2022 (5) TMI 375 - HC - Income Tax

Reopening of assessment u/s 147 - Eligibility of reasons to Believe - HELD THAT - As decided in the case of Radha Krishna Industries 2021 (4) TMI 837 - SUPREME COURT power to reopen an assessment must be conditioned on the existence of tangible material and that reasons must have a live link with the formation of the belief . Perusal of the impugned notice under Section 148 of the Act, 1961 and other impugned orders clearly shows that the reason to believe recorded by the assessing authority, failed to pass the standard of reason exercised by the assessing authority to be that of an honest and prudent person who would act on reasonable grounds and come to a cogent conclusion. The reasons recorded were totally unfounded and consequently the jurisdictional notice under Section 148 issued by the assessing authority was without jurisdiction. Once the notice under Section 148 of the Act, 1961 issued by the assessing authority was without jurisdiction, the subsequent proceedings, including re-assessment order, cannot be sustained. - Decided in favour of assessee.

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Jurisdiction of the respondent to issue the notice under Section 148.
3. Adequacy and relevance of the "reason to believe" for initiating reassessment proceedings.

Issue-Wise Detailed Analysis:

1. Validity of the Notice Issued Under Section 148 of the Income Tax Act, 1961:
The court examined whether the notice issued by the respondent under Section 148 was valid. The court had previously directed the respondent to file a personal affidavit explaining the validity of the notice. The respondent's counter affidavit failed to address the court's query adequately. The court noted that the reassessment order mentioned no inference drawn from the documentary evidence submitted by the petitioner regarding a transaction of Rs. 45 lakhs. The petitioner had objected to the "reason to believe" recorded by the assessing authority, stating no such transaction occurred. Despite the petitioner's objections and documentary evidence, the notice was issued on baseless grounds, rendering it arbitrary and unfounded.

2. Jurisdiction of the Respondent to Issue the Notice Under Section 148:
The court scrutinized whether the respondent had the jurisdiction to issue the notice when the basis for the "reason to believe" was unfounded. The court referred to several Supreme Court judgments emphasizing that the material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant, or irrelevant. The court cited cases like "State of Uttar Pradesh & Others vs. Aryaverth Chawal Udyog & Others" and "The Commissioner of Sales-Tax U.P. vs. M/s. Bhagwan Industries (P) Ltd., Lucknow," which established that the "reason to believe" must be based on rational grounds and not merely on suspicion or gossip. The court concluded that the respondent's notice failed to meet these standards, thus lacking jurisdiction.

3. Adequacy and Relevance of the "Reason to Believe" for Initiating Reassessment Proceedings:
The court delved into the meaning, scope, and consequence of the "reason to believe." It reiterated the principles laid down by the Supreme Court, which state that the belief must be that of an honest and reasonable person based on reasonable grounds. The court cited multiple cases, including "Sheo Nath Singh vs. Appellate Assistant CIT" and "Union Of India And Others vs M/S. Rai Singh Dev Singh Bist & others," to highlight that the reasons must have a direct nexus or live link with the formation of the belief. The court emphasized that the reasons should be based on tangible material and not on mere suspicion. The court found that the reasons recorded by the assessing authority were totally unfounded and did not pass the standard of reason exercised by an honest and prudent person. Consequently, the notice and subsequent proceedings were deemed without jurisdiction.

Conclusion:
The court quashed the impugned notice dated 31.03.2021 under Section 148 of the Income Tax Act, 1961, the order rejecting the petitioner's objection, the reassessment order for the Assessment Year 2013-14, and the demand notice issued under Section 156. The court allowed the writ petition with a cost of Rs. 5000/- to be deposited with the High Court Legal Services Committee within three weeks, failing which the amount would be recovered as a fine.

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