Reassessment based solely on Shah Commission report held invalid by Bombay High Court (Goa bench)

Background of the writ petitions

The Bombay High Court at Goa dealt with a batch of writ petitions filed by several assessees engaged in trading and exporting iron ore, some of whom were also carrying out mining and processing activities. All petitions challenged notices issued under Section 148 of the Income Tax Act 1961, seeking to reopen completed assessments on the strength of findings contained in the third report of the Commission of Inquiry headed by Mr. Justice M.B. Shah (Retd.) under the Commission of Inquiry Act 1952.

The Shah Commission was set up by the Government of India to examine alleged illegal mining, transportation and export of iron ore and manganese ore in various States, including Goa. In its third report, the Commission adverted, amongst other things, to alleged under-invoicing of export contracts by various lessees and traders.

The High Court treated Writ Petition No.329 of 2015 as the lead matter, because it encompassed all major issues common to the group:

  • Reopening after four years from the end of the relevant assessment year
  • Reopening within four years
  • Allegations of under-pricing of exports (under-invoicing)
  • Allegation that mining operations were illegal and resulting income should be assessed as “income from other sources” instead of business income

Facts in the lead case

The petitioner in the lead writ petition, Sesa Sterlite Limited (Formerly known as Sesa Goa Limited), was a mining concessionaire/lessee and was engaged in mining, production and export/trading of iron ore.

  • For Assessment Year 2008-09, the assessee filed a return declaring total income of 463,09,28,770.00.
  • The case was picked up for scrutiny under Section 143(2), and the assessee supplied detailed information on exports, including quantity, quality, buyer details and destination countries.
  • Assessment under Section 143(3) determined total income at 478,49,83,060.00.
  • The assessee challenged the assessment before the CIT(A), and then before the ITAT, obtaining partial relief by order dated 31/10/2014.

Meanwhile, the Shah Commission carried out its inquiry, visited Goa, collected data from State authorities and submitted three reports. The first two reports were considered by the Supreme Court in the Goa Foundation proceedings under Article 32, where the Court concluded that deemed mining leases in Goa had expired and that mining operations after 22/11/2007 were illegal. The Union of India and State of Goa, however, had assured the Supreme Court that no action would be taken against lessees merely on the basis of the Commission’s findings, without independent assessment and opportunity of hearing.

The third Shah Commission report later referred specifically to alleged under-invoicing and illegal exports by individual lessees and traders. Relying on this third report, the Assessing Officer issued a notice under Section 148 to reopen the assessment for AY 2008-09.

Reasons recorded for reopening

The Assessing Officer’s recorded reasons broadly rested on three propositions:

  1. Alleged under-invoicing of exports

    • The third Shah Commission report was stated to have shown that, for the same period and same grade (FE content), the assessee’s export prices were lower than “market prices”, implying under-invoicing.
    • A tabular comparison extracted from the Commission’s report was incorporated to quantify alleged under-invoicing.

  2. Income from alleged illegal mining to be taxed as “other sources”

    • Referring to the Supreme Court judgment in the Goa Foundation matter, which treated mining after 22/11/2007 as illegal, the Assessing Officer asserted that income for FY 2007-08 could not be treated as legitimate business income and should be assessed under the head “income from other sources”.

  3. Failure to disclose fully and truly all material facts

    • It was alleged that the assessee had not disclosed that its exports were under-invoiced and that it continued to mine on an expired deemed lease.
    • The Assessing Officer concluded that income of 116,75,46,110.00 had escaped assessment, calculated as the sum of the alleged under-invoicing for the relevant year based on the Shah Commission comparison.

Assessee’s objections before the Assessing Officer

The assessee challenged the reopening at the stage of objections, contending inter alia: