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TMI Blog2011 (11) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... and nobody knew which shares were transacted and with whom the transaction has taken place and in that case there were absolutely no details available and the information supplied was extremely scanty and vague and in that light of those facts, the Hon'ble Jurisdictional Delhi High Court held that initiation of proceedings u/s 147 of the Act by the AO was not valid and justified in the eyes of law X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of which, it could be said that the income of the assessee had escaped assessment. In other words, it was submitted by him that there was no material on the basis of which a reasonable belief that income has escaped assessment within the meaning of sec. 147 could be formed and even if some material could be said to be there, there was no live nexus between the material and the formation of the impugned belief by the AO. He, therefore, submitted that the reassessment proceedings initiated by the AO under sec. 147 are invalid and without jurisdiction. In this connection, he relied upon the following amongst others decisions:- (1) Calcutta Discount Ltd. v. ITO [1961] 41 ITR 191 (SC). (2) Ganga Saran & Sons (P.) Ltd. v. ITO (SC). (3) Phool Chand Bajranj Lal v. ITO [1993] 203 ITR 456 (SC). (4) ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). (5) United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 (Delhi). 8. The learned DR on the other hand, submitted that in the light of the information received from the Director of Income-tax (Inv.), New Delhi vide letter dated 16.06.2006, the AO had sufficient material to have reason to believe that income had escaped assessment wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adequacy or sufficiency of the reasons, which have weighed with the AO in coming to the belief, but the Court can certainly examine whether reasons are relevant and have a bearing on the matters in regard to which he is required to entertain a belief before he can issue notice u/s. 147/148 of the Act. If there is no rational or intelligible nexus or link between the reason to believe, so that, on such reasons, no one properly instructed on fact and law could reasonably entertain the belief, the conclusion would be inescapable that the AO could not have reason to believe that any part of the assessee's income had escaped assessment, and the notice issued by him would be liable to be struck down as invalid. 13. Similarly, in the case of Lakhmani Mewal Das (supra), the Hon'ble Apex Court of the land has held that the reasons for the formation of the belief contemplated by the section 147 of the Act for reopening of the assessment must have rational connections or relevant bearing on the formation of belief. Rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the AO and the formation of his belief that there has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has considered the scope and meaning of the words "reason to believe" used in section 147 of the Act, and, thus, held and observed as under:- "Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income has escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action u/s. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to the decision of Hon'ble Supreme Court in the case of Ganga Saran & Sons (P.) Ltd. (supra), and its own decision in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 (Delhi) and in the case of Bawa Abhai Singh v. Dy. CIT [2002] 253 ITR 83 (Delhi), wherein it was observed that "reason to believe" postulates the foundation based on information and a belief based on reasons. 18. The expression "information" must be something more than a mere rumour or gossip or a hunch as so observed by the Division Bench of Delhi High Court in the case of L. R. Gupta v. Union of India [1992] 194 ITR 32. Of course, this was in the context of section 132 of the Act but as held in United Electrical Co. (P.) Ltd.'s. case (supra), the logic is equally applicable to a case u/s. 147 of the Act. 19. Recently, in the case of Signature Hotels (P) Ltd. v. ITO [2011] 338 ITR 51 (Delhi), the Hon'ble jurisdictional High Court of Delhi has considered the object and scope of sec. 147 of the Act and has held as under:- 4. The aforesaid Section is wide but it is not plenary. We have to consider and examine the crucial expression "reason to believe" used in the said Section. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to show that the confession of M.K. related to a loan to the assessee, much less to the loan which was shown to have been advanced by that person to the respondent and the live link or close nexus which should be there between the material before the ITO and the belief which he was to form was missing or was, in any event, too tenuous to provide a legally sound basis for reopening the assessment ….. The position in the present case falls within the same category. At the time of the original assessment all the facts relating to the cash credits in question were fully disclosed. This has been found by the learned judge at page 960 (of 118 ITR) and indeed this is the accepted position on the basis of which even the proposal of the ITO to the Commissioner (set out at page 964) proceeded. Thereafter, the only material received by the ITO appears to be that the revenue authorities had carried out certain investigations, that they had discovered the existence of bogus hundi brokers who were allegedly lending their names to assessee and that a list had been circulated to various ITOs of the hundi brokers who were allegedly indulging in malpractices. The internal audit party appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CO. P. Ltd. v. 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." After referring the aforesaid decision of the Hon'ble Bombay High Court, the Hon'ble Delhi High Court further observed as under:- 11. The aforesaid paragraph in IBM World Trade Corporation (supra) was cited with approval in Prashant S. Joshi Versus Income-Tax Officer and Another, 2010 (324) ITR 154 (Bom.) and it was held as under :- 'Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 163, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be direct nexus or live link between the material coming to the notice of the AO and the formation of the belief that there has been escapement of income of the assessee from the assessment in the particular year. (iii) It is not any and every material, howsoever, vague and indefinite or distant, remote or far-fetched, which would warrant the formation of the belief relating to the escapement of income of the assessment. (iv) If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one can properly instructed on facts and law could reasonably entertain a belief, the conclusion would be inescapable that the AO could not have reason to believe. In such a case, the notice issued by him would be liable to be struck down as invalid. (v) The reasons recorded by the AO cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons, which were lacking in the material particulars would get supplemented, by the time the matter reaches to the court on the strength of affidavit or oral submissions advanced. In other words, the reasons recorded by the AO for initiating proceedings under sec. 147 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lved in giving and taking accommodation entries only and represented unsecured money of the assessee company is actually unexplained income of the assessee company or that it has been informed by the Director of Income-tax (Inv.), New Delhi vide letter dated 16.06.2006 that the assessee company was involved in giving and taking bogus entries/transactions during the relevant financial year. The AO did not mention the details of transactions that represented unexplained income of the assessee company. The information on the basis of which the AO has initiated proceedings u/s 147 of the Act are undoubtedly vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which a reasonable person could have formed a belief that income had escaped assessment. In other words, the reasons recorded by the AO are totally vague, scanty and ambiguous. They are not clear and unambiguous but suffer from vagueness. The reasons recorded by the AO do not disclose the AO's mind as to what was the nature and amount of transaction or entries, which had been given or taken by the assessee in the relevant year. The reasons recorded by the AO also do not disclose his mi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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