SMT. CHAYA SINHA,NEW DELHI vs. ACIT, FARIDABAD

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE SHRIA.T.VARKEY, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITANo.2462/Del/2014 (Assessment Year: 2006-07)

Chaya Sinha, ACIT, C/o. M/s. RRA Taxindia, Circle-II, Vs. D-28, South Extension, Part-I, Faridabad New Delhi PAN:ABOPS3215J (Appellant) (Respondent)

Assessee by :Sh.Rakesh Gupta, Adv Sh. Somil Agarwal, CA Respondent by:Sh Susan George, Sr. DR

Date of Hearing 12/01/2016 Date of pronouncement 11/03/2016

O R D E R PER PRASHANT MAHARISHI, A. M. 1. This appeal is preferred by the assessee for the Assessment Year 2006-07 against the order of learned Commissioner of Income- tax (Appeals)-18.03.2013 for the Assessment Year 2006-07, wherein there are six effective grounds of appeal have been raised as under:- “1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing impugned assessment order and that too without complying the mandatory conditions of section 147 to 151 of the Income Tax Act, 1961 and reopening of the case is bad in law and beyond the jurisdiction of the Ld. A.O. and without recording valid reasons in the eyes of law and the same is barred by limitation.

Page 2 of 11 2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in framing the impugned assessment order without issuing the mandatory notice 143(2) of the Income Tax Act, 1961. 3. That having regard to the facts and circumstances of the case, Ld. A.O. has erred in law and on facts in framing the assessment in violation of principles of natural justice in as much as passing the impugned order by recording incorrect facts and findings. 4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in bringing to tax alleged capital gain in respect of sale of agricultural land. 5. That in any case and in any view of the matter, impugned disallowance and impugned assessment order are bad in law, illegal, unjustified, contrary to facts & law and based upon incorrect facts and finding, without giving adequate opportunity of hearing, in violation of principles of natural justice and the same deserves to be quashed.”

Page 3 of 11 profit/capital gains received on the sale of this Sand was not taxable.ms the land in question was situated in the adjoining area of Tehsil-Palwa it cannot be said that the land does not fall under the definition of capital asset u/s 2(14) of the Act.” 3. According to above stated reasons it is apparent that the agricultural land sold by the assessee and profit earned thereof which has been claimed commission as now in question as it was claimed that as it is noted that the land in question is in the adjoining area of Tehsil Palwal and therefore it is a capital asset. The AO passed order u/s 143(3) of the read with Rule 147 taxing 50% of the capital gain on sold as this land as short-term capital gain. During the course of assessment proceedings the report of inspector was also obtained wherein it was stated that the area of distance from the market committee Palwal to the main land is about 11 kms and there are agricultural activities carried upon of the said land in the last 6 to 7 years. The inspector also reported that entire area is an industrial hub and therefore as in question was not used for agricultural purpose on the date when it was sold by the assessee or prior to 3 to 4 years. 4. Aggrieved by this the assessee preferred an appeal before the learned Commissioner of Income-tax (Appeals) challenging the order on the issue of reopening as well as on the merit. The learned Commissioner of Income-tax (Appeals) upheld the action of the reopening of the assessment and dismissed the appeal of the assessee on that ground. On the merit also the learned Commissioner of Income-tax (Appeals) of the view that the assessee is related on the amount revenue records and no agricultural income has been shown during the period of holding of this land for 10 months. He also held that as no agricultural activities are carried on by the assessee as per sought enquiry and the sale of the land as in development industrial hub he held

Page 4 of 11 that the main land sold is not an agricultural land and hence the profit of sale of this land is chargeable to tax as short term capital gains. Considering the main land as capital asset. 5. Aggrieved by this the assessee is in appeal before us. 6. The assessee has raised the following arguments:- a. There is no material come to possession of the AO after filing of return of income based on which the reopening has been made. For this he took us to the return of income and along with computation of total income and reasons recorded by the AO. He stated that for reopening even in case of assessment u/s 143(1) or merely on processing of return there has to be some tangible material for reopening. He relied on the decision of Hon’ble Delhi High Court in 354 ITR 536, in the case of Orient Craft Ltd. He relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Tupperware Ltd. b. Further he submitted that reopening needs to be seen independently and for this he relied on the decision of Hon’ble Bombay High Court in 321 ITR 509 and Allahabad High Court in 368 ITR 638. c. He also stated that reasons recorded for reopening does not speak about any material which had come to the notice of the officer, subsequent to finalization of the assessment u/s 143(1) and therefore the reassessment notice is without any foundation and hence not valid. He relied on the decision of the Hon’ble Delhi High Court in case of Sipra Srivastava and another Vs. ACIT 319 ITR 221. d. He further stated that reopening was made as per the reasons recorded, holding that the land in question was situated in adjoining area Tehsil Palwal. Further the report

Page 5 of 11 of the inspector shows that from that area the distance of the main land is about 11 kms. Therefore there is wrong assumption of the fact. 7. In view of the facts he submitted that reopening is invalid. 8. Against this the ld DR submitted that original assessment is u/s 143(1) of the Act which does not given any power to the AO for application of his mind and therefore the tangible material has come from the return itself and hence reopening is valid. 9. We have carefully considered the rival contention. The brief facts are already noted that the return of income was filed on 30th March 2007 and it was also processed on 30th March 2007 as per the reasons recorded. Second the reason recorded does not show any material based on which the reopening has been initiated. Further the reasons recorded for reopening as well as the inspector report are not in conformity with each other as the reopening has been made under the assumption with the land in question is falling within the specified number of kilometers, whereas the inspector’s report shows that the main land is about 11 kms from the Palwal-Tehsil. Hon’ble Delhi High Court in the case of Orient Craft Ltd 354 ITR 536 has held as under:-

“10. 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 fulfilment 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 Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC), 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. It would be appropriate to reproduce the following portions from the judgment (page 511) :

Page 6 of 11 "The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment forthe past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to Income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued. The inevitable conclusion is that the High Court has wrongly applied Adani's case [1999] 240 ITR 224 (Guj) which has no appli cation to the case on the facts in view of the conceptual difference between section 143(1) and section 143(3) of the Act." We have searched the judgment in vain for the liberty said to have been given to the Assessing Officer by the above judgment that the finality of an intimation under section 143(1) can be disturbed even by dispensing with the requirement of "reason to believe". On the contrary the observations extracted above reiterate that the intimation can be disturbed by initiating reassessment proceedings only "so long as the ingredients of section 147 are fulfilled" and with reference to section 143(1) vis-a-vis section 147, the only ingredient is that there should be reason to believe that income chargeable to tax has escaped assessment and it does not matter that there has been no failure or omission on the part of the assessee to disclose full and true particulars at the time of the original assessment. 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 hasbeen 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 behalf of the Revenue in other cases as well, under the misconception, if we may say so with respect, that an inti mation 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 April 1, 1989, the Legislature sought to replace the expression "reason to believe" with the expression "for reasons to be

Page 7 of 11 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 CIT v. Kelvinator in the following words (page 564) : "However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer . . . Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147 of the Act. However, on receipt of representations from the companies against omission of the words 'reason to believe', Parliament reintroduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549, dated October 31, 1989 ([1990] 182 ITR (St.) 1, 29), which reads as follows :

'7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression "reason to believe" in section 147. A number of representations were received against the omission of the words "reason to believe" from section 147 and their substitution by the "opinion" of the Assessing Officer. It was pointed out that the meaning of the expression, "reason to believe" had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression "has reason to believe" in place of the words "for reasons to be recorded by him in writing, is of the opinion". Other provisions of the new section 147, however, remain the same'." 11. It would be appropriate at this juncture to take a brief survey of a few decisions of the Supreme Court which have infused meaning and content to the expression "reason to believe" appearing in section 147. 12. A Constitution Bench of the Supreme Court in A. N. LakshmanShenoy v. ITO [1958] 34 ITR 275 (SC), speaking through S. K. Das J held that an assessment cannot be reopened on the basis of a mere guess, gossip or rumour. This was in the context of the pre-1948 law relating to reassessment under which the Assessing Officer was empowered to reopen the assessment on the basis of "definite information". Though this judgment is based on the phraseology of section 34 of the 1922 Act as it existed before 1948 which did not contain the expression "reason to believe", that principle was adopted by the Supreme Court while dealing with section 34 of the Act after the amendment made in 1948. In that year, the words "definite information" were replaced by the words "reason to believe". While expatiating on the new words, a three-judge Bench of the Supreme Court, speaking through V. Ramaswami J., in S.Narayanappa v. CIT [1967] 63 ITR 219 (SC), opined as under (page 222) : "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

Page 8 of 11 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 sec tion. To this limited extent, the action of the Income-tax Officer instarting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR191 (SC))." 13. In SheoNath Singh v. AAC of I. T. [1971] 82 ITR 147 (SC) the Supreme Court (Hegde J.) observed as under (page 153) : "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 sufficiency of the reasons for the belief cannot be investigated by the court." It was further observed that the reasons themselves cannot be stated to be beliefs, which would be an obvious self-contradiction. 14. The entire law as to what would constitute "reason to believe" was summed up by H. R. Khanna J., speaking for the Supreme Court in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC). 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. (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. (e) 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 Assessing Officer and the formation is belief regarding escapement of income. Page No : 0546 (f) 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." 15. In CIT v. Kelvinator (supra) the Supreme Court observed as under (page 564) :

Page 9 of 11 "However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in- built test to check abuse of power by the Assessing Officer." It was also observed that after April 1, 1989, the Assessing Officer has power to reopen provided there is "tangible material" to come to the conclusion that there is escapement of income. This judgment has laid emphasis on two more aspects : that there can be no review of an assessment in the guise of reopening and that a bare review without any tangible material would amount to abuse of the power. 16. 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, we have to understand the meaning of the expression 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 under section 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-avis 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 isapplied to the reopening of an assessment earlier made under section 143(3) cannot apply where only an intimation was issued earlier under section 143(1). It would in effect place an assessee in whose case the return was processed under section 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 without demur is not a matter which is within the control of the 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. 17. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the Revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under section 143(1) there is no opportunity to the assessing authority to form an opinion and, therefore, when its finality is sought to be disturbed by issuing a notice under section 148, the proceedings cannot be challenged on the ground of "change of opinion". It was not opined by the Supreme Court that the strict requirements of section 147 can be

Page 10 of 11 compromised. On the contrary, from the observations (quoted by us earlier) it would appear clear that the court reiterated that "so long as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that the Assessing Officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the said expression should apply to an intimation in the same manner and subject to the same interpretation as it would have applied to an assessment made under section 143(3). The argument of the Revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an "intimation" is not an"assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the Revenue would be prepared to concede that position. It is nobody's case that an "intimation" cannot be subjected to section 147 proceedings ; all that is contended by the assessee, and quite rightly, is that if the Revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. 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. 18. In the present case, the reasons disclose that the Assessing Officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under section 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the Assessing Officer, both strongly deprecated by the Supreme Court in CIT v. Kelvinator (supra). The reasons recorded by the Assessing Officer in the present case do confirm our apprehension about the harm that a less strict interpretation of the words "reason to believe" vis-a-vis an intimation issued under section 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 Assessing Officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147.” 10. In view of the above facts we are of the view that the case of the assessee squarely falls within the parameters laid down by Hon’ble Delhi High Court in above case. Hence we reverse the finding of the learned Commissioner of Income-tax (Appeals) and hold that the notice issued u/s 148 read with section 147 is invalid. Therefore we allow the appeal of the assessee on the issue of reopening.

Page 11 of 11 11. All the other grounds of the appeal we do not adjudicate in view of our decision of quashing the notice u/s 148 of the Act. 12. In the result the appeal of the assessee is allowed. Order pronounced in the open court on 11/03/2016. -Sd/- -Sd/- (A.T.VARKEY) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 11/03/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi