2014 (12) TMI 63 - HC - Income Tax

Reopening of assessment u/s 147 r.w section 148 - reasons to believe Held that - The Tribunal was rightly of the view that the reasons to believe correctly records that a provision made in accounts for an accrued and known liability is an admissible deduction - the amounts shown under the head provision per se is not to be disallowed as unascertained expenditure - The reasons to believe do not state why and how the AO came to the conclusion that the provision for expenses was an unascertained liability - assessee was following the mercantile system of accounting and any liability which had been incurred was to be allowed as a deduction, even when payment was not made in the said year - the reasons to believe must show live link and nexus with the formation of prima facie opinion that income which should be taxed has escaped assessment - In the absence of any cogent and relevant material or information to show that the amount shown under the head provision included unascertained liability, re-assessment proceedings could not have been initiated - There is a difference between reasons to believe and reasons to suspect . It was the responsibility of the Revenue to bring on record documents and material to show and establish that the provisions related to unascertained liability and the AO while forming his opinion and recording reasons to believe was in knowledge or aware of information or material to show that what was shown under the head provision was not a certain and accrued liability - in the absence of any material or information, reasons to believe it has to be held were not relevant and meet the test of satisfaction required to sustain the reopening - use of the heading or word provision in the balance sheet it is apparent became the material or information to reopen - the word/expression provision by itself and alone without other information/material, would not reflect and indicate unascertained liability - the assumption drawn by the AO in the reasons to believe is farfetched, vague and a mere pretence - unascertained liability had been claimed and allowed as expenditure Decided against revenue.

Summary

Issues:
1. Validity of re-assessment notice under Section 148 read with Section 147 of the Income Tax Act, 1961.
2. Interpretation of "provision" in accounts for accrued or known liability.
3. Requirement of cogent and relevant material for initiating re-assessment proceedings.

Analysis:
1. The High Court examined the validity of a re-assessment notice issued under Section 148 read with Section 147 of the Income Tax Act, 1961 for the assessment year 2006-07. The Tribunal had set aside the re-assessment notice and order, prompting the Revenue to appeal under Section 260A. The Court noted that the "reasons to believe" recorded by the Assessing Officer lacked clarity and failed to establish a valid basis for initiating re-assessment proceedings. The absence of cogent material to show that the provisions related to unascertained liability rendered the re-assessment invalid.

2. The Court delved into the interpretation of "provision" in accounts for accrued or known liability. While the first paragraph of the "reasons to believe" correctly acknowledged that such provisions are admissible deductions, the Assessing Officer erroneously concluded that a provision for expenses amounting to a specific sum was an unascertained liability. The Court emphasized that the Assessing Officer's reasoning lacked justification and failed to demonstrate how the provision constituted an unascertained liability, especially when the assessee followed the mercantile system of accounting.

3. The Court stressed the necessity of having a live link and nexus between the "reasons to believe" and the formation of a prima facie opinion that income had escaped assessment. It highlighted the distinction between "reasons to believe" and "reasons to suspect," emphasizing that mere suspicion or surmise cannot warrant reopening of assessment. The Court concluded that the Revenue failed to provide sufficient material or information to support the contention that the provisions represented unascertained liabilities, rendering the re-assessment proceedings unsustainable.

In light of the above analysis, the High Court dismissed the appeal by the Revenue, emphasizing the importance of establishing a valid basis supported by relevant material before initiating re-assessment proceedings under the Income Tax Act, 1961.