2010 (10) TMI 92 - HC - Income Tax

Issue shares in accordance with its Memorandum and Articles of Association - Four private limited companies decided to invest in the shares of the petitioner company - assessee-petitioner allotted the shares to these four companies - companies were active as per the records of the Registrar of Companies (ROC) and are assessed to income-tax and have been allotted permanent account numbers by the Income Tax Department - petitioner alleging that he had reason to believe that the income chargeable to tax for the assessment year 2003-04 had escaped assessment within the meaning of Section 147 of the Act - he required the petitioner to file the return for the said assessment year - Held that - companies had bank accounts and payments were made to the assessee company through banking channel - identity of the companies was not disputed - proceedings under Section 147 and issuance of notice under Section 148 of the Act are hereby quashed - Appeal is dismissed

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Whether the initiation of proceedings under Section 147 of the Income Tax Act, 1961, was justified in law.
3. Application of mind by the Assessing Officer in forming the belief that income had escaped assessment.
4. Relevance and application of the Supreme Court decision in CIT v. Lovely Exports (P) Ltd.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 148:
The assessee-petitioner challenged the notice dated 25th March 2010, issued under Section 148 of the Income Tax Act, 1961, for the assessment year 2003-04. The petitioner argued that the reasons recorded for the initiation of proceedings under Section 147 did not disclose the basis for the belief that income chargeable to tax had escaped assessment. The court noted that the notice stated the Assessing Officer had "reason to believe" that income had escaped assessment, but the reasons provided were based on information received from the investigation wing without independent application of mind by the Assessing Officer.

2. Justification of Initiation of Proceedings Under Section 147:
The court examined whether the initiation of proceedings under Section 147 was justified. The Assessing Officer's reasons for issuing the notice included information from the Additional Director of Income Tax (Investigation) that the assessee had received bogus accommodation entries during the financial year 2002-03. The court emphasized that the formation of belief by the Assessing Officer must be based on relevant material and independent application of mind. The court found that the reasons recorded did not show any independent application of mind by the Assessing Officer, thus rendering the initiation of proceedings unjustified.

3. Application of Mind by the Assessing Officer:
The court highlighted the necessity for the Assessing Officer to independently apply his mind to the information received and form a belief that income had escaped assessment. The reasons recorded by the Assessing Officer were found to be mere acceptance of information from the investigation wing without any verification or independent analysis. The court referred to previous judgments, including Hindustan Lever Ltd. v. R.B. Wadkar and Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., which established that the reasons recorded must be clear, unambiguous, and show independent application of mind.

4. Relevance and Application of the Supreme Court Decision in CIT v. Lovely Exports (P) Ltd.:
The court noted that the decision in CIT v. Lovely Exports (P) Ltd. was relevant to the case. In Lovely Exports, the Supreme Court held that if share application money is received from alleged bogus shareholders whose names are provided to the Assessing Officer, the department can proceed against the shareholders but not against the assessee company. The court found that the Assessing Officer in the present case did not consider this principle while rejecting the objections raised by the assessee. The companies involved were active and had bank accounts, and their identities were not disputed. Therefore, the principle laid down in Lovely Exports was applicable, and the initiation of proceedings against the assessee was unwarranted.

Conclusion:
The court quashed the initiation of proceedings under Section 147 and the issuance of notice under Section 148 of the Income Tax Act, 1961, as the reasons recorded did not show independent application of mind by the Assessing Officer, and the principle from Lovely Exports was not considered. The court emphasized that the formation of belief must be based on relevant material and independent analysis, which was lacking in this case.

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