2011 (3) TMI 1576 - HC - Income Tax

Reopening of Assessment u/s 147 - Notice u/s 148 - Reason to Believe - Time limit for Issuance of Notice u/s 149 - After a period of about six years of asseement of return of income, the impugned notice has been issued along with brief reasons for reopening the assessment - Petitioner objected the reopening of Assessment and requested for a copy of the reasons recorded for such reopening - AO threatened the petitioner with penal proceedings u/s 272A(i)(c) - Petition was filed u/s 226, In response to the petition, an affidavit-in-reply has been filed by AO who had recorded the reasons and initiated the proceedings u/s 147 HELD THAT - Reasons Recorded by AO - There is nothing whatsoever to indicate as to which is the income that has not been disclosed by the petitioner or that any income chargeable to tax has in fact escaped assessment. The entire tenor of the reasons recorded indicates that on the basis of some unsubstantiated and vague information. Since the reasons recorded do not reflect the requisite belief that income chargeable to tax has escaped assessment, the basic requirements of sec147 have not been satisfied. In the case of SHANKARLAL NAGJI CO. VERSUS INCOME TAX OFFICER 2009 (2) TMI 70 - GUJARAT HIGH COURT , it was held that a completed assessment cannot be reopened merely to make inquiries. From the reasons recorded it is apparent that the AO has reopened the assessment merely to make inquiries. In the facts of the present case, it is not the case of the AO that any income chargeable to tax has escaped assessment. The case of the AO is that in case the petitioner is a defaulter, under the provisions of the Act. Even if the petitioner were liable to pay penalty, the same would not give rise to a conclusion that income has escaped assessment. Reason to Believe - In CHHUGAMAL RAJPAL VERSUS SP CHALIHA AND OTHERS 1971 (1) TMI 9 - SUPREME COURT , the SC held that Before issuing a notice u/s 148, the ITO must have either reason to believe that by reason of the omission or failure on the part of the assessee to make a return u/s 139 for any assessment year to the ITO 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. It is apparent that the AO did not have any material before him so as to satisfy the requirements of sec. 147. The reasons recorded reflect that the AO feels that the matter requires detailed investigation and further verification. Thus, it appears that the AO has reason to suspect and not reason to believe that income chargeable to tax has escaped assessment. The reason to believe that income chargeable to tax has escaped assessment must be based upon material on record. In the facts of the present case, there is no such material. In the circumstances, in the absence of basic requirements of sec. 147 being satisfied, the assumption of jurisdiction by the AO is invalid and as such, the impugned notice u/s 148 cannot be sustained. Reopening of Assessment beyond limitation period - In the light of sec. 149(1)(b), while reopening the assessment is beyond a period of four years from the end of the relevant AY, since there is a statutory bar against reopening the assessment in case where the amount of income escaping assessment does not amount to rupees one lakh or more, the AO is also required to record a finding to that effect. In the present case, no such finding has been recorded. Except for a bare averment in the affidavit-in-reply wherein it is stated that the income which has escaped assessment is more than rupees one lakh, there is no material on record to indicate the extent of income which has escaped assessment. In fact, as observed hereinabove, there is nothing to indicate that the AO has reason to believe that any income whatsoever has escaped assessment

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Validity of the reasons recorded for reopening the assessment.
3. Compliance with the procedural requirements under Sections 147 and 148 of the Act.
4. Whether the income escaping assessment amounts to or is likely to amount to one lakh rupees or more.
5. Whether the reopening of assessment was initiated for making roving and fishing inquiries.

Detailed Analysis:

1. Legality of the Notice Issued Under Section 148:
The petitioner challenged the notice dated 25th March 2010 issued under Section 148 of the IT Act, 1961, which sought to reopen the assessment for the assessment year 2003-04. The petitioner contended that the notice was issued without proper reasons and was thus invalid. The court noted that the reasons for reopening must be recorded in writing before the issuance of the notice, and the sufficiency of these reasons is not for the court to judge. However, it is open to the assessee to establish that no belief existed or that the belief was not bona fide or based on vague, irrelevant, and non-specific information.

2. Validity of the Reasons Recorded for Reopening the Assessment:
The court examined the reasons recorded by the Assessing Officer (AO) and found multiple grounds for reopening the assessment. However, upon scrutiny, it was evident that the AO was uncertain about the nature of transactions and stated that detailed investigation was required. The court emphasized that the AO must have a reason to believe that income chargeable to tax has escaped assessment, which should be based on tangible material. The reasons recorded were found to be vague and based on unsubstantiated information, leading the court to conclude that the reopening was initiated for making roving and fishing inquiries, which is not permissible in law.

3. Compliance with Procedural Requirements Under Sections 147 and 148:
The court highlighted that for invoking Section 147, the formation of the requisite belief must precede the initiation of proceedings. The AO is required to record reasons for the formation of belief that income chargeable to tax has escaped assessment. In this case, the reasons recorded did not reflect such a belief. The court noted that the AO's reasons indicated a need for detailed investigation rather than a belief that income had escaped assessment, which is insufficient for invoking Section 147.

4. Whether the Income Escaping Assessment Amounts to or is Likely to Amount to One Lakh Rupees or More:
The petitioner argued that the notice was issued beyond a period of four years from the end of the relevant assessment year, and as per Section 149(1)(b), the income escaping assessment must amount to or be likely to amount to one lakh rupees or more. The court found that the reasons recorded did not indicate that the income escaping assessment was more than one lakh rupees. The absence of such a finding rendered the assumption of jurisdiction under Section 147 invalid.

5. Whether the Reopening of Assessment was Initiated for Making Roving and Fishing Inquiries:
The court observed that the AO's reasons for reopening the assessment were based on vague and unsubstantiated information, leading to the conclusion that the reopening was for the purpose of making roving and fishing inquiries. The court reiterated that a completed assessment cannot be reopened merely to make inquiries, as this falls within the domain of regular assessment.

Conclusion:
The court quashed and set aside the impugned notice dated 25th March 2010 issued under Section 148 of the Act, as well as the notice dated 16th June 2010 issued under Section 143(2) of the Act, and all proceedings taken pursuant thereto. The court ruled that the initiation of proceedings under Section 147 was invalid due to the lack of a bona fide belief that income chargeable to tax had escaped assessment and the failure to comply with procedural requirements. The petition was allowed with no order as to costs.

← Previous Next →