8The provisions of section 147/148 give plenary powers to reopen the concluded assessments upto a period of ten years. This cause a great hardship to the assessee. So there is inherent safeguard provided in the form of reasons to believe for the escapement of income. In other words it is the foundation stone on which the proceedings u/s 147/148 stand. The reasons to believe should be based on material available with the assessing officer. Reason to believe is different from reason to suspect. The assessing officer should have some reasons to believe that income has escaped assessment. The Courts cannot judge the sufficiency of reasons meaning thereby that if there are some reasons for the AO to believe that income has escaped assessment it is sufficient. But the belief of the assessing officer should be fair enough and it should not be extraneous or fallacious. Reason to believe can also be said that there should be some application of mind by the assessing officer while issuing notice u/s 148. This thing can be understood by a simple example that if a notice u/s 148 is issued with the reason that the assessee has not filed his /her return of income while in fact assessee has filed his/her return of income then in this case it can be said that there was no reason to believe or application of mind on the part of the assessing officer. Reason to believe is very difficult term to interpret because different courts have given different versions and length to the term reason to believe. We have tried to bring the harmony between the important decisions of the courts to understand the phrase reason to believe in the following literature.
Reason is the capacity of consciously applying logic by drawing conclusions from new or existing information, with the aim of seeking the truth. Reason to believe means a situation where a person has sufficient cause to believe that something is true or false, but not otherwise.
“Reason has always existed but not always in reasonable form”-Karl Marx
Similarly we can say that reasons also exists but not always reasons to believe. Reason to believe form an integral and crucial part of assessments under the various statutes.
In our article we will discuss about “reasons to believe” for initiating reassessment proceedings u/s 147/148 of the Income Tax Act but it can also help in understanding the phrase reason to believe where ever it is used in fiscal statutes.
Meaning of Reasons to believe
Before making an assessment/reassessment u/s 148, the assessing officer has to record reasons for making such an assessment/reassessment. Such reasons which will be recorded by the assessing officer would constitute reason to believe.
“Reasons are the links between materials on which certain conclusions are based and actual conclusions. They disclose how the mind is applied to the subject-matter for a decision whether it is purely administrative or quasi judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable.”- Union of India v. Mohan Lal Kapoor & Ors. (1973) 2 SCC 836 (SC)
Sufficiency of reasons to believe
Over the years various Courts/appellate authorities have passed various judgements concerning reasons to believe formed for income escaping assessment. We will try and enumerate the important ones in our article.
Reasons to believe must not be arbitrary and must be objective
In the case of State of Uttar Pradesh v. Aryaverth Chawal Udyog reported in [2016] 91 VST 1 (SC) ; [2015] 17 SCC 324 (paragraphs 28 to 30), the hon’ble Supreme Court has held as under (page 15 of 91 VST) :
“This court has consistently held that such material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant or irrelevant. It must bring home the appropriate rationale of action taken by the assessing authority in pursuance of such belief.
The standard of reason exercised by the assessing authority is laid down as that of an honest and prudent person who would act on reasonable grounds and come to a cogent conclusion.
Thus, reason to believe cannot be said to be the subjective satisfaction of the assessing authority but means an objective view on the disclosed information in the particular case and must be based on firm and concrete facts that some income has escaped assessment.
The expression ‘reason to believe’ refers to the belief which prompts the Assessing officer to apply section 147 to a particular case. It will depend on the facts of each case. The belief must be of an honest and reasonable person based on reasonable grounds. The assessing officer is required to act, not on mere suspicion, but on direct and circumstantial evidence. The expression ‘reason to believe’ does not mean a subjective satisfaction on the part of the officer- IPCA Laboratories Ltd. V. Gajanand Meena, DCIT (2001) 251 ITR 420 (Bom).
Existence of belief can be challenged in Court and not Sufficiency of reasons
In the case of the Commissioner of Sales-Tax v. Bhagwan Industries (P.) Ltd. [1973] 31 STC 293 (SC) ; AIR 1973 SC 370 (paras 9 and 10), hon’ble Supreme Court has held as under (page 299 of 31 STC) : The controversy between the parties has centred on the point as to whether the assessing authority in the present case had reason to believe that any part of the turnover of the respondent had escaped assessment to tax for the assessment year 1957-58. Question in the circumstances arises as to what is the import of the words ‘reason to believe’, as used in the section. In our opinion, these words convey that there must be some rational basis for the assessing authority to form the belief that the whole or any part of the turnover of a dealer has, for any reason, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this court, for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to observe that the belief must be held in good faith and should not be a mere pretence.
Reasons should not be vague and based on mere suspicion, gossip or rumour
In the case of Sheo Nath Singh v. Appellate Assistant CIT [1971]82 ITR 147 (SC) ; [1972] 3 SCC 234 (para 10), the hon’ble Supreme Court while considering the similar provisions of section 34(1A) of the Indian Income tax Act, 1922, held as under (page 153 of 82 ITR) : “There can be no manner of doubt that the words ‘reason to believe’ suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.”
In the case of Union of India v. Rai Singh Deb Singh Bist [1973]88 ITR 200 (SC) ; AIR 1974 SC 478 ; [1973] 3 SCC 581 (para 5), the hon’ble Supreme Court held as under (page 202 of 88 ITR) : “. before an Income-tax Officer can be said to have had reason to believe that some income had escaped assessment, he should have some relevant material before him from which he could have drawn the inference that income has escaped assessment. His vague feeling that there might have been some escape of income from assessment is not sufficient . . .”
In the case of ITO v. Lakhmani Mewal Das [1976]103 ITR 437(SC); [1976] 3 SCC 757 (paras 11 and 12), the hon’ble Supreme Court has held as under (page 448 of 103 ITR):”As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates 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. 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 for reopening 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 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 be taken for reopening assessment even if the information is wholly vague, indefinite, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.
Reasons to believe and not reasons to suspect
The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are ‘reason to believe’ and not ‘reason to suspect’. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the Income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter’s failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee-respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs.”
In the case of Ganga Saran and Sons (P.) Ltd. v. ITO [1981]130 ITR 1 (SC) ; [1981] 3 SCC 143 (para 6), the hon’ble Supreme Court held as under (page 11 of 130 ITR) :
“It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the Income-tax Officer can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under section 147(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.”
No reopening on the basis of mere change in opinion
In the case of ITO v. TechSpan India (P.) Ltd. [2018]404 ITR 10(SC) ; [2018] 6 SCC 685 (paras 14 to 18), the hon’ble Supreme Court held as under (page 16 of 404 ITR) : “The language of section 147 makes it clear that the Assessing Officer certainly has the power to reassess any income which escaped assessment for any assessment year subject to the provisions of sections 148 to 153. However, the use of this power is conditional upon the fact that the Assessing Officer has some reason to believe that the income has escaped assessment. The use of the words ‘reason to believe’ in section 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the Assessing Officer who may even initiate such reassessment proceedings merely on his change of opinion on the basis of same facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the Legislature. The said provision was incorporated in the scheme of the Income-tax Act so as to empower the assessing authorities to reassess any income on the ground which was not brought on record during the original proceedings and escaped his knowledge; and the said fact would have material bearing on the outcome of the relevant assessment order. Section 147 of the Income-tax Act does not allow the reassessment of an income merely because of the fact that the Assessing Officer has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the Assessing Officer the power of review and section 147 confers the power to reassess and not the power to review. To check whether it is a case of change of opinion or not one has to see its meaning in literal as well as legal terms. The words ‘change of opinion’ imply formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an Assessing Officer resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection.
It is well-settled and held by this court in a catena of judgments and it would be sufficient to refer to CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) wherein this court has held as under (page 564 of 320 ITR and SCC page 725, paras 5 to 7) where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April,1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe”. Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening 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 April 1, 1989, the Assessing Officer has power to reopen, 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.’ Before interfering with the proposed reopening of the assessment on the ground that the same is based only on a change in opinion, the court ought to verify whether the assessment earlier made has either expressly or by necessary implication expressed an opinion on a matter which is the basis of the alleged escapement of income that was taxable. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the Assessing Officer any opinion on the questions that are raised in the proposed reassessment proceedings. Every attempt to bring to tax, income that has escaped assessment, cannot be absorbed by judicial intervention on an assumed change of opinion even in cases where the order of assessment does not address itself to a given aspect sought to be examined in the reassessment proceedings.”
Conclusion
In a catena of cases including the ones mentioned above it has been clearly mentioned that the reasons to believe must be objective and should be framed based on tangible material having direct nexus with the income escaping assessment. Reasons should not be based on mere change in opinion. Reasons to believe for reopening assessment should not be subjective but they should be objective. Reasons must have live link with the formations of the belief.
After looking into various judgments mentioned above the income tax authorities should be cautious in forming reasons to believe but it is very disheartening that in the pressure of revenue collection the assessing officers at all levels record satisfaction without even considering the various rulings. There is complete abuse of power by the authorities while recording reasons in some cases. Majority of the times it is observed that reasons recorded are not supplied to the assessee and if provided then at very later point of time. There is an urgent need for supervision of the reasons and satisfaction recorded so that the system gets streamlined which will further help in reducing time and costs of both the assessee and the department.
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