2017 (9) TMI 743 - HC - Income Tax

Reopening assessment - validity of notice - Tribunal held that the formation of the belief by the Assessing Officer that income chargeable to tax had escaped assessment was not correct - Held that - The Tribunal went into minutest details of the reasons recorded by the Assessing Officer and relied on the material which had come on record during the assessment and the appellate proceedings to hold that such reasons were not valid. In other words, without so saying, the Tribunal held that the formation of the belief by the Assessing Officer that income chargeable to tax had escaped assessment was not correct. As noted, as the judicial trend suggests that in a case where the return of an assessee is accepted under section 143(1) of the Act without scrutiny, the Assessing Officer of course, subject to the limitation provision contained in the Act, would have a right to reassess the income provided that he forms a belief that income chargeable to tax had escaped assessment. The validity of such formation of belief is of course open to challenge. Nevertheless, in our opinion, it is not permissible to criticize the formation of belief and to declare it as invalid from the inception by carrying out threadbare examination of documents, materials and the evidences which have come on record during the assessment proceedings. It is one thing to hold that a certain addition or disallowance made by the Assessing Officer was impermissible on the basis of materials on record. It is entirely another thing to say that on the assessment of evidence on record the formation of belief by the Assessing Officer that income chargeable to tax had escaped assessment was wrong. In the present case, the Tribunal has evaluated the evidence on record in minutest detail as if each limb of the Assessing Officer s reasons recorded for issuing notice of reopening was in the nature of an addition made in the order of assessment which had either to be upheld or reversed, which was simply impermissible. - order of ITAT set aside. - Decided in favour of revenue

Issues Involved:
1. Validity of the notice for reopening the assessment.
2. Formation of belief by the Assessing Officer regarding income escapement.
3. Evaluation of evidence and materials for reopening the assessment.
4. Application of legal principles in reopening cases where the return was accepted without scrutiny.

Detailed Analysis:

1. Validity of the Notice for Reopening the Assessment:
The High Court examined whether the Income Tax Appellate Tribunal (ITAT) was justified in declaring the process of reopening the assessment invalid. The Tribunal had annulled the reassessment on the grounds that the formation of belief by the Assessing Officer (AO) that income chargeable to tax had escaped assessment was erroneous. The Tribunal noted that the AO's reasons for reopening the assessment lacked a live link between the material relied upon and the alleged income escapement. It emphasized that the AO's reopening reasons cannot be improved upon and must have a cause-effect relationship with the taxable income sought to be reassessed.

2. Formation of Belief by the Assessing Officer Regarding Income Escapement:
The Tribunal observed that the AO's reasons for reopening the assessment were based on mere apprehensions and led to a roving inquiry, which is impermissible. The AO had recorded reasons based on a survey conducted at the assessee's premises, during which incriminating documents were found, and the Director's statement was recorded. The AO believed that the assessee had introduced unaccounted capital through share capital and share premium, leading to the formation of the belief that income chargeable to tax had escaped assessment. However, the Tribunal found that the AO's reasons lacked a direct nexus or live link with the formation of the belief, making the reopening invalid.

3. Evaluation of Evidence and Materials for Reopening the Assessment:
The Tribunal evaluated the evidence on record and found that the AO's reasons for reopening the assessment were not supported by any material indicating unaccounted income invested in the share capital. The Tribunal noted that the AO's reopening reasons were based on the assessee's annual statement and other documents already filed with the return. The Tribunal also observed that the AO's reasons did not survive in light of the remand report and the lower appellate findings, which indicated that the purchasers of the share capital were not related to the assessee's directors. The Tribunal concluded that the AO's reopening reasons failed the test of cause-effect relationship and were based on a mere apprehension.

4. Application of Legal Principles in Reopening Cases Where the Return Was Accepted Without Scrutiny:
The High Court referred to various legal principles and judicial precedents, emphasizing that even in cases where the return was accepted without scrutiny, the AO must have a reason to believe that income chargeable to tax had escaped assessment. The Court noted that the formation of belief must be based on tangible material with a live link to the alleged income escapement. The Court highlighted that the Tribunal's approach in evaluating the evidence and declaring the notice for reopening invalid was not permissible. The Court emphasized that the formation of belief by the AO is a subjective satisfaction based on objective consideration of materials on record, and it is not permissible to declare the notice invalid by carrying out a threadbare examination of documents and materials.

Conclusion:
The High Court allowed the tax appeal, setting aside the Tribunal's judgment and quashing the conclusion that the notice for reopening the assessment was invalid. The Court revived the tax appeal before the Tribunal to be disposed of on merits, dealing with the rest of the contentions of the assessee. The Tribunal's detailed evaluation of evidence and materials for reopening the assessment was found to be impermissible, and the Court emphasized the need for a reasonable belief based on tangible material for reopening assessments.

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