2005 (3) TMI 55 - HC - Income Tax

Notice u/s 148 income escaping escapement - despite recording of reasons the respondent has sustained his objection to the proposal made by the Audit Department and the objection raised by the respondent has been endorsed by the Additional Commissioner of Income-tax. Therefore it is abundantly clear that the respondent did not hold the belief at any point of time either before or after recording reasons that income of the assessee has escaped assessment on account of erroneous computation of loss and it is required to be held that the exercise of recording reasons on the file is a mere pretence to give validity to the exercise of power for assuming jurisdiction. In other words it was a colourable exercise of jurisdiction and cannot be sustained in law - In the result the impugned notice issued under section 148 of the Act is quashed and set aside

Summary

Issues involved:
1. Validity of the notice issued under section 148 of the Income-tax Act, 1961.
2. Jurisdiction and belief of the Assessing Officer in initiating reassessment proceedings.
3. Compliance with legal requirements for reopening assessments.

Issue 1: Validity of the notice under section 148:
The petitioner, a private limited company, filed its income tax return for the assessment year 2001-02, declaring a total loss. The respondent issued a notice under section 148 of the Income-tax Act, challenging the declared loss. The petitioner, under protest, filed a return declaring the same loss. The petitioner raised objections to the jurisdiction and merits of the reasons recorded for reassessment. The court examined the facts and reasons recorded by the respondent, finding discrepancies between the belief projected on paper and the actual belief held by the respondent. The court cited precedents emphasizing the necessity of a genuine belief by the Assessing Officer for reopening assessments. It concluded that the reasons recorded did not reflect a valid belief, leading to the quashing of the notice under section 148.

Issue 2: Jurisdiction and belief of the Assessing Officer:
The court scrutinized the chain of events following an audit objection regarding bad debts claimed by the petitioner. Despite objections raised by the Audit Department, the Assessing Officer maintained that the objection was not acceptable. The Additional Commissioner of Income-tax endorsed the Assessing Officer's view, indicating a lack of belief in income escaping assessment due to erroneous computation. The court highlighted the importance of the Assessing Officer's genuine belief in initiating reassessment proceedings, emphasizing that audit objections alone cannot substitute for the officer's belief. The court found that the respondent did not hold a genuine belief at any point, rendering the recording of reasons a mere formality to assume jurisdiction, leading to the quashing of the notice.

Issue 3: Compliance with legal requirements for reopening assessments:
The court analyzed the correspondence between the respondent and the Audit Department, noting the insistence on initiating remedial action despite objections from the Assessing Officer. The court referred to instructions from the Board regarding prompt reassessment based on audit objections. However, the court held that such instructions cannot validate reassessment if the Assessing Officer lacks a genuine belief in income escaping assessment. The court concluded that the respondent's sustained objection to the Audit Department's proposal indicated a lack of belief in income escaping assessment, deeming the recording of reasons a colorable exercise of jurisdiction. Consequently, the court quashed the notice issued under section 148 of the Income-tax Act.

In conclusion, the High Court of GUJARAT held that the notice under section 148 was invalid due to the lack of a genuine belief by the Assessing Officer in income escaping assessment. The court emphasized the importance of the Assessing Officer's independent belief in initiating reassessment proceedings, highlighting that audit objections alone cannot serve as a basis for reassessment. The court's decision focused on upholding the legal requirements and ensuring the proper exercise of jurisdiction in income tax reassessment cases.