2018 (1) TMI 942 - HC - Income Tax

Reopening of assessment - reasons to believe - Held that - Findings of the Assessing Officer must be honest and cogent, based upon some material available on record, to support the prima facie finding and not predicated on mere assumption and guess work. A complaint or information may merit examination and consideration, but every complaint does not merit reopening or proceeding under sections 147/148 of the Act. The Assessing Officer must examine and ascertain whether or not allegation made are mere guess work, surmise and rumour, or has some basis to make it the basis for detailed final determination. AO has merely observed and recorded that the objections raised by the assessee were untenable and wrong, without elucidating and dealing with the contentions and issues raised in the objection letter dated 10th June, 2015. The Assessing Officer has not applied his mind to the assertions and contentions raised by the petitioner and the core issue to be examined and considered. We set aside the order dated 11th September, 2015 with a direction of remand to the Assessing Officer to pass a fresh order after hearing the petitioner or its authorised representative, without being influenced by the earlier order dated 11th September,2015 or by this order. We have not formed any firm opinion on merits.

Issues Involved:
1. Legitimacy of initiation of proceedings under Section 147/148 of the Income Tax Act, 1961.
2. Validity of the reasons to believe income had escaped assessment.
3. Adequacy of the Assessing Officer's response to the petitioner’s objections.

Detailed Analysis:

1. Legitimacy of initiation of proceedings under Section 147/148 of the Income Tax Act, 1961:

The petitioner, Scan Holding (P) Ltd., challenged the initiation of proceedings under Section 147 read with 148 of the Income Tax Act, 1961, for the Assessment Year (AY) 2008-09. The original return filed by the petitioner was processed under Section 143(1) without scrutiny assessment, indicating no change of opinion. The initiation of proceedings was based on a complaint alleging money laundering and other discrepancies. The court emphasized that the initiation of proceedings requires "reasons to believe" that income has escaped assessment, distinguishing it from "reasons to suspect."

2. Validity of the reasons to believe income had escaped assessment:

The reasons to believe included several allegations:
- Commission on Sales: The company allegedly received commissions from Ball Corporation, which were claimed to be sham transactions aimed at money laundering.
- Investment in Joint Venture: The company invested ?2,65,734/- in a joint venture in Singapore without showing any income from it.
- Escapement of Income u/s 14A read with Rule 8D: The company showed exempt dividend income without disclosing the expenditure incurred to earn it.
- Bogus and Personal Expenses: Allegations of claiming personal expenses as business expenses.
- Foreign Travelling Expenditure: Substantial foreign travel expenses were claimed without clear business purposes.
- Rent to Director: Rent paid to directors without proper agreements.
- Depreciation on Office: Depreciation claimed on entire consideration including land cost.

The petitioner filed detailed objections, arguing that the allegations were based on assumptions, lacked verification, and were motivated by a former auditor's complaint. The court noted that the Assessing Officer must form an honest belief based on definite information, not mere suspicion or gossip. The court cited precedents emphasizing the need for reasonable grounds and honest belief for reopening assessments.

3. Adequacy of the Assessing Officer's response to the petitioner’s objections:

The Assessing Officer rejected the petitioner’s objections in a cursory manner, without much examination or elucidation. The court found the order to be mechanical, noting that the Assessing Officer did not adequately address the petitioner’s detailed objections. The court emphasized the need for a speaking order that deals with the contentions and issues raised by the petitioner.

Conclusion:

The court set aside the Assessing Officer's order dated 11th September 2015 and remanded the matter for a fresh order after hearing the petitioner. The court directed the Assessing Officer to pass a reasoned and speaking order, considering the petitioner’s objections comprehensively. The court clarified that it had not formed any firm opinion on the merits of the case. The petitioner was directed to visit the Assessing Officer’s office on 31st January 2018 for further proceedings. The writ petition was disposed of without any order as to costs.

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