INTERPRETATION OF 'REASON TO BELIEVE' IN GST

The expression, 'reason to believe' is not defined anywhere in law but needs to be understood through judicial interpretation, some of which are as follows:

'Reason' means a course or justification. 'Believe' means to accept as true or to have faith in it. In Deputy Director of Income-Tax (Investigation) And Others Versus Mahesh Kumar Agarwal. - 2003 (2) TMI 40 - CALCUTTA High Court , it was observed that it is a statement of fact employed as an argument to justify or condemn some act. When information is received or the basic facts are harnessed in support of an argument, the resultant fact assumes the shape of a 'reason' and when a number of reasons are considered in relation to each other, the final result to this consideration assumes the shape of 'belief'.

The powers under the present section are wide but not plenary; the words of the section are 'reason to believe' and not 'reason to suspect'. The word 'believe' is a much stronger word than 'suspect'. Although these reasons cannot be called into question to prevent an inspection, later during adjudication, any 'palpable absence' of reasons to believe can be brought out to challenge the correctness of inspection. However, experts hold the view that inspection can be non-specific and general investigation may lead to findings that were not the 'reasons to believe' at the start of this exercise.

Reason to believe means to have knowledge of facts which, although not amounting to direct knowledge, would cause a reasonable person, knowing the same facts, to reasonably conclude the same thing. As per Section 26 of the IPC, 1860, 'A person is said to have 'reason to believe' a thing, if he has sufficient cause to believe that thing but not otherwise.' 'Reason to believe' implies an objective determination based on intelligent care and evaluation as distinguished from a purely subjective consideration. It has to be and must be that of an honest and reasonable person based on relevant material and circumstances.

Although the officer is not required to state the reasons for such belief before issuing an authorization for search, but he should disclose the material on which his belief was formed. 'Reason to believe' may not be recorded invariably in each case.

• In INDRU RAMCHAND BHARVANI Versus UNION OF INDIA - 1988 (7) TMI 78 - Supreme Court, it was observed that the gist of the two sections, namely, Sections 110 and 123 of the Customs Act, 1962, is that there must be materials to form a reasonable belief that the goods in question are smuggled. The officer concerned should have a reasonable belief that the goods in question are smuggled goods. The Court cannot sit on appeal on the formation of such a belief by the officer concerned.

• In STATE OF GUJARAT Versus SHRI MOHANLAL JITAMALJI PORWAL AND ANOTHER - 1987 (3) TMI 111 - Supreme Court, it was held that 'the circumstances have to be viewed from the experienced eye of the officer, who is well equipped to interpret the suspicious circumstances and to form a reasonable belief in the light of such circumstances. The Supreme Court had stated that an economic offence is committed with cool calculation and deliberate design, with an eye on personal profit, regardless of the consequences to the community. A disregard for the interest of the community can be manifested only at the cost of forfeiting the trust and faith of the community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest.'

• In PRATAP SINGH (DR.) Versus DIRECTOR OF ENFORCEMENT FOREIGN EXCHANGE REGULATION ACT - 1985 (4) TMI 323 - Supreme Court, it was held that the expression 'reason to believe' is not synonymous with the subjective satisfaction of the officer. The belief must be held in good faith and it cannot merely be pretence. It is open to the Court to examine the question to the limited extent 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.

• In PUKHRAJ Versus DR. KOHLI, COLLECTOR OF CENTRAL EXCISE, MADHYA PRADESH, VIDARBHA AND ANOTHER - 1962 (3) TMI 2 - Supreme Court, it was held that the question whether there was a reasonable belief or not was justifiable. However, the Court was not sitting in appeal over the decision of the officer concerned and it could only consider as to whether there were grounds which, prima facie, justified the reasonable belief for confiscation of the goods in question.

• In Ganga Saran And Sons Private Limited Versus Income-Tax Officer And Others - 1981 (4) TMI 5 - Supreme Court, it was held that the belief of the assessing authority is mandatory reasons to belief is stronger than is satisfied. The belief entertained by the assessing officer must not be arbitrary or irrational and it must be reasonable.

• In RADHIKA AGARWAL Versus UNION OF INDIA AND OTHERS - 2025 (2) TMI 1162 - Supreme Court (LB), Supreme Court dealt with multiple issues concerning the power of arrest under the GST Acts of 2017 and Customs Act, 1962 read with article 246A of the Constitution with emphasis on whether officers under these statutes can arrest individuals without a warrant? It was held that Section 104(1) of Customs Act, 1962 stipulates that a customs officers may only arrest a person if they have 'reasons to believe' that he has committed an offence and not otherwise; this 'reasons to believe' represents a more stringent standard than 'mere suspicion' threshold as provided under section 41 of Cr. PC, 1973 for reason that unbridled exercise of power to arrest without a warrant can result in arbitrariness and errors in decision making process.

• In UNION OF INDIA & ORS. ETC. Versus M/s. MAGNUM STEEL LTD. ETC. - 2023 (3) TMI 251 - SC Order, revenue filed an appeal against MP High Court judgment in a Customs case in Magnum Steel Ltd. Versus Union of India and Ors. - 2009 (12) TMI 1054 - MADHYA PRADESH HIGH COURT. The High Court had, in its impugned judgment relied upon 'STATE OF RAJASTHAN Versus REHMAN - 1959 (10) TMI 1 - Supreme Court' and 'DURGA PRASAD Versus HR. GOMES SUPDT. (PREVENTION) CENTRAL EXCISE NAGPUR - 1965 (12) TMI 135 - Supreme Court. In those judgments, the Court had ruled that although the power to search is wide, to do so validly, it is necessary that the conditions required by law i.e. officer concerned is to satisfy himself that there are reasons to believe, that the assessee was evading tax, to authorize a legal search should be available on the record.

The concerned officer who had authorized the search did not refer to any information or any report on the basis of which he had formed 'reasonable belief'. The file itself did not contain any material to disclose what was placed before the officer nor was there any noting on it to link the nature of the materials (however briefly) with the decision to search to legitimize the search proceedings. It was held that the basic premise of search proceedings is the reasonable belief that some objective material exists on the official record to trigger searches. The person authorizing the search must express his satisfaction that the material is sufficient for him to conclude that search is necessary; further there should exist something to show what is such material. The mere recording that the person concerned is satisfied, without the supportive materials, therefore, is insufficient to trigger a lawful search. In the present case the concerned official who authorized the search neither referred to any information nor any report was produced on record before the High Court. The appeal being devoid of merit was thus dismissed in favour of the assessee.

• In Income-Tax Officer, I Ward, Distt. VI, Calcutta, And Others Versus Lakhmani Mewal Das - 1976 (3) TMI 1 - Supreme Court,the Supreme Court emphasised that the expression 'reason to believe' could not be construed as 'reason to suspect' and held as under:

'12. The powers of the Income Tax Officer to reopen assessment though wide are not plenary. The words of the statute are 'reason to believe' and not 'reason to suspect' The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the Income Tax Authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi-judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income Tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter's failure or omission to disclose fully and truly all material facts was missing in the case. In any event, the link was too tenuous to provide a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs'.

• In Commissioner of Income Tax, Delhi Versus M/s. Kelvinator of India Limited - 2010 (1) TMI 11 - Supreme Court, the Supreme Court had, in the context of re-opening of the assessment under Section 147 of the Income Tax Act, 1961, construed the expression 'reason to believe', to denote reasons, which are based on tangible material and have 'a live link with the formation of the belief.' This view was also followed by the Supreme Court in a later decision in the case of Income Tax Officer Ward No. 16 (2) Versus M/s TechSpan India Private Ltd. & Another - 2018 (4) TMI 1376 - Supreme Court.

• In Commissioner of Income Tax - 15 (Erstwhile CIT-IX) Versus Shri Chintoo Tomar - 2015 (1) TMI 431 - DELHI HIGH COURT, a Division Bench of this Court had observed as under:

'5. .....The expression 'reasons to believe' predicates a belief which is founded and induced by existence of palpable or cogent material or information. Reason to suspect cannot amount to reason to believe. As it is the beginning of the inquiry, having a prima facie opinion is sufficient; and irrebuttable conclusive evidence or finding is not required. But the prima facie formation of belief should be rational, coherent and not ex facie incorrect and contrary to what is on record.'