2024 (10) TMI 870 - HC - Income Tax

Reopening of assessment u/s 147 - petitioner s balance sheet recorded an outstanding unsecured loan - reason to believe OR reason to suspect - HELD THAT - There is no material to indicate that the AO had any ground to believe that the loan availed by the assessee (as reflected in the books of accounts) was chargeable to tax under the Act. There is neither any allegation nor any material to even remotely suggest that the assessee had earned income chargeable to tax, which was camouflaged as an unsecured loan and reflected in its books of accounts. AO had clearly no material on record to form any belief that the income of the assessee had escaped assessment. The impugned order does not reflect any ground for believing that the income of the assessee had escaped assessment in the relevant financial year. AO had rightly rejected the contention that this is not a case of any change of opinion as an assessment had not been framed u/s 143 (3) - the impugned order throws no light as to how an unsecured loan reflected in the assessee s book was reason enough to believe that the income of the assessee had escaped assessment. Assessee had, in its letter explained that it had availed of the unsecured loan from its the then director Sh. Ashok Kumar Jain. It had also pointed out that the notes to the accounts for the financial year ended on 31.03.2012 and also disclosed that loan Rs. 5,00,000/- was received from Sh Ashok Kumar Jain, who was the Key Management Personnel. Notwithstanding the note, the AO has proceeded on the unfounded premise that the amount shown outstanding as unsecured loan in the balance sheet is unexplained and, thus chargeable to tax u/s 68 of the Act. As explained in Lakhmani Mewal Das 1976 (3) TMI 1 - SUPREME COURT the assessment can be reopened only on account of reason to believe and not reason to suspect . In the present case, a fortiori, there is no reason to even suspect that the balance sheet of the assessee did not correctly reflect its state of affairs. Necessary condition for initiating re-assessment u/s 147 of the Act is not satisfied - Assessee appeal allowed.

Summary

Issues Involved:

1. Legality of the re-opening of assessment under Section 147 of the Income Tax Act, 1961.
2. Validity of the reasons to believe that income had escaped assessment.
3. Compliance with procedural requirements for re-assessment.
4. Justification for issuing notice under Section 148 of the Act.

Issue-wise Detailed Analysis:

1. Legality of the Re-opening of Assessment:

The primary issue addressed in the judgment is whether the re-opening of the assessment for the assessment year 2012-13 was in accordance with the law under Section 147 of the Income Tax Act, 1961. The court examined whether the Assessing Officer (AO) had a valid reason to believe that the income had escaped assessment. The court noted that the AO can re-assess income if there is a reason to believe that income chargeable to tax has escaped assessment, provided the conditions under Section 147 are satisfied. The court emphasized that the re-opening of an assessment is a serious matter and must be justified by tangible material.

2. Validity of the Reasons to Believe:

The court scrutinized the reasons provided by the AO for re-opening the assessment. The AO's reason was based solely on the entry of an unsecured loan of Rs. 5,00,000/- in the assessee's balance sheet, which the AO believed indicated escaped income. However, the court found no material evidence to suggest that this loan was taxable income or that it was camouflaged income. The court referenced the Supreme Court's decision in Chhugamal Rajpal v. S.P. Chaliha, which requires a rational connection between the material and the belief of escaped income. The court concluded that the AO's belief was based on suspicion rather than tangible material, thus failing to meet the threshold for re-opening the assessment.

3. Compliance with Procedural Requirements:

The court examined whether the procedural requirements for initiating re-assessment were met. The petitioner had requested the reasons for re-assessment and the materials on which the AO's belief was based, but these were not adequately provided. The court underscored the need for the AO to furnish reasons and relevant materials to the assessee, as part of procedural fairness. The lack of compliance with these procedural requirements further invalidated the re-assessment proceedings.

4. Justification for Issuing Notice under Section 148:

The court evaluated whether the issuance of the notice under Section 148 was justified. It reiterated that for a notice under Section 148 to be valid, the AO must have a reason to believe that income has escaped assessment. The court found that the AO's belief was not based on any substantive evidence or material that linked the unsecured loan to escaped income. Consequently, the issuance of the notice was deemed unjustified.

Conclusion:

The court concluded that the necessary conditions for initiating re-assessment under Section 147 were not satisfied, as the AO's belief was not based on tangible material but rather on suspicion. The impugned notice and the subsequent re-assessment order were set aside, affirming the principle that re-assessment must be grounded in concrete evidence and adhere to procedural requirements.