2007 (4) TMI 258 - HC - Income Tax

Re assessment rectification - reason to believe notice - Apparently a completed assessment was reopened under section 147(b) read with section 148 of the Income-tax Act, 1961. The reopening was upheld by the Tribunal by the order dated January 25, 1985. Subsequently, an application for rectification under section 254 of the Act was moved by the assessee while allowing the rectification application, tribunal vacated the assessment u/s 147(b) held that - Apparently, the order of the Tribunal suggests now that there was nothing in the recorded reasons to believe to warrant the inference that the reason to believe was based upon the objections in the audit report. Thus, there was an error apparent on the record in the order dated January 25, 1985 - It is settled that errors apparent on the record can be rectified under section 254. - Appellate Tribunal was correct in holding that the Income-tax Officer had no material in his possession when he had issued the notice under section 148 for reopening the assessment

Issues:
Reopening of completed assessment under section 147(b) read with section 148 of the Income-tax Act, 1961 based on reasons recorded by the Income-tax Officer. Rectification application under section 254 of the Act filed by the assessee challenging the reopening. Tribunal's decision to recall the order dated January 25, 1985, and the correctness of the Income-tax Officer's "reason to believe" for reopening the assessment.

The judgment deals with the reopening of a completed assessment under section 147(b) read with section 148 of the Income-tax Act, 1961. The Tribunal initially upheld the reopening but later, upon an application for rectification under section 254 of the Act by the assessee, found that the reasons recorded by the Income-tax Officer for reopening the assessment were insufficient. The Tribunal noted that the Income-tax Officer did not specify the information in his possession showing income chargeable to tax had escaped assessment, rendering the reopening legally flawed. Consequently, the Tribunal vacated its earlier order upholding the reopening.

Two questions were referred by the Tribunal for consideration. The first question was whether the Appellate Tribunal was justified in recalling the order dated January 25, 1985. The second question pertained to the correctness of the Income-tax Officer's possession of material when issuing the notice under section 148 for reopening the assessment. The Tribunal found in favor of the assessee on both questions, affirming that the Income-tax Officer lacked sufficient material in his possession to justify the reopening of the assessment.

The Tribunal's earlier order had relied on a discrepancy highlighted in an audit report as the basis for the "reason to believe" for reopening the assessment. However, it is established that an audit report, unless an opinion on a legal matter, can serve as the foundation for forming the "reason to believe." The judgment emphasized that the "reason to believe" must be recorded by the Assessing Officer before proceeding with the reassessment, even if not communicated to the assessee.

The judgment highlighted the importance of the recorded "reasons to believe" aligning with the basis for reopening the assessment. It was noted that errors apparent on the record can be rectified under section 254 of the Act. The case law cited further supported the Tribunal's decision to recall the order dated January 25, 1985, based on the lack of sufficient material in the Income-tax Officer's possession to justify the reopening under section 147(b) of the Income-tax Act, 1961.

In conclusion, the Tribunal's decision to recall the order upholding the reopening of the assessment was deemed justified, and it was affirmed that the Income-tax Officer did not possess the requisite material to support the reopening under section 148. The judgment underscored the necessity for the "reason to believe" to be adequately substantiated and recorded before initiating proceedings to reassess the income chargeable to tax.

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