2006 (6) TMI 134 - AT - Income Tax

Income Escaping Assessment - legality and validity of the reassessment proceedings initiated in this case under section 147 of the Income- tax Act, 1961 - disallowance of deductions under section 80-IA. Whether the Assessing Officer was justified in initiating the reassessment proceedings on the basis of evidence and material placed on record? - HELD THAT - The basis for initiating the reassessment proceedings is to be judged solely on the basis of reasons recorded by the Assessing Officer and the material and information referred to by the Assessing Officer in the reasons for initiating such action. It is settled law that Assessing Officer cannot initiate the reassessment proceedings merely on the basis of suspicion or for the purpose of making verification. The Assessing Officer cannot support the reopening of the assessment by collecting the material or by making enquiry subsequently after the date of initiation of the proceedings. Thus, the reopening of the assessment is to be seen on the date when the Assessing Officer initiated action under section 147. In the present case, the material gathered by the Assessing Officer during the course of assessment proceedings or enquiry made by him during the remand proceedings cannot be taken into account for the purpose of deciding the validity of the initiation of the reassessment proceedings. In the present case also, whether the Assessing Officer was justified in initiating reassessment proceedings or not has to be decided on the basis of material and evidence placed on record and the legal position discussed above. The undisputed facts of the case are that the assessee had filed returns for the assessment years 1994-95, 1995-96 and 1996-97 claiming deduction under section 80-IA of the amount mentioned in the preceding paragraphs. Since no objection has been raised by the Revenue on any other ground, it is clear that the claims of the assessee were supported by audit report of the auditors. Further, it is also a fact that the assessee was engaged in the business of manufacture of Laptop computers and the project was approved by the Ministry of Industries, Government of India, State Excise Deptt., Sales-tax Deptt. and assessee had also obtained loan from State Bank of India - Admittedly, in this case, the Assessing Officer did not issue notices under section 143(2) for any of the assessment years. In other words, there were no proceedings pending in this case. Now the Assessing Officer initiated the proceedings under section 148 by recording identical reasons for all the three assessment years. It would be in the fitness of things to reproduce herein the reasons recorded by the Assessing Officer for the assessment year 1994-95 which are same as for the subsequent assessment years also. It is relevant to mention that even for selection of a case under scrutiny, the Assessing Officer is required to obtain approval of the higher authorities. Therefore, the provisions of section 147 cannot be resorted to by the Assessing Officer with a view to circumvent the legal requirement/procedure more so when there is no such material to warrant initiation of reassessment proceedings. The conditions necessary for initiating reassessment proceedings are that there must be a direct nexus between the information and material becoming available to the Assessing Officer which enables him to form a 'reason to believe' that income chargeable to tax had escaped assessments. In the present case, the material placed on record does not show any nexus between the statements and the formation of belief by the Assessing Officer that income chargeable to tax had escaped assessment. The Assessing Officer cannot initiate the reassessment proceedings on the basis of suspicion, vague or unspecific information. It is trite law that where the Assessing Officer had no specific basis for his belief that income chargeable to tax had escaped assessment, the reassessment proceedings initiated by the Assessing Officer simply for the purpose of making further verification of the claim of the assessee would be without jurisdiction, illegal and invalid. If the Assessing Officer wanted to verify such claim, he could have done so by issue of notices under section 143(2) within the period prescribed under the Act. The machinery of reassessment proceedings could not be resorted to, for covering the legal lacuna/procedure or even for patch up work by the Assessing Officer. In the present case, we are of the considered opinion that there was no information/material available with the Assessing Officer for entertaining a belief that income chargeable to tax had escaped assessment. The Ld. CIT(A) was not justified in sustaining the action of the Assessing Officer for initiating the reassessment proceedings, which were illegal and void ab initio. Accordingly, we quash the reassessments completed by the Assessing Officer under section 143(3) read with section 147 and consequent order of the CIT(A) for all the assessment years - The appeals of the assessee are allowed.

Summary

Issues Involved:
1. Legality and validity of the reassessment proceedings initiated under section 147 of the Income-tax Act, 1961.
2. Whether the Assessing Officer (AO) was justified in disallowing the claim for deductions under section 80-IA.

Detailed Analysis:

1. Legality and Validity of the Reassessment Proceedings:

The primary issue revolves around the legality of the reassessment proceedings initiated under section 147 of the Income-tax Act, 1961. The assessee argued that the AO initiated reassessment proceedings without any substantial material and based merely on suspicion and hearsay. The AO initiated the reassessment on the grounds that no business activities were being carried out at the given address, thus leading to the belief that the income chargeable to tax had escaped assessment.

The Tribunal examined the reasons recorded by the AO for initiating reassessment proceedings. It was noted that the AO's reasons lacked specificity, such as the dates of visits, the names of persons whose statements were recorded, and the sections under which these statements were recorded. The Tribunal emphasized that the expression "reason to believe" is stronger than "reason to suspect" and requires a higher level of evidence and material. The Tribunal referred to several judgments, including ITO v. Lakhmani Mewal Das and Ganga Saran & Sons (P.) Ltd. v. ITO, which highlighted that the reasons for the formation of belief must have a rational connection with the material coming to the notice of the AO.

The Tribunal found that the AO's reasons were vague and unspecific, and there was no direct nexus between the material gathered and the belief that income had escaped assessment. The Tribunal concluded that the reassessment proceedings were initiated merely for verification purposes, which is not permissible under the law. Therefore, the reassessment proceedings were deemed illegal, invalid, and void ab initio.

2. Disallowance of Claim for Deductions under Section 80-IA:

The second issue pertains to the disallowance of the assessee's claim for deductions under section 80-IA. The AO disallowed the deductions on the grounds that no business activities were being carried out at the given address, thus rendering the claim for deductions invalid.

The Tribunal noted that the assessee had provided substantial evidence to support the claim for deductions, including approvals from the Ministry of Industries, Government of India, and regular inspections by Customs & Central Excise officials. The assessee also furnished proof of import of raw materials and export of finished goods from Jammu. The Tribunal found that the AO failed to establish that the assessee had not carried out any manufacturing activities at the said premises.

Given that the reassessment proceedings were quashed, the Tribunal did not find it necessary to record detailed findings on the merits of the disallowance of deductions under section 80-IA. The Tribunal allowed the appeals of the assessee, thereby overturning the disallowance of deductions.

Conclusion:

The Tribunal quashed the reassessment proceedings initiated by the AO under section 147, deeming them illegal, invalid, and void ab initio. Consequently, the disallowance of the assessee's claim for deductions under section 80-IA was also overturned, and the appeals of the assessee were allowed.