Section 147 of the Income tax Act , 1961 and explanation of the text ‘Reason to Believe’

Reason to believe does not mean a purely subjective satisfaction on the part of the ITO

The expression ‘reason to believe’ in section 147 does not mean purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith, it cannot be merely a pretence. It is open to the court to examine whether the reason for the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceeding under section 147 is open to challenge in a court of law. –[ S. Narayanappa v. CIT(1967) 63 ITR 219 (SC)]

Belief may be subjective but reason is objective

“Reason to believe” is a common feature in taxing statutes. It has been considered to be the most salutary safeguard on the exercise of power by the officer concerned. It is made of two words “reason” and “to believe”. The word “reason” means cause or justification and the word “believe” means to accept as true or to have faith in it. Before the officer has faith or accepts a fact to exist there must be a justification for it. The belief may not be open to scrutiny as it is the final conclusion arrived at by the officer concerned, as a result of mental exercise made by him on the information received. But, the reason due to which the decision is reached can always be examined. When it is said that reason to believe is not open to scrutiny what is meant is that the satisfaction arrived at by the officer concerned is immune from challenge but where the satisfaction is not based on any material or it cannot withstand the test of reason, which is an integral part of it, then it falls through and the court is empowered to strike it down. Belief may be subjective but reason is objective.- [Ganga Prasad Maheshwari v. CIT (1983)139 ITR 1043: (1981) 21 CTR 83 (All.)]

The expression ‘reason to believe’ occurring in section 147 does not means a purely subjective satisfaction on the part of the ITO, the reasons for the belief must have a rational connection or relevant bearing to the formation of the belief.[ ITO v. Nawab Mir Barkat Ali Khan Bahadur (1974) 97 ITR 239 (SC)].

Following Constitutes reasons:

Following Constitutes reasons to believe for invoking section 147:

  • Evidence in possession of Assessing Officer that the assessee has understated his income.
  • Evidence in possession of Assessing Officer that the assessee has claimed excessive loss/deduction, allowances, reliefs

Reasons to believe

i. There must be reason to believe that income chargeable to tax has escaped assessment.

ii. The existence of tangible material is necessary.

iii. Reason to believe is stronger than “is satisfied”.

iv. Reason to believe does not mean “reason to suspect”.

v. Reason must be good in faith and must have rational connection with the relevant grounds.

vi. Belief must not be based on suspicion, gossip or rumors.

vii. Belief must be that of Assessing Officer.

viii. “Change of Opinion” in the mind of Assessing Officer on interpretation of law or on facts cannot be basis for forming “Reason to Believe”.

It was held that the word ‘reason’ in the phrase ‘reason to believe’ would mean cause or jurisdiction and if the Assessing Officer has a cause or justification to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. It was also held that such justification for his belief is not to be judged from the standards of proof required for coming to a final decision and at the stage where he finds cause or justification to believe that such income has escaped assessment , the Assessing Officer is not required to base his belief on any final adjudication of the matter based on any judicial or quasi judicial enquiry.[Praful Chunilal Patel v. M.J. Makwana, ACIT (1999) 236 ITA 832 (Guj.)]

The expression “has reason to believe” is a very strong and important condition. It is not mere satisfaction. The words “has reason to believe” are stronger than the words “is satisfied”. The Assessing Officer must form a prima facie opinion based upon expressed statement and definite and relevant material in his possession.

Now text is understood by a simple example .Before a qualified doctor a patient comes for treatment . Now before the doctor, the ailment, his test reports , and its cause of illness and the presence of the patient ,conducting certain tests on the body of the patient is the reason and further what comes to the mind of the Doctor is the formation of his belief that the patient will be cured.  . And that belief prompts him to make surgery upon the patient and his belief cures the patient . The belief of the doctor is faith on his decision to cure the patient . In the same way an Assessing Officer must have first reason in the form of material which comes to his knowledge , information , and his faith on the escapement of income and these two things make him to go ahead and he reopens the case u/s 147 by issuing a notice u/s 148 within time limit u/s 149.

Following are judgement of the various courts, tribunals on the text “Reason to believe”. One must go through the entire judgement word to word before quoting at any place.

S. NO HEADING PARTICULARS COURT JUDGEMENT
1 Meaning of “Reason to believe” 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’ doers not mean a subjective satisfaction on the part of the officer. IPCA Laboratories Ltd. V. Gajanand Meena, DCIT (2001) 251 ITR 420 (Bom)
2 There must be some material on the basis of which the assessing officer can have reason to believe that action under section 147 is called for There must be some material which can be regarded as information, on the basis of which the assessing officer can have reason to believe that action under section 147 is called for. The jurisdiction of the court to interfere is very limited, as court does not act as an appellate authority. No meticulous examination of the information by the court is permissible to decide for itself whether action under section 147 is to be called for. The ‘reason to believe’ must be tenable in law.Only if the information or the reason has no nexus with the belief or there is no material or tangible information for forming of requisite belief,then only the court can interfere, otherwise not. Bawa Abhai Singh v. DCIT (2002) 253 ITR 83 (Del)
3 Reason to believe does not mean a purely subjective satisfaction on the part of the ITO The expression ‘reason to believe’ in section 147 does not mean purely subjective satisfaction on the part of the assessing officer. The belief must be held in good faith; it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent the action of the Assessing officer in starting proceedings under section 147 is open to challenge in a court of law. S. Narayannappa v. CIT (1967) 63 ITR 219 (SC)
4 Belief can be challenged by the assessee. The existence of the belief upon which the Assessing officer has produced to reassess can be challenged by the assessee. The assessee cannot challenge the sufficiency of the belief. It was held that when a challenge is made to the action under section 147 what the court is required to examine is whether some material existed on record for the assessing officer to form the requisite belief. But the sufficiency of the grounds which induced the Assessing officer to act under the said section is not a matter for the court to look into. United electrical Co. Pvt. Ltd. V. CIT (2002) 258 ITR 317:178 CTR 192 (Del.)
5 Sufficiency of belief cannot be challenged  by the assessee. The supreme court affirmed the decision of the High court and held that there was nothing to show in a confession made by a third party related to the loan taken by the assessee much less a loan which was shown to have advanced by that person to the assessee and, therefore, live link or close nexus, which should be there between the material and the belief formed by the Assessing officer was missing or was too tenuous to provide legal sound basis for initiation of assessment proceedings under section 147.
6 There must be a reason to induce the belief. The belief of the officer is as to escapement of income and the belief should not be a product of imagination or speculation. There must be reason to induce the belief. The belief should be that, by  reason of omission or failure on the part of the assessee to disclose fully and truly the material facts, income has escaped assessment in any particular year. Unless the escapement is as a consequence or result of such omission or failure, the provision will have no application. Such a belief could not be entertained by the Assessing officer if he had no reason to think that escapement was by reason of such omission or failure. TS. PL. P. Chidambaram Chettiar v. CIT (1966) 62 ITR 774, 779 9Mad), on appeal (1971) 80 ITR 467 (SC)
7 Non submission of schedules to the balance sheet along with its income and expenditure account and balance sheet, does not form reasonable belief for reassessment. The fact that the assessee, ac charitable trust, has not submitted the schedules to the balance sheet along with is income and expenditure account and balance sheet or that it earned substantial rental income or that it earned income from sale of books and a printing press or that two societies are donating a fraction of their profits to the corpus of the assessee-trust did not constitute reason to believe that some taxable income has escaped assessment, more so and therefore made under section 147 read with section 143(3) in furtherance thereto was not valid. [Bharti Vidhyapeeth v. ACIT (2012) 146 ITJ 238:70 BTR 375 (pune)(trib.)]; [ACIT v. Bharti Vidyapeth (2012) 146 TTJ 238:70 DTR 375 (Pune)(Trib)]
8 Formation of belief not to be sustained where no material or reason exists The court can invalidate a notice issued under section 148 only if it is satisfied that no material was available before the officer on the basis of which he could form a belief that the income chargeable to tax has escaped assessment or that the said belief was not at all bona fied or was based on vague, arbitrary and non-specific information. However, the court cannot go into the sufficiency or adequacy or correctness of the reasons for forming the belief and sit in appeal over the opinion formed by the officer concerned. Grover nursing Home v. ITO (2001) 248 ITR 493 (P & H)
9 Belief may be subjective but Reason is Objective. “Reason to believe” is a common feature in taxing statutes. It has been considered to be the most statutory safeguard on the exercise of power by the officer concerned. It is made of two words ” reason: and ” to believe” . The word “reason” means cause or justification and the word “believe” means to accept as true or to have faith in it. Before the officer has faith or accepts a fact to exist there must be a justification for it. The belief may not be open to scrutiny as it is final conclusion arrived at by the officer concerned, as a result of mental exercise made by him on the information received. But, the reason due to which the decision is reached can always be examined. Ganga Prasad Maheshwari v. CIT (1983) 139 ITR 1043: (1981) 21 CTR 83 (All.)
10 Information to form reason to believe available at the time of reopening not subsequent to it It was held undisputed that the assesing officer had initiated reassessment proceedings on the basis of information received from the survey circle that the assessee had got prepared a demand draft for a sum of Rs. 83040 which was not accounted in the books of account of the assessee.

The assessing officer had not examined and corroborated the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings. The assessing officer had thus acted only on the basis of suspicion and it cannot be said that the same was based on belief that the income chargeable to tax had escaped income. The assessing officer has to act on the basis of ‘reasons to believe‘ and not on ‘reasons to suspect’.  The tribunal had, thus, rightly concluded that the assessing officer had failed to incorporate the material and his satisfaction for reopening the assessment and, therefore, the issuance of notice under section 148 of the Act for reassessment proceedings was not valid.

CIT v. Smt. Pramjit Kaur (2009) 311 ITR 38 (P&H)
11 Reason to believe’ is different from ‘Reason to suspect’ The “Reason to believe” is different from “Reason to suspect” or from “To have an opinion”. It has been held that the reason to believe can be said to exist only when the assessing officer comes into possession or “discovers” “some material” or, “gets a new insight” subsequent to the conclusion of the original proceedings. Some “Information”/ event after the original assessment would normally be required to form a belief that the income chargeable to tax escaped assessment. Indian Oil Corporation v. ITO (1986) 159 ITR 956 (SC)
Reason to suspect cannot be equated with reason to believe This is so because the ‘reason to believe’ is not the same thing as ‘reason to suspect’. In Indian Oil Corporation, the court pertinently observed “it is for the taxing authority to draw interference. It is not necessary for the assessee to draw interference.”
12 Reason’ can also mean ‘Cause or justification’ It was held that the word ‘reason’ in the phrase ‘reason to believe’would mean cause or justification  and if the Assessing officer has a cause or justification to think or suppose that income has escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. It was also held that such justification for his belief is not to be judged from the standards of proof required for coming to a final decision and at the stage where he finds cause or justification to believe that such income has escaped assessment, the Assessing officer is not required to base his belief on any final adjudication of the matter based on any judicial or quasi judicial inquiry. Praful Chunnilal Patel v. M. J. Makwana, ACIT (1999) 236 ITA 832 (Guj.)
13 Phrase “if the Assessing officer has reasons to believe” is stronger than the words “if the assessing officer is satisfied”. The important words “hs reason to believe” in section 147 are stronger than the words “is satisfied” The belief entertained by the Assessing 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. Ganga saran & sons P. Ltd. V. ITO (1981) 130 ITR 1 (SC)
14 There must be  reasons on record  to issue notice under section 147. In Ganga saran & sons P. Ltd. V. ITO (1981) 130 ITR 1 , The supreme court noted that the expression ‘reason to believe’ as occurring in section 147 of the Act is stronger than the expression “is satisfied”. In other words mere satisfaction of the Assessing officer for the issuance of the notice is not enough ” there must be reasons on record which have led him to believe that a notice should be issued” CIT v. Vinita Jain (208) 299 ITR 383 (SC)
15 Reasons must have live link with the formations of the belief Where the reassessment proceedings were initiated on the basis of an affidavit by the daughter of the assessee in a different proceeding showing that the assessee had made a gross understatement of expenditure incurred on the marriage of the daughter, such initiation was held to be valid. Jagan Nath Singhal v. DCIT (2000) 242 ITR 554 (P & H)
16 Existence of reasonable belief is the sine qua non for the initiation of reassessment proceedings. The court indicated that the jurisdiction of the income tax officer to initiate the proceeding under section 147 of the act is on the basis of reasonable belief and that is the  sine qua non for initiation of proceeding. ITO v. Ramnarayan Bhojnagarwala (1976) 103 ITR 797 (SC)
17 The power to reopen assessment is not akin to a review. The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power. Aventis Pharma Ltd. V. ACIT (2010) 323 ITR 570 (Bom.)
18 Meanong of ‘reasons’ as defined by the Hon’ble Apex Court “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)
19 Notice issued u/s 148 beyond four years without any allegation of failure to disclose fully and truly in the reasons becomes invalid Failure to disclose all material facts- Notice after four years- reassessment notice was held as quashed on the ground that as failure to disclose all material facts was not set out in reasons. The assessment of the assessee was completed, under section 143(3) on 10.12.2008. The assesssing officer allowed deduction u/s 10A treating the business activity of the assessee is manufacturing of jewellery in a special economic zone. The Assessing Officer reopened assessment on the basis of the assessment order for A.Yr.2007-08. In appeal the commissioner has allowed the claim u/s 10A of the Act after proposing to seek the reassessment for the A.Yr. 2005. The court held that in the recorded reasons it has not been stated that there was failure to disclose all material facts. Accordingly the court quashed the notice issued u/s 148.(A.Yr. 2005-06) Sitara Diamond Pvt. Ltd. V. DCIT(2012) 345 ITR 91: (2013) 262 CTR 299 : 68 DTR 106 (Bom.)
20 Existence of the reason to believe on the part of the ITO was a justifiable issue and it was for the court to be satisfied. The SC in the case of madnani Engineering Works Ltd. Pointed out the importance of not only the belief but also the material on the basis of which such belief was drawn

“We may also point out that though it was contended in the writ petition that the ITO could have no reason to believe that any part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of material facts , the ITO did not disclose in his affidavit any material on the basis of which it could be said that he had come to the requisite belief. All transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus. the ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief. We are, therefore, not at all satisfied on the affidavit that the ITO had reason to believe that a part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure  of the material facts. The notice u/s 147(a) of the Act for reopening the assessment must be in the circumstances be held to be Void.”

ITO v. Madnani engineering Works Ltd. (1979) 118 ITR 1 : UPTC 1107 (SC)

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