2008 (2) TMI 210 - HC - Income Tax

Challenge to order of settlement commission reopening of assessment of assessee on basis of observation of settlement commission (in settlement proceedings relating to party with whom assessee had transactions) observations by settlement commission were adverse to assessee in those proceedings assessee is not allowed to challenge those settlement proceedings but those observations would not automatically bind the assessee because those observations are not conclusive proof

Summary

Issues:
Challenge to order of Settlement Commission dated 28.10.2002 regarding reopening of assessment for assessment years 1995-96 and 1996-97 under Section 147 of the Income-tax Act, 1961.

Analysis:

1. The appellant challenged the order of the Settlement Commission dated 28.10.2002, which led to the issuance of notices under Section 148 of the Act for reopening the assessment for the mentioned assessment years. The appellant argued that the observations made by the Settlement Commission should not be binding on them as they were not a party to the proceedings involving another entity, MAL.

2. The Settlement Commission's order revealed that MAL and the appellant had a business arrangement where profits from imported items were to be shared. Despite profits shown in MAL's accounts, the appellant did not disclose their share in their own accounts. This discrepancy led to the reopening of the assessment by the Assessing Officer.

3. The High Court emphasized the importance of specific, relevant, and reliable information for a valid reason to believe in reopening assessments. It cited legal precedents to highlight that the material forming the basis for reopening should have a rational connection to the reason to believe, not merely a reason to suspect.

4. The court referred to a previous judgment involving a Division Bench that stressed the necessity of a live link between the material discovered and the belief in income escapement. It cautioned against arbitrary exercise of power under Section 147 of the Income Tax Act, emphasizing the need for definite, specific, relevant, and reliable materials.

5. The court concluded that while the Settlement Commission's observations could serve as a reason for reopening the appellant's assessment, they were not conclusive proof. The appellant was granted the liberty to submit objections to the reopening notices and the observations made against them. The Assessing Officer was directed to consider these objections independently and not be influenced by the Settlement Commissioner's observations.

6. The judgment clarified that the Settlement Commission's observations were binding only on MAL, not the appellant. Therefore, the appellant had the right to challenge the reopening based on those observations and present their objections for the Assessing Officer's consideration. The court upheld the appellant's right to a fair hearing in the assessment process.