2015 (1) TMI 431 - HC - Income Tax

Validity of reopening of assessment - Escapement of income - Held that - time period stipulated for issue of notice under Section 143(2) of the Act had expired and, therefore, the Assessing Officer could have only issued notice under Section 148 of the Act, if the jurisdictional pre-conditions mentioned in Section 147 of the Act were satisfied. The Assessing Officer should have formed a prima facie opinion that income chargeable to tax had escaped assessment and recorded these reasons in writing. The reasons so recorded should have some basis or support and not a mere gossip. The reasons cannot be a mere pretence and should be held in good faith. - Reason to suspect cannot amount to reason to believe. As it is the beginning of the inquiry, having a prima facie opinion is sufficient; and irrebuttable conclusive evidence or finding is not required. But the prima facie formation of belief should be rational, coherent and not ex facie incorrect and contrary to what is on record. As noticed in paragraph 3 above, the facts recorded are incorrect. Secondly, the reasons must have live nexus and must disclose on what basis or evidence the Assessing Officer feels and has reason to believe that income chargeable has escaped assessment. The reasons must be germane and genuine. For grounds elucidated in paragraph 4 above, this requirement falters. The reasons recorded by the Assessing Officer do not meet and satisfy the said basic and limited pre-jurisdictional requirement. There is no rational connection between the reason recorded and the formation of belief that income had escaped assessment. - Decided against Revenue.

Summary

Issues:
1. Validity of notice issued under Section 148 of the Income Tax Act, 1961.
2. Assessment of capital gains exemption under Section 54 of the Act.
3. Application of Section 147 for escaped assessment of income.
4. Requirement of rational nexus between reasons recorded and belief of escaped income.

Issue 1: Validity of notice under Section 148:
The judgment scrutinizes a notice issued under Section 148 of the Income Tax Act for the Assessment Year 2007-08. The court finds discrepancies in the reasons recorded by the Assessing Officer for initiating proceedings. It is noted that the property in question, initially deemed agricultural land, was actually a residential property located within the city limits. The court highlights the lack of proper examination by the Assessing Officer, labeling the assumptions made as baseless and lacking factual support. The court emphasizes that the notice lacks a rational basis and is deemed a case of non-application of mind, leading to the dismissal of the appeal.

Issue 2: Assessment of capital gains exemption under Section 54:
The judgment delves into the assessment of capital gains exemption under Section 54 of the Income Tax Act. It is revealed that the property sold, initially considered agricultural land, was actually a residential property as per the details provided by the taxpayer. The court points out that if the property were genuinely agricultural land, no capital gains tax would have been applicable. The court deems the Assessing Officer's conclusion as erroneous and illogical, emphasizing the need for a factual and logical basis for tax assessments.

Issue 3: Application of Section 147 for escaped income assessment:
The court analyzes the application of Section 147 concerning escaped income assessment. It stresses the importance of the Assessing Officer forming a prima facie opinion based on tangible material before issuing a notice under Section 148. The judgment highlights that the reasons recorded must be founded on genuine beliefs, supported by coherent and rational evidence. In this case, the court finds the reasons recorded to be incorrect, lacking a live nexus between the assumptions made and the alleged escaped income. The court emphasizes that suspicion alone cannot justify the issuance of a notice under Section 148.

Issue 4: Requirement of rational nexus between reasons and belief of escaped income:
The judgment underscores the necessity of a rational nexus between the reasons recorded and the belief of escaped income. It points out that the reasons must be genuine, coherent, and supported by evidence to justify the initiation of assessment proceedings. The court deems the reasons recorded in this case as lacking in substance and factual accuracy, leading to the dismissal of the appeal. The judgment emphasizes the importance of a valid and well-founded basis for tax assessments to uphold the principles of fairness and justice in income tax proceedings.