2016 (9) TMI 1528 - HC - Income Tax

Re-asessment u/s 148 - change of opinion - eligibility of reason to believe - HELD THAT - The standard of reason exercised by Assessing Authority is laid down as that of an honest and prudent person who would act on reasonable grounds and come to a cogent conclusion. The necessary sequitur is that a mere change of opinion while perusing the same material, cannot be a reason to believe that a case of escaped assessment exists requiring assessment proceedings to be reopened. If a conscious application of mind is made to the relevant facts and material available or existing at the relevant point of time while making assessment, and again a different or divergent view is reached, it would tantamount to change of opinion . If an Assessing Authority forms an opinion during original assessment proceedings on the basis of material facts and subsequently finds it to be erroneous; it is not a valid reason under the law for reassessment. Thus, reason to believe cannot be said to be the subjective satisfaction of Assessing Authority but means an objective view on the disclosed information in the particular case and must be based on firm and concrete facts that some income has escaped assessment. In case of there being a change of opinion, there must necessarily be a nexus that requires to be established between change of opinion and the material present before Assessing Authority. Discovery of an inadvertent mistake or non-application of mind during assessment would not be a justified ground to re-initiate proceedings on the basis of change in subjective opinion. When we go through the reasons assigned in the notice dated 31.3.2015, we find that Assessing Authority has failed to decide the objections raised by petitioner in accordance with law. The authorities had already assessed and passed final order for the said assessment year. All the material was before the authorities, no rational is disclosed in the order passed by Assessing Authority regarding escapement of income which was already assessed. We find that return to the tune for a total income of ₹ 4,47,70,070/- and ₹ 5,42,80,400/- were filed for A.Y. 2011-12 and A.Y. 2012-13 respectively. Assessment with respect to A.Y. 2011-12 was subsequently rectified for a mistake in conclusion of depreciation. For A.Y. 2012-13 assessment was completed under Section 143(3) vide order dated 9.12.2014. In its objection to the notice under Section 148 of Act, 1961, petitioner has denied entering into any transaction with any of the persons mentioned in the notice or on whom said was carried. The reason given by Assessing Officer has merely recorded a reason to suspect that certain transactions have escaped assessment. There is no material on record to show nor any material could be pointed out by Revenue so as to justify re-assessment proceedings under Section 148 of Act, 1961. We are satisfied that the so called reasons mentioned by authority concerned, for all Assessment Years in question, for justifying re-assessment proceedings under Section 147/148 of Act 1961, are illegal, showing non application of mind and an arbitrary exercise on the part of authority concerned. The writ petitions are allowed to the extent of notices issued by authority concerned under Section 148 and orders rejecting objection filed by petitioner against re-assessment under Section 147/148 of Act 1961, are hereby quashed.

Summary

Issues Involved:
1. Legality of the notices issued under Section 148 of the Income Tax Act, 1961.
2. Validity of the re-assessment proceedings initiated under Section 147 of the Income Tax Act, 1961.
3. Examination of "reason to believe" for income escaping assessment.
4. Adequacy of the material for re-assessment proceedings.
5. Non-application of mind by the Assessing Authority.

Issue-wise Detailed Analysis:

1. Legality of the Notices Issued under Section 148 of the Income Tax Act, 1961:
The writ petition challenges the notices dated 31.3.2015 and the subsequent order dated 21.8.2015, which proposed re-assessment under Section 148 of the Income Tax Act, 1961 for the Assessment Years 2011-12 and 2012-13. The petitioner argued that all transactions for the relevant assessment years were disclosed, and regular assessments were made. The Assessing Officer issued a notice under Section 148, and the petitioner requested that the previously filed returns be considered in compliance with these notices.

2. Validity of the Re-assessment Proceedings Initiated under Section 147 of the Income Tax Act, 1961:
The respondents contended that the re-assessment proceedings were based on material discovered during search and seizure operations involving other entities, which indicated that the petitioner had received accommodation entries in the form of bogus purchases. The respondents argued that there was a reason to believe that income had escaped assessment, justifying the initiation of re-assessment proceedings under Section 147.

3. Examination of "Reason to Believe" for Income Escaping Assessment:
The court reviewed the statutory provisions and relevant case law, emphasizing that the Assessing Officer must have "reason to believe" that income chargeable to tax has escaped assessment. This belief must be based on tangible material and not mere suspicion. The court cited several precedents, including Calcutta Discount Co. Ltd. vs. Income-Tax Officer and Ganga Saran & Sons P. Ltd vs. Income Tax Officer, to highlight that the belief must be reasonable, relevant, and material.

4. Adequacy of the Material for Re-assessment Proceedings:
The court found that the Assessing Authority failed to decide the petitioner's objections in accordance with the law. The reasons recorded for issuing the notice under Section 148 did not disclose any rational basis for believing that income had escaped assessment. The court noted that the material before the authorities did not justify the re-assessment proceedings, and the reasons provided were inadequate and based on mere suspicion.

5. Non-application of Mind by the Assessing Authority:
The court observed that the Assessing Authority exhibited a clear non-application of mind. The rejection of the petitioner's objections was based on an erroneous assumption of a search and seizure operation, which did not occur in the petitioner's case. This demonstrated that the competent authority did not thoroughly review the relevant records or apply its mind before passing the order.

Conclusion:
The court concluded that the reasons provided by the Assessing Authority for initiating re-assessment proceedings under Sections 147/148 were illegal, arbitrary, and showed non-application of mind. Consequently, the writ petitions were allowed, and the impugned notices dated 31.3.2015 and the subsequent orders were quashed. The court set aside the re-assessment proceedings, highlighting the importance of a rational and bona fide belief based on tangible material for initiating such proceedings.