REASON TO BELIEVE

[Mr. M. GOVINDARAJAN]

 

            The law makers used many phrases in the drafting of the legislations.  Such phrases are subjected to interpretation in many angles by many courts.   One such phrase is 'Reason to believe'.   This phrase may be used in many of the Acts.   But in this article the use of this phrase in Section 147 of the Income Tax Act, 1961 has been analyzed.   Before 01.04.1989 Section 147 required fulfillment of two conditions for initiation of action under the said provision of law, namely-

•  The Assessing Officer must have reason to believe that income, profit or gain chargeable tax have escaped assessment; and
•  He must have also reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary  for his assessment of that assessment year.

The amended provision requires the fulfillment of only one condition, namely, the Assessing Officer has 'reason to believe' that the income has escaped assessment.   Once the said condition is fulfilled, it confers jurisdiction up on the Assessing Officer to take action under Sec. 147 of the Act.

 

          In 'Asst. CIT V. Rajesh Jhaveri Stock Brokers P Ltd' - (2007 -TMI - 6563- SUPREME Court) the Supreme Court held that an action under Sec. 147 of the Act, after the Direct Tax Laws (Amendment) Act, 1987 came into force with effect from 01.04.1989, can be taken against an assessee if the Assessing Officer, for whatever reason, has reason to believe that the income has escaped assessment.   The requirement of fulfilling the two conditions as stipulated in the un-amended provision of Sec. 147 (a) of the Act no longer exists after the new Section 147 has been substituted by the said amendment Act.

           The expression 'reason to believe' has been discussed in various decisions of various High Courts and Supreme Court. 

           In 'Sheo Nath Singh V. AAC' - (1971 -TMI - 6258 - SUPREME Court) the Supreme Court has observed that the words 'reason to believe' suggest that the belief must be that of an honest and reasonable person, based upon reasonable grounds and though the Assessing Officer may act on direct or substantial evidence but he cannot act on mere suspicion, gossip or rumor.  The Supreme Court further observed that the Assessing Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the Section.  The Court can always examine this aspect, though the declaration or sufficiency of 'reason to believe' cannot be investigated by the Court.

           In 'ITO V. Lakhmani Mewal Das' (1976 -TMI - 6471 - SUPREME Court) has observed that the ground or reasons which lead to the formation of belief contemplated by Section 147 of the Act must have a material bearing on the question of escapement of income of the assessee from assessment.   Once there exist reasonable grounds for the Assessing Officer to form the belief that would be sufficient to clothe him with the jurisdiction to issue notice.  The expression 'reason to believe' does not mean a purely subjective satisfaction on the part of the Assessing Officer and the 'reason to believe' must be held in good faith and it cannot be merely a pretence and should not be based on extraneous or irrelevant consideration.   There must be a live link between the material and the belief.

           In 'Ganga Saran and Sons V. ITO' (1981 -TMI - 5851 - SUPREME Court), the Supreme Court has held that if there is no rational and intelligible nexus between the reasons and belief, so that on such reasons no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to believe that any part of the income of the assessee had escaped assessment.

           In 'Praful Chunilal Patel V. Makwana (M.J.) Asst. CIT' - 1998 -TMI - 16457 - (GUJARAT High Court), a Division Bench of the Gujarat High Court, while dealing with the expression 'reason to believe', has opined that the word 'reason' would mean cause or justification and, therefore, if the Assessing Officer has a cause or justification to think or suppose that such income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment.   The Court further observed that the expression 'reason to believe' cannot mean that the Assessing Officer should have finally ascertained the facts by legal evidence.   What requires is the formation of a belief from the examination he makes and if he likes from any information that he receives.   In cases where the Assessing Officer had overlooked something at the first assessment, there can be no question of any change of opinion when the income which was chargeable to tax is not actually taxed, though ought to have been under the law, due to an error committed at the first assessment. 

          In 'Assam Co. Ltd. V. Union of India' - 2005 -TMI - 10431 - (GAUHATI High Court), a single bench of Gauhati High Court has observed that for exercising the jurisdiction under Sec. 147 of the Act, there must be relevant and rational reason on which the Assessing Officer proceeds to act, which must have a bearing on the process of formation of the belief by the Assessing Officer that the income has escaped assessment, it has further been observed that if either of these two essentials is absent, the action under Sec. 147 would be unauthorized.

          In 'Consolidated Photo and Finvest Limited V. Asst. CIT' - 2006 -TMI - 9473 - (DELHI High Court), a Division Bench of the Delhi High Court opined that an action under Sec. 147 of the Act is permissible even if the Assessing Officer gathers his 'reasons to believe' from the very same record which was not the subject matter of the completed assessment proceedings.

          In 'Commissioner of Income Tax V. Shiv Shakti Flour Mills P Limited' - 2009 -TMI - 78704 - (Gauhati High Court) (Gauhati) the High Court held that there must be a live link between the materials on which conclusions are based and the actual conclusion of the Assessing Officer in formation of his belief that any income chargeable to tax has escaped assessment and also cannot be based on extraneous or irrelevant consideration.   Unless the Assessing Officer has 'reason to believe' and such reason is material and relevant from a belief that there is an escaped assessment, no action under Sec. 147 of the Act can be taken.   Unless there is a rational or intelligible nexus between the reasons and the belief, so that, on such reason any one properly instructed on facts and on law could reasonably entertain the belief, the Assessing Officer cannot initiate any action under Sec. 147 of the Act.   There is always a necessity of live link between the materials and the belief.   The Court, however, though can examine whether there were relevant materials before the Assessing Officer to form the 'reason to believe', the sufficiency of reasons for the belief, however, cannot be investigated by the Court.   The relevant materials must appear from the order by which the Assessing Officer has decided to proceed with the assessment or reassessment under section 147 of the Act.  The satisfaction of the Assessing Officer cannot be supplemented by the Revenue by filing an affidavit subsequently inasmuch as the Assessing Officer only on formation of reason to believe on the basis of materials available before him that there is escapement of assessment can proceed to take action under Sec. 147 of the Act.   Such an order must be construed objectively with reference to the reasons given in the order itself and cannot be construed in the light of the explanation subsequently given by the Assessing Officer.