2004 (8) TMI 23 - HC - Income Tax

Court invalidates tax notices citing lack of valid reasons

Peerless General Finance And Investment Co. Ltd. Versus Deputy Commissioner Of Income-Tax And Others.

The court held that the Assessing Officer lacked valid reasons to believe in income suppression by the appellant for the years 1973-74, 1980-81, and ... Notice u/s 148 – reopening of the assessment - Although, the learned judge in his judgment practically was of the opinion that the Revenue failed to substantiate its claim that on the basis of the information the AO had reason to believe that there was suppression of income by the assessee-company, still he preferred to rely on the statement made by the company in its writ petition. On the basis of such statement, the learned judge was of the opinion that there cannot be any doubt that the AO had sufficient reasons to issue the notice for the purpose of reopening the assessment for those three years. But we are unable to agree with this approach of the learned judge in coming to the conclusion that the AO was justified in issuing the notice – Further, law does not allow the AO to reopen the assessment on any other new ground which is not the basis of the issuance of the notice u/s 148 – impugned notices are set aside - assessee’s appeal is allowed Issues Involved:1. Legality of the notice issued under section 148 of the Income-tax Act, 1961, for reopening the assessment for the years 1981-82, 1980-81, and 1973-74.Issue-Wise Detailed Analysis:Legality of the Notice Issued under Section 148 of the Income-tax Act, 1961The appellant challenged the notice issued under section 148 of the Income-tax Act, 1961, for reopening the assessment for the years 1981-82, 1980-81, and 1973-74. The Income-tax Officer issued the notices based on three grounds:- Auditor's observations in the annual reports for 1986 and 1987-88.- Supreme Court's observations in the case of RBI v. Peerless General Finance and Investment Co. Ltd.- Report of the Reserve Bank of India on inspection of the books of Peerless conducted in 1979.The core legal question was whether the Assessing Officer had 'reason to believe' that income had escaped assessment due to the appellant's failure to disclose fully and truly all material facts necessary for the assessment.Analysis of Grounds for Issuance of Notice1. Supreme Court's Observations:- The Supreme Court did not indicate that the appellant-company failed to disclose all material facts or that income had escaped assessment. The court noted some unhealthy practices but did not link these to the suppression of income.- The court referenced an inspection by the Reserve Bank of India in 1979 but did not find any evidence of income suppression relevant to the assessment years in question.2. Reserve Bank of India Report:- The report was not presented to the court or disclosed in the recorded reasons or affidavit in opposition.- The court cited the decision in Smt. Uma Devi Jhawar v. ITO, emphasizing that the material forming the basis for the belief must be disclosed and have a rational nexus with the belief of income escapement.- In the absence of the report, the court concluded that the Assessing Officer was not justified in issuing the notice based on this ground.3. Auditor's Observations:- The auditor's report for the assessment years 1987-88 did not indicate suppression of material facts for the years 1980-81, 1981-82, and 1973-74.- The discrepancies noted in the auditor's report did not suggest that there was a failure to disclose income fully and truly for the earlier years.- The court held that the auditor's report for a later year could not form a reasonable basis for reopening assessments for earlier years.Legal Principles and PrecedentsThe court referred to several legal precedents to determine the validity of the Assessing Officer's actions:- Calcutta Discount Co. Ltd. v. ITO: Established that the Assessing Officer must have reason to believe that income has escaped assessment due to the assessee's failure to disclose material facts.- Ganga Saran and Sons P. Ltd. v. ITO: Clarified that the belief must be reasonable and based on relevant and material reasons.- Coca-Cola Export Corporation v. ITO: Held that violations of other regulations (e.g., Foreign Exchange Regulation Act) could not justify reopening assessments under the Income-tax Act.ConclusionThe court concluded that the Assessing Officer did not have valid reasons to believe that there was suppression of income by the appellant-company for the years 1973-74, 1980-81, and 1981-82. The grounds cited by the Assessing Officer were insufficient and did not establish a rational connection or live link with the alleged escapement of income.The court allowed all three appeals, striking down and setting aside the notices issued under section 148 of the Income-tax Act. The judgment emphasized that the Assessing Officer's power to reopen assessments must be exercised in good faith and based on substantial grounds, not mere suspicion.Final JudgmentThe notices issued under section 148 of the Income-tax Act for the years 1981-82, 1980-81, and 1973-74 were declared illegal and invalid. The appeals were allowed, and the notices were struck down and set aside.