2015 (2) TMI 1360 - AT - Income Tax

Invalid reopening based solely on show cause notice; reassessment orders canceled. Assessee's appeals allowed.

The tribunal held that the reopening of the assessment was invalid as it solely relied on a show cause notice without independent verification by the ... Reopening of assessment - notice under section 148 - reasons recorded under section 148(2) - formation of bona fide belief - escapement of income - reopening based on show cause notice of the Excise Department - requirement to verify particulars declared in the returnReopening of assessment - notice under section 148 - reasons recorded under section 148(2) - reopening based on show cause notice of the Excise Department - requirement to verify particulars declared in the return - Validity of reopening assessments for the Assessment Years 2004-05 to 2007-08 where AO issued notice under section 148 relying on the Excise Department's show cause notice without verifying the assessee's income-tax return particulars. - HELD THAT: - The Tribunal examined whether the reasons recorded by the AO under section 148(2) constituted a valid basis for forming a bona fide belief that income chargeable to tax had escaped assessment. It reiterated that validity of a notice under section 148 is to be judged solely on the recorded reasons and that the AO must form a real, non-arbitrary belief based on relevant, specific and reliable material. The AO's recorded reasons reproduced the DGCEI's investigative findings and the Excise Department's show cause notice alleging suppression of sales. The AO concluded that the show cause notice was 'foolproof' and treated its quantification of suppressed sales as evidence of escapement of income under the Income-tax Act. The Tribunal found this approach inadequate: reliance on the Excise show cause notice could at best raise suspicion but, without verification of the particulars declared by the assessee in its income-tax return, could not ground a belief of escapement of taxable income under the Income-tax Act. The Tribunal also relied on the jurisdictional High Court's view (Futura Ceramics Pvt. Ltd.) that issuance of an Excise show cause notice, in itself, does not warrant presuming evasion under a different fiscal statute and that reassessment founded solely on such a notice may be unsustainable if the excise proceedings do not culminate in a final adverse order. Applying these principles, the Tribunal concluded that the AO had not performed the necessary mental act of accepting and verifying the material against the return to form a bona fide belief of escapement and therefore the recorded reasons were legally insufficient to sustain reopening. [Paras 16, 18, 20, 21, 22]Reopening of assessment for Assessment Years 2004-05 to 2007-08 held invalid; reassessment orders quashed.Final Conclusion: The Tribunal allowed the assessee's appeals for Assessment Years 2004-05, 2005-06, 2006-07 and 2007-08 by quashing the reassessment orders dated 15.12.2011, and dismissed the Revenue's cross-appeals as infructuous. Issues Involved:1. Validity of reopening of assessment under section 147 of the Income Tax Act.2. Reliance on show cause notice by the Central Excise Department for reopening the assessment.3. Verification of particulars declared in the income-tax return by the Assessing Officer (AO).Detailed Analysis:1. Validity of Reopening of Assessment under Section 147:The assessee challenged the reopening of the assessment by the AO, arguing that it was based on insufficient tangible material and that there was no failure on the part of the assessee to disclose necessary facts. The tribunal noted that the validity of a notice issued under section 148 must be judged solely on the reasons recorded by the AO under section 148(2). It is established law that the AO must form a bona fide belief based on specific, definite, relevant, and reliable material. The belief must be real and not arbitrary or irrational, indicating that taxable income has escaped assessment.2. Reliance on Show Cause Notice by the Central Excise Department:The AO based the reopening on a show cause notice from the Central Excise Department, which alleged suppression of sales by the assessee. The tribunal found that the AO concluded that the show cause notice was foolproof and contained substantial material evidence of sales suppression. However, the tribunal cited a jurisdictional High Court decision stating that a show cause notice alone cannot be a ground to presume tax evasion under the VAT Act, and the same principle applies to income tax. The tribunal emphasized that the AO should not rely solely on the show cause notice without further verification.3. Verification of Particulars Declared in the Income-Tax Return:The tribunal observed that the AO did not verify the particulars declared by the assessee in its income-tax return against the alleged suppressed sales. The recorded reasons did not show any comparison between the declared sales and the alleged suppressed sales. The tribunal held that without such verification, the information in the show cause notice could only be a reason to suspect, not a reason to believe in the escapement of taxable income.Conclusion:The tribunal concluded that the reopening of the assessment was invalid as it was based solely on the show cause notice without independent verification by the AO. Consequently, the reassessment orders for the assessment years 2004-05, 2005-06, 2006-07, and 2007-08 were canceled. The appeals of the assessee were allowed, and the appeals of the Revenue were dismissed as infructuous.Order Pronouncement:The order was pronounced on February 27, 2015, at Ahmedabad, allowing the assessee's appeals and dismissing the Revenue's appeals.