2003 (11) TMI 30 - HC - Income Tax

Court validates income tax notice under Section 148, emphasizing justified belief of income escape assessment.

The court upheld the validity of the notice issued under Section 148 of the Income-tax Act, 1961, and the reassessment proceedings under Section 147. It ... Notice u/s 148 - the deeming fiction provided by Explanation 2 to section 147 imparts an added obligation in the matter of believing escapement of income - According to the aforesaid Explanation (clause (c)) even where an assessment is made, but income chargeable to tax has been under-assessed, it has to be deemed that such income has escaped assessment, and after noticing that income chargeable to tax was under assessed and applying the deeming fiction, the Assessing Officer can hardly have reason not to believe that any income chargeable to tax has escaped assessment - Held that the legality of the impugned notice and the very assumption of jurisdiction under section 147 only being under challenge, it is neither within the scope nor an issue in this judgment to pronounce upon the questions whether the non-compete fees received by the petitioner was a capital receipt or revenue receipt and whether, in fact, there was escapement of income chargeable to tax – Petition dismissed Issues Involved:1. Validity of notice issued under Section 148 of the Income-tax Act, 1961.2. Recording and communication of reasons for reassessment.3. Alleged change of opinion by the Assessing Officer.4. Legality of reassessment proceedings under Section 147 of the Income-tax Act, 1961.5. Nature of non-compete fee as capital or revenue receipt.Detailed Analysis:1. Validity of Notice Issued under Section 148 of the Income-tax Act, 1961:The petitioner challenged the notice dated July 15, 2002, issued under Section 148 of the Income-tax Act, 1961, proposing to reassess the income. The court initially directed the respondents to disclose the reasons for reassessment and not to proceed further pursuant to the impugned notice. The reasons for reopening the assessment were supplied to the petitioner on August 13, 2003. The reasons indicated that the non-compete fee of Rs. 1,85,40,000 received by the petitioner was taxable and should have been included in the total income, thus leading to the belief that income had escaped assessment.2. Recording and Communication of Reasons for Reassessment:The petitioner argued that the reasons required to be recorded before issuing the notice under Section 148 were not recorded at the relevant time and were not intelligible or reasonable. The court found that the reasons were indeed recorded on July 15, 2002, and were communicated to the petitioner. The court did not agree with the contention that the reasons were not intelligible or were merely a straightforward conclusion. The court also rejected the argument that the recording of reasons and issuance of the impugned notice were by different officers.3. Alleged Change of Opinion by the Assessing Officer:The petitioner claimed that the reassessment was based on a mere change of opinion, as the non-compete fee was initially accepted as a capital receipt not subject to tax. The court noted that the regular assessment concluded with the issuance of an intimation under Section 143(1)(a) without issuing a notice under sub-section (2). The court referred to the judgment in Praful Chunilal Patel v. M. J. Makwana, Asst. CIT [1999] 236 ITR 832 (Guj), which clarified that if the Assessing Officer had not made an assessment of any item of income, it could not be said that such income was subjected to assessment. The court concluded that there was no formation of opinion regarding the non-compete fee being taxable or non-taxable, and hence, there was no question of change of opinion.4. Legality of Reassessment Proceedings under Section 147 of the Income-tax Act, 1961:The court emphasized that the provisions of Section 147 require the Assessing Officer to have 'reason to believe' that any income chargeable to tax has escaped assessment. The term 'reason to believe' implies a cause or justification for the belief, not necessarily based on final adjudication. The court held that the Assessing Officer's belief that income had escaped assessment was justified and that the initiation of reassessment proceedings was within the jurisdiction of the Assessing Officer. The court also noted that the function of the Assessing Officer is to administer the Act with fairness to taxpayers and solicitude for the public treasury.5. Nature of Non-Compete Fee as Capital or Revenue Receipt:The court clarified that the legality of the notice under Section 148 and the assumption of jurisdiction under Section 147 were the only issues under challenge. The court did not pronounce upon whether the non-compete fee received by the petitioner was a capital receipt or a revenue receipt, leaving these issues open for decision in accordance with the law.Conclusion:The petition was dismissed, the interim relief vacated, and the notice discharged with no order as to costs. The court upheld the validity of the notice under Section 148 and the reassessment proceedings under Section 147, finding that the reasons for reopening the assessment were recorded and communicated appropriately, and there was no mere change of opinion by the Assessing Officer.