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Re-assessment order is valid only when AO applies own mind in respect of information received from Investigative Wing to form reasons to believe, rather than just following the observations in such report: HC

2019-TIOL-1992-HC-AHM-IT

IN THE HIGH COURT OF GUJARAT

AT AHMEDABAD

R/Special Civil Application No. 19392 of 2018
R/Special Civil Application No. 19393 of 2018

HEMJAY CONSTRUCTION COMPANY PVT LTD
THROU DEENABEN, YOGESHBHAI SHAH

Vs

INCOME TAX OFFICER
WARD -2(2)

J B Pardiwala & A C Rao, JJ

Dated: August 20, 2019

Appellant Rep by: Mr Darshan B Gandhi (9771) & Mr SP Majmudar (3456)
Respondent Rep by: Mrs Mauna M Bhatt (174)

Income Tax – Writ – Section 148

Keywords – Accommodation entries – Reason to believe – Unsecured loan transactions

THE assessee return for the relevant AY was processed u/s 143(1) without modification. Later the case was selected for scrutiny assessment. During the original assessment, the AO raised a query in respect of unsecured loan transactions. Notices u/s 133(6) was sent to parties concerned who claimed to had been given the loan. Later, the notice of reopening came to be issued on the grounds that the assessee had received loans from five Kolkata based shell companies who were indulged in providing accommodation entries in the form of unsecured loans. The assessee’s objections were overruled and the re-assessment order was passed.

Having heard the parties, the High Court held that,

Whether validity of the assumption of jurisdiction u/s 147 is tested only as per the reasons recorded for issuing reopening notice u/s 148 and not by any other reasons even if it can be otherwise inferred from the records – YES: HC

++ the Court should be guided by the reasons recorded for the reassessment and not by the reasons or explanation given by the AO at a later stage in respect of the notice of reassessment. To put it in other words, having regard to the entire scheme and the purpose of the Act, the validity of the assumption of jurisdiction u/s 147 can be tested only by reference to the reasons recorded u/s 148(2) and the AO is not authorized to refer to any other reason even if it can be otherwise inferred or gathered from the records. The AO is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others upto his sleeves to be disclosed before the Court if his action is ever challenged in a court of law;

Whether re-assessment order is valid when the AO applies his/ her own mind to materials such as information received from the Investigation Wing to form his/her own subjective satisfaction of reason to believe rather than reproducing the observation made by the investigation report – YES: HC

++ the instant case is not a case of total non-application of mind on the part of the AO while recording the reasons for reopening of the assessment. It also cannot be said that his conclusion was merely based on the observations and information received from the Investigation Wing. The AO could be said to have applied his mind to the information. The AO could not be said to have merely concluded without verifying the facts that it is the case of reopening of the assessment. There is no merit in the vociferous submission of the assessee that the contents of the reasons recorded by the AO for the reopening is merely an introduction about the investigations conducted by the IW, the modus operandi of the entry provided, the summing up of inquiry of the IW and the information received from the IW. This court has examined the belief of the AO to a limited extent to look into whether there was sufficient material available on record to form a reasonable belief and whether there was a live link existing of the material and the income chargeable to tax that escaped assessment. The case on hand is not one where it could be argued that the AO on absolutely vague or unspecific information, initiated the proceedings of reassessment without taking the pains to form his own belief in respect of such materials. Thus, no case is made out by the assessee for interference.

Assessee’s writ applications dismissed

Cases followed:

Income Tax Officer vs Selected Dalurband Coal Co. Pvt. Ltd – 2002-TIOL-2198-SC-IT

Income Tax Officer vs Purushottam Das Bangur – 2002-TIOL-2363-SC-IT

Principal Commissioner of Income tax, Rajkot-3 v. Gokul Ceramics – 2016-TIOL-1420-HC-AHM-IT

AGR Investment Ltd. vs. Additional Commissioner of Income Tax and Anr. – 2011-TIOL-29-HC-DEL-IT

Yogendrakumar Gupta vs. Income-Tax Officer – 2014-TIOL-2480-HC-AHM-IT

JUDGEMENT

Per: J B Pardiwala:

1. Since the issues raised in both the captioned writ applications are the same and the parties are also the same, those were heard analogously and are being disposed of by this common judgment and order.

2. For the sake of convenience, the Special Civil Application No.19392 of 2018 is treated as the main matter.

3. By this writ application under Article 226 of the Constitution of India, the writ applicant has prayed for the following reliefs;

“(i) This Hon’ble Court be pleased to issue a writ of Mandamus or Prohibition or any other appropriate writ, order or direction quashing the impugned 148 notice dated 29.03.2018 at Annexure-K and impugned order rejecting objection dated 22.11.2018 at Annexure-O.

(ii) Pending the hearing and final disposal of this application, this Hon’ble Court be pleased to stay the reassessment proceedings pursuant to notice under section 148 dated 29.03.2018 at Annexure-K.

(iii) This Hon’ble Court be pleased to grant any further or other relief as this Hon’ble Court deems just and proper in the interest of justice, and

(iv) This Hon’ble Court be pleased to allow this application with costs against the respondent.”

4. The facts giving rise to this writ application may be summarized as under:

4.1 The writ applicant is an assessee. The assessee filed its return of income for the A.Y.2011-12, declaring the total income of Rs.14,00,432/- on 30th March, 2013. The same was processed under Section 143(1) of the Income Tax Act, 1961 ( for short ” the Act, 1961″) without any modification.

4.2 The case was selected for scrutiny assessment and a notice under Section 143(2) dated 12th August, 2013 was issued and served upon the assessee. The case was, thereafter, transferred to the office of the Income Tax Officer, Ward-2(1), Jamnagar from the office of the Deputy Commissioner of Income Tax, Central Circle-II, Rajkot on 3rd August, 2013.

4.3 A notice under Section 142(1) dated 16th September, 2013 was issued along with the questionnaire calling for certain specific details/information. In para-6 of the said notice dated 16th September, 2013, the Assessing Officer raised a specific query with regard to the unsecured loan transactions. The query reads thus:

“6. Furnish complete details (confirmations, creditworthiness proof) of new unsecured loans/deposits taken and squared up accounts during the year along with details regarding interest payment, if any, made to them and also copies of balance sheet, return of income filed and copy of bank statement for the year under consideration in support of your claim. Provide confirmation of all such loans including old loans etc.”

4.4 It is the case of the writ applicant that the specific query raised by the Assessing Officer with regard to the unsecured loan transactions was answered with supporting documentary evidence. It also appears that in the course of the proceedings of the original assessment under Section 143(3) of the Act, the notices dated 19th March, 2014 were issued under Section 133(6) of the Act,1961 to those parties who claimed to have given the unsecured loan to the writ applicant.

4.5 A notice under Section 148 of the Act, 1961 dated 29th March, 2018 came to be issued to the writ applicant.

4.6 The reasons assigned by the Income-tax Officer for reopening of the assessment under Section 147 of the Act, 1961 are as follows:

“1. The assessee is a company and has filed its return of income for the A.Y. 2011-12 on 30.03.2013 declaring total income at Rs.14,00,430/-. The assessment u/s. 143(3) of the Act was finalized accepting the returned income of Rs.14,00,430/-.

2. As per information received from the DDIT (Inv), Jamnagar, it is revealed that the assessee has taken unsecured loan aggregating to Rs.2,28,00,000/- during the year under consideration from five shell companies situated in Kolkatta details of which are as under:

Sr. No.Name of CompanyAddressAmount of unsecured loanDate of Acceptance of LoanDate of Repayment
1BSR Finance & Construction Ltd.7/1A, Grant lane, 2nd Floor, Room No.202, Kolkatta- 700012.20,00,00017.01.201120.03.2013
25,00,00021.01.2011 
2Spectrum Stock Service Pvt. Ltd.1, British Indian Street, 4th Floor, Room No.405, Kolkatta18,00,000122.06.201019.03.2015
3Nirlon Trade & Finance Pvt. Ltd.29B, Rabindra Sarani, 3rd Floor, Room No.2E, Kolkatta25,00,00010.06.201015.02.2013
25,00,00014.06.201019.02.2013
25,00,00016.06.2010 
4Shri Sati Fivest Pvt. Ltd3, Amartolla Street, 1st Floor, Kolkatta- 70000125,00,00010.06.201019.03.2013
25,00,00025.01.2011 
5Ishan Tie Up Pvt. Ltd.369/14, Dakshindari Road Narmada Appt, 4th Floor, Flat No.9, Kolkatta- 700048.30,00,00017.01.201113.03.2013
10,00,00025.01.2011 

3. During the investigation, it was also found that all the above companies have No credentials to carry out transaction of huge amounts as per their income profile. These Kolkatta based companies are indulged in providing accommodation entries in the form of unsecured loans.

4. On analysis of above fact, it can be construed that the assessee has taken accommodation entries from the above shell companies in the form of bogus loan as these companies have no such credit worthiness. In view of the above facts, I have reason to believe that income chargeable to tax of Rs.2,28,00,000/- has escaped assessment for A.Y.2011-12 by reason of failure on part of the assessee.

5. Therefore, I have reason to believe that income chargeable to tax to the tune of Rs.2,28,00,000/- has escaped assessment.

6. In this case, more than four years have lapsed from the end of assessment year under consideration. Hence, necessary sanction to issue notice u/s. 148 has been obtained separately from Principal Commissioner of Income-tax, Jamnagar as per the provisions of section 151 of the Act.”

4.7 The writ applicant filed his objections dated 17th November, 2018, stating as under:

“The case is re-opened and you have sent reasons for reopening also. The assessment for A.Y. 2011-12 was completed u/s. 143(3) by the ITO, Ward 2(1) and order u/s. 143(3) was passed on 28/03/2014.

At the time of assessment u/s. 143(3), then ITO has already touched upon the Cash Credit and Unsecured Loan which you have considered for re-opening. It is merely a change of opinion and that cannot be the base for re-opening of the completed assessment. We strongly oppose the proceedings u/s. 148 of the LT Act. In support of our belief we would like to draw your kind attention to the following notices and our reply during the assessment u/s. 143(3) of the I.T. Act.

In addition to the questionnaire we draw your kind attention to notice issued by the ITO on 17/2/2014, 20/3/2014, 21/3/2014 and our reply dated 21/3/2014, 24/3/2014. All above notices were in respect of application money which you have considered the base for re-opening.

We have already proved the identity, capacity and genuineness of transactions in respect of unsecured loan by filing confirmations with PA Number, Address of Five Companies. All transactions are through property banking channel and we have already filed our bank statement as well as bank statements of the lenders/depositors. Moreover, the depositor has directly filed their copy of IT Return. It proves that we have established the identity, capacity and genuineness of transactions took place between the assessee and the depositors. The basis for re-opening as stated in your recorded reasons is para-3 and 4 we would like to submit that we cannot be expected to prove the source of source and there are number of judgments of various Court that the assessee is not expected to prove the source of source and hence no addition can be made u/s.68 of the I.T. Act.

With reference to your notice dated 13.11.2018 we submit as under.

A. The assessee is a construction contractor.

B. We have already filed audit report and acknowledgment of ITR vide our letter dated 13.09.2013.

C. We enclose herewith all bank statements.

D. As already replied.

E. Working of Capital Gain and Copy of Computation of Income is enclosed herewith.”

4.8 Ultimately, an order came to be passed dated 22nd November, 2018, overruling the objections raised by the assessee against the issue of notice under Section 148 of the Act, 1961. The order reads thus:

“The assessee filed its Return of income for A.Y. 2011-12 declaring total income of Rs.14,00,432/- on 30.03.2013. The assessment u/s. 143(3) of the I.T. Act was finalized on 28.03.2014 accepting total income at Rs.14,00,432/-. This office got in possession of information that the assessee has taken unsecured loan of Rs.2,25,00,000/- from five shell companies situated in Kolkata during the year under consideration It was also found that the above five companies has given accommodation entries to the assessee in the form of unsecured loan which fact is further substantiated by the income profile of these companies. The assessee has taken accommodation entries from the above five shell companies in the form of bogus loan as these companies have no such creditworthiness and by doing so the assessee has evaded tax. This information was received in this office on 26.03.2018 and the same was not on records earlier.

2. In view of the above, notice u/s. 148 of the I.T. Act, 1961 was issued to the assessee on 29.03.2018 after getting prior approval of the appropriate authority requesting to file its return of income within 30 days of receipt of the notice. In response, the A.R. of the assessee, Shri V P Sutaria, CA submitted a letter on 16.04.2018 stating that the original return filed for A.Y. 2012-13 be treated as return filed u/s. 148 of the Act and requested to give copy of reasons recorded for reopening and enclosed copy of Acknowledgement for the year under consideration. Subsequently, vide letter dated 12.09.2018, the assessee was again requested to e-file his Return of Income and after verifying the same submit the copy of ROI along with Computation of Income. Thereafter, vide notice u/s. 142(1) of the Act dated 13.11.2018, the assessee was requested to submit the details called for and copy of reason for reopening of the assessment was enclosed.

3. The A.R. of the assessee vide his letter dated 17.11.2018 received in this office on 19.11.2018 submitted objection letter for the notice u/s.148 of the Act in this case. The operative part of the submission is reproduced as under:

“At the time of assessment u/s. 143(3), then ITO has already touched upon the Cash Credit and Unsecured Loan which you have considered for re-opening. It is merely a change of opinion and that cannot be the base for re-opening of the completed assessment. We strongly oppose the proceedings u/s. 148 of the LT Act. In support of our belief we would like to draw your kind attention to the following notices and our reply during the assessment u/s. 143(3) of the I.T. Act.

We have already proved the identity, capacity and genuineness of transactions in respect of unsecured loan by filing confirmations with PA Number, Address of Five Companies. All transactions are through property banking channel and we have already filed our bank statement as well as bank statements of the lenders/depositors. Moreover, the depositor has directly filed their copy of IT Return. It proves that we have established the identity, capacity and genuineness of transactions took place between the assessee and the depositors. The basis for re-opening as stated in your recorded reasons is para-3 and 4 we would like to submit that we cannot be expected to prove the source of source and there are number of judgments of various Court that the assessee is not expected to prove the source of source and hence no addition can be made u/s.68 of the I.T. Act.

4. The objection raised-by the assessee has been duly considered, however, objections raised by the assessee are not found acceptable on the following reasons:

(i) As additional facts and information has come on the records upon investigation and enquiries made which clearly establish that the lendor companies are shell companies and has no such creditworthiness to advance such amount of loan. These companies have given accommodation entries in the form of unsecured loans amounting to Rs.2,25,00,000/-. Moreover, these companies have no financial credentials to carry out transactions of huge amounts which are also evident from the Income profiles of these companies. In view of the above facts and Information, it clearly establish that due to failure of the assessee to disclose the above facts during the time of assessment u/s143(3) of the Act has made the aesessee to escape tax evasion.

(ii) With regard to the objections raised by the assessee that the issue of Unsecured Loan was touched upon and verified by the then A0 during the course of assessment proceedings u/s. 143(3) of the Act, it is observed that the case of the assessee for the A.Y. 2011-12 was selected for scrutiny under CASS for reason “Unsecured Loan”. Though, the contention of the assessee that issue of unsecured loan was verified by the then A0 is not maintainable as the then A0 was not aware of the additional facts and information regarding the above transactions which came to light recently. Moreover, the issue of creditworthiness of such loans was not the subject matter in the earlier proceedings and as such this is not a case of change of opinion as alleged in the objection raised.

5. The explanation/objection raised by the assessee vide his letter dated 17.11.2018, is not accepted as discussed above. Notice issued u/s.148 of the Act dated 29.03.2018 served upon the assessee is held as “good” and “valid” within the meaning of provisions of Section 148 and follow up action for finalization of assessment proceedings will be exercised. The objection/explanations raised by the assessee vide letter dated 17.11.2018 against the proceedings for re-opening and issuance of notice u/s. 148 of the Act is, hereby, rejected. “

4.9 Being dissatisfied with the re-opening of the assessment, the writ applicant has come up with the present writ application.

5. Submissions on behalf of the writ applicant:-

5.1 Mr. Darshan Gandhi, the learned counsel appearing for the writ applicant invited our attention to the reasons recorded for reopening the assessment. He submitted that the Assessing Officer seeks to reopen the assessment on the ground that the information received from the DDIT (Inv), Jamnagar reveals that the petitioner has taken unsecured loan aggregating to Rs.2,28,00,000/- during the year under consideration from five shell companies, details whereof are set out in the reasons. He submitted that according to the Assessing Officer, during the investigation it was found that the said companies have no credentials to carry out transactions of huge amounts as per their income profile and, therefore, the Assessing Officer seeks to reopen the assessment on the ground that the above income has escaped assessment.

5.2 The learned counsel invited our attention to the notice dated 16.9.2013 issued by the Assessing Officer during the course of the scrutiny proceedings, to point out that the Assessing officer had called for complete details of the new unsecured loans/deposits taken and accounts squared up, in response to which, the writ applicant had furnished all the necessary details with regard to the loan taken from the five companies referred to in the reasons recorded.

5.3 It was pointed out that the confirmations from the said companies were furnished during the course of the scrutiny proceedings together with the copies of their bank statements.

5.4 It was submitted that the Assessing Officer after being satisfied with regard to the creditworthiness and genuineness of the said parties did not make any addition. It was pointed out that subsequent to the assessment order being passed, the Assessing Officer had also received confirmations from each of the said companies, copies whereof are annexed at Annexure-J to the petition.

5.5 It was submitted that every transaction referred to in the reasons recorded had been gone into at the time of scrutiny assessment and hence, it is clear that the Assessing Officer now seeks to reopen the assessment on a mere change of opinion. It was submitted that, therefore, the assumption of jurisdiction on the part of the Assessing Officer under section 147 of the Income Tax Act, 1961 is invalid.

5.6 It was further submitted that the impugned notice is dated 29.3.2018 whereby the Assessing Officer seeks to reopen the assessment for assessment year 2011-12, which is clearly beyond a period of four years from the end of the relevant assessment year, and hence, the first proviso to section 147 of the Act would be attracted.

5.7 It was submitted that all the material necessary for the assessment had been duly furnished before the Assessing Officer during the course of the scrutiny assessment, and hence, there is no failure on the part of the writ applicant to disclose fully and truly all the material facts necessary for the assessment and, in such circumstances, the reopening of assessment is bad in law.

5.8 Mr. Gandhi, in support of his submissions, has placed reliance on one order passed by the Bombay High Court in the case of NuPower Renewables Pvt. Ltd. vs. Asst. Commissioner of Income Tax, Writ Petition No.3618 of 2018, decided on 7th March, 2019 = 2019-TIOL-715-HC-MUM-IT. This decision of the Bombay High Court is sought to be relied upon to fortify the submission that the information supplied to the A.O. by the Investigation Wing, by itself, would not be sufficient to reopen the assessment. In other words, the investigation into the loan transactions would fall within the realm of fishing or roving inquiry which is wholly impermissible in law in the context of the reopening of the assessment.

5.9 Mr. Gandhi also placed reliance on the decision of the Supreme Court in the case of Income-tax Officer vs. Lakhmani Mewal Das, reported in (1976) 103 ITR 437 (SC) = 2002-TIOL-886-SC-IT to make good his submission that the grounds or reasons which lead to the confirmation of the belief contemplated by Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all the materials facts. The reason must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.

5.10 Mr. Gandhi also placed reliance on a decision of this Court in the case of Inductotherm (India) (P.) Ltd. vs. M. Gopalan, Deputy Commissioner of Income Tax, reported in (2013) 356 ITR 481 = 2012-TIOL-667-HC-AHM-IT. This decision has been relied upon by Mr. Gandhi to fortify his submission that even in case of reopening of an assessment which was previously accepted under Section 143(1) of the Act without scrutiny, the Assessing Officer would have the power to reopen the assessment provided he had some tangible material, on the basis of which, he could form a reason to believe that the income chargeable to tax had escaped assessment. According to Mr. Gandhi, the information furnished by the Investigation Wing would not constitute tangible material, on the basis of which, the Assessing Officer could form a reason to believe that the income chargeable to tax had escaped assessment. In such circumstances, referred to above, Mr. Gandhi prays that there being merit in both the writ applications, they be allowed and the notice for reassessment be quashed.

6. Submissions on behalf of the Revenue:-

6.1 Mr. Bhatt, the learned senior counsel appearing for the department has vehemently opposed both the writ applications. Mr. Bhatt submitted that it would be immaterial whether the Assessing Officer, at the time of making the original assessment, could or could not have found by further inquiry or investigation whether the transactions were genuine or not. If on the basis of the subsequent information, the Assessing Officer arrives at a conclusion after satisfying the twin conditions prescribed in Section 147(a) of the Act that the assessee had not made a full and true disclosure of the material facts at the time of the original assessment, the income chargeable to tax could be said to have escaped assessment. Mr. Bhatt submitted that the argument of Mr. Gandhi that the question regarding the truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto, is without any merit. According to Mr. Bhatt, if such argument is accepted, the same would amount to doing violence to the plain language of Sections 147(a) and 148 of the Act respectively.

6.2 Mr. Bhatt submitted that the Court should look to the purpose and intent of the provisions. Mr. Bhatt would submit that one of the purposes of Section 147 is to ensure that an assessee does not get away by willfully making a false or untrue statement at the time of the original assessment. Mr. Bhatt submitted that the information provided by the Deputy Director of Income-Tax (Investigation), Jamnagar to the Assessing Officer speaks for itself. It is on the basis of such information that the Assessing Officer has formed a reasonable belief that the transactions were all sham and bogus. According to Mr. Bhatt, on the basis of such tangible material if the Assessing Officer proposes to reopen the assessment, it cannot be termed as a roving or a fishing inquiry. According to Mr. Bhatt, the Assessing Officer could not be said to have merely and mechanically acted on the report of the Investigation Wing. The reasons recorded by the Assessing Officer speak for itself. Mr. Bhatt, in support of his submissions, has placed reliance on the following decisions:

“(i) Calcutta Discount Company Limited vs. Income Tax Officer, Companies District, I & Ors., 41 ITR 191 (SC); = 2002-TIOL-550-SC-IT-CB

(ii) Phool Chand Bajrang Lal & Ors. vs. Income Tax Officer & Ors., 203 ITR 456 (SC); = 2002-TIOL-794-SC-IT

(iii) Yogendrakumar Gupta vs. Income-Tax Officer, 366 ITR 186; = 2014-TIOL-2480-HC-AHM-IT

(iv) Gujarat Power Corporation Ltd. vs. Assistant Commissioner of Income Tax, 350 ITR 266; = 2012-TIOL-689-HC-AHM-IT

6.3 Mr. Bhatt also made available for our perusal the information in writing furnished by the Investigation Wing to the Assessing Officer. It appears that during the course of the investigation, it was found that all those companies said to have given unsecured loan to the writ applicant and which is shown to have been repaid by the writ applicant to the respective company, are all shell companies found to have been indulging in providing accommodation entries in the form of secured loans. The report further indicates that thousands of companies have been registered at one address situated at Calcutta. The Directors are all common in the multiple companies. The companies have no financial credential to carry out the transactions of huge amounts which was found evident from the income profiling of all those companies. This is just a gist of the investigation report.

6.4 In such circumstances, referred to above, Mr. Bhatt, the learned senior counsel appearing for the department prays that there being no merit in the writ applications, those may be rejected.

7. At this stage, Mr. Gandhi, the learned counsel appearing for the writ applicant insisted that he should be supplied with the copy of the report of the Investigation Wing. We declined to accede to such request of Mr. Gandhi. We did give a fair idea about the contents of the report of the Investigation Wing. The proceedings initiated under Section 147 of the Act would not be rendered void on non-supply of such document, for which, confidentiality is claimed at this stage. In this regard, we place reliance on the decision of the Delhi High Court in the case of Acorus Unitech Wireless (P) Ltd. vs. Asst. CIT, (2014) 362 ITR 417 = 2014-TIOL-284-HC-DEL-IT.

ANALYSIS

8. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the reopening of the assessment is permissible in law having regard to the facts on record.

9. Section 147 of the Income-tax Act, 1961 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 153, assess or reassess such income “and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section”. The proviso deals with the reopening of an assessment upon the expiry of a period of four years from the end of the relevant assessment year. Explanation 3 to section 147 was inserted by the Finance (No. 2) Act of 2009, with effect from 1-4-1989. Explanation 3 provides as follows :

“Explanation 3.–For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.”

10. Prior to its amendment with effect from 1-4-1989, section 147 provided as follows :–

“147. Income escaping assessment. – If — (a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).”

11. The condition precedent to the exercise of the jurisdiction under section 147 is the formation of a reason to believe by the Assessing Officer that any income chargeable to tax has escaped assessment. Upon the formation or a reason to believe, the Assessing Officer, before making the assessment, reassessment or recomputation under section 147 has to serve on the assessee a notice requiring him to furnish a return of his income. Upon the formation of the reason to believe that income chargeable to tax has escaped assessment, the Assessing Officer is empowered to assess or reassess such income “and also” any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under section 147.

12. The effect of Explanation 3 which was inserted by the Finance (No. 2) Act of 2009 is that even though the notice that has been issued under section 148 containing the reasons for reopening the assessment does not contain a reference to a particular issue with reference to which income has escaped assessment, the Assessing Officer may assess or reassess the income in respect of any issue which has escaped assessment, when such issue comes to his notice subsequently in the course of the proceedings. The reasons for the insertion of Explanation 3 are to be found in the Memorandum explaining the provisions of the Finance (No. 2) Bill of 2009. The Memorandum treats the amendment to be clarificatory and contains the following Explanation:

“Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.

With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in section 147 to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under subsection (2) of section 148.”

13. In order to appreciate the reasons for the amendment inserting Explanation 3, it would be necessary to advert to some of the judgments of the High Courts, prior to the amendment.

14. The Punjab and Haryana High Court, in its decision, in Vipan Khanna v. Asstt. CIT [2002] 255 ITR 2201dealt with the question as to whether, after initiating the proceedings under section 147 on the ground that the petitioner had claimed depreciation at a higher rate, the Assessing Officer would be justified in launching an inquiry into the issues which were not connected with the claim of depreciation. This question was answered in the negative.

15. A Division Bench of the Kerala High Court held in Travancore Cements Ltd. v. CIT [2008] 305 ITR 1701, that upon the issuance of a notice under section 148(2), when the proceedings were initiated by the Assessing Officer on the issues in respect of which he had formed a reason to believe that the income had escaped assessment, it was not open to the Assessing Officer to carry out an assessment, or reassessment in respect of the other issues which were totally unconnected with the proceedings that were already initiated and which came to his knowledge during the course of the proceedings. The Division Bench held that in respect of an issue which is totally unconnected to the basis on which the Assessing Officer formed a reason to believe that income escaped assessment and issued a notice under section 148, it was open to him to issue a fresh notice by following subsection (2) of section 148 with regard to the escaped income which came to his knowledge during the course of the proceedings. The Kerala High Court held as follows:

“. . .The Assessing Officer gets jurisdiction under section 148 to assess or reassess the income which has escaped assessment only after sub-section (2) of section 148 is complied with. The question is whether sub-section (2) of section 148 has to be complied with if any other income chargeable to tax has escaped assessment, or which comes to his knowledge subsequently in the course of the proceedings. In other words, when proceedings are already on in respect of one item in respect of the income for which he had already recorded reasons is it necessary that he should record reasons for assessing or reassessing any of the items which are totally unconnected with the proceedings already initiated. Suppose under two heads, income has escaped assessment and those two heads are inter-linked and connected, the proceedings initiated or notice already issued under sub-section (2) of section 148 would be sufficient if the escaped income on the second head comes to the knowledge of the officer in the course of the proceedings. But if both the items are unconnected and totally alien then the assessing authority has to follow sub-section (2) of section 148 6 ITA No.2032/Kol/2018 Dipti Mehta AY- 2010-11 with regard to the escaped income which comes to his knowledge during the course of the proceedings.”

16. Hence, the Punjab and Haryana High Court and the Kerala High Court took the view that once the Assessing Officer has reason to believe that the income chargeable to tax has escaped assessment and proceeds to issue a notice under section 148, it is not open to him to assess or, as the case may be, reassess the income under an independent or unconnected issue, which was not the basis of the notice for reopening the assessment.

17. The Parliament stepped in to correct what it regarded as an incorrect interpretation of the provisions of section 147. The Memorandum explaining the provisions of the Finance (No. 2) Bill of 2009 states in this background that some courts had held that the Assessing Officer should restrict the reassessment proceedings only to the issues in respect of which the reasons have been recorded for reopening the assessment and that it was not open to him to touch upon any other issue for which no reasons have been recorded. This interpretation was regarded by Parliament as being contrary to the legislative intent. Hence, Explanation 3 came to be inserted to provide that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings under section 147 though the reasons for such issue were not included in the reasons recorded in the notice under section 148(2).

18. The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) The Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148; (iii) The Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section; and (iv) Though the notice under section 148(2) does not include a particular issue with respect to which income has escaped assessment, he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.

19. It is by now well settled that for reopening of the assessment by issuing notice under section 148 of the Act, even in a case where previously no scrutiny assessment was carried out, the Assessing Officer must have reasons to believe that income chargeable to tax had escaped assessment. This aspect has been elaborated by this Court in the case of Inductotherm (India) P. Ltd vs. M. Gopalan, Deputy Commissioner of Income Tax reported in 356 ITR 481 making the following observations:

“13. Despite such difference in the scheme between a return which is accepted under section 143(1) of the Act as compared to a return of which scrutiny assessment under section 143(3) of the Act is framed, the basic requirement of section 147 of the Act that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment is not done away with. Section 147 of the Act permits the Assessing Officer to assess, re-assess the income or re-compute the loss or depreciation if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. This power to reopen assessment is available in either case, namely, while a return has been either accepted under section 143(1) of the Act or a scrutiny assessment has been framed under section 143(3) of the Act. A common requirement in both of cases is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.

16. It would, thus, emerge that even in case of reopening of an assessment which was previously accepted under section 143(1) of the Act without scrutiny, the Assessing Officer would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. However, as held by the Apex Court in the case of Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers P. Ltd., (supra) and several other decisions, such reason to believe need not necessarily be a firm final decision of the Assessing Officer.”

20. In this context, it is also equally well settled that the term “reason to believe” is vitally different from “reason to suspect”. We may recall, for a brief while, section 147 of the Act contained the expression “if the Assessing Officer for the reasons to be recorded by him in writing is of the opinion”. However, it was soon realized that this expression “is of the opinion” would be too wide giving excessive powers to the Assessing Officer to resort to reopening of assessment. This expression was, therefore, quickly changed to bring back the expression “if the Assessing Officer has reason to believe”. This aspect was highlighted by the Supreme Court in the case of Commissioner of Income Tax vs. Kelvinator of India Ltd. reported in 320 ITR 561 = 2010-TIOL-06-SC-IT-LB. In context of section 147 of the Act post its amendment w.e.f. 01.04.1989, the Supreme Court held that Section 147 does not vest arbitrary power in the Assessing Officer and held that even post amendment of 01.04.1989 in section 147, concept of change of opinion would apply. It was observed as under:

“6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open the assessment. Therefore, post-1st April, 1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to re-open assessments on the basis of “mere change of opinion”, which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No.549 dated 31st October, 1989, which reads as follows:

“7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.–A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression ‘has reason to believe’ in place of the words ‘for reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new section 147, however, remain the same.”

21. The principle, that the notice of reopening can be issued only upon the Assessing Officer bona fide forming a belief that income chargeable to tax had escaped assessment is thus, well settled. Reassessment cannot be resorted to on mere suspicion or for carrying out fishing or roving inquiries. This is so for many reasons. The reopening of a completed assessment is a serious issue. Once an assessment is reopened on a certain ground, the entire assessment at the hands of revenue would be at large. This Court in the case of Gujarat Power Corporation Ltd vs. Assistant Commissioner of Income Tax reported in 350 ITR 266 = 2012-TIOL-689-HC-AHM-IT had observed as under:

“41. The powers under section 147 of the Act are special powers and peculiar in nature where a quasi-judicial order previously passed after full hearing and which has otherwise become final is subject to reopening on certain grounds. Ordinarily, a judicial or quasi-judicial order is subject to appeal, revision or even review if statute so permits but not liable to be re-opened by the same authority. Such powers are vested by the Legislature presumably in view of the highly complex nature of assessment proceedings involving large number of assessees concerning multiple questions of claims, deductions and exemptions, which assessments have to be completed in a time frame. To protect the interest of the revenue, therefore, such special provisions are made under section 147 of the Act. However, it must be appreciated that an assessment previously framed after scrutiny when reopened, results into considerable hardship to the assessee. The assessment gets reopened not only qua those grounds which are recorded in the reasons, but also with respect to entire original assessment, of course at the hands of the revenue. This obviously would lead to considerable hardship and uncertainty. It is precisely for this reason that even while recognizing such powers, in special requirements of the statute, certain safeguards are provided by the statute which are zealously guarded by the courts. Interpreting such statutory provisions courts upon courts have held that an assessment previously framed cannot be reopened on a mere change of opinion. It is stated that power to reopening cannot be equated with review.”

REASONS TO BELIEVE

22. The expression “reasons to believe” stands adequately elaborated by the Apex Court in its various pronouncements. The issue is no longer debatable.

23. By relying upon its earlier decision, rendered by a Constitution Bench (five-Judge) judgment, in Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District I, Calcutta, AIR 1961 SC 372 = 2002-TIOL-550-SC-IT-CB , a Three-Judge Bench of the apex Court in S. Narayanappa v. Commissioner of Income- Tax, Bangalore, (1967) 63 ITR 219 : [AIR 1967 SC 523] = 2002-TIOL-2086-SC-IT-LB, held that:

“if there are in fact some reasonable grounds for the Income-tax Officer to believe that there had been any non-disclosure as regards any fact, which could have a material bearing on the question of under-assessment that would be sufficient to give jurisdiction to the Income Tax Officer to issue the notice under S. 34. Whether these grounds are adequate or not is not a matter for the Court to investigate. In other words, the sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression “reason to believe” in S. 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be 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. To this limited extent, the action of the Incometax Officer in starting proceedings under S. 34 of the Act is open to challenge in a Court of law”.

(Emphasis supplied)

24. The position came to be reiterated by a two-Judge Bench of the apex Court in Lakhmani Mewal Das (supra), wherein the Court held that the grounds or reasons which lead to the formation of belief must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly, all material facts.

25. Later on in Phool Chand (supra), it stood clarified that decision to quash the action in Lakhmani Mewal Das (supra), was based on its given fact situation, where information received by the Assessing Officer was wholly vague, indefinite, farfetched, remote and without any basis for holding a reasonable belief, warranting action, under Section 147 of the Act. It further observed that:

“19……….Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the same facts and material which was available with the I.-T.O at the time of original assessment proceedings. The two situations are distinct and different. Thus, where the transaction itself on the basis of subsequent information is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings cannot be said to be a disclosure of the “true” and “full” facts in the case and the I.-T.O would have the jurisdiction to reopen the concluded assessment in such a, case. It is correct that the assessing authority could have deferred the completion of the original assessment proceedings for further enquiry and investigation into the genuineness to the loan transaction but in our opinion his failure to do so and complete the original assessment proceedings would not take away his jurisdiction to act under S. 147 of the Act, on receipt of the information subsequently. The subsequent information on the basis of which the I.-T.O acquired reasons to believe that income chargeable to tax had escaped assessment on account of the omission of the assessee to make a full and true disclosure of the primary facts was relevant, reliable and specific. It was not at all vague or non-specific.”

“26… …One of the purposes of S. 147, 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 travesty of justice to allow the assessee that latitude.”

(Emphasis supplied)

26. The Apex Court also had an occasion to deal with the amended provisions in Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Private Limited, (2008) 14 SCC 208;(2007) 291 ITR 500 = 2007-TIOL-95-SC-IT. The Court found the scope and effect of section 147 to 148 as substituted with effect from April 1, 1989, to be substantially different from the earlier provisions. For conferment of jurisdiction under original section 147(a), two conditions required satisfaction (i) the Assessing Officer must have reason to believe that the income profits or gains chargeable to income tax have escaped assessment, and (ii) he must also have reason to believe that such escapement occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. However, under the substituted section 147, only the first condition required satisfaction of reason to believe, that the income had escaped assessment. It further observed that:-

“19. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any 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 had 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.”

“20.………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)

27. It is also the law that the Assessing Officer is not precluded to reopen assessment of an earlier year on the basis of his finding of fact, so made on the basis of fresh material, so discovered, in the course of assessment of next assessment year [Ess Kay Engineering Co. P. Ltd. vs Commissioner Of Income-Tax, 2001 247 ITR 818 SC] = 2002-TIOL-775-SC-IT.

28. In Calcutta Discount Co. Ltd. (supra), the apex Court held that:

“9. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example – “I have produced the account books and the documents: You, the assessing officer examine them, and find out the facts necessary for your purpose: My duty is done with disclosing these account-books and the documents”. His omission to bring to the assessing authority’s attention these particular items in the account books, or the particular portions of the documents, which are relevant, will amount to “omission to disclose fully and truly all material facts necessary for his assessment.” Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions; and the position remains that so far as primary facts are concerned, it is the assessee’s duty to disclose all of them – including particular entries in account books, particular portions of documents and documents, and other evidence, which could have been discovered by the assessing authority, from the documents and other evidence disclosed.”

(Emphasis supplied)

29. The Apex Court in S. Ganga Saran and sons (Pvt.) Ltd., Calcutta v. Income Tax Officer, (1981) 3 SCC 143 has observed as under:

“6……… (a) are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief, entertained by the Income-tax Officer 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 Income-tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under Section 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 Income-tax Officer 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.”

(Emphasis supplied)

30. The Apex Court in Income Tax Officer, Cuttack v. Biju Patnaik, 1991 Supp (1) SCC 161 = 2002-TIOL-836-SC-IT, observed that while examining the existence of reasons, record can be looked into.

31. In Niranjan & Co. Pvt. Ltd. v. Commissioner of Income Tax, West Bengal-I, 1986 Supp SCC 272, the apex Court held that:

“21. It was contended on behalf of the assessee/appellant relying on the observations of this Court in Commr. of Income-tax, Gujarat v. A. Raman and Co., (AIR 1968 SC 49) (supra), that the Income-tax Officer must have had reason to believe and in consequence of information he must have that reason to believe and it was submitted that the information was already there and there was no new information from which the Income-tax Officer could have formed the belief. Having regard to the facts of this case as discussed above and the nature of the information indicated before, we are of the opinion that there was information in the form of a revised return and since the information mentioned before came to the knowledge of the Income-tax Officer subsequent to the making of the first assessment and the information being such from which a reasonable person could have formed the belief that there was escapement of income or underassessment of income, it cannot be said that there was no jurisdiction of the Income-tax Officer to reopen the assessment. Whether in fact the reassessment to be made pursuant to the notice issued, the income assessed would be more by Re, 1/- or less than the income already assessed is not material or relevant for the question of jurisdiction to issue the notice under S. 147 of the Act.”

(Emphasis supplied)

32. The Supreme Court in Lakhmani Mewal Das (supra), had observed as under:

“The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income- tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The 963 sufficiency of grounds which induce the Income-tax Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law [see observations of this Court in the cases of Calcutta Discount Co. Ltd. v. Income-tax Officer and S. Narayanappa & Ors. v. Commissioner of Income-tax while dealing with corresponding provisions of the Indian Income-tax Act, 1922]. “

33. A Division Bench of this Court in the case of Dishman Pharmaceuticals & Chemicals Limited vs. Deputy Commissioner of Income-Tax [OSD], reported in [2012] 346 ITR 228 [Guj] = 2012-TIOL-529-HC-AHM-IT made the following observations :

“From the above judicial pronouncements, the following principles can be culled out :

[i] To confer jurisdiction to the Assessing Officer to reopen the assessment under Section 147 of the Incometax Act beyond four years from the end of the assessment year, the following two conditions must be satisfied (a) that the Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment; and (b) that the same was occasioned, on account of either failure on the part of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year, or to disclose fully and truly all material facts necessary for assessment of that year; [ii] both the above conditions are conditions precedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen the assessment beyond four years of the end of the assessment year; [iii] such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of these two conditions, reopening notice must fail; [iv] there is no set format in which such reasons must be recorded. It is not the language but the contents of such recorded reasons which assumes importance. In other words, a mere statement that the Assessing Officer had reason to believe that certain income has escaped assessment and such escapement of income was on account of non filing of the return by the assessee or failure on his part of disclose fully and truly all material facts necessary for assessment would not be conclusive. Nor absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs..”

Information Received from the Investigation Wing: Accommodation entries:

34. In the case of PCIT v. Manzil Dineshkumar Shah[2018] 95 Taxmann.com 46 (Guj) HC) = 2018-TIOL-948-HC-AHM-IT, this Court held that; even the assessment which is completed u/s 143(1) cannot be reopened without proper ‘reason to believe’. If the reasons state that the information received from the VAT Dept that the assessee entered into bogus purchases “needed deep verification”, it means the AO is reopening for doing a ‘fishing or roving inquiry’ without proper reason to believe, which is not permissible. The Court also observed that, before closing, we can only lament at the possible revenue loss. The law and the principles noted above are far too well settled to have escaped the notice of the Assessing Officer despite which if the reasons recorded fail the test of validity on account of a sentence contained, it would be for the Revenue to examine reasons behind it.

35. In the case of Amar Jewellers Ltd. v. Dy. CIT (2018) 254 Taxman 384 (Guj.)(HC) this Court held that; On verifying the record it was found that, there was no nexus with the reasons recorded for initiating the reassessment proceedings and the information received by the AO from the investigation wing, accordingly, the reassessment was held to be bad in law.

36. However In the case of Jayant Security & Finance Ltd. v. ACIT (2018) 254 Taxman 81 (Guj.)(HC) this court held that; the Information from the Investigation Wing stating that the loan from the company working as an entry operator and earning bogus funds to provide advances to various persons was sufficient and would constitute genuine and bona fide reason to believe. Reassessment was held to be valid.

37. Similarly in the case of Ankit Agrochem (P.) Ltd. v. JCIT (2018) 253 Taxman 141 (Raj)(HC) the Court held that; the reassessment on the basis of the information for the DIT stating that the assessee had received share application money from several entities which were only engaged in the business of providing bogus accommodation entries to the beneficiary concerns, the reassessment on the basis of said information was justified.

38. The other cases where reopening has been held to be justified on the basis of the information from the Investigation Wing are as follows:

(i) PCIT v. Paramount Communication P. Ltd. (2017) 392 ITR 444 (Delhi)(HC); = 2017-TIOL-850-HC-DEL-IT

(ii) Aravali Infrapower Ltd. v. DCIT, (2017) 390 ITR 456 (Delhi)(HC) = 2016-TIOL-3029-HC-DEL-IT

(iii) Aradhna Estate Pvt. Ltd. v. DCIT, (2018) 404 ITR 105 (Guj) (HC)

(iv) Rajnish Jain. v. CIT (2018) 402 ITR 12 (All) (HC) = 2017-TIOL-2952-HC-ALL-IT

39. While it is true that the court is conscious that the reassessment notice should not have been routinely issued, at the same time, the nature of power is wide enough that when there is an escapement of income and the Revenue has information ruling that this escapement is also relatable to the suppression of material facts (which could include false claims), the power to reopen concluded assessment can validly be exercised. The consideration which ought to weigh with the Revenue and are considered valid are the existence of the tangible material or information in the light of the judgment in CIT vs. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC) = 2010-TIOL-06-SC-IT-LB. Having regard to the reasons assigned for reopening the assessment, we are unable to accept the vociferous submissions of Mr. Gandhi. It constitutes reference to tangible material “outside” the record, i.e., the information based upon the investigation of the office of the Deputy Director of Income Tax (Investigation), Jamnagar with respect to the bogus and sham loan transactions.

40. The contention that the Assessing Officer had merely and mechanically acted on the report of the Investigation Wing also cannot be accepted. We have reproduced the reasons recorded by the Assessing Officer and noted the gist of his reasons for resorting the reopening of the assessment. We have recorded that the Assessing Officer had perused the materials placed for its consideration and thereupon, upon examination of such materials, formed a belief that the income chargeable to tax had escaped assessment.

41. In the case of Principal Commissioner of Income tax, Rajkot-3 v. Gokul Ceramics, reported in (2016) 241 Taxman 341 (Gujarat) = 2016-TIOL-1420-HC-AHM-IT, a similar contention was raised by the counsel for the assessee contending that the Assessing Officer had acted mechanically on the investigation carried out by the Excise department and not formed his independent belief. Such a contention was rejected making the following observations :

“9. It can thus be seen that the entire material collected by the DGCEI during the search, which included incriminating documents and other such relevant materials, was alongwith report and show cause notice placed at the disposal of the Assessing Officer. These materials prima facie suggested suppression of sale consideration of the tiles manufactured by the assessee to evade excise duty. On the basis of such material, the Assessing Officer also formed a belief that income chargeable to tax had also escaped assessment. When thus the Assessing officer had such material available with him which he perused, considered, applied his mind and recorded the finding of belief that income chargeable to tax had escaped assessment, the reopening could not and should not have been declared as invalid, on the ground that he proceeded on the show cause notice issued by the Excise Department which had yet not culminated into final order. At this stage the Assessing Officer was not required to hold conclusively that additions invariably be made. He truly had to form a bona fide belief that income had escaped assessment. In this context, we may refer to various decisions cited by the counsel for the Revenue.

10. In case of Central Provinces Manganese Ore Co. Ltd. vs. Income Tax Officer, Nagpur (Supra) the Supreme Court noted that in case of the assessee which had an office in London, this Customs authority had come to know that the assessee had declared very low price in respect of the consignment of Manganese exported by them out of India. After due inquiries and investigations, the Customs authorities found that the assessee was systematically undervoicing the value of Manganese as compared with the prevailing market price. The Income Tax Officer on coming to know about the proceedings before the Customs Collector in this respect issued notice for reopening of the assessment. In the reasons that the Assessing Officer relied on the facts as found by the Customs Authorities that the assessee had under-voiced goods during export. Under such circumstances, upholding the validity of the notice for reopening, the Supreme Court held and observed as under :-

“So far as the first condition is concerned, the Income Tax Officer, in his recorded reasons, has relied upon the fact as found by the Customs Authorities that the appellant had under invoiced the goods it exported. It is not doubt correct that the said finding may not be binding upon the income tax authorities but it can be a valid reason to believe that the chargeable income has been under assessed. The final outcome of the proceedings is not relevant. What is relevant is the existence of reasons to make the Income Tax Officer believe that there has been under assessment of the assessee’s income for a particular year. We are satisfied that the first condition to invoke the jurisdiction of the Income Tax Officer under Section 147(a) of the Act was satisfied.”

11. In case of Income Tax Officer vs. Purushottam Das Bangur (Supra) after completion of assessment in case of the assessee, the Assessing Officer received letter from Directorate of Investigation giving detailed particulars collected from Bombay Stock Exchange which revealed earning of share and price of share increased during period in question and quotation appearing at Calcutta Stock Exchange was as a result of manipulated transaction. On the basis of such information,the Assessing Officer issued notice for reopening of the assessment. The question, therefore, arose whether the information contained in the letter of Directorate of Investigation could be said to be definite information and the Assessing Officer could act upon such information for taking action under Section 147(b) of the Act. In such background, the Supreme Court observed as under:

“12. Ms. Gauri Rastogi, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the Income tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under Section 147(b) of the Act and that he did not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income Tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income Tax officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment. The High Court, in our opinion, was in error in proceeding on the basis that it could not be said that the Income Tax Officer had in his possession information on the basis of which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the relevant assessment years. For the reasons aforementioned, we are unable to uphold the impugned judgment of the High Court. The appeal is, therefore, allowed, the impugned judgment of the High Court is set aside and the Writ Petitions filed by the respondents are dismissed. No order as to costs.

12. In case of Income Tax Officer vs Selected Dalurband Coal Co. Pvt. Ltd. (Supra), the assessment was reopened on the basis of the information contained in letter from Chief Mining Officer that the colliery of the assessee had been inspected and there had been under reporting of coal raised. Upholding the validity of re-opening of assessment, the Supreme Court held and observed as under :-

“After hearing the learned counsel for the parties at length, we are of the opinion that we cannot say that the letter aforesaid does not constitute relevant material or that on that basis, the Income Tax Officer could not have reasonably formed the requisite belief. The letter shows that a joint inspection was conducted in the colliery of the respondent on January 9, 1967, by the officers of the Mining Department in the presence of the representatives of the assessee and according to the opinion of the officers of the Mining Department, there was under reporting of the raising figure to the extent indicated in the said letter. The report is made by a Government Department and that too after conducting a joint inspection. It gives a reasonably specific estimate of the excessive coal mining said to have been done by the respondent over and above the figure disclosed by it in its returns. Whether the facts stated in the letter are true or not is not the concern at this stage. It may be well be that the assessee may be able to establish that the facts stated in the said letter are not true but that conclusion can be arrived at only after making the necessary enquiry. At the stage of the issuance of the notice, the only question is whether there was relevant material, as stated above, on which a reasonable person could have formed the requisite belief. Since we are unable to say that the said letter could not have constituted the basis for forming such a belief, it cannot be said that the issuance of notice was invalid. Inasmuch as, as a result of our order, the reassessment proceedings have not to go on we don not and we ought not to express any opinion on the merits.”

13. In case of AGR Investment Ltd. vs. Additional Commissioner of Income Tax & Anr. (Supra), Division Bench of Delhi High Court considered the validity of reopening of assessment where the notice was based on information received from Directorate of investigation that the assessee was beneficiary of bogus accommodation entries. The Court while upholding the validity of reopening observed that sufficiency of reason cannot be considered in a writ petition. It was observed as under :

“23. The present factual canvas has to be scrutinized on the touchstone of the aforesaid enunciation of law. It is worth noting that the learned counsel for the petitioner has submitted with immense vehemence that the petitioner had entered into correspondence to have the documents but the assessing officer treated them as objections and made a communication. However, on a scrutiny of the order, it is perceivable that the authority has passed the order dealing with the objections in a very careful and studied manner. He has taken note of the fact that transactions involving Rs.27 lakhs mentioned in the table in Annexure P-2 constitute fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income. The assessing officer has referred to the subsequent information and adverted to the concept of true and full disclosure of facts. It is also noticeable that there was specific information received from the office of the DIT (INV-V) as regards the transactions entered into by the assessee company with number of concerns which had made accommodation entries and they were not genuine transactions. As we perceive, it is neither a change of opinion nor does it convey a particular interpretation of a specific provision which was done in a particular manner in the original assessment and sought to be done in a different manner in the proceeding under Section 147 of the Act. The reason to believe has been appropriately understood by the assessing officer and there is material on the basis of which the notice was issued. As has been held in Phool Chand Bajrang Lal (supra), Bombay Pharma Products (supra) and Anant Kumar Saharia (supra), the Court, in exercise of jurisdiction under Article 226 of the Constitution of India pertaining to sufficiency of reasons for formation of the belief, cannot interfere. The same is not to be judged at that stage. In SFIL Stock Broking Ltd. (supra), the bench has interfered as it was not discernible whether the assessing officer had applied his mind to the information and independently arrived at a belief on the basis of material which he had before him that the income had escaped assessment. In our considered opinion, the decision rendered therein is not applicable to the factual matrix in the case at hand. In the case of Sarthak Securities Co. Pvt. Ltd. (supra), the Division Bench had noted that certain companies were used as conduits but the assessee had, at the stage of original assessment, furnished the names of the companies with which it had entered into transactions and the assessing officer was made aware of the situation and further the reason recorded does not indicate application of mind. That apart, the existence of the companies was not disputed and the companies had bank accounts and payments were made to the assessee company through the banking channel. Regard being had to the aforesaid fact situation, this Court had interfered. Thus, the said decision is also distinguishable on the factual score.”

13. Learned Single Judge of Madras High Court in case of Sterlite Industries (India) Ltd. vs. Assistant Commissioner of Income Tax reported in [2008] 302 ITR 275 (Mad) = 2008-TIOL-181-HC-MAD-IT upheld the notice for reopening which was based on information from enforcement directorate showing possible inflation of purchases made by the assessee.”

42 In the case of Central Provinces Manganese Ore Co. Ltd. vs. Income Tax Officer, Nagpur, 1992 AIR 567, 1991 SCR (3) 627 = 2002-TIOL-1870-SC-IT, the Supreme Court noted that in the case of the assessee which had an office in London, the Customs authority had come to know that the assessee had declared very low price in respect of the consignment of Manganese exported by them out of India. After due inquiries and investigations, the Customs authorities found that the assessee was systematically under-voicing the value of Manganese as compared with the prevailing market price. The Income Tax Officer on coming to know about the proceedings before the Customs Collector in this respect issued notice for reopening of the assessment. In the reasons recorded, the Assessing Officer relied on the facts as found by the Customs Authorities that the assessee had under-voiced the goods during export. In such circumstances, while upholding the validity of the notice for reopening, the Supreme Court held and observed as under:

“So far as the first condition is concerned, the Income Tax Officer, in his recorded reasons, has relied upon the fact as found by the Customs Authorities that the appellant had under invoiced the goods it exported. It is not doubt correct that the said finding may not be binding upon the income tax authorities but it can be a valid reason to believe that the chargeable income has been under assessed. The final outcome of the proceedings is not relevant. What is relevant is the existence of reasons to make the Income Tax Officer believe that there has been under assessment of the assessee’s income for a particular year. We are satisfied that the first condition to invoke the jurisdiction of the Income Tax Officer under Section 147(a) of the Act was satisfied.”

43. In the case of Income Tax Officer vs Purushottam Das Bangur, (1997) 224 ITR 0362 = 2002-TIOL-2363-SC-IT after completion of the assessment in the case of the assessee, the Assessing Officer received a letter from the Directorate of Investigation giving detailed particulars collected from the Bombay Stock Exchange which revealed earning of share and price of share increased during the period in question and the quotation appearing at the Calcutta Stock Exchange was as a result of manipulated transaction. On the basis of such information, the Assessing Officer issued notice for reopening of the assessment. The question, therefore, arose whether the information contained in the letter of Directorate of Investigation could be said to be definite information and the Assessing Officer could act upon such information for taking action under Section 147(b) of the Act. In such background, the Supreme Court observed as under:

“12. Ms. Gauri Rastogi, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the Income tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under Section 147(b) of the Act and that he did not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income Tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income Tax officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment. The High Court, in our opinion, was in error in proceeding on the basis that it could not be said that the Income Tax Officer had in his possession information on the basis of which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the relevant assessment years. For the reasons aforementioned, we are unable to uphold the impugned judgment of the High Court. The appeal is, therefore, allowed, the impugned judgment of the High Court is set aside and the Writ Petitions filed by the respondents are dismissed. No order as to costs.”

44. In the case of Income Tax Officer vs Selected Dalurband Coal Co. Pvt. Ltd, 1978 113 ITR 489 Cal = 2002-TIOL-2198-SC-IT, the assessment was reopened on the basis of the information contained in a letter from the Chief Mining Officer that the colliery of the assessee had been inspected and there had been under reporting of the coal raised. Upholding the validity of reopening of assessment, the Supreme Court held and observed as under:

“After hearing the learned counsel for the parties at length, we are of the opinion that we cannot say that the letter aforesaid does not constitute relevant material or that on that basis, the Income Tax Officer could not have reasonably formed the requisite belief. The letter shows that a joint inspection was conducted in the colliery of the respondent on January 9,1967, by the officers of the Mining Department in the presence of the representatives of the assessee and according to the opinion of the officers of the Mining Department, there was under reporting of the raising figure to the extent indicated in the said letter. The report is made by a Government Department and that too after conducting a joint inspection. It gives a reasonably specific estimate of the excessive coal mining said to have been done by the respondent over and above the figure disclosed by it in its returns. Whether the facts stated in the letter are true or not is not the concern at this stage. It may be well be that the assessee may be able to establish that the facts stated in the said letter are not true but that conclusion can be arrived at only after making the necessary enquiry. At the stage of the issuance of the notice, the only question is whether there was relevant material, as stated above, on which a reasonable person could have formed the requisite belief. Since we are unable to say that the said letter could not have constituted the basis for forming such a belief, it cannot be said that the issuance of notice was invalid. Inasmuch as, as a result of our order, the reassessment proceedings have not to go on we don not and we ought not to express any opinion on the merits.”

45. In the case of AGR Investment Ltd. vs. Additional Commissioner of Income Tax and Anr. [2011] 333 ITR 146 =2011-TIOL-29-HC-DEL-IT, a Division Bench of Delhi High Court considered the validity of reopening of assessment where the notice was based on the information received from the Directorate of investigation that the assessee was the beneficiary of bogus accommodation entries. The Court while upholding the validity of reopening observed that sufficiency of reason cannot be considered in a writ petition. It was observed as under:

“23 The present factual canvas has to be scrutinized on the touchstone of the aforesaid enunciation of law. It is worth noting that the learned counsel for the petitioner has submitted with immense vehemence that the petitioner had entered into correspondence to have the documents but the assessing officer treated them as objections and made a communication. However, on a scrutiny of the order, it is perceivable that the authority has passed the order dealing with the objections in a very careful and studied manner. He has taken note of the fact that transactions involving Rs.27 lakhs mentioned in the table in Annexure P2 constitute fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income. The assessing officer has referred to the subsequent information and adverted to the concept of true and full disclosure of facts. It is also noticeable that there was specific information received from the office of the DIT (INVV) as regards the transactions entered into by the assessee company with number of concerns which had made accommodation entries and they were not genuine transactions. As we perceive, it is neither a change of opinion nor does it convey a particular interpretation of a specific provision which was done in a particular manner in the original assessment and sought to be done in a different manner in the proceeding under Section 147 of the Act. The reason to believe has been appropriately understood by the assessing officer and there is material on the basis of which the notice was issued. As has been held in Phool Chand Bajrang Lal (supra), Bombay Pharma Products (supra) and Anant Kumar Saharia (supra), the Court, in exercise of jurisdiction under Article 226 of the Constitution of India pertaining to sufficiency of reasons for formation of the belief, cannot interfere. The same is not to be judged at that stage. In SFIL Stock Broking Ltd. (supra), the bench has interfered as it was not discernible whether the assessing officer had applied his mind to the information and independently arrived at a belief on the basis of material which he had before him that the income had escaped assessment. In our considered opinion, the decision rendered therein is not applicable to the factual matrix in the case at hand. In the case of Sarthak Securities Co. Pvt. Ltd. (supra), the Division Bench had noted that certain companies were used as conduits but the assessee had, at the stage of original assessment, furnished the names of the companies with which it had entered into transactions and the assessing officer was made aware of the situation and further the reason recorded does not indicate application of mind. That apart, the existence of the companies was not disputed and the companies had bank accounts and payments were made to the assessee company through the banking channel. Regard being had to the aforesaid fact situation, this Court had interfered. Thus, the said decision is also distinguishable on the factual score.”

46. We may also refer to and rely upon some of the relevant observations made by this Court in the case of Yogendrakumar Gupta vs. Income-Tax Officer, reported in (2004) 366 ITR 186 (Guj.) = 2014-TIOL-2480-HC-AHM-IT.

“We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness or falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of Sections 147(a) and 148 of the Act and is against the settled law by this Court. We have to look to the purpose and intent of the provisions. One of the purposes of Section 147, 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 travesty of justice to allow the assessee that latitude.

As held by the Apex Court in Phool Chand Bajrang Lal v. Income tax Officer (Supra) where transaction itself on the basis of subsequent information is found to be a bogus transaction, the Court held that mere disclosure of such transaction at the time of original assessment proceedings, cannot be said to be a disclosure of ‘full’ and ‘true’ facts and the Assessing Officer surely would have jurisdiction to reopen concluded assessment in such a case. The Apex Court also had observed in the said case that the Assessing Officer may start reassessment proceedings either because some fresh facts come to light which were not previously disclosed, or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income tax Officer, the sufficiency of reasons for forming the belief, is not for the Court to judge but is is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and nonspecific information. To that limited extent, the Court may look the conclusion arrived at by the Income tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by him and further whether that material had any rational connection or a live link with the formation of the requisite belief.

In the instant case also, these observations and findings would have a direct bearing. The Assessing Officer, at the time of making original assessment though made an enquiry, could not have found by further inquiry or investigation whether such transactions were genuine or not. However, on the basis of subsequent informations, he arrived at such conclusion after satisfying both the conditions prescribed under Section 147 that the assessee failed to disclose fully and truly all material facts at the time of original assessment and therefore, the income chargeable to tax had escaped assessment. The Assessing Officer certainly would assume jurisdiction under Section 147.

Ostensibly, thus, there was disclosure and the occasion would not arise to term this as the assessee not having disclosed fully and truly all the material facts necessary for assessment. However, in essence, if the unsecured loans obtained from Basant Marketing Pvt. Ltd. from the material supplied by them, the DCIT, Kolkata reveals that the same was as a result of accommodation entry in the form of loans and advances from Basant Marketing Pvt. Ltd. to the tune of Rs.8.71 crore, the case of the assessee would surely be covered under the said provision of law as it would not amount to full and true disclosure on the part of the assessee.

At this stage, the reasons recorded shall have to be regarded, which have been based on the information contained in the report of the DCIT, Kolkata, dated March 24, 2013, wherein it had been noticed that the assessee company obtained accommodation entry in the form of loans and advances from Basant Marketing Pvt. Ltd. and, therefore, the Assessing Officer based his reason to believe that the income chargeable to tax had escaped the assessment.

In the post notice correspondence dated March 05, 2014, it has been stated by the Assessing Officer that Basant Marketing Pvt. Ltd. provided accommodation entry to various companies, where assessee company is one of them. Basant Marketing Pvt. Ltd. is a dummy company of one Shri Arun Dalmia and substantial material is found to base such reasons recorded during the search by CBI, Mumbai and, therefore, the Assessing Officer issued a notice to show cause as to why the said amount of Rs.8.71 crore received from Basant Marketing Pvt. Ltd. should not be treated as cash credit under section 68 of the Act. “

47. The following principles of law are discernible from the various decisions we have referred to, relied upon and discussed.

(i) The Court should be guided by the reasons recorded for the reassessment and not by the reasons or explanation given by the Assessing Officer at a later stage in respect of the notice of reassessment. To put it in other words, having regard to the entire scheme and the purpose of the Act, the validity of the assumption of jurisdiction under Section 147 can be tested only by reference to the reasons recorded under Section 148(2) of the Act and the Assessing Officer is not authorized to refer to any other reason even if it can be otherwise inferred or gathered from the records. The Assessing Officer is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others upto his sleeves to be disclosed before the Court if his action is ever challenged in a court of law.

(ii) At the time of the commencement of the reassessment proceedings, the Assessing Officer has to see whether there is prima facie material, on the basis of which, the department would be justified in reopening the case. The sufficiency or correctness of the material is not a thing to be considered at that stage.

(iii) The validity of the reopening of the assessment shall have to be determined with reference to the reasons recorded for reopening of the assessment.

(iv) The basic requirement of law for reopening and assessment is application of mind by the Assessing Officer, to the materials produced prior to the reopening of the assessment, to conclude that he has reason to believe that income has escaped assessment. Unless that basic jurisdictional requirement is satisfied-a postmortem exercise of analysing the materials produced subsequent to the reopening will not make an inherently defective reassessment order valid.

(v) The crucial link between the information made available to the Assessing Officer and the formation of the belief should be present. The reasons must be self evident, they must speak for themselves.

(vi) The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. To put it in other words, something therein, which is critical to the formation of the belief must be referred to. Otherwise, the link would go missing.

(vii) The reopening of assessment under Section 147 is a potent power and should not be lightly exercised. It certainly cannot be invoked casually or mechanically.

(viii) If the original assessment is processed under Section 143(1) of the Act and not Section 143(3) of the Act, the proviso to Section 147 will not apply. In other words, although the reopening may be after the expiry of four years from the end of the relevant assessment year, yet it would not be necessary for the Assessing Officer to show that there was any failure to disclose fully or truly all the material facts necessary for the assessment.

(ix) In order to assume jurisdiction under Section 147 where assessment has been made under sub-section (3) of section 143, two conditions are required to be satisfied;

(i) The Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment;

(ii) Such escapement occurred by reason of failure on the part of the assessee either (a) to make a return of income under section 139 or in response to the notice issued under sub-section (1) of Section 142 or Section 148 or (b) to disclose fully and truly all the material facts necessary for his assessment for that purpose.

(x) The Assessing Officer, being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria.

(xi) While the report of the Investigation Wing might constitute the material, on the basis of which, the Assessing Officer forms the reasons to believe, the process of arriving at such satisfaction should not be a mere repetition of the report of the investigation. The reasons to believe must demonstrate some link between the tangible material and the formation of the belief or the reason to believe that the income has escaped assessment.

(xii) Merely because certain materials which is otherwise tangible and enables the Assessing Officer to form a belief that the income chargeable to tax has escaped assessment, formed part of the original assessment record, per se would not bar the Assessing Officer from reopening the assessment on the basis of such material. The expression “tangible material” does not mean the material alien to the original record.

(xiii) The order, disposing of objections or any counter affidavit filed during the writ proceedings before the Court cannot be substituted for the “reasons to believe.

(xiv) The decision to reopen the assessment on the basis of the report of the Investigation Wing cannot always be condemned or dubbed as a fishing or roving inquiry. The expression “reason to believe” appearing in Section 147 suggests that if the Income Tax Officer acts as a reasonable and prudent man on the basis of the information secured by him that there is a case for reopening, then Section 147 can well be pressed into service and the assessments be reopened. As a consequence of such reopening, certain other facts may come to light. There is no ban or any legal embargo under Section 147 for the Assessing Officer to take into consideration such facts which come to light either by discovery or by a fuller probe into the matter and reassess the assessee in detail if circumstances require.

(xv) The test of jurisdiction under Section 143 of the Act is not the ultimate result of the inquiry but the test is whether the income tax officer entertained a “bona fide” belief upon the definite information presented before him. Power under this section cannot be exercised on mere rumours or suspicions.

(xvi) The concept of “change of opinion” has been treated as a built in test to check abuse. If there is tangible material showing escapement of income, the same would be sufficient for reopening the assessment.

(xvii) It is not necessary that the Income Tax Officer should hold a quasi judicial inquiry before acting under Section 147. It is enough if he on the information received believes in good faith that the assesee’s profits have escaped assessment or have been assessed at a low rate. However, nothing would preclude the Income Tax Officer from conducting any formal inquiry under Section 133(6) of the Act before proceeding for reassessment under Section 147 of the Act.

(xviii) The “full and true” disclosure of the material facts would not include that material, which is to be used for testing the veracity of the particulars mentioned in the return. All such facts would be expected to be elicited by the Assessing Officer during the course of the assessment. The disclosure required only reference to those material facts, which if not disclosed, would not allow the Assessing Officer to make the necessary inquiries.

(xix) The word “information” in Section 147 means “instruction or knowledge derived from the external source concerning the facts or particulars or as to the law relating to a matter bearing on the assessment. An information anonymous is information from unknown authorship but nonetheless in a given case, it may constitute information and not less an information though anonymous. This is now a recognized and accepted source for detection of large scale tax evasion. The non-disclosure of the source of the information, by itself, may not reduce the credibility of the information. There may be good and substantial reasons for such anonymous disclosure, but the real thing to be looked into is the nature of the information disclosed, whether it is a mere gossip, suspicion or rumour. If it is none of these, but a discovery of fresh facts or of new and important matters not present at the time of the assessment, which appears to be credible to an honest and rational mind leading to a scrutiny of facts indicating incorrect allowance of the expense, such disclosure would constitute information as contemplated in clause (b) of Section 147. (xx) The reasons recorded or the material available on record must have nexus to the subjective opinion formed by the A.O. regarding the escapement of the income but then, while recording the reasons for the belief formed, the A.O. is not required to finally ascertain the factum of escapement of the tax and it is sufficient that the A.O had cause or justification to know or suppose that the income had escaped assessment [vide Rajesh Jhaveri Stock Brokers (P.) Ltd.’s case (supra)]. It is also well settled that the sufficiency and adequacy of the reasons which have led to the formation of a belief by the Assessing Officer that the income has escaped the assessment cannot be examined by the court.

48. Having regard to the materials on record it cannot be said that there is a total non-application of mind on the part of the Assessing Officer while recording the reasons for reopening of the assessment. It also cannot be said that his conclusion was merely based on the observations and information received from the Investigation Wing. The Assessing Officer could be said to have applied his mind to the same. The Assessing Officer could not be said to have merely concluded without verifying the facts that it is the case of reopening of the assessment. We do not find merit in the vociferous submission of the learned counsel appearing for the writ applicant that the contents of the reasons recorded by the Assessing Officer for the reopening of the assessment is merely an introduction about the investigations conducted by the Investigation Wing, the modus operandi of the entry provided, the summing up of inquiry of the Investigation Wing, the information received from the Investigation Wing etc. We have examined the belief of the Assessing Officer to a limited extent to look into whether there was sufficient material available on record for the Assessing Officer to form a reasonable belief and whether there was a live link existing of the material and the income chargeable to tax that escaped assessment. The case on hand is not one where it could be argued that the Assessing Officer, on absolutely vague or unspecific information, initiated the proceedings of reassessment without taking the pains to form his own belief in respect of such materials.

49. In the overall view of the matter, we are convinced that no case is made out by the writ applicant for interference.

50. In the result, both the writ applications fail and are hereby rejected. Notice stands discharged in each of the writ applications. The interim relief, earlier granted, stands vacated forthwith.

(Paras are numbered as per the original text: Editor)

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