2024 (9) TMI 156 - HC - Income Tax

Reopening of assessment - reason to believe or suspect - reason recorded was solely based on DDIT s letter - independent application of mind v/s borrowed satisfaction - HELD THAT - Formation of belief by the AO that income has escaped assessment is the heart of the provision. The reasons recorded must be based on some tangible material and the same should be evident from the reading of the reasons and this constitutes the mandatory requirement of Section 147 of the Act. As well settled through number of decisions that concluded assessments cannot be reopened merely on suspicion and the Assessing Officer must have reason to believe that income has escaped assessment and this is quite different from merely having a reason to suspect. In the present case, as may be seen, there is no close nexus or live link between tangible material and the reason to believe that income has escaped assessment. The information received from the Investigating Unit of the Revenue cannot be the sole basis for forming a belief that income of the assessee has escaped assessment. Having received information from the Investigating Wing, it was incumbent upon the Assessing Officer to take further steps, make further enquiries and garner further material and if such material indicate that the income of the assessee has escaped assessment and then form a belief that the income of the assessee has escaped assessment. Clearly, in this case, the AO has not acquired any material to form such belief. There is not even a line of reason which may justify the formation of the belief. Consequently, we are satisfied that reopening of assessment for the assessment year in question by the AO does not satisfy the requirement of law in terms of Section 147 148 - Thus reassessment proceddings set aside - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Independent application of mind by the Assessing Officer (AO).
3. Adequacy of reasons to believe that income has escaped assessment.
4. Legal requirements for reopening an assessment under Section 147 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961:
The petitioner challenged the notice dated 22.03.2018 issued under Section 148 of the Income Tax Act, 1961, for the Assessment Year (AY) 2011-12. The petitioner argued that the notice was based solely on information received from the Deputy Director of Income Tax (DDIT) and lacked an independent application of mind by the Assessing Officer (AO). The respondents contended that the notice was issued in accordance with statutory provisions and satisfied jurisdictional requirements. They also argued that the petitioner had an efficacious remedy of appeal available.

2. Independent application of mind by the Assessing Officer (AO):
The petitioner asserted that the AO did not independently exercise quasi-judicial power and that the belief of income escapement was essentially the belief of the DDIT, not the AO. The petitioner highlighted that the reasons recorded were undated and thus questioned their validity. The respondents countered that the AO had independently applied their mind before recording the reasons and that the reasons were based on credible information from the DDIT's inquiry.

3. Adequacy of reasons to believe that income has escaped assessment:
The court examined whether the reasons recorded by the AO for reopening the assessment satisfied the legal requirement under Section 147 of the Act. The court emphasized that the formation of belief by the AO that income has escaped assessment must be based on tangible material and not merely on suspicion. The court referred to precedents, including the Supreme Court's decision in ITO v. Lakhmani Mewal Das, which clarified that "reason to believe" is distinct from "reason to suspect."

4. Legal requirements for reopening an assessment under Section 147 of the Income Tax Act, 1961:
The court reiterated that the power to reopen an assessment under Section 147 is potent and cannot be exercised lightly. The reasons recorded must demonstrate a "close nexus" or "live link" between tangible material and the belief that income has escaped assessment. The court cited the case of Principal Commissioner of Income Tax vs. Meenakshi Overseas Pvt. Ltd., where it was held that the reasons must reflect independent application of mind by the AO and not merely be a reproduction of information received from another authority.

Analysis & Conclusion:
The court found that the AO had reproduced the information received from the DDIT without conducting further inquiries or acquiring additional material to substantiate the belief of income escapement. The court concluded that there was no "close nexus" or "live link" between the information received and the belief that income had escaped assessment. Consequently, the court held that the reopening of the assessment did not satisfy the legal requirements under Section 147 and 148 of the Act.

Judgment:
The court allowed the writ petition, setting aside the impugned reassessment notice dated 22.03.2018 issued under Section 148 of the Income Tax Act, 1961, and any further proceedings initiated pursuant to the said notice.

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