2014 (5) TMI 1005 - HC - Income Tax

Court affirms validity of Income Tax Act Section 148 notices based on post-search enquiries

The court upheld the validity of notices issued under Section 148 of the Income Tax Act, determining that the Assessing Officer had sufficient grounds to ... Reassessment - Validity of notice u/s 148 of the Act – Reason to believe – Held that:- Under Section 147 of the Act, proceedings initiated for re-assessment proceedings can only be done if the Assessing Officer had reasons to believe, namely, that any income chargeable to tax had escaped income in any assessment year - The assessee had disclosed the gift cheques in his return filed u/s 139 of the Act - no notice was issued to the petitioner u/s 143(2) of the Act by the AO and the returns were accepted by issuance of an intimation u/s 143(1) of the Act – u/s 143 of the Act, it is the discretion of the AO to accept the return as it is or to proceed further with the assessment of income - once the AO decides to proceed, he has to issue notice u/s 143(2) of the Act within the prescribed period, at the relevant moment of time, was 12 months to make the assessee aware that his return has been selected for scrutiny assessment. The material came into existence during post search enquiry when it became known that the gift cheques shown in the return filed u/s 139 of the Act were not regular transactions but were purely arranged transactions to avoid income tax - income disclosed in the return filed u/s 139 of the Act could not become 'undisclosed income', merely because in post search enquiry, it came known that the gift cheques was a sham transaction - An amount which has already been included in the regular assessment cannot be assessed again in the course of block assessment - The gift cheques, having been disclosed in the return u/s 139 of the Act could not be re-assessed in block assessment proceedings u/s 158BC - The authorities were justified in not including the gift cheques in block assessment proceedings. The material found in post search enquiries could form a 'reason to believe' that income had escaped assessment by issuance of a notice under Section 143(2) of the Act - the period u/s 143(2) of the Act had expired, the AO having genuine reasons to believe that income had escaped assessment and consequently, could issue a notice u/s 148 of the Act - Such notices so issued were perfectly justified and was within the powers of the Assessing Officer – Relying upon Assistant Commissioner of Income-Tax Versus Rajesh Jhaveri Stock Brokers P. Limited [2007 (5) TMI 197 - SUPREME Court] - the expression 'reason to believe' in Section 147 of the Act would mean cause of justification to know that income had escaped assessment - at the stage of issue of notice, the only question is, whether there was relevant material on which a reasonable person could form the requisite belief that income had escaped assessment - the AO was justified in forming an opinion, that income had escaped assessment and was justified in issuing notice u/s 148 of the Act – thus, the notice u/s 148 of the Act is upheld – Decided against Assessee. Issues Involved:1. Validity of notices issued under Section 148 of the Income Tax Act.2. Use of material from post-search enquiries for reopening assessments.3. Jurisdiction and powers of the Assessing Officer in issuing notices under Section 148.4. Interpretation of 'undisclosed income' under Section 158B(b) of the Income Tax Act.Detailed Analysis:1. Validity of Notices Issued Under Section 148:The petitioner challenged the notices dated 15.12.2004 and 16.12.2004 issued under Section 148 for the assessment years 1999-2000, 2000-01, and 2001-02, arguing that they were based solely on post-search enquiries. The court held that the Assessing Officer had 'reasons to believe' that income had escaped assessment due to the discovery of sham gift transactions during post-search enquiries. The court found that the material from post-search enquiries could form a valid basis for reopening assessments under Section 148, thus validating the notices.2. Use of Material from Post-Search Enquiries for Reopening Assessments:The petitioner argued that material found during post-search enquiries could only be used in block assessment proceedings under Section 158BC and not for reopening assessments under Sections 147/148. The court noted that the Finance Act, 2002, clarified that block assessments are based on evidence found during search and post-search enquiries. However, it emphasized that income disclosed in regular assessments cannot be reassessed in block assessments. The court concluded that while post-search enquiry material could not be used in block assessments, it could be used to form a 'reason to believe' for reopening assessments under Section 148.3. Jurisdiction and Powers of the Assessing Officer in Issuing Notices Under Section 148:The court examined whether the Assessing Officer had jurisdiction to issue notices under Section 148 based on the 'reasons to believe' that income had escaped assessment. It reiterated that the formation of belief must have a rational connection to the material found. The court cited the Supreme Court's decision in Rajesh Jhaveri Stock Brokers P. Ltd., stating that 'reason to believe' means cause or justification and does not require conclusive proof of income escapement at the notice stage. The court found that the Assessing Officer had valid reasons to believe that income had escaped assessment, thus justifying the issuance of notices under Section 148.4. Interpretation of 'Undisclosed Income' Under Section 158B(b) of the Income Tax Act:The court analyzed the definition of 'undisclosed income' as amended by the Finance Act, 2002, which includes income based on false claims of expenses, deductions, or allowances. It clarified that block assessments are intended for undisclosed income detected through searches and are in addition to regular assessments. The court found that the gift cheques disclosed in the petitioner's regular returns could not be reassessed in block assessments but could be grounds for reopening assessments under Section 148 if found to be sham transactions during post-search enquiries.Conclusion:The court dismissed the writ petition, holding that the notices issued under Section 148 were valid and within the jurisdiction of the Assessing Officer. It found no infirmity in the notices and emphasized that the material from post-search enquiries provided a legitimate basis for reopening assessments. The court upheld the Assessing Officer's decision to issue the notices, stating that the belief that income had escaped assessment was justified.