2019 (8) TMI 894 - HC - Income Tax

Reopening of assessment u/s 147 - validity of reasons to believe - original return filed was accepted without any scrutiny - HELD THAT - A plain look at the reasons so assigned would confirm that no tangible material was in possession of the AO which could constitute any reasons which led to a belief that any part of income chargeable to tax had escaped assessment rather it is in search of such tangible material that the proceedings had been reopened. Income Tax Officer fairly mentions in the reasons so supplied that the assessee had not produced certain evidences in support of agricultural income and in absence of which the claim towards agricultural income could not be substantiated. We completely fail to appreciate as to how such admission by the AO regarding absence of material, could lead to a formation of belief that the disclosure was incorrect and chargeable to tax u/s147. In view of the position settled by the Supreme Court in the case of Kelvinator of India 2010 (1) TMI 11 - SUPREME COURT after taking note of the transitory change in Section 147, the legal position as to the prerequisites for such exercise, has not undergone a change and which is that, there had to be tangible material at the disposal of the AO for reopening of such proceedings and which power cannot be exercised for initiating a roving enquiry. There was no tangible material in possession of the AO for formation of belief of escaped income chargeable to tax. In view of the clear fact situation available on the record where such reopening is simply founded on the advisory dated 10.03.2016 issued by the department and where the reasons so present for the formation of belief is not resting on any tangible material, in possession of AO as confirmed from the discussions above, in our opinion, the entire exercise is illegal and dehors the provisions of Section 147/148. Since the entire exercise is held de hors the statutory prescriptions, we do not consider it necessary to express our opinion on the expanded scope of Explanation 3 attached to Section 147 and leave it open for discussion in an appropriate case. - Decided in favour of assessee.

Summary

Issues Involved:
1. Limitation under Section 149 of the Income Tax Act, 1961.
2. Jurisdiction of the Assessing Officer under Section 147 to compel the production of records.
3. Availability of tangible material for reopening the assessment.
4. Scope of Explanation 3 attached to Section 147 regarding disallowance of expenses.

Detailed Analysis:

Issue (a): Limitation under Section 149 of the Act
The court found that the notice issued under Section 148 on 22.03.2018 was within the limitation period prescribed under Section 149, as the returns were originally filed on 30.03.2012. Therefore, the initiation of the proceedings was not barred by limitation.

Issue (b): Jurisdiction to Compel Production of Records
The court noted that the Assessing Officer initiated an enquiry under Section 133(6) requiring the petitioner to furnish various documents related to agricultural income. The court emphasized that the advisory issued by the Principal D.G.I.T. (S), New Delhi, which led to the reopening, did not constitute an information or live link between the materials available and the reasons to believe for reopening the assessment. The court held that the Assessing Officer could not compel the petitioner to produce records in the absence of tangible material, as this power should have been exercised at the stage of the original assessment under Sections 142/143.

Issue (c): Availability of Tangible Material
The court scrutinized the reasons recorded by the Assessing Officer, which indicated that the petitioner had not produced concrete evidence to substantiate the agricultural income. The court concluded that the absence of material evidence could not form the basis for a belief that income had escaped assessment. The court reiterated that tangible material must be present for the formation of such a belief, as established in the Supreme Court judgment in Commissioner of Income Tax versus Kelvinator of India. The court found that the reopening of the assessment was based on a search for tangible material rather than its possession.

Issue (d): Scope of Explanation 3 Attached to Section 147
The court did not find it necessary to express an opinion on the expanded scope of Explanation 3 attached to Section 147, given that the entire exercise of reopening the assessment was held to be illegal and de hors the statutory provisions.

Conclusion:
The court quashed the entire proceedings, including the notice dated 22.03.2018, the final order dated 26.12.2018, and the demand notice issued thereunder. The writ petition was allowed with no order as to costs. The court underscored that the reopening of the assessment was not supported by tangible material and was based on an advisory that did not constitute valid reasons to believe that income had escaped assessment.