2024 (4) TMI 711 - HC - Income Tax

Validity of Reopening of assessment - tangible material as may ever give rise to a reason to believe - Justice M.B. Shah Commission submitted its Report and only suggested possibility of under invoicing of Iron Ore extracted from mines and exported from the State of Goa - HELD THAT - Undisputed between the parties that the present re-assessment proceeding has arisen under the unamended law i.e. the law that was in force upto 31.03.2021. Under the law as it then existed, no re-assessment proceedings could ever be initiated except against a valid reason to believe recorded by the assessing authority. Second, even in a no assessment case, re-assessment could rise only after such reason to believe had been recorded in writing before issuance of notice u/s 148. Thus, recording of reasons to believe in writing was a sine qua non for valid assumption of jurisdiction to re-assess an assesse. As to what amounts to a reason to believe, the law has remained settled over long decades. In S Ganga Saran and Sons (P) Ltd. 1981 (4) TMI 5 - SUPREME COURT in the context of the then existing Section 147(a) of the Act, yet, in the context of initiation of reassessment proceedings upon recording of reasons to believe , it was established in law that those words were stronger than is satisfied ; the belief must be based on reasons that are relevant and material . For initiation of reassessment proceedings, there must exist tangible material indicating some income had arisen either on accrual or actual/ cash basis and that it has escaped assessment. Merely because the invoices issued by the petitioner were below the international price, it could never be alleged that there was any income on accrual basis as the petitioner earned no legal right to receive any higher amount. Therefore, we have to examine if there exists any material indicating receipt of any income on actual/ cash basis, over and above the invoice price. The entire opinion of the Commission and the recital made in the reasons to believe recorded by the petitioner as also reasons recorded by that authority while rejecting the objections raised by the petitioner are directed and confined solely to the observations made by the Commission. The Report is not before us in entirety. To the extent it has been relied by the assessing authority, it only admits of a possibility of higher realizations having been made. Even that possibility exists not on the strength of any material discovered by the commission of higher realizations made by exporters (including the petitioner) but on a presumptuous basis solely by comparing the invoice price with the prevailing international price. Hence, that presumption/ opinion howsoever considered is not based on any hard evidence (either oral or documentary) of any higher price realized. Rather, it is conjectural and in any case on suspicion. Report remains a pure subjective opinion and nothing more. The vital fact of value/ price realized by the petitioner against the invoice issued, was neither gone into nor any definite opinion was expressed thereto. In any case, no material was discovered by the Commission, as may support that belief . Thus we find reassessment proceedings initiated against the petitioner for the AY 2011-12 were wholly without jurisdiction. It also being beyond the pale of doubt- unless jurisdiction is first clearly established, the reassessment- proceedings may not survive and an assessee may not be forced to participate in the same. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of re-assessment proceedings initiated u/s 148 of the Income Tax Act, 1961.
2. Existence of "tangible material" to form "reason to believe" for income escapement.
3. Reliance on the Justice M.B. Shah Commission Report as a basis for re-assessment.

Summary:

1. Validity of Re-assessment Proceedings Initiated u/s 148 of the Income Tax Act, 1961:
The petitioner challenged the re-assessment proceedings initiated against them for A.Y. 2011-12 based on a notice dated 27.10.2014. The assessment was initially concluded without scrutiny u/s 143(3) but later reopened u/s 148. The petitioner argued that the re-assessment notice lacked "tangible material" and was solely based on the Justice M.B. Shah Commission Report, which only suggested the possibility of under-invoicing in iron ore exports from Goa.

2. Existence of "Tangible Material" to Form "Reason to Believe" for Income Escapement:
The petitioner contended that the re-assessment was based on conjecture and suspicion rather than concrete evidence. The Commission's report did not present any factual discovery of income escapement but merely compared the invoice price with the international price, suggesting a 55% under-invoicing. The petitioner argued that there was no evidence of receiving any amount over the invoice price, and thus, no "reason to believe" income had escaped assessment.

3. Reliance on the Justice M.B. Shah Commission Report as a Basis for Re-assessment:
The assessing authority relied heavily on the Commission's report, which was deemed insufficient as it was based on presumptions rather than tangible evidence. The court noted that the Commission's findings were speculative and did not constitute a valid basis for forming a "reason to believe." The report's conclusions were not supported by any hard evidence of higher realizations made by exporters, including the petitioner.

Court's Decision:
The court held that the re-assessment proceedings were initiated without any relevant material or tangible evidence. The "reason to believe" was based on subjective opinion rather than objective facts. The court emphasized that mere suspicion or conjecture could not justify re-assessment. Consequently, the re-assessment proceedings for A.Y. 2011-12 were quashed, and the writ petition was allowed. The court also referenced similar judgments from the Bombay High Court and Supreme Court, reinforcing the need for concrete evidence to initiate re-assessment proceedings.