2014 (4) TMI 172 - HC - Income Tax

Court validates re-opening assessment under Income Tax Act based on incriminating documents from third party

The court upheld the validity of re-opening the assessment under Section 147 of the Income Tax Act, 1961, based on incriminating documents obtained during ... Reassessment - reason to believe - Notice for re-assessment u/s 148 of the Act – Incriminating documents found - Held that:- It is not a case for intervention in the re-assessment proceedings at this stage - the record shows that during search and seizure operation conducted on Sh. S.K. Jain on 04.09.2010, certain incriminating documents such as cash books and cheque books leading to unaccounted transport were taken in possession by the Department - The cash book contains the names of the middlemen through whom cash was received by Sh. S.K. Jain and in lieu of this cash, he used to provide cheques to the beneficiary company which included the assessee as well – Relying upon Commissioner of Income Tax, Delhi Versus M/s. Kelvinator of India Limited [2010 (1) TMI 11 - SUPREME COURT OF INDIA ] - mere change of opinion is not a “reason to believe” to re-open the assessment – there is a distinction between the ‘power of review’ and ‘power to re-assess’ - The reasons recorded have a link with the belief that income has escaped income - The source of information to frame an opinion to reassess the income is the documents seized from S.K. Jain – the documents were not in possession of the AO at the time of framing assessment - The relevancy of the documents is required to be inquired into –Decided against Assessee. Issues:1. Challenge to the communication for issuance of notice under Section 148 of the Income Tax Act, 1961.2. Re-assessment based on information received from other sources.3. Validity of re-opening assessment.4. Distinction between power to review and power to re-assess.5. Link between reasons recorded and belief that income has escaped assessment.Analysis:1. The petitioner challenged the communication for the issuance of a notice under Section 148 of the Income Tax Act, 1961, based on reasons communicated by the Assessing Officer. The petitioner filed its return for the assessment year 2009-10, which was finalized on 02.12.2011. Subsequently, a notice for re-assessment was issued on 25.03.2013, citing reasons related to unaccounted cash transactions and accommodation entries obtained by the petitioner. The petitioner objected to the re-opening, arguing that the proceedings initiated were not valid in law. The Assessing Officer, in response to the objections, maintained that the re-assessment was based on valid information received from other sources.2. The re-assessment was initiated based on information obtained during a search and seizure operation conducted on a third party, which revealed incriminating documents related to cash transactions and investments in the petitioner's company. The petitioner contended that the Assessing Officer had no evidence of direct cash transactions between the petitioner and the third party, and therefore, the re-assessment proceedings were unfounded. However, the court held that the source of information from the seized documents formed a valid basis for re-opening the assessment under Section 147 of the Act.3. The court emphasized that the re-assessment proceedings should not be interfered with at the initial stage, as the investigation into the cash transactions and investments needed to be conducted thoroughly. The court noted that the Assessing Officer lacked the incriminating documents during the initial assessment, and the new information warranted a re-assessment to determine if income had escaped assessment. Therefore, the court dismissed the challenge to the validity of re-opening the assessment.4. Referring to the judgments cited by the petitioner, the court highlighted the distinction between the power to review and the power to re-assess. The court reiterated that re-assessment must be based on tangible material and should not be a mere change of opinion by the Assessing Officer. The court underscored the importance of a live link between the reasons recorded and the belief that income has escaped assessment, as supported by the amendments to Section 147 of the Act.5. The court concluded that the reasons recorded for re-opening the assessment had a direct link to the belief that income had escaped assessment, as evidenced by the documents seized during the search and seizure operation. The court emphasized that the relevance of the seized documents needed to be investigated further, and premature judgment should be avoided during the re-assessment proceedings. Therefore, the court found no grounds to interfere in the writ jurisdiction at that stage and dismissed the petition.