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TMI Blog2004 (1) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... which revealed that transactions with the above mentioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. ITO [1993] 203 ITR 456 (SC)". 1.2 It is seen from para 3 from the consolidated appellate order for assessment years 1990-91 to 1994-95 that reopening of the assessments for assessment years 1990-91 to 1993-94 has been held to be bad in law and accordingly the reopened assessments have been cancelled. The CIT(A) has taken the following grounds for doing so:- (i) In the reassessment order no escaped income has been taxed. The Assessing Officer has rejected the books of account on the basis of his observations in the assessment order for assessment year 1994-95 and has estimated the income at a higher figure. (ii) An assessment which was made under section 143(3), cannot be reopened unless there be any specific evidence regarding escapement of income. 'Reasons to believe' means that there is proper identification and quantification of the escaped income. No such ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR the Inspector's report is vague. That the Inspector's report is not final for which reason the Assessing Officer was still calling for information from the assessee even after the receipt of the Inspector's report. The AR referred to the decision of Calcutta High Court in Reform Flour Mills (P.) Ltd. v. CIT [1973] 88 ITR 150. The successor-Assessing Officer had taken a different view on the same materials which were available before the Assessing Officer who had made the original assessment. On the basis of this decision the AR wanted to contend that the Assessing Officer could not base his reasons to believe on the report of Inspector being a lower authority. But we must say that this decision is not relevant for the contention taken by the AR. The AR also referred to the decision of Gujarat High Court in Hotel Appolo v. P.S. Rashtrapal, ITO [1995] 213 ITR 762 that an assessment could not be reopened on the basis of Inspection report of the Controlling Officer of the Assessing Officer. In our opinion this decision is also not relevant for deciding the issue before us. 3.1 The AR points out that in the reasons recorded for reopening the assessment the following two grounds ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether there was any material available on the record from which the requisite belief could be formed by the ITO and further whether that material had any rational connection with or a live link for the formation of the requisite belief" The Court went ahead as reported on page 459: By the Court: "One of the purposes of section 147 is to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of the original assessment and when that falsity comes to notice, to turn around and say: 'You accepted my lie, now your hands are tied and you can do nothing'. It would be traversity of justice to allow the assessee that latitude." Selected Dalurband Coal Co. P. Ltd. 's case The assessment had been reopened on the basis of a letter from the Chief Mining Officer that there had been no reporting of the coal raised. It was held that at the stage of reopening it was not necessary to go into the correctness or otherwise of the content of the said letter as it had been issued by the concerned Government Department, also mentioning the basis as to how there was no reporting of production. Thus it was held that the information could be made the basis f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain inquiries, etc. had been made which showed that sundry creditors shown by the assessee were not correct. As many of the sundry creditors for this year were covered by the said finding for the following year, so it could be said that the Assessing Officer was quite justified in forming his reasons to believe for this year on the basis of inquiries, etc. done for the next year. For assessment year 1994-95 the Income-tax Inspector who had visited the given address of a large nos. of sundry creditors in Feb. 1995 had gathered the information that many of them were not residing at the given address. Many of the sundry creditors had also given information/had stated before the Assessing Officer that they were falsely being shown as sundry creditor by the assessee. That the assessee had misutilised their letter heads for this purpose. In our opinion, the fact that the reasons recorded are sketchy or do not fully reflect the materials available before the Assessing Officer, will not vitiate the correctness of the reasons to believe. On going through the facts of this case, we are satisfied that there was adequate material on the basis of which the Assessing Officer had formed hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served on assessee on 15-3-1995. In response to the notice, the assessee filed a letter dated 10-4-1995 stating that the return already filed under section 139(1) may be treated as filed in compliance to the notice under section 148." 6. For resorting to proviso under section 147 of the I.T. Act he recorded as follows: - "In course of inquiry for asstt. year 1994-95 following persons were found to be non-existent: - 1. Rafique Ansari 2. Mohan Roy 3. Kishan Ram 4. Hari Ram 5. Shyam Suppliers 6. Bharat Timber Traders 7. Sethi Traders 8. Shankar Enterprises and transaction with certain other persons like Satpal Singh, Mazid Khan etc. have been found to be non-genuine. I have reason to believe that the income of the assessee has escaped assessment. Issue notice under section 148 of the I.T. Act. Though a list of sundry creditors were disclosed in the return of the income but notice under section 148 is being issued in view of the enquiries which revealed that transactions with the above mentioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t examine the matter correctly and in right perspective. It was not correct that the Assessing Officer did not have any material to form a reasonable belief that there was no escapement of income in this asstt. year. He submitted that while making enquiry for the asstt. year 1994-95 the genuineness of the creditors was examined and verified. An Income-tax Inspector was deputed to serve notices. Out of 49 creditors 25 creditors were found to be non-genuine and those non-genuine creditors were also listing for this asstt. year. That material was sufficient for the Assessing Officer to form a belief that there escaped assessment of income. According to the ld. DR of the revenue the reopening was justified. 9. On the other hand, Shri K.N. Jain, ld. AR of the assessee supported the order of the ld. CIT(A) and vehemently resorted to the submissions of the ld. DR of the revenue. He submitted that Assessing Officer did not have any material on the basis of which he could have formed a reasonable belief that there escaped assessment of income for the asstt. year under consideration. According to him whatever enquiries were made by the Assessing Officer was for the asstt. year 1994-95. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held by the Hon'ble Supreme Court in the case of Ganga Saran Sons Ltd. Similar view has been taken by the Hon'ble Calcutta High Court in the case of Ram Narain Bhojnagarwalla v. ITO [1970] 77 ITR 653 though it was decided keeping in view the old provision but the principle of law is somewhat same. In that case it has been held that forming of belief is to be on the basis of certain materials. It is not enough for the Assessing Officer to have the material in his possession. He must perform further necessary mental act of accepting the material and information as reliable and confirming the belief that can be acted upon. In view of these principles of law one has to see what was the material before the Assessing Officer to have a reasonable belief that there escaped assessment of income. It is to be noted that Assessing Officer, while framing the assessment for asstt. year 1994-95, examined some of the trade creditors and he found that some of the creditors were bogus. He finally rejected the books of account of the assessee and made assessments. Probably Assessing Officer thought that the creditors found to be bogus in asstt. year 1994-95. There must be bogus creditors for this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and that is why he further observed that the reopening of the assessment by taking recourse to provision under section 147 was invalid and bad in law. His observations are justified. There is no merit in the grounds raised by the revenue. 11. In the result, the appeal is dismissed. ORDER UNDER SECTION 255(4) OF THE I.T. ACT. Since there is difference of opinion amongst the Members constituting the Division Bench, Patna on the undermentioned issues and hence the same is referred to the Hon'ble President, ITAT for necessary action: - "1. Whether in the facts and circumstances of the case and in law the CIT(A) has erred to hold that reopening of the assessment under section 147 of the I.T. Act is unjustified and bad in law? 2. Whether on the basis of material collected for the assessment year 1994-95 that certain creditors were bogus reopening of the assessment for the assessment year 1993-94 can be made under section 147 of the I.T. Act?" THIRD MEMBER ORDER M.A. Bakshi, Vice President. - The appeal of the Revenue and the cross objection of the assessee for the assessment year 1993-94 were heard by Division Bench at Patna. As a result of difference of opinion of the tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to believe that the income of the assessee has escaped assessment. Issue notice under section 148 of the I.T. Act. Though a list of sundry creditors were disclosed in the return of the income but notice under section 148 is being issued in view of the enquiries which revealed that transactions with the above mentioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. JTO[1993] 203 ITR 456 (SC)." The assessee pleaded before the Assessing Officer that the reopening of assessment was bad in law. It was pointed out that merely because some sundry creditors for assessment year 1994-95 appeared to be non-genuine, it should not necessarily be taken that the creditors for assessment year 1993-94 would also not be genuine. The objection of the assessee was not accepted by the Assessing Officer. He examined the books of account and after rejecting the book results estimated the income of the assessee from contract business at Rs. 5,10,374 by adopting a rate of gross profit at 8% on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that in assessment year 1994-95 enquiry was conducted by the Assessing Officer and admittedly the Inspector of the Income-tax Department had given a report to the ITO about 25 creditors appearing to be bogus. According to the learned counsel, the report of the Inspector is vague and the very fact that the Assessing Officer was making enquiries in regard to the sundry creditors for assessment year 1994-95 establishes the fact that the report of the Inspector was not conclusive. With reference to the order sheet entries, it was contended that the enquiry on 14-3-1995 had not been completed by the Assessing Officer for the assessment year 1994-95 and, therefore, he could not have formed a reasonable belief that the income of the assessee had escaped assessment for assessment year 1993-94. Reliance was placed on the following decisions of the Supreme Court in support of the claim that the reopening of assessment made by the Assessing Officer is bad in law:- Calcutta Discount Co. Ltd.'s case Ganga Saran Sons (P.) Ltd. s case Narayanappa's case Chidambaram Chettiar's case Durga Timber Works's case Chhugamal Rajpal's case Lakhmani Mewal Das's case East Coast Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 34(1)(a) is a condition precedent: the fulfilment of this condition is not a mere formality, it is mandatory, and failure to fulfil that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement: the officer is further required to record his reasons for taking action under section 34(1)(a) and obtain the sanction of the Central Board or the Commissioner, as the case may be." 8. In the case of Lakhmani Mewal Das, their Lordships of the Supreme Court held as under:- "The reasons for the formation of the belief contemplated by section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduce evidence of payment. In any event, this should come for consideration only in the assessment year 1945-46 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation." The Assessing Officer completed the assessment on February 12, 1946, without including that amount. Thereafter, the officer made further inquiry and on March 9, 1953, issued a notice under section 34(1)(a) of the Income-tax Act, 1922 for reassessment and included the sum of Rs. 1,50,000 in the income of the assessee for the assessment year 1944-45. The Appellate Assistant Commissioner, on appeal, set aside the order and directed the officer to redo the assessment after giving the assessee an opportunity to cross-examine the parties examined by the officer. The Income-tax Officer, without issuing a fresh notice of reassessment, enquired further into the matter: P's books of account were produced to prove the payment to the assessee, some witnesses were examined in the presence of the assessee, and a fresh order of assessment was made. This order was affirmed by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. The existence of the reason(s) to believe is intended to be a check, a limitation, upon his power to reopen the assessment. Section 148(2) imposes a further check upon the said power, viz,, the requirement of recording of reasons for such reopening by the Income-tax Officer. Section 151 imposes yet another check upon the said power, viz., the Commissioner or the Board, as the case may be, has to be satisfied, on the basis of the reasons recorded by the Income-tax Officer, that it is a fit case for issuance of such a notice. The power conferred upon the Income-tax Officer by sections 147 and 148 is thus not an unbridled one. It is hedged in with several safeguards conceived in the interest of eliminating room for abuse of this power by the Assessing Officers. The idea was to save the assessees from harassment resulting from mechanical reopening of assessments but this protection avails only to those ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held in good faith: it cannot be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section." 14. In the case of Ganga Saran Sons P. Ltd., their Lordships of the Supreme Court held as under:- "It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under section 147(a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude." 16. The legal principles that emerge from the aforementioned decisions may be summarized as under :- (i) That for valid reopening of assessment after four years, the Assessing Officer should have reason to believe that the income of the assessee had escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It is a condition precedent for assumption of jurisdiction under section 147(a). (ii) The condition that the Assessing Officer had reason to believe that the income of the assessee had escaped assessment is question of jurisdiction, a vital thing which can always be investigated by Court. The words 'has reason to believe' in section 147 are stronger than the words 'is satisfied'. The belief entertained by the Assessing Officer must not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons was not sufficient for forming a belief that the income of the assessee for assessment year 1993-94 had escaped assessment. As pointed out earlier, the enquiry relating to assessment year 1994-95 itself was in progress and no final conclusion had been arrived at, at the time of recording the reasons for the assessment year 1993-94. It also observed from the reasons recorded for the assessment year 1993-94 that the Assessing Officer has not pointed out that some of the creditors appearing for assessment year 1994-95 also appeared in assessment year 1993-94. Thus the only information available to the Assessing Officer at the time of issue of notice and recording of reasons for the assessment year 1993-94 was the report of the Inspector that some of the creditors appearing in the balance sheet for the assessment year 1994-95 may not be genuine This information may, in my opinion, at best be reason to suspect that for the assessment year 1993-94 also some creditors may not be genuine. So, however, it is well established principle of law that the 'reason to believe' for the purpose of section 147 does not mean 'reason to suspect'. There should be something more than mere suspicion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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