Reopening is invalid when there is no direct nexus between material gathered & formation of belief of income escaping assessment

Reopening is invalid when there is no direct nexus between material gathered & formation of belief of income escaping assessment

Brief of the case:

• The Hon’ble Karnataka HC in the above cited case held that there must be a direct nexus between the material coming to the notice of the Income-Tax Officer and the formation of his belief that income has escaped assessment.Therefore, when  a material gathered by the AO is such that conclusion regarding escapement  can be made only after further investigation then reopening basis such material is not permissible because in the garb of reopening detailed assessment cannot be made.
  

Facts of the case:

• For AY 2004-05 assessee filed his return of income on 21.03.2005 which was processed under Section 143(1) and the assessment for the year in question stood concluded, as no further regular assessment was made.On the basis of some survey conducted on 27.01.2006 inthe premises of a person named as M.L.Venkatesh, certain papers with regard to the purchase of some property by the assessee for a sum of Rs.10 lacs on 25.07.2003 were found.
• Pursuant to such survey a notice under Section 148 of the Act was issued to assessee on 28.09.2006 for which reasons had been recorded by the Assessing Officer on 15.09.2006. Assessee challenged the reopening validity of reopening on jurisdiction as well as on merits.
• The CIT (A) held the reopening to be valid but allowed partial relief on merits. The tribunal also partly allowed the revenue’s appeal and made certain additions in the taxable income of the assessee, and at the same time dismissed the cross objections of the assessee.
• Aggrieved by the said order, this appeal has been filed by the assessee on merits, as well as on the legal question with regard to the validity of the reopening of assessment under Section 147/148 of the Act.
  

Contention of the Assessee:

• The learned counsel for the assessee contended that the reopening of the assessment for theyear in question was made merely for the purpose offurther investigation, which could not be said to be avalid reason for reopening; and that the AssessingOfficer had no substance on the basis of which he couldhave had ‘reason to believe’ that income chargeable totax had escaped assessment for the assessment year inquestion.
  

Contention of the Revenue:

• The learned counsel for the revenue contended that there was a vast gap betweenthe income of the assessee in the year in question, andthe investment made by the assessee by way of purchase of the property and such gapprovided AO to have good reason to believe that income has escaped assessment. Thus, reopening was fully justified.
  

Held by Hon’ble High Court:

• On perusal of reasons recorded by AO before reopening the court observed that Assessing Officer stated that he had reason to believe that source of investment of purchase of property was not acceptable, and for which further investigation was necessary. As such, the Assessing Officer concluded that he had ‘reason to believe’ that income subject to tax had escaped assessment within the meaning of Section 147 of the Act.
• Section 147/148 of the Act is not meant for reopening an already concluded assessment by first issuing notice and then proceeding to investigate and find out if there was any lacuna in the accounts. If such further investigation, by reopening a concluded assessment, is permitted, it would give rise to fishing and rowing enquiries, because, in every case, the Assessing Officer can then issue notice for the purpose of investigation, and thus reopen any concluded assessment.

• HC relied on the decision of Hon’ble Supreme Court in the case of Income-Tax Officer – vs- LakhmaniMewal Das reported in (1976) 103 ITR 439 wherein the court held that there must be a direct nexus or live link between the material coming to the notice of the Income-Tax Officer and the 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.
• In the present case, the court found that there is no nexus or live link between the materialwhich had come to the notice of the Assessing Officer, and the formation of his belief that there wasescapement of income by the assessee which may be assessable to tax. Merely by mentioning the income of the assessee in the assessment year, and the investment made by him for the purchase of residential property, it cannot be concluded that the difference would automatically be the income which had escaped assessment.
• It was only if there was any definite information that the assessee had some additional income, which was not disclosed by him and was invested in purchase of property, then alone the notice under Section 148 of the Act could have been issued, and that also after recording the basis on which the Assessing Officer had formed his opinion that he had ‘reason to believe’ that any such income had escaped assessment. The same is totally lacking in the present case.
• Therefore, in the present case the notice issued for reopening was without jurisdiction and hereby quashed. In result the appeal of the assessee was allowed.