2014 (9) TMI 890 - HC - Income Tax

Validity of notice u/s 148 Reason to believe - Capital gains income had escaped assessment or not - Conversion from lease hold to free hold resulting into short term capital gains or not - Held that - The AO has wide powers to reopen the assessment if he has reasons to believe that the income chargeable to tax has escaped assessment - this wide power is circumscribed and does not give jurisdiction to the AO to reopen a completed assessment on a mere change of opinion - AO recorded that the assessee has sold her property but no capital gains income had been shown in the return of income and, therefore, there was reasons to believe that capital gains income had escaped assessment for the AY 1997-98 - the notice was issued after four years but before six years - the reasons so recorded by the AO was not sufficient to initiate proceedings u/s 148 of the Act relying upon Ganga Saran And Sons Private Limited Versus Income-Tax Officer And Others 1981 (4) TMI 5 - SUPREME Court - no satisfaction has been recorded by the AO in his reasons to believe , that there was omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. Assessee had disclosed fully and truly all material facts necessary for his assessment - The fact that short term capital gains tax is to be paid or long term capital gains tax is to be paid is a different issue and for this purpose, reassessment proceedings, if any, ought to have been drawn within four years which, in the present case had not been done - where a notice is issued after four years the jurisdiction of the AO is conferred where he has reasons to believe that income chargeable to tax has escaped assessment and that such under assessment has occurred by reason of omission or failure on the part of the assessee to make a return of his income or omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment in that year - the conversion of the rights of the lessee in the property from lease hold to free hold was only an improvement of the rights over the property, which the assessee enjoyed and this would not have any effect on the taxibility of capital gains from such property. Since the property was held by the petitioner for more than three years, short term capital gains would not be applicable - The conversion from lease hold to a free hold being an improvement of the title, does not have any effect on the taxibility of profits as short term capital gains the assessee cannot be non-suited on this ground at this stage, especially when the writ petition was entertained in the year 2003, 2007 and 2008 and since affidavits have been exchanged, it would be unfair at this stage to relegate the petitioner to avail an alternative remedy - the notices issued u/s 148 of the Act does not comply with the proviso to Section 147 and 149 of the Act - The reasons recorded does not indicate that the assessee has failed to disclose fully and truly all material facts necessary for his assessment and that the escaped income was likely to be ₹ 1 lac or more - the notices issued u/s 148 of the Act cannot be sustained and are quashed - All proceedings initiated in pursuance of the notices u/s 148 of the Act would be wholly illegal and without jurisdiction and are also quashed Decided in favour of assessee.

Issues Involved:
1. Validity and legality of notices issued under Section 148 of the Income Tax Act for assessment years 1997-98, 2000-01, and 2001-02.
2. Jurisdiction of the Assessing Officer to reopen assessments based on "reasons to believe".
3. Requirement of disclosing fully and truly all material facts necessary for assessment.
4. Time limit for issuance of notice under Section 148 and compliance with Section 149.

Issue-wise Detailed Analysis:

1. Validity and Legality of Notices Issued under Section 148:
The petitioner challenged the notices issued under Section 148 for the assessment years 1997-98, 2000-01, and 2001-02. The notices were issued for reopening assessments on the grounds that income chargeable to tax had escaped assessment. The court examined whether the reasons to believe were based on any fresh material or merely a change of opinion, which is not permissible.

2. Jurisdiction of the Assessing Officer:
The court scrutinized whether the Assessing Officer had jurisdiction to reopen the assessments. It was emphasized that the Assessing Officer must have "reasons to believe" that income had escaped assessment and that such escapement was due to the assessee's failure to disclose fully and truly all material facts. The court reiterated that mere change of opinion does not grant jurisdiction to reopen assessments.

3. Requirement of Disclosing Fully and Truly All Material Facts:
The court examined whether the petitioner had disclosed all material facts necessary for assessment. It was found that the petitioner had disclosed the computation of capital gains tax liability and all relevant material facts. The court held that the Assessing Officer's reasons did not indicate any failure on the part of the petitioner to disclose fully and truly all material facts, which is a sine qua non for initiating proceedings under Section 148 after four years.

4. Time Limit for Issuance of Notice under Section 148 and Compliance with Section 149:
The court analyzed the time limits prescribed under Section 149 for issuing notices under Section 148. It was noted that the notices were issued after four years but before six years. The court emphasized that in such cases, the reasons must state that the escaped income is likely to amount to Rs. 1 lakh or more. The court found that the reasons recorded by the Assessing Officer did not meet this requirement for the assessment years 1997-98 and 2000-01, rendering the notices invalid.

Conclusion:
The court concluded that the notices issued under Section 148 did not comply with the proviso to Section 147 and Section 149. The reasons recorded did not indicate that the petitioner had failed to disclose fully and truly all material facts necessary for assessment, nor did they state that the escaped income was likely to be Rs. 1 lakh or more. Consequently, the notices and all proceedings initiated in pursuance of them were quashed as being wholly illegal and without jurisdiction. All writ petitions were allowed, and parties were directed to bear their own costs.

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