2015 (2) TMI 1360 - AT - Income Tax

Reopening of assessment u/s 147 - validity of notice issued u/s 148 - reason to believe or reason to suspect - suppression of sales - As per AO sale found by the Excise Department to have been suppressed for levy of excise duty has escaped assessment under the Income Tax Act - whether the reasons as recorded in the instant case was a valid reason for forming a belief of escapement of income tax of the income, which is otherwise assessable to income-tax? - HELD THAT - AO conclusion that the show cause notice issued by the Excise Department is foolproof and substantial material evidence of suppression of sales is contrary to the decision of Futura Ceramics Pvt. Ltd. 2012 (12) TMI 955 - GUJARAT HIGH COURT wherein held that Merely because the Excise Department issued a show cause notice, that cannot be a ground to presume and conclude that there was evasion of excise duty implying thereby that there was also evasion of tax under the VAT Act. Show cause notice issued by the Excise Department contains the allegation of the Excise Department that the assessee has suppressed sales for the purpose of making payment of excise duty. A perusal of recorded reasons does not show that the AO verified the particulars declared by the assessee in its income-tax return. Nowhere in the recorded reasons, the sale declared by the assessee in its income-tax return, has been brought on record. Information contained in the show cause notice of the Excise Department can be reason to suspect by the AO, but without verifying the relevant particulars declared in the income-tax return, it cannot be reason to believe about the escapement of taxable income under the Income Tax Act. Reopening of the assessment based on the above recorded reasons, is bad in law and cannot be sustained - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income Tax Act.
2. Reliance on show cause notice by the Central Excise Department for reopening the assessment.
3. Verification of particulars declared in the income-tax return by the Assessing Officer (AO).

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment by the AO, arguing that it was based on insufficient tangible material and that there was no failure on the part of the assessee to disclose necessary facts. The tribunal noted that the validity of a notice issued under section 148 must be judged solely on the reasons recorded by the AO under section 148(2). It is established law that the AO must form a bona fide belief based on specific, definite, relevant, and reliable material. The belief must be real and not arbitrary or irrational, indicating that taxable income has escaped assessment.

2. Reliance on Show Cause Notice by the Central Excise Department:
The AO based the reopening on a show cause notice from the Central Excise Department, which alleged suppression of sales by the assessee. The tribunal found that the AO concluded that the show cause notice was foolproof and contained substantial material evidence of sales suppression. However, the tribunal cited a jurisdictional High Court decision stating that a show cause notice alone cannot be a ground to presume tax evasion under the VAT Act, and the same principle applies to income tax. The tribunal emphasized that the AO should not rely solely on the show cause notice without further verification.

3. Verification of Particulars Declared in the Income-Tax Return:
The tribunal observed that the AO did not verify the particulars declared by the assessee in its income-tax return against the alleged suppressed sales. The recorded reasons did not show any comparison between the declared sales and the alleged suppressed sales. The tribunal held that without such verification, the information in the show cause notice could only be a reason to suspect, not a reason to believe in the escapement of taxable income.

Conclusion:
The tribunal concluded that the reopening of the assessment was invalid as it was based solely on the show cause notice without independent verification by the AO. Consequently, the reassessment orders for the assessment years 2004-05, 2005-06, 2006-07, and 2007-08 were canceled. The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed as infructuous.

Order Pronouncement:
The order was pronounced on February 27, 2015, at Ahmedabad, allowing the assessee's appeals and dismissing the Revenue's appeals.