1979 (11) TMI 47 - HC - Income Tax

Court quashes reassessment, deems it change of opinion not new material; Notices under Section 147 Income Tax Act, 1961, invalidated.

The court held that the Income Tax Officer (ITO) lacked valid information to support the belief that income had escaped assessment, and the reassessment ... Income Escaped Assessment, Reason To Believe, Reassessment Issues Involved:1. Validity of the notices issued under Section 147(b) of the Income Tax Act, 1961.2. Whether the Income Tax Officer (ITO) had valid information to believe that income had escaped assessment.3. Whether the reopening of assessments was based on new information or merely a change of opinion.4. Applicability of Section 52(2) of the Income Tax Act concerning the fair market value of shares.5. Methods for determining the fair market value of shares.Detailed Analysis:1. Validity of the Notices Issued under Section 147(b) of the Income Tax Act, 1961:The primary issue was whether the notices issued by the ITO under Section 147(b) were legal and valid. The court examined the statutory framework of Section 147(b), which allows the ITO to reassess income if he has 'reason to believe' that income chargeable to tax has escaped assessment due to information in his possession. The court emphasized that the belief must be based on reasonable grounds and not on mere suspicion or vague feelings.2. Whether the ITO Had Valid Information to Believe That Income Had Escaped Assessment:The ITO issued the notices based on a letter from Shri S. M. Bagai, Deputy Director, Directorate of Inspection (Investigation), Special Cell, New Delhi, which suggested that the market quotations of shares were manipulated. The court scrutinized whether this letter constituted valid information. The court noted that the letter contained suspicions but lacked concrete evidence of manipulation or collusive transactions. The ITO did not conduct any further inquiries after receiving the letter, which indicated a lack of new material or information to justify the belief that income had escaped assessment.3. Whether the Reopening of Assessments Was Based on New Information or Merely a Change of Opinion:The court highlighted that reopening an assessment based on a mere change of opinion is not permissible. It must be based on new information that was not available during the original assessment. In this case, the court found that the ITO's action was influenced by the letter from Shri Bagai, which did not provide new factual information but rather a suspicion of manipulation. The court concluded that the ITO's belief was not based on new information but was a result of reappraising the same material considered during the original assessment, amounting to a change of opinion.4. Applicability of Section 52(2) of the Income Tax Act Concerning the Fair Market Value of Shares:The revenue argued that the fair market value of the shares transferred by the assessee exceeded the declared value by more than 15%, invoking Section 52(2). However, the court observed that the ITO had not referred the valuation of the shares to a Valuation Officer under Section 55A, which could have provided a basis for determining the fair market value. The court reiterated that the ITO must have valid grounds to believe that the declared value was understated, which was not established in this case.5. Methods for Determining the Fair Market Value of Shares:The court discussed various methods for determining the fair market value of shares, including the yield method and the break-up value method. The court referred to precedents, including CWT v. Mahadeo Jalan and CIT v. Simon Carves Ltd., to emphasize that the method chosen must be appropriate to the facts and circumstances of each case. The court noted that the ITO initially accepted the quoted market value of the shares based on stock exchange quotations, which generally reflect the true value unless there is evidence of manipulation. The court found no new material to justify a shift to the break-up value method.Conclusion:The court concluded that the ITO did not have valid information to justify the belief that income had escaped assessment, and the reopening of assessments was based on a mere change of opinion. Consequently, the court quashed the impugned notices issued under Section 147 of the Income Tax Act, 1961, and allowed the writ petitions. The parties were left to bear their own costs.