Case Law Details
Brief of the Case
Delhi High Court held In the case of CIT vs. M/s Multiplex Trading & Industrial Co. Ltd. that the requirements regarding recording the reasons to believe; communicating the same to the Assessee; permitting the Assessee to file the objections; and passing a speaking order disposing of the objections are all designed to ensure that the AO does not reopen assessments, which have been finalized, on his mere whim and fancy and that he does so only on the basis of lawful reasons. It was further held that a deviation from the above directions would entail nullifying the proceedings.
Facts of the Case
In this case, the assessment was re-opened based on information received by the AO from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators during the relevant period. The controversy involved in the present appeal relates to the action of the AO in reopening the assessment in respect of transactions that had been examined and verified by the AO during the initial assessment proceedings. The Assessee’s challenge to the initiation of re-assessment proceedings as well as the addition made to the Assessee’s taxable income which was allowed by the CIT (A) as well as the Tribunal in favour of assessee.
Contention of the Assessee
The ld counsel of the assessee contended that the Assessee had disclosed fully and truly all material facts during the initial assessment proceedings and, therefore, reopening of the assessment could not be sustained. He referred to the decision of this Court in Haryana Acrylic Manufacturing Company (supra) in support of his contention that the provisions of Section 147 of the Act could not be invoked after the expiry of four years from the relevant assessment year unless the AO came to the conclusion that the income had escaped by reason or failure on the part of the Assessee to file a return or to disclose fully and truly all material facts necessary for the assessment. He submitted that in the present case the Assessee had provided all necessary material and, thus, the reopening of assessment under Section 147 of the Act could not be sustained.
He also submitted that the judgment of Phool Chand Bajrang Lal v. Income-Tax Officer: 2003 ITR 456 was not applicable as the provisions of Section 147 had undergone a change. He drew the attention of this Court to paragraph 25 and 26 of the decision in Haryana Acrylic Manufacturing Company 308 ITR 38 in support of this contention.
Contention of the Revenue
The ld counsel of the revenue contended that the Tribunal had erred in observing that no fresh material had been relied upon for reopening of assessment. He contended that the AO had proceeded to reopen the assessment on the basis of information obtained from the Investigation Wing and the same constitutes fresh material that was not available with the AO at the time of initial assessment. He also pointed out that the observation of the Tribunal that the reasons recorded by the AO did not contain the allegation that there was a failure on the part of the Assessee to disclose all material facts, was factually incorrect. He further contended that the Tribunal had not examined the issue regarding addition made under Section 68 of the Act on merits. He relied upon the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-Tax Officer: 2003 ITR 456 in support of his contention that information obtained by the AO subsequent to the assessment could lead to a belief that income chargeable to tax had escaped assessment even though the transaction in question had been examined during the assessment proceedings.
Held by CIT (A)
The CIT (A) held that the AO had not been able to make out the case to sustain the reopening of assessment under Section 147 of the Act. The CIT (A) noted that the notice under Section 148 of the Act had been issued after a lapse of 4 years from the end of the relevant assessment year and in the circumstances, reopening of assessment was permissible only if the proviso to Section 147 of the Act was satisfied; that is, income chargeable to tax had escaped assessment by reason of failure on the part of the Assessee to disclose fully and truly all material facts necessary for his assessment. The CIT (A) observed that the Assessee had provided all material in support of the loan availed from Richie Rich and the same was ignored by the AO. The CIT (A) was of the view that the Assessee had duly explained the entries in question and, therefore, the addition made by the AO to the assessable income of the Assessee under Section 68 of the Act, was erroneous.
Held by ITAT
ITAT held that the Assessee had disclosed all the relevant material at the time of original assessment and, therefore, the pre-condition under the proviso to Section 147 of the Act had not been met. The Tribunal further held that the reopening of assessment was not based on any fresh material but material disclosed by the Assessee during the initial assessment. The Tribunal also observed that the reasons recorded by the AO for reopening of assessment did not contain any allegation that there was any failure on the part of the Assessee to disclose all material facts.
ITAT relied upon the decisions of this Court in Wel InterTrade P. Ltd. & Anr. v. ITO: 308 ITR 22 (Del.) and Haryana Acrylic Manufacturing Company v. CIT & Anr 308 ITR 38 in support of its view that the reopening of assessment could not be sustained as the necessary condition for invoking Section 147 of the Act had not been met. The Tribunal was also of the view that the addition had been made on account of a change in AO’s opinion, which was not permissible.
Held by High Court
It is now well settled that the AO can reopen the assessment if he has reason to believe the Assessee’s income has escaped assessment. However, his reasons to believe must not be based on surmises, conjectures or occasioned by change in opinion but must be based on some tangible and credible material on the basis of which a reasonable belief could be formed that income of an assessee has escaped assessment. The language of Section 147 requires the AO to have a reason to believe and not a reason to suspect. The reason to believe that income of an Assessee has escaped assessment must be bonafide and reasonable. It is also settled that the material on which the AO forms his opinion must not be the same material which had been considered at the time of the initial assessment, as in that case, the proceedings under Section 147 of the Act would amount to reviewing the assessment order merely on a change of opinion, which is not permissible.
The Supreme Court in CIT v. Kelvinator of India Ltd.: 320 ITR 561 (SC) emphasized that the expression “reason to believe” as used in Section 147 of the Act must be read in context of the scheme of the Act and cannot be interpreted in a manner as conferring arbitrary power on the AO. Thus, such ‘reason to believe’ must be based on ‘tangible material’ and not on a change of opinion. However Section 147 of the Act does not postulate that the AO arrives at a final conclusion and ascertains, as a fact, that the income of the Assessee had escaped assessment. All that is required at the stage of initiation of proceedings for reassessment is for the AO to form a reasonable belief on tangible material that the income of the Assessee has escaped assessment. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd.: 291 ITR 502, the Supreme Court held that 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.
In Calcutta Discount Company v. Income Tax Officer: 41 ITR 191 the Supreme Court considered the import of the words “omission or failure to disclose fully and truly all material facts necessary for his assessment and held that What facts ‘are material and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. In CIT v. Burlop Dealers Ltd.: (1971) AIR 1635, the Supreme Court referred to the above passage from its decision in Calcutta Discount Company (supra) and held that if an Assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income Tax Officer about the inference, which the Income Tax Officer may draw from those facts. The aforesaid decision was followed by the Supreme Court in a later decision in ITO v. Madnani Engineering Works Ltd.: (1979) 118 ITR 1 (SC). These decisions were referred in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. 308 ITR 38. The Court has held that once the Assessee had disclosed all facts which have been examined by the AO during the assessment proceedings; it would not be open for the AO to allege that the Assessee had not truly and fully disclosed all material facts. In our view, this decision must be understood in the context of the facts of that case. It is also relevant to note that in this case the reasons recorded by the AO did not even mention that the Assessee had failed to disclose truly and fully all material facts necessary for the assessment.
It is at once seen that the Amendment in Section 147 of the Act brought about a material change in law w.e.f. 1st April, 1989. Section 147(a) as it stood prior to 1st April 1989 required the AO to have a reason to believe that (a) the income of the Assessee has escaped assessment and (b) that such escapement is by reason of omission or failure on the part of the Assessee to file a return or to disclose fully and truly all material facts necessary for his assessment for that year. After the Amendment, only one singular requirement is to be fulfilled under Section 147(a) and that is, that the AO has reason to believe that income of an Assessee has escaped assessment. However, the proviso to Section 147 of the Act provides a complete bar for reopening an assessment, which has been made under Section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return or to disclose fully and truly all material facts necessary for his assessment.
In the facts of this case, where the AO had already in the initial round examined and verified the entries in question, it would only be reasonable for the AO to examine the information received and to at least verify the same with the records of the concluded assessment proceedings. A plain examination of the same would have revealed that the Assessee had not claimed to have received any funds from Richie Rich as share capital. Further, the Assessee had also provided confirmation of the loans received as well as other details, during the said proceedings. It would also be relevant to note that the loans availed had been returned through banking channels during the period and this was also confirmed independently to the AO. In the given circumstances, the least that was required for the AO was to independently apply his mind to ascertain that the information provided was credible and sufficient for drawing a reasonable inference that the income of the Assessee had escaped assessment on account of failure on the part of the Assessee to disclose truly and fully all material facts.
In the present case, it does not appear that the AO applied its mind to the material available including the records of the earlier assessment proceedings. This is also apparent from the fact that during the assessment proceedings, the AO did not confront the Assessee with any new material or examine any other evidence other than what was already available in the initial assessment period.
The Supreme Court in the case of G.K.N Driveshafts (India) Ltd. v. ITO: (2003) 259 ITR 19 (SC); (2003) 1 SCC 72 had held that if an Assessee if so desirous, could seek reasons for issuance of notice under Section 148 of the Act and the AO would be bound to furnish the same within a reasonable time. The Court further held that that the noticee would be entitled to file objections against the issuance of the notice and the AO would be bound to dispose of the same by passing a speaking order.
In the present case, the Assessee filed its objections by a letter dated 12th December, 2008 and requested the AO to drop the proceedings. The Assessee by its letter dated 18th December, 2008 sent in response to another notice, also provided its response in respect of the alleged accommodation entries, which were reported by the Investigation Wing. However, the objections filed by the Assessee were not disposed of by the AO and he proceeded to frame the assessment. This Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. 308 ITR 38 had observed that the requirements regarding recording the reasons to believe; communicating the same to the Assessee; permitting the Assessee to file the objections; and passing a speaking order disposing of the objections are all designed to ensure that the AO does not reopen assessments, which have been finalized, on his mere whim and fancy and that he does so only on the basis of lawful reasons. It was further held that a deviation from the directions issued by the Supreme Court in G.K.N Driveshafts (India) Ltd. (2003) 259 ITR 19 (SC); (2003) 1 SCC 72 would entail nullifying the proceedings.
Thus, although we are in agreement with the contention advanced by the Revenue that information received by the AO regarding passing of bogus entries in its books after the conclusion of the assessment proceedings could in certain circumstances, provide tangible material for AO to reopen assessment and assume jurisdiction, but, in the facts of the present case, we are unable to accept that it would be open for the AO to proceed on the basis that income of the Assessee had escaped assessment on account of the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment for AY 2001-02.
On the matter of addition on account of unexplained credit under Section 68 of the Act, it is relevant to observe that although the AO had reopened the assessment, the AO did not produce any material or confront the Assessee with any credible evidence that could lead to the inference that the entries pertaining to the loan from Richie Rich were bogus or accommodation entries. In the absence of such material, it was clearly not permissible for the AO to take a view contrary to one taken by the AO during the initial assessment.
Accordingly, appeal of the revenue dismissed.
