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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 46 & 47/Bang/2021 Assessment years : 2002-03 & 2003-04 Shri Jitendra Virwani, Vs. The Assistant Commissioner No.341, Embassy Woods, of Income-tax, 6A, Cunningham Road, Central Circle 1(3), Vasanth Nagar, Bangalore. Bangalore – 560 052. PAN: AAVPV 0738P APPELLANT RESPONDENT Appellant by : Shri S. Ramasubramanian, CA Respondent by : Shri Priyadarshi Mishra, Addl.CIT(DR)(ITAT), Bengaluru. Date of hearing : 16.04.2021 Date of Pronouncement : 23.06.2021 O R D E R Per Chandra Poojari, Accountant Member These two appeals by the assessee are directed against different orders of CIT(Appeals) for AYs 2002-03 & 2003-04. The grounds are common in both the appeals and only change in figures, which read as follows:-
AY 2002-03 “1. The CIT(A) erred both in Law and on the Facts of the case in upholding the re-opening of the assessment u/s. 147 of the Income-tax Act, 1961 (“Act”) made on 24.03.2014.
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The CIT(A) erred in upholding the addition of income of Rs. 731845- u/s 69 of the Act and in levying an interest of Rs. 53,222/- u/s. 234D of the Act. 3. The CIT(A) erred in not appreciating and considering the submission of the Appellant that the re-opening of the assessment on 24.03.2014 was beyond the time limit prescribed under the Act and amendment to section 147 would not be applicable to the Appellant’s case and therefore the re-assessment was not valid. 4. The CIT(A) has erred in not appreciating the fact that Assessing officer had merely relied upon the reasons recorded by predecessor without independently applying mind. 5. The CIT(A) has erred in not appreciating the grounds of the Appellant that Assessment under section 147 is liable to be quashed as the ingredients mentioned in section 147 have not been satisfied before assumption of jurisdiction and even at the time of conclusion of the assessment. 6. The CIT(A) failed to appreciate that the appellant had disclosed fully and truly all material facts necessary for assessment. 7. The CIT(A) erred in ignoring the statement given by the Appellant that he was not owning or operating any Bank Account with HSBC Bank, Geneva. 8. The CIT(A) failed to consider the fact that the document purported to be the evidence or the information forming the basis of the belief that income has escaped assessment, shown to the appellant was an unsigned document giving some bank account number and other personal details of the appellant. 9. The CIT(A) failed to consider the fact that the evidence submitted by the AO is a mere surmise and conjecture which cannot form the basis of an assessment as the authenticity of the alleged evidence is not established. 10. The CIT(A) failed to appreciate the appellant’s contentions that the source of evidence was not specified by the
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AO except stating in the Order that the information was procured through diplomatic channels. 11. The CIT(A) failed to consider the fact that the AO produced no physical evidence or document so that his statement that the information was procured through diplomatic channels can be verified. 12. The CIT(A) erred in not appreciating the facts that the appellant was deprived of the opportunity to examine the evidence which the AO claimed to be in possession of. The order passed in violation of the principles of natural justice is bad in law. 13. The CIT(A) erred in law and facts of the case by not considering that the AO has assessed the same income for the same assessment year in the hands of both the appellant and his ex-wife without appreciating that the AO was not able to convert his initial reason to believe that income had escaped assessment at the beginning of the enquiry into a conclusive statement at the end of the enquiry, indicating that the ‘reason’ forming the basis of reopening had failed. 14. The CIT(A) erred in law in upholding the levying of the interest u/s .234D as mandatory and consequential without appreciating the law that it cannot be levied/increased in the re- assessment u/s. 147 of the Act. 15. The Appellant, therefore, prays that the re-assessment u/s. 147 may be annulled, that the addition of Rs. 7,31,845/- may be deleted and that the interest of Rs. 53,222/- levied u/s. 234D may be cancelled.” 2. For these assessment years, the assessee’s income mostly consists of salary, property income and income from other sources. He filed return of income for these assessment years declaring income as follows:-
A.Y. Rs. 2002-03 52,31,130 2003-04 63,95,979
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The AO gathered information that assessee’s ex-wife, Ms. Vandana Virwani, had maintained an account with HSBC Bank, Geneva in which there were transactions of US $ 14,149 for AY 2002-03 and US $ 14,500 for AY 2003-04.
During enquiry at the time of assessment, statement was recorded u/s. 131 of the Income-tax Act, 1961 [the Act] wherein the assessee has stated that she was not owner nor operating any bank account with HSBC Bank, Geneva and therefore the transaction did not relate to him. However, addition was made in these assessment years towards the transactions in HSBC Bank, Geneva. Against this, the assessee carried the matter before the CIT(Appeals), who has confirmed the addition. Against this, the assessee is in appeals before us.
At the outset, the assessee argued that reopening of assessment in these assessment years is bad in law. He drew our attention to the reasons recorded for reopening of assessments which reads as under:-
““The assessee is a resident individual assessed to tax. The case has been notified to this Circle by the order of CIT-IV dated 06.12.2012. Based on the information received by the department, the assessee and his ex-wife Smt. Vandana Virwani were beneficiaries and authorised signatories of accounts maintained at HSC Bank, Geneva. The assessee has opened an account with M/s. HSBC Bank, Geneva on 04.10.2001 at HSBC Geneva by depositing an amount of USD 14149, the same has not been admitted as income in the return of income filed before the tax authorities in India. Hence income chargeable to tax has been escaped assessment fir the AY 2002-03.” 6. Further, the ld. AR submitted that validity of notice u/s. 147 of the Act for the initiation of reassessment proceedings is barred by limitation. The impugned assessment year is 2002-03. Notice u/s. 148 of the Act had
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been issued on 24.03.2014. Section 149 which deals with time-limit for issuing notice, prior to its amendment by Finance Act, 2012, read as under:
“149.(1) No notice under section 148 shall be issued for the relevant assessment year:- a) if for years have elapsed from the end of the relevant assessment year, unless the case falls under clause( b); (b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or its likely to amount to one lakh rupees or more for that year. Explanation - In determining income chargeable to tax which has escaped assessment for the purpose of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purpose of that section (2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151. (3) if the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or precomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall notice shall not be issued after the expiry of a period of two years from the end if the relevant assessment year.”
Section 149, prior to its amendment by Finance Act, 2012, stated that the time-limit for issuing notice u/s. 148 is 4 years from the end of the relevant assessment year if the income chargeable to tax which has escaped assessment amounts to or is likely to amount to less than Rs. 1 lakh. If the income chargeable to tax which has escaped assessment amounts to or is likely to amount to Rs. 1 lakh or more, then the time-limit
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to issue notice u/s. 148 is 6 years from the end of the relevant assessment year.
Section 149 has been amended by Finance Act, 2012. The amended section reads as under:-
“149. (1) No notice under section 148 shall be issued for the relevant assessment year,— (a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) or clause (c); (b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year; (c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment. Explanation.—In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section. (2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151. (3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of six years from the end of the relevant assessment year. Explanation.—For the removal of doubts, it is hereby clarified that the provisions of sub-sections (1) and (3), as amended by the
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Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.”
As per section 149 as amended by Finance Act, 2012, in case income in respect of an asset located outside India has escaped assessment then notice u/s 148 can be issued upto 16 years from the end of the relevant assessment year. The amendment made to section 149 took effect from 01.07.2012. The time-limit for issuing notice u/s 148 r.w.s. 149 of the Act for AY 2002-03 expired on 31.03.2009 under the old law.
The ld. AR submitted that the extended period of limitation under the new law is applicable only to those cases where the time-limit to issue notice under section 148 r.w.s 149 has not expired on the date on which the amendment made to section 149 by the Finance Act, 2012 is effective. The amendment made to section 149 is effective only from 01.07.2012. As stated earlier, the period of limitation to issue notice u/s 148 r.w.s 149 already expired on 31.03.2009 which is much earlier to the date from which the amendment made to section 149 by Finance Act, 2012 is effective. Hence, the notice issued u/s 148 is barred by limitation. In this connection, he relied on the following decisions of the Hon’ble Supreme Court:-
S.S. Gadgil v. Lal & Co. [1964] 53 ITR 231 (SC) In this case, a notice was issued against the assessee as an agent of a non-resident on 27th March, 1957, and that notice related to the assessment year 1954-55. Under clause (iii) of the proviso to section 34(1), as it stood prior to its amendment by the Finance Act, 1956, a notice of assessment or reassessment could not be issued against a person deemed to be an agent of a non-resident after the expiry of one year from the end of the year of assessment. The right to commence a proceeding for assessment against the assessee as agent of a nonresident for the assessment year 1954-55, therefore, ended on 31st March, 1956, under the new Act before its amendment
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in 1956. This provision was, however, amended by the Finance Act, 1956, and under the amended provision the period of limitation was extended to two years from the end of the assessment year. The amendment was made on 8th September, 1958, but was given effect to from 1st April, 1956. Since the time within which notice could be issued against a person deemed to be an agent of a non-resident was extended to two years from the end of the assessment year, it was contended on behalf of the Income-tax Officer that the notice issued by him was within the terms of the amended provision and was, therefore, a valid notice. Now the notice issued on 27th March, 1957, was clearly within a period of two years from the end of the assessment year 1954-55 and if the amended provision applied, the notice would be a valid notice. It was, however, held by this court that the notice was not a valid notice inasmuch as the right of the Income-tax Officer to reopen the assessment of the assessee under the unamended provision became barred on 31st March, 1956, and the amended provision did not operate against him so as to authorise the Income-tax Officer to commence proceedings for reopening the assessment of the assessee in a case where, before the amended provision came into force, the proceedings had become barred under the unamended provision.
Based on the above facts, the Hon’ble Supreme Court held as under:- "As we have already pointed out, the right to commence a proceeding for assessment against the assessee as an agent of a non-resident party under the Income-tax Act before it was amended, ended on March 31, 1956. It is true that, under the amending Act, by section 18 of the Finance Act, 1956, authority was conferred upon the Income-tax Officer to assess a person as an agent of a foreign party under section 43 within two years from the end of the year of assessment. But the authority of the Income-tax Officer under the Act before it was amended by the Finance Act of 1956, having already come to an end, the amending provision will not assist him to commence a proceeding even though at the date when he issued the notice it is within the period provided by that
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amending Act. This will be so, notwithstanding the fact that there has been no determinable point of time between the expiry of the time provided under the old Act and the commencement of the amending Act. The legislature has given to section 18 of the Finance Act, 1956, only a limited retrospective operation, i.e., up to April 1, 1956, only. That provision must be read subject to the rule that in the absence of an express provision or clear implication, the legislature does not intend to attribute to the amending provision a greater retrospectivity than is expressly mentioned, nor to authorise the Income-tax Officer to commence proceedings which before the new Act came into force had by the expiry of the period provided become barred."
In the case of K.M. Sharma vs. ITO (2002) 254 ITR 772 (SC), the Hon’ble Supreme Court held as under:- “On a proper construction of the provisions of section 150(1) and the effect of its operation from 1-4-1989, we are clearly of the opinion that the provisions cannot be given retrospective effect prior to 1-4-1989 for assessments which have already become final due to bar of limitation prior to 1-4-1989. Taxing provision imposing a liability is governed by normal presumption that it is not retrospective and settled principle of law is that the law to be applied is that which is in force in the assessment year unless otherwise provided expressly or by necessary implication. Even a procedural provision cannot in the absence of clear contrary intendment expressed therein be given greater retrospectivity than is expressly mentioned so as to enable the authorities to affect finality of tax assessments or to open up liabilities, which have become barred by lapse of time. Our conclusion, therefore, is that sub-section (1) of section 150, as amended with effect from 1-4-1989, does not enable the authorities to reopen assessments, which have become final due to bar of limitation prior to 1-4-1989 and this position is applicable equally to reassessments proposed on the basis of orders passed under the Act or under any other law.”
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The larger Bench of Supreme Court in S.C. Prashar v. Vasantsen Dwarkadas Hungerford Investment Trust Ltd. (1963) 49 ITR 1 (SC) held as under:- “I now take up the second facet of the same question. On this aspect of the case both the learned single judge (Desai J.) and the appellate court (Chagla C.J. and Tendolkar J.) were agreed. The relevant assessment year was 1942-1943 and it ended on March 31, 1943. The period of four years therefrom would end on March 31, 1947, and the period of eight years would end on March 31, 1951. Now the second proviso to sub-section (3) came into effect, as I have stated earlier, on April 1, 1952. In other words, the time limit fixed by sub-section (1) had expired some time before the amended second proviso came into effect. Desai J. has rightly pointed out that it is a firmly established principle of income-tax law that once a final assessment is arrived at and the assessment is complete, it cannot be reopened except in the circumstances detailed in sections 34 and 35 of the Act and within the time limited by those sections. Is there anything in the proviso in question which would give it a retrospective effect beyond April 1, 1952 ? In my opinion there is none. The second proviso came into force on April 1, 1952, and before that date the period of eight years from March 31, 1943, had already expired. The legislation which provided that from April 1, 1952, there would be no limitation in respect of certain cases could not revive a remedy which was already lost to the Income-tax Officer. It seems to me that the proposition of law is settled beyond any doubt that although limitation is a procedural law and although it is open to the legislature to extend the period of limitation, an important right accrues to a party when the remedy against him is barred by the existing law of limitation and a vested right cannot be affected except by express terms used by the statute or the clearest implication flowing therefrom…..……… On behalf of the appellants, some distinction was sought to be drawn between a right and the remedy thereof and it was contended that the liability of an assessee to pay the tax owing to the State was always there from the commencement of the
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assessment year and section 34 of the Act dealt merely with the machinery of assessment. It was argued that a case under section 34 was not analogous to a time-barred claim to recover money from one individual by another. In my opinion such a distinction is entirely out of place so far as section 34 is concerned. The learned Chief Justice has rightly pointed out that under section 34 the Income-tax Officer has the right to issue a notice within the period of limitation fixed by sub- section (1); in another sense, it may be said that the remedy of the Income-tax Officer to bring to tax escaped income is available to him under section 34 provided he avails himself of the remedy within the period of limitation. No distinction can be drawn, so far as section 34 is concerned, between the right of the Income-tax Officer and the remedy available to him. If the remedy is lost, the right is also lost and if the right is lost, much more so is the remedy. Therefore, I am clearly of the view that on April 30,1954, the Income-tax Officer had no jurisdiction to issue the notice which he did on the firm Purshottam Laxmidas under the second proviso to sub-section (3) of section 34, because the time limit fixed by sub-section (1) of section 34 had expired long before the said proviso came into effect and the proviso does not in express terms or by necessary implication revive a remedy which has been lost before April 1, 1952………… In all these cases the Privy Council proceeded on the principle that if the right of action had become barred according to the law of limitation in force, subsequent enlargement of the period of time does not revive the remedy to enforce the rights already barred. The same principle, in my opinion, would apply to the periods specified in section 34 of the Act and if the period prescribed for taking action had already expired, subsequent change in the law does not make it so retrospective in its effect as to revive the power of an Income-tax Officer to take action under the new law. It is one of the canons of construction of statute of limitation that in the absence of express words or necessary intendment no change in the period of limitation can revive the right to sue which has become barred nor can it impair the immunity from any action which had become final after the lapse of a specified period of time……………
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Another argument raised on behalf of the appellant was that the eight-years' period prescribed in section 34 is not a rule of limitation but merely a fetter on the power of the Income-tax Officer to take action and the removal of the fetter revives the power of the Officer. This really is not a different argument but the same argument of revival of a right to sue which has been discussed above. Change in the law as to the period in which a suit can be brought to recover a debt or action can be taken by the Income-tax Officer to commence an assessment or reassessment does not impair the rights already acquired by the bar of limitation or revive the power of the Income-tax Officer which has already become incapable of being exercised by lapse of time. The two stand on the same footing and have the same effect, i.e., provide immunity and place a bar on any attack on the rights of the defendant or the assessee as the case may be.”
The ld. AR submitted as stated earlier, the extension was brought in by amendment which is with effect from 01.07.2012. There is nothing in the amendment to indicate retrospectivity in clear terms. As stated earlier, retrospectivity cannot be easily inferred or implied. The Explanation clarifying that the provisions of sub-sections (1) and (3), as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012 does not explicitly provide that such extension applies even where the earlier time limit had long before lapsed. At the most it may provide that such extension is available for prior assessment years where the limitation has not lapsed as yet. Therefore, notice dated 24.03.2014 issued u/s 148 of the Act is barred by limitation.
Section 142(1) states that “For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 115WD or section 139 or in whose
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case the time allowed under sub-section (1) of section 139 for furnishing the return has expired a notice requiring him, on a date to be therein specified,…….”. The ld. AR submitted, therefore, notice u/s 142(1) can be issued only ‘for the purpose of making assessment.’ When the time-limit to initiate assessment proceedings itself is barred by limitation, it is trite to state that the notice u/s 142(1) issued purportedly for making assessment which is invalid in the eyes of law should also be held to be invalid.
It was further submitted that vide letter dated 26.09.2014 the ACIT, Circle-2(1), Bangalore has communicated the recorded reasons. The same has been extracted supra. Section 147 of the Act states 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 153, assess or reassess such income….” , Hence the basic requirement for initiating proceedings u/s. 147 is that the AO should have “reason to believe that nay income chargeable to tax has escaped assessment”.
The ld. AR submitted that a perusal of the reasons recorded do not state what is the amount of income chargeable to tax that as escaped assessment in my hands. According to the AO, based on the information received by the department, the assessee and his ex-wife Smt. Vandana Virwani were beneficiaries and authorized signatories of accounts maintained at HSBC Bank, Geneva. The assessee opened an account with HSBC Bank, Geneva on 04.10.2001 at HSBC Geneva by depositing an amount of US $ 14,149/-. The same has not been admitted as income in the return of income filed before the tax authorities in India. Hence income chargeable to tax has escaped assessment for the AY 2002-03. The assessee did not admit of the alleged bank account as belonging to him. It was submitted that the alleged bank account does not meet with the
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requirements of section 147 compliance with which is necessary for assuming jurisdiction under the said section.
It was further submitted that a perusal of the above reasons recorded would show that the amount of income that is chargeable to tax that has escaped assessment has not been quantified. As per the information, the Bank Account has been held jointly by assessee along with his wife. In such a scenario, it should be ascertained as to how much of the transactions pertain to the assessee and his wife. Moreover, merely entering into transactions would not mean that income is earned. The reasons recorded do not state whether the transactions are income bearing transactions or not.
The ld. AR submitted that the expression ‘reason to believe’ cannot be a mere conjecture or surmise. The reason for formation of belief for initiating assessment u/s 147 must have a rational connection or relevant bearing on the formation of belief. The existence or otherwise of such a belief on the part of the AO, is the very foundation for him to assume jurisdiction u/s 147. In the present case, it is established that the AO did not have any ‘reason to believe’ as judicially interpreted by various courts. So the initiation of proceedings u/s 147 is bad in law.
The Hon’ble Supreme Court in Sheo Nath Singh v. Appellate 17. Asstt. CIT [1971] 82 ITR 147 (SC) observed as under:-
"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 circumstances 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
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sufficiency of the reasons for the belief cannot be investigated by the court." 18. A three-Judge Bench of the Supreme Court in S. Narayanappa v. CIT [1967] 63 ITR 219 held as under:-
"Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it different, it is open to the court to examine the question 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 Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District 1, Calcutta)." 19. In Ganga Saran & Sons (P.) Ltd. v. Income-tax Officer [1981] 130 ITR 1 (SC), the Hon’ble Supreme Court observed as under:-
“The important words in section 147(a) are “has reason to belief” and these words are strong 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 fact 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 has 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
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material facts and the notice issued by him would be liable to be struck down as invalid.” 20. The Hon’ble Gauhati High Court in Assam Co. Ltd. v. Union Of India [2006] 150 TAXMAN 571 [GAU.] held as under:-
“The litmus test as is decipherable from the consistent judicial pronouncements on this facet of the lis, therefore, is the existence, relevance and rationale of the reason on which the Assessing Officer proceeds to act under Section 147 and the bearing it has on the process of formation of the belief that income has escaped assessment. If either of these two essentials is absent, the proposed action would be ex facie unauthorized. Not only the reason has to be one, which is relevant and recognized in law, the same has to have a rational and logical link with the belief that there has been an escapement of taxable income. The belief has to have its roots in the reasons and obviously has to be genuine and bona fide and not merely a pretence. The subjective satisfaction metamorphing into the belief has to be guided by objectivity based on existing relevant reasons acknowledged and recognized by law. A tangible and bona fide legal necessity to scuttle tax avoidance is the essence of the power and no roving enquiry on vague-hunches or indeterminate and impertinent consideration is envisaged.” 21. The entire law as to what would constitute "reason to believe" was summed up by the Hon’ble Supreme Court in ITO v Lakhmani Mewal Das [1976] 103 ITR 437. The following principles were laid down:-
(a) The powers of the Assessing Officer to reopen an assessment, though wide, are not plenary. (b) The words of the statute are "reason to believe" and not "reason to suspect". (c) The reopening of an assessment after the lapse of many years is a serious matter. Since the finality of a judicial or quasi- judicial proceedings are sought to be disturbed, it is essential that before taking action to reopen the assessment, the requirements of the law should be satisfied.
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(d) The reasons to believe must have a material bearing on the question on escapement of income. It does not mean a purely subjective satisfaction of the assessing authority; the reason be held in good faith and cannot merely be a pretence.
The ld. AR submitted that the reasons to believe 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 AO and the formation is belief regarding escapement of income. The fact that the words "definite information" which were there in section 34 of the Act of 1922 before 1948, are not there in section 147 of the 1961 Act would not lead to the conclusion that action can now be taken for reopening an assessment even if the information is wholly vague, indefinite, far-fetched or remote. From perusal of the reasons recorded, he submitted that the reasons recorded cannot lead one to form a belief that income chargeable to tax has escaped assessment. The observations of the Hon’ble Supreme Court in Income- tax Officer v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) on this proposition are reproduced below:-
“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
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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 now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.”.
In Commissioner of Income-tax v. Daulat Ram Rawatmull [1973] 87 ITR 349 (SC), the Hon’ble Supreme Court held as under:
“There should, in our opinion, be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which that conclusion is based. The use of extraneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of fact because it is difficult to predicate as to what extent the extraneous and irrelevant material has influenced the authority in arriving at the conclusion of fact.” 24. A Constitution Bench of the Hon’ble Supreme Court in M. Ct. Muthiah v. CIT AIR 1956 SC 269, considered the expressions "reason to believe" and distinguished the same from "reason to suspect" comparing the provisions with the un-amended provisions of section 34(1) of the Income-tax Act, 1922 and held that after amendment, the expressions "reason to believe" had to be based as a consequence of "definite information" which came into possession of the Revenue. However, there must be some material in possession of the Revenue on the basis of which an objective opinion can be formed that the person concerned has undisclosed amount for the purpose of the Act.
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It is submitted that there is no nexus between the material coming to the notice of the AO and the formation of his belief that there has been escapement of income. The assessee does not hold any bank account with HSBC Geneva. Hence, the very basis for assuming jurisdiction is not factually correct, no reasonable belief can be formed based on such incorrect facts.
Without prejudice to the above, it is submitted that the AO should have reason to believe that income chargeable to tax has escaped assessment. The learned Assessing Officer has to determine ‘income chargeable to tax’. This presupposes that the material based on which he forms reason to believe that income chargeable to tax which has escaped assessment should enable computation of income that has escaped assessment. The AO has not stated as to how the entries in the Bank account represent income. Under such circumstances, it cannot be alleged that income chargeable to tax has escaped assessment.
It was further submitted that the return of income has been processed u/s 143(1) of the Act. It is submitted that once the return has been processed u/s 143(1), then unless there is tangible material which has come to the possession of the AO subsequent to issue of intimation, proceedings u/s 147 cannot be initiated. It has not been stated as to what is the material that is available based on which the learned DCIT, Circle – 2(1) has reason to believe that income chargeable to tax has escaped assessment. Vide notice dated 26.09.2014 issued u/s 142(1), the DCIT, Circle – 2(1) sought copy of account with HSBC Geneva. If the DCIT, Circle – 2(1) did not have a copy of the bank account, it was submitted that it is not understood as to what material was in the possession of the Department for initiating assessment u/s 147. Hence, initiation of assessment u/s 147 without tangible material in possession is liable to be quashed. Reliance was placed on the following decisions:-
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In Commissioner of Income-tax-V v. Orient Craft Ltd. [2013] 29 taxmann.com 392 (DELHI), the Hon’ble Delhi High Court held as under:- “We think that the point taken on behalf of the assessee that even an assessment made under Section 143(1) of the Act can be reopened under Section 147 only subject to fulfillment of the conditions precedent, which include the condition that the Assessing Officer must have "reason to believe" that income chargeable to tax has escaped assessment, is sound. It is true that no assessment order is passed when the return is merely processed under Section 143(1) and an intimation to that effect is sent to the assessee. However, it has been recognised by the Supreme Court itself in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P). Ltd. [2007] 291 ITR 500/ 161 Taxman 316, a decision that was relied upon by the revenue, that even where proceedings under Section 147 are sought to be taken with reference to an intimation framed earlier under Section 143(1), the ingredients of Section 147 have to be fulfilled; the ingredient is that there should exist "reason to believe" that income chargeable to tax has escaped assessment. This judgment, contrary to what the Revenue would have us believe, does not give a carte blanche to the Assessing Officer to disturb the finality of the intimation under Section 143(1) at his whims and caprice; he must have reason to believe within the meaning of the Section.
…………..There is nothing in the language of Section 147 to unshackle the Assessing Officer from the need to show "reason to believe". The fact that the intimation issued under Section 143(1) cannot be equated to an "assessment", a position which has been elaborated by the Supreme Court in the judgment cited above, cannot in our opinion lead to the conclusion that the requirements of Section 147 can be dispensed with when the finality of an intimation under Section 143(1) is sought to be disturbed. We are at pains to point out this position, which seems fairly obvious to us, because of the argument frequently advanced before us on
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behalf of the Revenue in other cases as well, under the misconception, if we may say so with respect, that an intimation under Section 143(1) can be disturbed on any ground which appeals to the Assessing Officer. The consequence of countenancing such an argument could be grave. The expression "reason to believe" has come to attain a certain signification and content, nourished over a long period of years by judicial refinement painstakingly embarked upon by great judges in the past. The expression has been judicially interpreted in a particular manner. When Section 147 was recast with effect from 1st April, 1989, the legislature sought to replace the expression "reason to believe" with the expression "for reasons to be recorded by him in writing". But there were representations against the proposal and bowing to them the original expression was restored. This aspect of the matter has been brought out by the Supreme Court in Kelvinator of India Ltd. (supra)……………… Having regard to the judicial interpretation placed upon the expression "reason to believe", and the continued use of that expression right from 1948 till date, the ld. AR submitted that the meaning of the expression has to be understood in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation u/s. 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-a- vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made u/s. 143(3) cannot apply where only an intimation was issued earlier u/s. 143(1). It would in effect place an assessee in whose case the return was processed u/s. 143(1) in a more vulnerable position than an assessee in whose case there was a full-fledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted
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without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return under Section 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression "reason to believe" in cases where assessments were framed earlier under Section 143(3) and cases where mere intimations were issued earlier under Section 143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed. ………………In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements.
The ld. AR submitted that in the present case the reasons disclose that the AO reached the belief that there was escapement of income after he accepted the return u/s. 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the AO, both strongly deprecated by the Supreme Court in Kelvinator of India Ltd. (supra). The reasons recorded by the AO in the present case confirms the apprehension about the harm that a less strict interpretation of
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the words "reason to believe" vis-a-vis an intimation issued u/s. 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the AO subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147.
In Prashant S. Joshi v. Income-tax Officer, Ward 19(2)(4) [2010] 189 TAXMAN 1 (BOM.), the Hon’ble Bombay High Court held as under:-
“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 creates 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.” 30. In the above case, no assessment had been carried out u/s 143(3) or 144 of the Act. Only intimation u/s 143(1) had been issued.
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The Hon’ble Tribunal in Grey Worldwide (India) Private Limited Vs. Asst Commissioner Of Income Tax 2011-TIOL-291-ITAT-MUM held as under:-
“13. The expression ‘reason to believe' still continues to be part of main section 147. There is no distinction at all between the assessment deemed to be completed under section 143(1) and the assessment completed under section 143(3) of the Income Tax Act. The Hon'ble Bombay High Court in the case of Prashant S. Joshi vs. ITO 324 ITR 154(Bom) = (2010-TIOL-146-HC-MUM- IT) after considering the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 (SC) = (2007-TIOL-95-SC-IT) has held that even when an intimation is issued u/s. 143(1) of the Act, the validity of initiation of reassessment proceedings has to satisfy the test of existence of “reason to believe” that income chargeable to tax has escaped assessment. The law regarding existence of reason to believe is by now well settled. Belief of the Assessing Officer should not be arbitrary or irrational, but based on relevant and specific information or material. In this context, it is also important to note that there should be a direct nexus or live-link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee. The important words under section 147 are “has reason to believe” and these words 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. In this context it may also be noted that the Courts have got powers to examine whether the reasons are relevant and have a bearing on the matter, in regard to which, the Assessing Officer is required to entertain the belief, before he issues notice under section 147. Besides, the expression “reason to believe” does not mean a purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in
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good faith, it cannot merely be pretence. In addition, suspicion, gossip or rumour would not form the basis for such belief.”
In Rambagh Palace Hotels Pvt Ltd Vs DCIT 2013-TIOL-45-HC-DEL- IT, the Hon’ble Delhi High Court held as under:-
“Even so, it is necessary that the assessing officer must have “reasons to believe” that income chargeable to tax had escaped assessment. There must be tangible material before him on the basis of which he could form the belief, bona fide and in good faith, that there was escapement of income. The material must have a live link or nexus with the formation of the belief. The belief cannot be a mere pretence. These are the most basic and indispensable requirements for the validity of the notice under Section 148”
The Third Member in M/s. Telco Dadajee Dhackjee Ltd. Vs. The DCIT, Circle 2(3) 2012-TIOL-532-ITAT-MUM-TM held as under:-
“section 147 applies both to section 143(1) as well as section 143(3) and, therefore, except to the extent that the reassessment notice issued under section 148 in a case where the original assessment was made under section 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to an assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. The reason to believe must have a live link with the formation of the belief that income chargeable to tax had escaped assessment when the return was processed and accepted under section 143(1). To hold that in every case where a return was processed and accepted under section 143(1) the Assessing Officer will be free to reopen the same under section 148 even in the absence of a live link between the reasons recorded and the formation of belief would be to make the conditions of section 147 and section 148 otiose as regards notices reopening issued in cases where the return was originally processed under section
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143(1). There is no exclusion in section 147 to the effect that where the return was earlier processed under section 143(1) it is not necessary for the Assessing Officer to hold or entertain a belief that income chargeable to tax had escaped assessment for the reasons recorded by him. Therefore, the condition that the Assessing Officer must have reason to believe and the further condition that those reasons must have a live link with the formation of the belief is applicable equally to cases where the return was processed under section 143(1) as also to cases where the return was examined and an assessment was made by a speaking order under section 143(3). The only distinction recognized in section 147 between the two is where it is provided by the proviso that where the earlier assessment was made under section 143(3), no action for reopening the assessment can be taken after the expiry of four years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment because of the failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for the assessment. Such an exception has not been provided for in a case where the return has been processed under section 143(1) in which case the proviso will have no application. If it is correct that an intimation under section 143(1) as well as an assessment order under section 143(3) are both amenable to section 147, it should also be conceded that even in a case where the original return was merely processed under section 143(1) the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment. He also has to record reasons under section 148(2) for reopening the earlier assessment made under section 143(1). All that has been excluded is that the assessee, in whose case the return was first processed under section 143(1), cannot challenge the notice of reopening on the ground that it is prompted by a mere change of opinion. Only to this limited extent there is a disability on the part of the assessee to challenge the notice of reopening in a case where his return was earlier processed under section 143(1) of the Act. ……………..the notice of reopening issued in a case where the return was first processed under section 143(1) is open to challenge on all grounds available to the assessee, including the ground that there was no reason to believe that income chargeable to tax had escaped assessment or that the materials
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before the Assessing Officer had no live link or nexus with the formation of such belief or that the reasons are based on gossip or rumour or were a mere pretence. This is made clear by the observations of the Court at page 512 of the report where it was held that “so long as the ingredients of section 147 are fulfilled” the Assessing Officer can reopen the proceedings even where intimation under section 143(1) had been issued. Thus fulfillment of the conditions of section 147, including the one that there should be “reason to believe”, is essential for the validity of the notice under section 148. It is while expounding the words “reason to believe” that the Supreme Court in the later judgment in CIT vs. Kelvinator of India Ltd. (supra) held that there should be “tangible material” to come to the conclusion that income had escaped assessment. Thus, in my humble understanding of both the judgments, while resorting to section 147 even in a case where only an intimation had been issued under section 143(1)(a) it is essential that the Assessing Officer should have before him tangible material justifying his reason to believe that income had escaped assessment.” 34. Reliance is also placed on following decisions wherein it has been held that the proceedings initiated under section 147 are liable to be quashed on the ground that there was no tangible material before the Assessing Officer, even though no assessment u/s 143(3) or 144 had been made before and the return was merely processed u/s 143(1) of the Act:-
Indivest Pte. Ltd., Singapore v. Additional Director of Income- tax-3(1), Mumbai [2012] 206 TAXMAN 351 (BOM.) Inductotherm (India) Pvt. Ltd vs. DCIT (Guj.) 2012-TIOL-667- HC-AHM-IT
It is submitted that the ‘reason to believe’ contemplated in section 147 should be that of the Assessing Officer. The AO has to apply his mind independently to the material based on which the belief is sought to be formed. If based upon his examination, he has reason to believe that
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income chargeable to tax has escaped assessment, then he can initiate proceedings u/s 147. The AO cannot merely rely on the report of some other income-tax authority and issue notice u/s 148 that he has reason to believe that income chargeable to tax has escaped assessment. Hence, the initiation of proceedings u/s 147 is not valid.
The Tribunal in Assistant Commissioner of Income-tax, Vapi Circle v. Resham Petrotech Ltd. [2012] 136 ITD 185 (AHD.) held as under:
“The ITO himself should form the reasonable belief that income has escaped assessment and then only he can reopen an assessment. Reassessment proceedings initiated on the directions given by the CIT would be invalid [CIT v. T. R. Rajkumari [1973] 96 ITR 78 (Mad.): TC 51R 430].The requisite belief u/s. 147 must be that of the ITO concerned and not of any other officer. If the ITO does not form, his own belief but merely act at the behest of any superior authority, it must be held that the assumption of jurisdiction under section 148 was bad for non- satisfaction of the conditions precedent [Sheo Narain Jaswal & Ors. v. ITO & Ors. [1989] 176 ITR 352 (Pat.); TC 51R 432.. See also Vishal Swamp Agrawilla v. ITO [1976] CTR (Cal.) 296: TC 51R 432A and Chunnilal Onkarmal (Pvt) Ltd., (1983) 349 ITR 380 (MP): TC 51R 435]'…………………….. The reasons for reopening must be recorded by jurisdictional AO because he is keeping all relevant and primary record. The basic requirement of section 147 of the Act is that the AO has reason to believe that any income chargeable to tax has escaped assessment. Such belief must be the belief of jurisdictional AO and not any other AO or authority of the department. Therefore, it is well settled that the AO's jurisdiction to reopen an assessment u/s. 147 depends upon the issuance of a valid notice. If the notice issued by him is invalid for any reason the entire proceedings taken by him would become void for want of jurisdiction.” 37. The Tribunal in Assistant Commissioner of Income-tax v. Radheshyam Mohanlal Maheshwari [2011] 12 ITR(TRIB.) 429 (AHD.) held as under:-
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“reopening of the assessment under section 147 of the Income-tax Act as per its plain language provided in the Act provides prerogative to the Assessing Officer to reopen the assessment if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. Even if the learned Commissioner of Income-tax (Appeals) has issued a direction in the appellate order dated December 11, 2003 to reopen the assessments, it is the prerogative of the Assessing Officer to reopen the assessment by satisfying the requirements of the law as mentioned above and shall have to record in writing, the reasons to believe that any income chargeable to tax has escaped assessment for any assessment year. However, the reasons recorded by the Assessing Officer in all the above cases do not find mention such facts and the satisfaction of the Assessing Officer for escapement of income. In the absence of the fulfilment of the requirements of section 147 of the Income-tax Act for initiation of the reassessment proceedings in the above cases, we are of the view that the Assessing Officer instead of complying with the requirements of law merely was swayed by the direction of the learned Commissioner of Income-tax (Appeals) in the appellate order dated December 11, 2003. Considering the above discussions, we are of the view that these are not the fit cases for initiation of the reassessment proceedings because the Assessing Officer failed to make out a case within the four corners of the provisions of section 147 of the Income-tax Act.” 38. The Hon’ble Delhi High Court in Commissioner of Income-tax v. SPL'S Siddhartha Ltd. [2012] 345 ITR 223 (DELHI) held as under:-
“8. Thus, if authority is given expressly by affirmative words upon a defined condition, the expression of that condition excludes the doing of the Act authorised under other circumstances than those as defined. It is also established principle of law that if a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be "independent" and not "borrowed" or "dictated" satisfaction. Law in this regard is now
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sell-settled. In Sheo Narain Jaiswal v. ITO [1989] 176 ITR 352/ 45 Taxman 213 (Pat.), it was held: "Where the Assessing Officer does not himself exercise his jurisdiction under Section 147 but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non-satisfaction of the condition precedent." 39. 9. The Apex Court in the case of AnirudhSinhji KaranSinhji Jadeja v. State of Gujarat [1995] 5 SCC 302 has held that if a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion. If discretion is exercised under the direction or in compliance with some higher authorities instruction, then it will be a case of failure to exercise discretion altogether.
The Hon’ble High Court in Mrs.Vinita Jain v. ITO 158 Taxman Magazine 167 held that where Assessing Officer reopened assessee’s assessment merely because DDIT (Inv.) believed that transaction of capital gains shown by assessee was bogus and no separate reason disclosing satisfaction of assessing Officer for formation of belief that income of assessee had escaped assessment had been recorded, notice issued under section 148 was to be quashed and assessment made in pursuance thereof was to be annulled.
The Hon’ble Supreme Court in ACIT v. Dhariya Construction Co. [2010] 328 ITR 515 (SC) held that the opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, 1961. It was held that the Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon and without the same, the Department was not entitled to reopen the assessment.
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The Hon’ble Rajasthan High Court in CIT v. Shree Rajasthan Syntex Ltd. [2009] 313 ITR 231 (Raj) held that it has been very intelligibly projected that the factum of the Assessing Officer at Mumbai having allowed depreciation allowance to the lessee did constitute a fact which came to the notice of the Assessing Officer here and that furnished reason to believe that the income of the assessee chargeable to tax had escaped assessment but then if properly appreciated all that it comes to is that a set of lease deeds had been appreciated by the Assessing Officer of the lessee at Mumbai, who after appreciating them allowed depreciation and the Assessing Officer here came to the conclusion that the assessee continues to be the owner of the assets and is entitled to depreciation allowance, while the Assessing Officer at Mumbai formed an opinion from the same set of lease deeds that the lessee should be taken to be the owner and has right to depreciation. Thus, the net result which comes to is that simply because after the Assessing Officer here had formed a particular opinion on a particular set of documents simply because the Assessing Officer at Mumbai had formed a different opinion on the same set of documents the action was sought to be initiated here for reassessment which, in our view, has rightly been found by the learned Tribunal that it was a “borrowed satisfaction” under the opinion of the Assessing Officer at Mumbai and has rightly been found to be not sufficient to confer power on the Assessing Officer to initiate reassessment proceedings.
The Department’s special leave petition against the judgment of the Rajasthan High Court reported in 313 ITR 231 (supra) whereby the High Court held that initiation of reassessment proceedings based upon the opinion of the Assessing Officer of the lessor at Mumbai was “borrowed satisfaction” and was not sufficient reason to believe that income had
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escaped assessment proceedings under section 147 has been dismissed. [CIT v. Shree Rajasthan Syntex Ltd. [2009] 313 ITR (Statutes) 27]
The Hon’ble Mumbai High Court in ICICI Home Finance Co Ltd Vs ACIT, Mumbai 2012-TIOL-590-HC-MUM-IT held as under:-
“The belief u/s 147 that income has escaped assessment has to be the reasonable belief of the AO himself and cannot be an opinion and/or belief of some other authority. The AO cannot blindly follow the opinion of an audit authority for the purpose of arriving at a belief that income has escaped assessment. On facts, the recorded reasons are identical to the objection of the audit authority. The reasons do not rely upon any tangible material in the audit report but merely upon an opinion and the existing material already on record. This itself indicates that there was no independent application of mind by the AO before he issued the s. 148 notice (India Eastern Newspaper Society 119 ITR 996 (SC) followed).”
The Bangalore Tribunal in M/s GMR Holdings Pvt Ltd Vs DCIT, Bangalore 2012-TIOL-114-ITAT-BANG held that issue of notice u/s. 148 of the Act only after the audit party raised certain objections is invalid.
The ld. AR submitted that in the present case, the reasons recorded do not show as to how the AO has come to the conclusion that income chargeable to tax has exceeded Rs. 1 lac merely based on certain bank entries. The AO considered the bank entries itself to represent the income chargeable to tax that has escaped assessment. It is submitted that the reasons recorded must disclose the process of reasoning by which the AO holds that he has reason to believe that income chargeable to tax has
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escaped assessment. The AO in the present case has recorded his conclusion itself as reason.
In the case of VXL India Ltd. v. Asst. CIT [1995] 215 ITR 295 the Gujarat High Court has held as under:-
“ In a case where the Assessing Officer holds the opinion that because of excessive loss or depreciation allowance the income has escaped assessment, the reasons recorded by the Assessing Officer must disclose by what process of reasoning he holds such belief that excessive loss or depreciation allowance has been computed in the original assessment. Merely saying that excessive loss or depreciation allowance has been computed without disclosing reasons which led the assessing authority to hold such belief, in our opinion, does not confer jurisdiction on the Assessing Officer to take action under sections 147 and 148 of the Act.” 48. In CIT Vs ICICI Bank Ltd 2012-TIOL-512-HC-MUM-IT, the Hon’ble Mumbai High Court held as under:-
“As disclosed in the reasons recorded while issuing notice under Section 148 of the Act, in the present case, the impugned notice was based on the ground that the income earned from the non fund based activities of the respondent had been included in the fund based income so as to claim excess deduction under Section 36(1)(viii) of the said Act. The reasons only provide a conclusion and give no material particulars of information obtained during the course of assessment proceedings for the assessment year 1998-99 Therefore the reasons recorded do not indicate any tangible material which has led to a reasonable belief that income has escaped assessment. As held by this court in the matter of Hindustan Lever Ltd. v. R.B. Wadkar 268 ITR 332 = (2004- TIOL-72-HC-MUM-IT), the reasons for reopening as recorded must be clear and not suffer from any vagueness so to keep the assessee guessing for the reasons. It is the reasons which provide the link between the evidence and the conclusion. In this case the reasons as recorded do suffer from the vice of vagueness.”
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As regards, the transaction of USD $ 14149 based on which the reassessment proceedings are initiated, it was submitted that the same has already been assessed in AY 2003-04 reassessment proceedings and the same cannot be considered in the relevant AY of 2002-03.
On the basis of the above submissions, the ld. AR submitted that that the reassessment proceedings may be quashed.
On the other hand, the ld. DR submitted that reopening of assessment is within the time limit. Further, he submitted that unaccounted money was deposited into HSBC Bank, Geneva and these facts came to the knowledge of AO. After recording due reasons, the AO reopened the assessment to bring the escaped income to tax and the assessee being the beneficial owner of HSBC Bank, there is very good reason to believe that income has escaped assessment in the hands of assessee.
It is contended that based on the material on record, the AO has reasons to believe that income has escaped assessment. According to the ld. DR, there is specific information which has come to the knowledge of AO about the assessee’s account with HSBC Bank and having huge balance. On this basis, the AO is justified in reopening assessment since the bank account amounts are not disclosed to revenue authorities and the amounts so placed therein have not been considered in the return of income filed by the assessee. He relied on the orders of lower authorities and pleaded to uphold the reopening of assessment. He relied on the judgment of Mumbai Bench in the case of Renu T Tharani v. DCIT, ITA No.2333/Mum/2018 dated 16.7.2020 for AY 2006-07.
We have heard both the parties and perused the material on record. In these cases, the AO has reopened the assessment by recording reasons which are extracted in the earlier part of this order. Similar is the reason
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for both the assessment years. Notice dated 24.03.2014 for AY 2002-03 was served on 25.3.2014 and notice dated 10.5.2013 for AY 2003-04 was served on 13.5.2013.
As per reasons recorded, the assessee has invested along with his ex-wife in HSBC Bank, Geneva and the transaction with HSBC Bank were not disclosed to the department. However, it has not been stated that the said investment in HSBC was out of income which escaped assessment. The AO also has not mentioned in the aforesaid reasons that he was satisfied that the above income escaped assessment. He simply relied on the information received in his possession to come to the conclusion that this HSBC bank account belonged to the assessee.
From the provisions of section 147, it is clear that the AO must have reason to believe that any income chargeable to tax has escaped assessment. However, it cannot be said that if there is any investment or bank account it is sufficient to believe that income to that extent escaped assessment because there may be so many sources for making such investment and it is not necessary that only on the basis of investment it can be presumed that income to that extent escaped assessment. There should be concrete finding before coming to the conclusion that any income escaped assessment and merely on the basis of information provided by any other wing of the department, the AO cannot believe that there was income which has escaped assessment.
In the present case, the AO simply relied upon the information received by him and stated that the investment in assessee’s joint account with his ex-wife, Ms. Vandana Virwani with HSBC Bank which has not been disclosed in the return of income filed by the assessee is the income which escaped assessment in the hands of assessee. It clearly shows that AO simply acted upon the information and did not apply his own mind to the
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information to arrive at a belief independently that on the basis of material before him to come to the conclusion that income has escaped assessment. Further, it is to be noted that it is a joint account of assessee with his ex-wife, Ms. Vandana Virwani with HSBC Bank, Geneva and the assessee solely cannot be considered as owner of the account so as to bring the entire transaction in that account in the hands of the assessee.
Further the transaction with HSBC Bank led to the conclusion of the AO that this investment was unexplained and the AO has not brought on record any material with respect to this conclusion that this deposit was unexplained. It was only a doubt, but not a reason to believe meaning thereby that, even if there was some material in respect of source of deposit, it was not sufficient for arriving at the conclusion that the deposit represented unexplained income of the assessee. In other words, the AO has just suspicion in his mind and it is trite law that an assessment cannot be reopened merely on the basis of suspicion and initiation of reassessment proceedings u/s. 148 of the Act on the basis of this aspect was invalid in the eye of law.
Further, the AO framed assessment on protective basis in AY 2002- 03 which clearly shows that he was not sure as to whether assessee was having income which escaped assessment. In similar circumstances, the Bangalore Bench in the case of DCIT vs. Bullion Investments & Financial Services (P) Ltd. [2010] 123 ITD 568 held as under:-
“The fact of undisclosed investment in the share capital of the assessee-company was found during the course of search and material was collected during the course of search that such investment belonged to 'G'. If such income was to be assessed in the hands. of a person other than 'G'; then the revenue should have taken recourse under section 158BD. If the revenue was not sure as to whose hands the assessment was to be made, then the revenue could have initiated proceedings against both the
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assessees. In the instant case, the assessment in the case of 'G' was completed on 31-7-1997. Notice under section 148 had been issued to the assessee-company on 27-7-1998. Once the revenue had taken its stand that such investment in the share capital belonged to 'G' and the assessment order was passed, then it could not be said that the Assessing Officer was having reason to believe that income had escaped in the hands of the assessee. Reassessment cannot be made on mere suspicion. The Assessing Officer has to form a belief that income has escaped assessment in the hands of the assessee. Once it had been held that such investment belonged to 'G', then there was no further material to come to the conclusion that such escaped income belonged to the assessee. [Para 2.5]. In the instant case, the revenue held that such undisclosed income belonged to 'G' and the assessment was made in the hands of 'G' on substantive basis. The case of the assessee was not reopened during the pendency of proceedings in the case of 'G'. Had the revenue made protective assessment in the case of 'G', then it could have taken action against the assessee. Thus, the basic requirement for reopening the assessment that the Assessing Officer should have reason to believe that income has escaped assessment, was not satisfied in this case. Hence, the Commissioner (Appeals) was justified in holding that the assessment could not be reopened for making protective addition. [Para 2.6] In view of the above discussion, it was to be held that the Commissioner (Appeals) was justified in cancelling the assessment in the hands of the assessee. [Para 2.8] In the result, the appeal filed by the revenue was to be dismissed.”
In the present case also, first of all, the AO is not sure whether income has to be assessed in the hands of assessee or his ex-wife, Ms. Vandana Virwani. Next, he was not sure in which assessment year it has to be taxed, whether AY 2002-03 or 2003-04. In addition, he is not sure who is the exact owner of this bank account.
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Further, the HSBC bank account is a joint account with assessee’s ex-wife. It does not lead to the conclusion that the assessee is the sole owner and beneficial of the said bank account in order to bring this deposit as taxable in the hands of assessee as the owner of the account. The onus of proving lies with the department. This legal proposition has been laid down by the Hon’ble Supreme Court in the case of CIT v. K. Chinnathamban (2007) 162 Taxman 459 (SC) wherein it was held that where a deposit stands in the name of a third person and where that person is related to the assessee, then in such a case the proper course would be to call upon the person in whose books the deposit appears or the person in whose name the deposit stands to explain such deposit. This legal proposition is further supported by the decision of the Hon’ble Calcutta High Court in the case of Durga Kamal Rice Mills v. CIT (2003) 130 Taxman 533 (Cal) where it was held that there is nothing to show that the learned Tribunal has ever come to any conclusion that the assessee owned this amount. Even then, in this case once it had added to the income of the assessee and then again the same amount has been accepted as income of the partners in their revised return, the Income-tax Authority is precluded from contending that the assessee is the owner of the amount or the income.
Further the Hon’ble Supreme Court in the case of R.B. Jodha Mal Kuthiala v. CIT, 1971 SCC 369, had explained the term “Owner” which is as follows:- “ The question is who is the "owner" referred to in this section? Is it the person in, whom the property vests or is it he who is entitled to some beneficial interest in the property It must be remembered that S. 9 brings to tax the income from property and not the interest of a person in the property. A property cannot he owned by two persons, each one having independent and exclusive right over it. Hence for the purpose of s. 9, the owner must he that person who can exercise the rights of the owner, not on behalf of the owner but
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in his own right. 17. ... It is not necessary for our present purpose to examine what the word "owner" means in different contexts. The meaning that we give to the word " owner" in s. 9 must not be such as to make that provision capable of being made an instrument of oppression, must be in consonance with the principles underlying the Act.” 61. Therefore, considering the facts and circumstances of the case and also by following the precedents discussed above, we are of the considered opinion that the AO reopened the assessment merely on suspicion and surmise, without there being any positive material in his possession to prove that the assessee is the owner of the bank account or having beneficial interest in this bank account. Therefore, we are of the opinion that the reopening of assessments are bad in law, which cannot be sustained. Accordingly, we quash the reassessments.
The assessee also argued on the limitation of issue of notice u/s. 148 of the Act as well as on merits of the case. As we have quashed the assessments itself, we are not going into the same and the other grounds raised by the assessee in these appeals.
In the result, both the appeals by the assessee are allowed.
Pronounced in the open court on this 23rd day of June, 2021.
Sd/- Sd/-
( BEENA PILLAI ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 23rd June, 2021. /Desai S Murthy /
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Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.