2023 (9) TMI 988 - HC - Income Tax

Reopening of assessment - reasons to believe - Power of court to investigate reopening - reasons to believe or suspicion - HELD THAT - While the Court cannot investigate into the adequacy or sufficiency of the reasons, which have weighed with the ITO in coming to the belief, the Court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which the AO is required to entertain the belief before he can issue notice u/s 148 - If there is no rational or intelligible nexus between the reasons and the belief, the exercise undertaken by the ITO can be interfered with. The reason recorded only indicates that the officer was only wanting to examine the case of assessees with regard to the deposits, that also on the basis of report which he received from another Investigating Officer. Obviously, in such a case, there is no question of the AO having any basis to reasonably entertain the belief that any part of income of the assessee had escaped assessment. Thus, if more details are sought or some verification or examination is proposed, that cannot be a substitute for the reasons and which led the AO to believe that income chargeable to tax has escaped assessment. In the present case, Respondents do not state that income chargeable to tax has escaped assessment. All that the Revenue desires is to examine certain details pertaining to information that it received from another AO. That is also not founded on the belief that any income, which is chargeable to tax, has escaped assessment and hence, such verification is necessary. That belief is not recorded which alone would enable the AO to proceed. The reasons must be founded on the satisfaction of AO that income chargeable to tax has escaped assessment. Once that is not to be found, then the impugned notice cannot be sustained. The reasons as recorded at the highest, can only be termed as a suspicion subject to a case of fishing inquiry . Even though the Revenue has a greater latitude in re-opening an assessment where the return of income has been processed u/s 143(1) of the Act, even in such cases the re-opening of an assessment can only be done if there is reason to believe that income chargeable to tax has escaped assessment. The reasons which have been recorded, could never lead a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Adequacy and relevance of the "reason to believe" for issuing notice under Section 148.
3. Application of mind by the Assessing Officer (AO) in forming the belief that income has escaped assessment.

Summary:

1. Validity of the reopening of assessment under Section 147 of the Income Tax Act, 1961:

The petitioners challenged the reopening of their assessments for the Assessment Year 2007-2008, arguing that the notices issued under Section 148 were based on inadequate grounds. The court noted that the returns of income were processed under Section 143(1) but no intimation was served on the petitioners. The notices for reopening were issued six days before the expiry of the limitation period, based on a letter from the DCIT indicating cash deposits in the petitioners' bank accounts.

2. Adequacy and relevance of the "reason to believe" for issuing notice under Section 148:

The petitioners contended that the reasons recorded for reopening the assessments were more indicative of suspicion rather than a "reason to believe" that income had escaped assessment. They argued that the AO did not have any tangible material to conclude that there was an escapement of income. The court emphasized that the reasons must have a live link with the formation of the belief and not merely be a cause for suspicion.

3. Application of mind by the Assessing Officer (AO) in forming the belief that income has escaped assessment:

The court found that the AO had not applied his mind independently and had issued the reopening notices based on information from the Deputy Director of Income Tax (Investigation). The court reiterated that the AO must issue the reopening notice based on his own satisfaction and not on borrowed satisfaction. The court observed that the reasons recorded were sketchy and indicative of a fishing inquiry rather than a reasonable belief that income chargeable to tax had escaped assessment.

Conclusion:

The court concluded that the reasons recorded did not disclose any application of mind by the AO and were insufficient to form a belief that income had escaped assessment. The reopening notices dated 25th March 2014 and the consequential orders rejecting the objections were set aside. The petitions were allowed, and the rule was made absolute.