2005 (9) TMI 284 - AT - Income Tax

Assumption of jurisdiction by the ITO to proceed u/s147 - Reason To Believe - escaped assessment - HELD THAT - As has been pointed out by the learned Departmental Representative that it was a mere suspicion in the mind of the AO and so also which appeared in his order the expression reasons to believe as has been held is stronger than the words is satisfied . The reasons recorded are not relevant and could not have bearing on the matters with regard to which he was required to frame the assessment insofar as the order of the AO can be pursued have no nexus to the rationality for the purpose of reason to believe. To put otherwise, the information which formed the basis for the 'reason to believe' for the AO lacked specific, relevant and reliable criteria which material are liable to be rejected only on the ground that they may be reason to escape (suspect) but not reasons to believe as was not considered by the Hon'ble apex Court in the case of Phool Chand Bajrang Lal Anr. vs. ITO Anr. 1993 (7) TMI 1 - SUPREME COURT . It was not the case of the AO that the return indicated possible escapement of income and he was not Sure about it to initiate proceedings u/s 147. When proceedings u/s 147 are initiated, the proceedings are open only qua items of under-assessment. The finality of assessment proceedings on either (other) issues remains undisturbed. It makes no difference whether the assessment proceedings have become final on account of framing of an assessment u/s 143(1) of the Act or on account of non-issue of notice u/s 143(2) of the Act within the stipulated period. Therefore, it was the AO's loud thinking by reasoning his suspicion to verify the very return which enquiry could only be made by him by issuing a notice u/s 143(2) within the stipulated period which in the case of the assessee had already expired. It is not the case of the Revenue that during the course of proceedings u/s 147 it had come across any material relating to the items as mentioned in his reason to believe suggesting escapement of income under any of those heads. We are, therefore, inclined to uphold the order of the learned CIT(A) insofar as he rightly held that the AO had simply wanted to investigate the case and had no information on the basis of which there could be a reason to believe that income had escaped assessment. He, therefore, on the basis of various case laws as relied on, rightly considered that the AO was debarred from holding jurisdiction u/s 147 and, therefore, proceedings thereupon were held to be invalid. He rightly considered the assessee's appeal before him by annulling the order of the AO. No interference therein is called for. In the result, the appeal filed by the Revenue is dismissed.

Issues Involved:
1. Validity of the reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Justification for the increase in turnover and unexplained investments.
3. Adequacy of the reasons recorded by the Assessing Officer (AO) for reopening the assessment.
4. Requirement and sufficiency of material evidence for forming a belief that income has escaped assessment.

Issue-wise Detailed Analysis:

1. Validity of the Reopening of Assessment under Section 147 of the Income Tax Act, 1961:
The Revenue appealed against the CIT(A)'s decision to annul the AO's order under Section 147, arguing that the AO had valid grounds to believe that income had escaped assessment. The AO based this on a significant increase in turnover and unexplained investments. However, the CIT(A) found that the reasons recorded by the AO did not justify the reopening of the assessment, as they were based on suspicion rather than concrete evidence. The Tribunal upheld the CIT(A)'s decision, stating that the AO's reasons lacked a rational connection or relevant bearing on the formation of the belief that income had escaped assessment.

2. Justification for the Increase in Turnover and Unexplained Investments:
The AO noted an abrupt increase in turnover by more than twenty times and unexplained investments in opening a new office in Ahmedabad. The AO argued that these factors indicated potential income escapement. However, the assessee provided detailed explanations and supporting documents, including a tax audit report, balance sheet, and profit & loss account, which were initially accepted under Section 143(1)(a). The Tribunal found that the AO did not have sufficient material to form a belief that the increase in turnover led to income escapement, and the investments were duly recorded in the books of accounts.

3. Adequacy of the Reasons Recorded by the AO for Reopening the Assessment:
The AO's reasons for reopening the assessment included the need to investigate the substantial increase in turnover and investments in the new office. However, the Tribunal noted that mere suspicion or the need for investigation does not constitute "reasons to believe" as required under Section 147. The Tribunal emphasized that the AO's reasons must be based on tangible material and not on mere suspicion or the desire to conduct a general inquiry, which should have been done under Section 143(2) within the stipulated period.

4. Requirement and Sufficiency of Material Evidence for Forming a Belief that Income has Escaped Assessment:
The Tribunal highlighted that for the AO to reopen an assessment, there must be definite and relevant information leading to a reasonable belief of income escapement. The Tribunal found that the AO's reasons lacked specific, relevant, and reliable criteria. The AO's belief was based on suspicion rather than concrete evidence, and there was no direct nexus or live link between the material and the belief of income escapement. The Tribunal cited various judicial precedents, including the Special Bench decision in Raj Kumar Chawla vs. ITO and the Delhi High Court's ruling in United Electrical Co. (P) Ltd. vs. CIT, to support its conclusion that the AO's reasons were insufficient to justify reopening the assessment.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to annul the AO's order under Section 147, concluding that the reopening of the assessment was unjustified and based on suspicion rather than concrete evidence. The Tribunal emphasized the importance of tangible material and a rational connection between the material and the belief of income escapement for validly reopening an assessment under Section 147. The appeal filed by the Revenue was dismissed.

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