CASE LAWS DETAILS
DECIDED BY: HIGH COURT OF BOMBAY,
IN THE CASE OF: Prashant S. Joshi Vs Income Tax Officer, Appeal No: WP No. 2287 of 2009 With WP No. 59 of 2010, DECIDED ON: February 22, 2010
2. The principal challenge in these proceedings is to the notices issued by the first respondent under section 148 of the Income Tax Act, 1961 proposing to assess the income of the petitioner for assessment years 2005-06 and 2006-07 on the ground that there is reason to believe that income chargeable to tax had escaped assessment, within the meaning of section 147. By a deed of Partnership dated 5th May, 2003, the petitioner entered into a partnership with two other persons. The business of the partnership consisted of developing real estate. The petitioner retired from the partnership on 11th March, 2005. Under the Deed of dissolution, the petitioner to the first Writ Petition (W.P. No.2287 of 2009) agreed to receive a sum of Rs. 50 lacs, in addition to the balance lying to his credit on the capital and / or current account as reflected in the books of account as on 8th March, 2005 in full and final settlement of his dues on account of retirement. Out of the amount of Rs. 50 lacs, the petitioner received an amount of Rs.17 lacs in financial year 2004-05, relevant to the assessment year 2005- 06, and Rs.33 lacs in financial year 2005- 06 relevant to assessment year 2006- 07. The petitioner filed his return of income for assessment year 2005- 06 on 31st August, 2005 and for assessment year 2006- 07 on 21st July, 2006. Both the returns disclose the amounts received on account of the retirement of the petitioner from the partnership firm and that the amounts, being capital receipts, were not offered to tax.
9. Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of Sections 148 to 163, assess or reassess such income and also any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlines section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and on those reasons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference to the reasons recorded by the Assessing Officer. The reasons which are recorded cannot be supplemented by affidavits. The imposition of that requirement ensures against an arbitrary exercise of powers under section 148.
18. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of section 147. Explanation (2) to section 147 creats a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation “where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.” For the purpose of clause (b) to explanation (2), the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the Court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circumstances, the petition shall have to be allowed by setting aside the notice under section 148.