2013 (9) TMI 810 - HC - Income Tax

Notice for income escaping assessment u/s 148 of the Income Tax Act Reasons to believe Held that - It would be the proximity of the reasons with the belief of escapement of income which would be the determinative factor for reopening of the assessment. The remoteness of the reasons would obviate the possibility of a belief and would bring the case in the realm of mere suspicion which cannot be a ground for reopening of assessment - The prior period expenses are eligible for deduction during the current year provided the liability was determined and crystallized during the relevant year. In the present case, the assessee has debited a sum of Rs 1,20,765/- in the P & L account on account of prior period expenses after netting income of Rs 30,34,463/- and expenditure of Rs. 31,55,228/- - The Assessing Officers has placed reliance on the notes to the accounts that were available at the time of the scrutiny assessment. But the notes also states that the prior period expenses had crystallized/ settled in the year. The reasons to believe recorded do not show as to on what basis the Assessing Officer has formed a reasonable belief that the said expenditure had not crystallized during the year relevant to the assessment year. The words reason to believe indicate that the belief must be that of a reasonable person based on reasonable grounds emerging from direct or circumstantial evidence and not on mere suspicion, gossip or rumour. The reason to believe recorded do not refer to any material that came to the knowledge of the Assessing Officer whereby it can be inferred that the Assessing Officer could have formed a reasonable belief that the expenditure referred to had not crystallized during the relevant year. The reasons to believe recorded that income has escaped assessment are not based on any direct or circumstantial evidence and are in the realm of mere suspicion. The requirement of law is reason to believe and not reason to suspect . In the present case Since the reasons to believe recorded indicate that the Assessing Officer has acted on mere surmise, without any rationale basis, the action of reopening of the Assessment is thus clearly contrary to law and unsustainable Decided in favor of Assessee.

Summary

Issues:
Challenge to order under Section 148 of the Income Tax Act, 1961 for reopening assessment for the year 2002-03.

Analysis:
The petitioner, an Indian construction company, challenged the order dated 15.03.2012 by the Assistant Commissioner of Income Tax regarding the issuance of a notice under Section 148 of the Income Tax Act, 1961. The petitioner filed its return of income for the year 2002-03, declaring an income of Rs.2,26,07,425, which was accepted without any additions. However, in 2006, a notice was issued for reopening the assessment based on prior period expenses. The petitioner objected, citing full disclosure during the original assessment. The respondent furnished reasons for reopening, alleging that certain expenses were not crystallized during the relevant year. The petitioner contended that the reopening was based on mere suspicion and not a change of opinion.

The High Court analyzed the law on reopening assessments under Section 143(3) of the Act. It highlighted the conditions for reopening, emphasizing the need for a prima facie opinion on under-assessment or escapement of income. The court stressed that the reasons recorded must show a nexus to the subjective opinion formed by the Assessing Officer. Additionally, the court clarified that mere suspicion is insufficient for reopening an assessment, emphasizing the requirement of a reasonable belief based on direct or circumstantial evidence.

In this case, the court found that the reasons for reopening the assessment were not based on any new material that came to the knowledge of the Assessing Officer. The court noted that the Assessing Officer's belief was mere suspicion, lacking a reasonable basis. As per legal requirements, the belief must be reasonable and based on grounds emerging from evidence, not mere suspicion. Therefore, the court set aside the impugned order dated 15.03.2012 and quashed the proceedings initiated in 2006. The writ petition was allowed with costs of Rs.10,000.

This judgment underscores the importance of a valid reason to believe in reopening assessments and the necessity for a reasonable basis supported by evidence, not mere suspicion. It clarifies the legal standards for reopening assessments under the Income Tax Act, ensuring that Assessing Officers act on substantive grounds rather than conjecture.