Case Law Details
Brief of the Case
Delhi High Court held In the case of CIT vs. Vishishth Chay Vyapar Ltd. that the legal requirement that “the reason to believe must be predicated on tangible material or information” and that “the belief must be rational and bear a direct nexus to the material on which such a belief is based” was not fulfilled in the present case. In this case, the only reason for forming the ‘reasons to believe’ that income had escaped assessment was the dismissal of the Assessee’s appeal by CIT (A) for AY 1997-98 in which share loss was disallowed for the first time. There was no material as such for coming to the conclusion that the assessee understated its income for earlier year i.e. AY 1995-96 by an amount of Rs.1,28,80,000. Hence reopening of assessment is not sustainable in law.
Facts of the Case
The Assessee is a non-banking finance company registered as such with RBI. Its objects are investments in shares and providing loans and advances. The Assessee’s shares are listed in Delhi Stock Exchange. For AY 1995-96, the Assessee filed a return of income on 29th November 1995 declaring an income of Rs. 6,23,880. The return was picked up for scrutiny and by an assessment order dated 10th July 1996 under Section 143(3), the AO determined the taxable income of the Assessee at Rs. 6,83,130. In the return the assessee claimed a loss of Rs. 1,28,80,000 on account of sale of shares of M/s. Purbanchal Prestressed Ltd. (PPL).
The Assessee continued filing returns for the subsequent AYs 1996-97, 1997-98 and 1998-99 in which it showed losses on the sale of shares of PPL and sought to set off those losses against its income. For AY 1997-98, the loss shown in the purchases and the sales of shares was disallowed by the AO. It was noted by the AO that Mr. R.R. Modi, a Director of the Assessee company had actually floated PPL and no business activity had actually been carried out by it. The AO concluded that the share transactions involving the Assessee and PPL were of a collusive nature. The Assessee’s appeal against the said order was dismissed by the CIT (A). Taking note of the above facts, a decision was taken to invoke Section 147 for AYs 1995-96 and 1996-97. A notice under Section 148 issued to the Assessee on 26th March 2002 for AY 1995-96 recording inter alia that the income which had escaped assessment was Rs.1,28,80,000.
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