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TMI Blog2010 (10) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... ticles of Association during the previous year relevant to the assessment year 2003-04 and for the said purpose approached a number of prospective investors. Four private limited companies, namely, Nishant Finvest Pvt. Ltd., Shri Dinanath Luhhariwal Spinning Mills Pvt. Ltd., Division Trading Pvt. Ltd and K.R. Fincap Pvt. Ltd., decided to invest in the shares of the petitioner company. As pleaded, after observing all the legal formalities, the assessee-petitioner allotted the shares to these four companies on 31st March, 2003. The amount invested by the said companies are Rs.2,50,000/-, Rs.2,50,000/-, Rs.3,00,000/- and Rs.2,50,000/- respectively. The above-named companies were active as per the records of the Registrar of Companies (ROC) and are assessed to income-tax and have been allotted permanent account numbers by the Income Tax Department. 3. As pleaded, on 25th March, 2010, a notice under Section 148 of the Act was issued by the respondent No.1 to the petitioner alleging that he had reason to believe that the income chargeable to tax for the assessment year 2003-04 had escaped assessment within the meaning of Section 147 of the Act and, accordingly, he required the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question that emerges for consideration is whether in the case at hand, the initiation of proceedings under Section 147 is justified in law or not. 9. The assessing officer, while issuing the notice, has stated thus:- "Whereas I have reason to believe that your income chargeable to tax for the assessment year 2003-2004 has escaped assessment within the meaning of Section 147 of the Income Tax Act, 1961. I, therefore, propose to assess/reassess the income for the said assessment year and I hereby require you to deliver to me within 20 days from the date of service of this notice, a return in the prescribed form of the income of your income in respect of which you are assessable for the said assessment year." 10. After receipt of the said notice, the petitioner submitted that the return of income, as filed earlier, should be treated as the return in compliance with the notice under reference. In the said letter, he asked for reasons to enable him to file the objections. After receipt of the said letter, the respondent No.1, the assessing officer, sent a communication vide Annexure-XI wherein it has been stated thus:- "M/s Sarthak Securities Pvt. Ltd. AY 2003-04 19/3/2010 Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. The law postulates the A.O. (and not the Addl. DIT) to have reason to believe. Blind acceptance of the information furnished by the Addl. DIT cannot form reasons leading to the belief by the A.O. of any escapement of income. 4. The A.O. has to independently apply his mind to the information received from the Addl. DIT and arrive at the belief that income has escaped assessment............... In the instant case, the reasons recorded do not show any application of mind nor the same show any belief independently arrived at, which is the basic pre requisite for issuing notice under Section 148. 5. At any rate, the alleged bogus shareholders are all incorporated and active companies as per the records of Registrar of Companies. Moreover, as per the alleged information provided by the Addl. DIT himself, all of them had bank accounts and payments were made by them to the assessee company through banking channels. As such the identity of the shareholders stands duly accepted even by the Addl. DIT on whose information the proceedings have been initiated........ 6. In the instant case, the names of the shareholders have been provided by the Addl. DIT himself and are also incorpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year: Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.-Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason so recorded can be looked at for sustaining or setting aside a notice issued under section 148. In the case of Equitable Investment Co. (P.) Ltd. vs. ITO [1988] 174 ITR 714, a Division Bench of the Calcutta High Court has held that where a notice issued under section 148 of the Income-tax Act, 1961, after obtaining the sanction of the Commissioner of Income-tax is challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the Commissioner of Income-tax has been obtained. The Income-tax Department cannot rely on any other material apart from the report." 17. In Hindustan Lever Ltd. v. R.B. Wadkar, [2004] 268 ITR 332 (Bom), a Division Bench has opined thus:- ".... the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the Assessing Officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the Assessing Officer to reach to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO, [1991] 191 ITR 662, for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction." [Emphasis supplied] 19. In this context, we may refer with profit to a Division Bench decision of this Court in ITA No.1056/2009 (The Commissioner of Income Tax III v. SFIL Stock Broking Ltd.) decided on 27th April, 2010 wherein the Bench was dealing with the validity of the proceedings under Section 147 of the Act. The Bench reproduced the initial iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recedent as engrafted in the said provision are to be satisfied. 21. At this juncture, it is profitable to refer to the authority in GNK Driveshafts (India) Ltd. v. Income Tax Officer and Others, (2003) 179 C54 (SC) 11 wherein their Lordships of the Apex Court have held thus:- "5. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under Section 148 of the Income Tax Act is issued, the proper course of action for the notice is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years." 22. In Lovely Exports (P) Ltd. (supra), the Apex Court held thus:- "2. Can the amount of share money be regarded as u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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