2014 (2) TMI 1125 - HC - Income Tax

Validity of assessment reopening notice upheld based on income escapement belief. Importance of valid reasons stressed.

M/s. Pankaj Hospital Ltd. Versus Commissioner of Income Tax And Another

The Court upheld the validity of the notice issued under Section 148 read with Section 147 for reopening the assessment for the Assessment Year 2006-07 ... Notice u/s 148 of the Act – Reopening of Assessment - Interpretation of the term reason to believe - Whether there was reason to believe that any income chargeable to tax had escaped assessment – Held that:- The expression 'reason' has been explained by the Supreme Court in Assistant CIT Vs. Rajesh Jhaveri Stock Broker Pvt. Ltd. [2007 (5) TMI 197 - SUPREME Court] means a cause or justification - the order of assessment passed by the AO u/s 143(3) does not indicate that the AO had brought his mind to bear - there is nothing in the reply filed by the assessee to the notice under Section 142(1) that would indicate a full disclosure of facts in regard to either the credit worthiness of the companies which made the investments or the genuineness of the transaction - From the reply which was furnished by the assessee during the course of the assessment proceedings, it does not emerge that the assessee had discharged the onus of establishing the credit worthiness of the companies which had ostensibly invested the amount or in regard to the genuineness of the transaction - though the reopening of the assessment is beyond the period of four years but the Assessing Officer was satisfied that the condition stipulated in the first proviso to Section 147 was duly fulfilled – thus, there was no illegality in the order of the AO or in the Notice issued u/s 148 r.w section 147 of the Act – Decided against Assessee. Issues:Reopening of assessment under Section 147 based on information received, Failure to disclose fully and truly all necessary facts, Justification for reopening assessment after a search conducted, Interpretation of 'reason to believe' under Section 147(1), Assessment of credit worthiness and genuineness of transaction, Compliance with proviso to Section 147(1) for reopening assessment beyond four years.Reopening of Assessment under Section 147:The judgment pertains to a petition challenging a notice issued under Section 148 of the Income Tax Act, 1961 for reopening the assessment for the Assessment Year 2006-07 under Section 147. The reasons for reopening the assessment were based on information received regarding accommodation entries provided by bogus companies. The petitioner challenged the reopening, arguing that there was no failure to disclose necessary facts and that the reopening beyond four years was contrary to law.Failure to Disclose Fully and Truly:The petitioner contended that there was no failure to disclose all relevant facts during the initial assessment under Section 143(3). The petitioner had provided information, including details about the alleged bogus companies, during the assessment proceedings. However, the revenue argued that mere disclosure of transaction details does not establish genuineness, and the Assessing Officer did not adequately assess the credit worthiness of the companies involved.Justification for Reopening after Search Conducted:The petitioner questioned the justification for reopening the assessment more than four years after a search was conducted on the office of the Chartered Accountant involved in creating bogus companies. The revenue argued that the basis for reopening was the information gathered during the investigation, indicating a reason to believe that income had escaped assessment.Interpretation of 'Reason to Believe' under Section 147(1):The Court analyzed the meaning of 'reason to believe' as per legal precedents, emphasizing that the Assessing Officer must have a cause or justification to suspect income escapement, not conclusive proof. The reopening of assessment under Section 147(1) requires a valid reason to believe that income has escaped assessment.Assessment of Credit Worthiness and Genuineness of Transaction:The Court highlighted the importance of assessing three aspects - identity of investors, credit worthiness of applicants, and genuineness of the transaction. It noted that the initial assessment order did not demonstrate a thorough evaluation of these aspects, especially regarding the credit worthiness of the companies involved in the transactions.Compliance with Proviso to Section 147(1) for Reopening Assessment Beyond Four Years:The judgment clarified that although the reopening of assessment was beyond four years, the Assessing Officer was satisfied that the conditions stipulated in the proviso to Section 147(1) were fulfilled. The Court emphasized that the observations made were solely for determining the validity of the notice reopening the assessment, leaving the factual determinations for the assessment proceedings.Conclusion:Ultimately, the Court found no illegality in the Assessing Officer's order or the notice issued under Section 148 read with Section 147, leading to the dismissal of the petition with no costs awarded. The judgment underscores the significance of establishing a valid reason to believe income escapement for the lawful reopening of assessments under Section 147.