2015 (2) TMI 213 - HC - Income Tax

Reopening of assessment - the interest received is much less than interest paid resulting substantial business loss, it transpires that it is a case of diversion of business funds for non-business purpose - Held that - T here is no sufficiency or adequacy of material available with the assessing officer. This information or material was already available in the computation of income filed by the petitioner in his return. Nothing new has been received by way of information or otherwise by the assessing officer. The present case is not a case of testing the sufficiency of material available, but is a case of absence of material, as held by the Supreme Court in Ganga Saran case (1981 (4) TMI 5 - SUPREME Court). There is no direct nexus or live link between the material coming to the notice of the assessing officer and the formation of his belief that there had been escapement of income of the assessee from the assessment in the particular year in question. In our view, there is no rational and tangible nexus between the reason and the belief and the conclusion is inescapable, namely, that in the absence of material the assessing officer had no jurisdiction to initiate the proceedings under Sections 147/148 of the Act. - Decided in favour of asessee.

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act.
2. Jurisdiction of the Assessing Officer to initiate reassessment proceedings.
3. Adequacy of material for "reasons to believe" for reassessment.
4. Applicability of Section 40-A(2)(b) of the Income Tax Act.
5. Availability and applicability of alternative remedies.

Detailed Analysis:

1. Legality of the Notice Issued Under Section 148 of the Income Tax Act:
The petitioner challenged the notice issued under Section 148, arguing that it was illegal and without jurisdiction. The notice was based on the grounds that the petitioner had paid more interest than earned, resulting in a substantial business loss, which the assessing officer interpreted as a diversion of business funds for non-business purposes.

2. Jurisdiction of the Assessing Officer to Initiate Reassessment Proceedings:
The court emphasized that the Assessing Officer has wide powers under Sections 147 and 148 to reopen assessments if there are "reasons to believe" that income has escaped assessment. However, this power is circumscribed and cannot be based on a mere change of opinion. The court cited the Supreme Court's decisions in Ganga Saran & Sons P. Ltd. and Sheo Nath Singh, which held that the belief must be reasonable and based on relevant and material reasons.

3. Adequacy of Material for "Reasons to Believe" for Reassessment:
The court found that the material used by the Assessing Officer to initiate reassessment was already available in the original return filed by the petitioner. There was no new information or tangible material received after the original assessment. The court held that the reasons recorded by the Assessing Officer did not provide a rational and tangible nexus between the material and the belief that income had escaped assessment. The court cited the Supreme Court's decision in Commissioner of Income Tax Vs. Kelvinator of India Ltd., which held that reassessment cannot be initiated on a mere change of opinion.

4. Applicability of Section 40-A(2)(b) of the Income Tax Act:
The Department argued that the reassessment was justified under Section 40-A(2)(b) because the partnership entities were controlled by the petitioner's family members. However, the court found no material evidence to support this claim in the reasons to believe. The court held that new grounds not part of the original reasons to believe could not justify reassessment proceedings.

5. Availability and Applicability of Alternative Remedies:
The Department contended that the petitioner had an alternative remedy to contest the matter before the assessing officer and file appeals if aggrieved. The court distinguished this case from Commissioner of Income-Tax vs. Chhabil Dass Agarwal, noting that the petitioner challenged the validity of the notice itself, not a reassessment order. Since the writ petition was already entertained and affidavits exchanged, the court decided to rule on the merits.

Conclusion:
The court concluded that the notice issued under Section 148 was without jurisdiction due to the absence of new material and the reliance on already existing information. The reasons to believe did not establish a rational and tangible nexus between the material and the belief that income had escaped assessment. Consequently, the notice dated 17.12.2007 was quashed, and the writ petition was allowed.

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