2007 (3) TMI 757 - HC - Income Tax

Summary

Issues Involved:
1. Validity of Notices Issued u/s 148
2. Application of Mind by Assessing Officer (AO)
3. Relevance of Order u/s 132(5)

Summary:

1. Validity of Notices Issued u/s 148:
The Tribunal quashed the notices issued u/s 148 on the grounds that the satisfaction of the Income Tax Officer (ITO) about the escapement of income was vague and not founded on existing material. The notices were issued purely based on the order passed u/s 132(5) without the AO applying his mind to the material before him. The Court emphasized that the AO must record his reasons in writing about his satisfaction related to the escapement of income before issuing notices, and the validity of such notices must be judged in light of the reasons recorded by the AO.

2. Application of Mind by Assessing Officer (AO):
The AO did not refer to any specific material in the reasons recorded by him that could give rise to a clue as to the process by which he could have related any material found during the search to the income escaped from assessment for the assessment year in question. The reasons recorded by the AO remained vague and did not satisfy the test of an honest belief or satisfaction reached by the AO about the escapement of income before issuing the notice. The Court noted that the AO's conclusion was not his own but a borrowed satisfaction held by the Asstt. CIT, Ward-I, Jodhpur while making the order u/s 132(5).

3. Relevance of Order u/s 132(5):
The Court acknowledged that an order u/s 132(5) may contain material relevant for forming the necessary belief before initiating proceedings u/s 148. However, in this case, the order u/s 132(5) was merely an exercise to estimate the total tax liability and retain assets worth that value for the purpose of discharge of such liability as and when it crystallizes into a demand on completion of regular assessment proceedings. The order was not directed to find income from undisclosed sources for each assessment year. The AO did not apply his mind to the facts and circumstances before him and was solely dependent on the conclusion noticed u/s 132(5) for the purpose of retaining assets.

Conclusion:
The Court agreed with the Tribunal that the satisfaction about the escapement of income for the assessment year 1986-87 was founded without any relevant material going into consideration of the AO. The material stated in the reasons recorded by the AO did not connect any existing material which could relate to the assessment year in question having a nexus for the formation of belief by him that income for the assessment year 1986-87 had escaped assessment. The appeal was dismissed.