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TMI Blog2012 (8) TMI 152X X X X Extracts X X X X X X X X Extracts X X X X ..... e - It is precisely for this reason that the liability of an individual or HUF to deduct tax at source upon the payments being made to the sub-contractor, is made relatable to financial year immediately preceding the year when such payment is made or credited - AO's reason to believe that the income chargeable to tax has escaped assessment is without any foundation and lacks validity - in favour of assessee. - SPECIAL CIVIL APPLICATION NO. 12243 OF 2009 - - - Dated:- 16-7-2012 - AKIL KURESHI and ms. HARSHA DEVANI, JJ. JUDGMENT Akil Kureshi, J. Petitioner has challenged a notice dated 05.03.2009, by which, the Assessment Officer sought to reopen the assessment of the petitioner for the assessment year 2005-06. 2. Facts may be noted in brief. 2.1 Petitioner is an individual. He is engaged in diamond processing. For the A.Y. 2005-06, he filed his return of income on 28.10.2005. In the return, the petitioner showed labour charges payment of Rs. 3,07,59,872/-. The Assessing Officer framed the assessment after scrutiny under Section 143(3) of the Act on 21.12.2007. In the assessment order, he made no disallowance on such charges. 2.2 Subsequently, the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 44AB of the Act. The petitioner contended that the Assessing Officer wrongly believed that the petitioner was required to deduct tax at source on the payment of labour charges, which he made during the financial year relevant to A.Y. 2005-06. 2.5 Such objections were disposed of by the Assessing Officer vide order dated 06.11.2009. The Assessing Officer was of the opinion that the petitioner's interpretation of Section 194C of the Act was erroneous. At that stage, the petitioner approached this Court by filing present petition. 3. Learned counsel, Mr. J.P. Shah for the petitioner submitted that under Section 194C of the Act and particularly sub-section (2) thereof, the petitioner was not required to deduct tax at source on the payment of labour charges which he had paid. He submitted that in the immediately preceding financial year, the petitioner was not covered under Section 44AB of the Act. In fact, the financial year relevant to the A.Y. 2005-06 was first year of the petitioner's business. That being so, Section 194C of the Act was wrongly applied. 4. Counsel submitted that when the sole reason recorded by the Assessing Officer to reopen the assessment lacked va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a hearing on the matters in regard to which he is required to entertain the belief before he can issue notice under s.147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid." 8. Coming back to the facts of the case, we may record that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein: Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the sub-contractor, shall be liable to deduct income-tax under this sub-section. Explanation I.- For the purposes of sub-section (2), the expression "contractor" shall also include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State or a foreign enterprise or any association or body established outside India. Explanation II.- For the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the sub-contractor. However, proviso brings such individual or HUF within the fold of sub-section (2) if in the financial year immediately preceding the financial year during which such sum is credited or paid, such individual or HUF was covered by clause (a) or clause (b) of Section 44AB. Therefore, to insist that an individual or HUF should deduct tax at source under sub-section (2) of Section 194C on payments made to a sub-contractor, it must be established that in the financial year immediately preceding the financial year in which such sum is paid or credited, total sales, gross receipts or turnover of such individual or HUF from profession or business exceeded the limits provided in Section 44AB of the Act and the accounts were thus compulsorily auditable. 14. In the present case, admittedly such condition was not satisfied in the preceding financial year. The AO however interpreted that liability to deduct tax at source would arise even if the case of the assessee fell under clauses (a) or (b) of Section 44AB in the current financial year. We do not see how such interpretation is possible. Firstly, proviso to sub-section (2) of Section 194C clearly refers to financial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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