. It says it has used the first number consistently since.

Under that first number it filed its first return as a partnership firm for assessment year 2021-22, declaring total income of Rs 1,23,64,150 and paying tax of Rs 43,20,528, with an audited set of accounts which it says took in every financial transaction, including a cash deposit of Rs 4.59 crore in an HDFC Bank account whose source was covered by declared sales of Rs 27.78 crore in gold and silver ornaments. That return was accepted under Section 143(1) by an intimation of 10 May 2022, and returns for the two following assessment years were filed on the same number and accepted.

Two inquiries, and a verification report

The Intelligence and Criminal Investigation wing of the Department then began an inquiry under Section 133(6) of the Income-tax Act, 1961, asking the firm to explain cash deposits of Rs 8.33 crore during financial year 2020-21 in an HDFC Bank account. The firm replied that the entire deposit was accounted for in its books and covered by the total sales of Rs 27.78 crore declared in its audited accounts.

A second inquiry followed by a notice of 1 May 2024, about cash deposits in another HDFC account. The firm replied that it had already applied to surrender the duplicate number, that it was regularly using the other one, and that the deposits were disclosed in its balance sheet and return, producing its return, audited accounts and bank details. On the firm's account of what happened next, the Income Tax Officer, after inquiry and verification and after considering those replies, recorded a finding that the cash deposit of Rs 4.59 crore was out of explained sources, namely the sale of gold and silver ornaments worth Rs 27.78 crore, and observed that the verification issues stood explained because the information value had been taken into consideration against the firm's other number.

Notwithstanding that, a notice under Section 148 was issued on 29 March 2025 under the second number, after obtaining the prior approval of the specified authority, alleging that income of Rs 4.59 crore on account of cash deposit in bank had escaped assessment for assessment year 2021-22 within the meaning of Sections 135A, 147 and 148, and requiring a return within ninety days in respect of that number.

A notice on an entity that does not exist?

Senior Counsel Mr Ajay Kumar Rastogi argued for the firm that the notice had been issued upon a non-existent entity. Deactivating or cancelling a number allotted to a non-existent entity is in the exclusive domain of the revenue authorities, and it was the Department's failure to discharge that statutory obligation that produced a notice addressed to something that does not exist. He also argued that the allegation of escapement was contrary to the material on record and bereft of “information” as required by Explanation 1 to Section 148 read with Section 135A, so that the jurisdictional condition for reopening was absent and the assumption of jurisdiction wholly illegal. He relied on Chhugamal Rajpal v. S.P. Chaliha, Commissioner of Income Tax v. Kelvinator of India Ltd., the Bombay High Court's decision in Siemens Financial Services Private Ltd. v. Deputy Commissioner of Income Tax, and the recent Supreme Court decision in Sanand Properties Private Limited v. Joint Commissioner of Income Tax.

The Department's counter affidavit answered on both the facts and the law. On the inquiry, it said that while the firm had replied that the deposits were covered by declared sales, the Final Verification Report uploaded on the Department's assessment system showed Rs 4,59,91,700 as the total income escaping assessment, being the sum of all verification issues. That information was flagged on the Insight Portal for assessment year 2021-22 under the Central Board of Direct Taxes' High-Risk e-Verification Scheme, under clause (i) of Explanation 1 to Section 148, and the notice issued on that basis after approval.

On the number itself, the Department's position was that the surrendered one remains active and operative because the application to cancel it was never accepted — and it was not accepted because the firm had used it not only in its HDFC Bank account but also in an account with IDBI Bank in assessment years 2022-23 and 2023-24, in which it made cash deposits, including through bearer's cheques, of Rs 77,48,832 and Rs 66,23,500 respectively.

The Department also pointed to sub-section (7) of Section 139A, which bars a person already allotted a permanent account number from applying for, obtaining or possessing another. Both numbers had been allotted on the firm's own applications, and the second application had changed the declared source of income from “other sources” to “business” while retaining the status of a firm.

How far a writ court may look

The Bench framed the question as one of the permissible scope of interference with a notice under Section 148, and took the law from two sets of authorities.

The first was on alternative remedy. Following Commissioner of Income Tax v. Chhabil Dass Agarwal, the Bench recorded that while exceptions exist — where the statutory authority has not acted in accordance with the enactment, or in defiance of fundamental principles of judicial procedure, or has invoked repealed provisions, or where an order is passed in total violation of natural justice — the rule in Thansingh Nathmal and Titaghur Paper Mills still holds the field: a High Court will not entertain a petition under Article 226 where an effective alternative remedy is available or where the statute itself contains a mechanism for redressal. The Income-tax Act provides complete machinery for assessment and reassessment, for penalty and for relief against improper orders, and an assessee cannot abandon that machinery, though the Bench noted the qualification that the statutory remedy must be effective and not a mere formality.

The second was on the standard for testing the reopening itself. Drawing on Sanand Properties and, through it, on Phool Chand Bajrang Lal v. Income Tax Officer, the Bench recorded the distinction between acquiring fresh information, specific in nature and reliable in character, which exposes the falsity of a statement made at the original assessment, and merely drawing a fresh inference from the same material already available. Where a transaction is found on subsequent information to be bogus, its mere disclosure at the original assessment is not disclosure of true and full facts, and jurisdiction to reopen exists. Since the belief is the officer's own, the sufficiency of his reasons is not for a court to judge; an assessee may still establish that no belief in fact existed, or that it was not bona fide, or that it rested on vague, irrelevant and non-specific information, and to that limited extent a court may examine whether there was material from which the belief could be formed and whether it had a rational connection or live link to it. One purpose of Section 147, as those authorities put it, is to prevent a party getting away with a wilfully false statement at the original assessment and then saying that the Department's hands are tied because the statement was accepted.

The Bench also noted the proposition from Sanand Properties that the validity of a reopening must be tested solely on the reasons recorded at the time of issuing the notice, and that a document not referred to in those reasons cannot be used to justify it, because the assessee must not be deprived of a fair opportunity to dispute the grounds.

Order

Applying that framework, the Bench held that it could not go into the sufficiency of the reasons, which is in the sole domain of the Income Tax Officer, and that it could not conclude in a writ petition that the belief of the assessing or intelligence officer was not bona fide at all, or that it was based on vague, irrelevant and non-specific information. The limited extent to which a court may examine the officer's conclusion would not permit it to travel beyond that and take a different view.

It recorded one further matter it had already noted: the admitted fact that the firm had not filed its return of income under the second permanent account number. Finding no reason to interfere with the impugned notice, the Bench dismissed the writ petition.