Case Law Details
RELEVANT EXTRACTS:
7. In the aforestated background now we may advert to the factual position in the instant case. In this case, after the processing of return under section 143(1) the Assessing Officer recorded reasons on 8-2-2006 to initiated proceedings under section 147/148 as under:
” the assessee filed return of income for the above noted assessment year declaring total income at Rs. Nil after claiming deduction under section 80-IA amounting to Rs. 51,73,798/-. The assessee firm derives income from manufacturing of emergency lights. The NP shown is against total turnover of Rs. 2,96,74,155/ and Net Profit percentage is 17.4% which is exceptionally high rate of net profit.
A perusal of manufacturing account reveals that assessee has shown expenses under the head electricity at Rs. 3,894/-. Wages Rs.2,25,502/ – and Packing expenses Rs.l, 195/- only. It appears that either manufacturing activities have not been carried out by the assessee firm or expenses.
As per fixed assets plant & machinery is worth only Rs. 27,101/- whereas total sales/ production has been shown at Rs.2,96,74,155/ – during the period under consideration. Plant & Machinery engaged in the manufacturing process is not sufficient to generate such a huge production.
From the above facts it is clear that either the income earned by the assessee from other sources has been declared from business activities or the manufacturing expenses have not been booked properly. I have reasons to believe that income to the tune of Rs.51,73,798/ – claimed as deduction u/s 80IA/80JB has escaped assessment. As such notice u/s 148 needs to be issued ‘in this case.”
8. From the perusal of the above reasons recorded it is evident that the Assessing Officer has assumed jurisdiction under section 147 of the Act since in his prima-facie opinion income to the tune of Rs.51,72,798/ – claimed as deduction under section 80IA/80IB of the Act has escaped assessment on account of the following factors:-
(a) The net profit shown of Rs.51.73.798/ – against total turnover of Rs.2,96,74,155/ – is 17.4% which is exceptionally high;
(b) That expenses under the head electricity at Rs.3894/-, wages at Rs.2,25.502/ -, packing expenses at Rs. 11 95/-debited in the, monthly account show that either manufacturing activities have not been carried out by the assessee firm or expenses have been suppressed to declare maximum profit which is exempt under section 80IA of the Act; and
(c) That as per fixed assets, plant and machinery is worth Rs. 27,101/- whereas total sales/ production has been shown at Rs. 2,96,74,155/ during the period which is insufficient for such a huge production.
9. It is therefore apparent from the reasons recorded that prima-facie belief of the Assessing Officer that deduction under section 80IA of the Act was incorrectly claimed and allowed is unsupported by any material. The Assessing Officer has led no evidence whatsoever to either allege or establish that the expenses incurred were insufficient to carry out the manufacturing process. He has also led no material to assume that net profit declared by the assessee was exceptionally high rate of profit. There is also no material to allege that plant and machinery was insufficient to carry out the manufacturing process. The Assessing Officer has thus not relied upon any material or evidence, which could enable him to assume that income of the assessee, has escaped assessment either by understatement or expenses or overstatement of profits. He has merely proceeded on surmises, conjectures and suspicion to observe that income of the assessee has escaped assessment which in law cannot constitute a reason to believe for invoking section 147 of the Act. Reliance is placed on the judgment of the Hon’ble Supreme Court in the case of Indian Oil Corporation vs. ITO reported in 159 ITR 956 wherein it was held “that the reasons to believe is not the same thing as reasons to suspect’. It is a case where the Assessing Officer’s belief is unsupported by any evidence and all the factors stated in the reasons recorded fall within the realm of suspicion. In fact plain reading of the reasons supports our conclusion, when he has observed that “either the income earned by the assessee from other sources has been declared from business activities or the manufacturing expenses have not been booked properly.” Therefore proceedings have been initiated for the purpose of investigation. It is settled law that the provisions contained in section 147 of the Act cannot be used as a. tool or as a provision to enable the Assessing Officer to conduct investigation. The Hon’ble Apex Court in the case of Madhya Pradesh Indl. Corpn. v. ITO reported in 57 ITR 637 has held that, proceedings cannot be initiated for the purpose of making fishing and roving inquiries. In our opinion, the Assessing Officer was obliged in law to firstly place on record any material which enabled him to have reason to believe that income of the appellant has escaped assessment and only thereafter initiate proceedings under section 147 of the Act. In other words, until and unless, the aforesaid burden had been discharged, the Assessing Officer could not have resorted to the provisions contained in section 147 of the Act. The Assessing Officer has proceeded on mere assumptions and surmises which in law cannot be -made to assume that income of the assessee has escaped assessment. The Hon’blc Supreme Court in the case of Lakhmani Mewal Das reported in 103 ITR 437 has held as under :-
“The reasons for the formation of the belief contemplated by section M7{u) of the Income-tax Act, ]961, for the reopening of an assessment must have a rational connection or relevant bearing on formation of belief. Rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the Income-tax Officer and thy formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated or re-opening the assessment. At the same time we have to bear in mind that it is not any and every material howsoever vague and indefinite or distant remote and farfetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words “definite information” which were there in section 34 of the Act of the Act 1922 at one time before its amendment in 1948 are . not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague indefinite far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. “[Emphasis Supplied by us].
10. In view of the above in our considered opinion the mandatory pre- condition for taking action under section 147 of the Act that the Assessing Officer should have reason to believe that income of the assessee has escaped assessment and such reason to believe must be based on some valid material has not been satisfied in the case of the appellant.
11. In light of the above in our considered opinion all of the above three factors stated in the reasons in absence of any material either individually or cumulatively can be considered a basis so as to enable the Assessing Officer to form a requisite belief that income of the assessee has escaped assessment in terms of the judgment of Apex Court in the case of Rajesh Jhaveri (supra). In such circumstances, we are of the opinion that initiation of proceedings was without jurisdiction. The entire reassessment proceedings are therefore, found to be null and void and on this basis the assessment order is liable to be quashed. We therefore cancel the assessment on this ground and allow ground Nos. 1 and 2 in favor of the assessee.
