1975 (5) TMI 4 - HC - Income Tax

Notices under section 148: requirement of bona fide belief and valid sanction essential; absence of either invalidates reopening notices.

Reopening assessments requires a bona fide belief by the assessing officer that income escaped assessment; absence of such belief, shown by inadequate or ... Assessment Year - Validity of the notices issued u/s 148 - Burden Of Proof - non-disclosure of material facts - reopening of assessments of earlier years - HELD THAT:- Absence of bona fide belief of the Income-tax Officer at the time when he recorded the aforesaid order and asked for sanction of the Commissioner receives support from the conduct of the Income-tax Officer while sending up the proposal to the Commissioner. We shall deal with that aspect of the matter a little later while dealing with the question of sanction and, therefore, though it is relevant for this aspect of the matter, for avoiding repetition, we do not deal with it here. Our conclusion, therefore, is that the Income-tax Officer had no reason to believe that there had been any escapement of income from the net of taxation within the meaning of section 147(a) of the Act. We have no definite material before us to uphold his contention. What papers were considered by the Commissioner of Income-tax before sanction was accorded is not known to us. That was a matter within the special knowledge of the Commissioner but we have not been told as to what he looked into before according sanction. On the other hand, in view of the facts stated in the proposal of the Income-tax Officer, we must uphold the contention of Mr. Rath for the assessee that true facts had not been stated and the bona fides of the Income-tax Officer in the matter of his belief that there existed reasons to believe that income of the assessee had escaped assessment were non-existent. Admittedly, to the facts of this case, sub-section (2) has application. Sanction of the prescribed authority is a condition precedent to issue of notice and if there be no sanction, the proceedings are invalid. The statute requires the Commissioner to take into account the reasons recorded by the Income-tax Officer. The Income-tax Officer, therefore, is obliged under the law to make a full report of the correct state of affairs and furnish the Commissioner adequate material to enable him either to accord or withhold sanction. While the petitioner's assertions related to facts within the special knowledge of the Income-tax Officer, who was the deponent of the counter-affidavit, he did not choose to raise any specific plea. The learned standing counsel has not been able to satisfy us as to why there was no specific denial of the allegations raised in the writ application and why the true position has not been disclosed which in a case of this type with reference to the allegations made was very much necessary. Settlement was admittedly in relation to the adoption of an appropriate percentage basis for determination of assessable profits in relation to contract works. Work-site account related to the contract works. It is, therefore, legitimate to accept that while determining the percentage, the high authorities of the revenue must have taken into consideration the work-site account which was relevant and had legitimate bearing. We are prepared to give necessary credit to the high authorities from the directorate that the work-site account could not have escaped their attention. In these circumstances, it is appropriate to hold by accepting the petitioner's assertion that the work-site account had been duly taken into consideration at the time the settlement was reached. In view of our findings on the other aspects, it is, however, not necessary to deal with this point any further. For the reasons indicated above, the writ application must succeed. We, accordingly, allow the application and quash the notices under section 148 of the Act. Issues: (i) Whether the notices issued under section 148 could be validly issued when the Income-tax Officer had no reason to believe that income had escaped assessment because primary facts (work-site account and related books) had been disclosed at original assessments; (ii) Whether the notices were barred by limitation under section 149(1)(b); (iii) Whether sanction under section 151(2) was validly and properly accorded by the Commissioner; (iv) Whether the prior settlement/terms adopted by revenue in relation to contract business covered the work-site account so as to preclude reopening.Issue (i): Whether the Income-tax Officer had jurisdiction to issue notices under section 148 having reason to believe that income had escaped assessment due to non-disclosure of primary facts in the years in question.Analysis: The Court examined whether primary facts relating to the work-site account had been placed before the assessing officers at original assessments and whether the subsequent recording of reasons relied upon facts that survived the appellate disposal for assessment year 1970-71. The appellate tribunal had held the work-site account not fictitious and deleted prior adverse findings. The Court found documentary evidence (balance-sheets, ledger pages bearing the assessing officer's endorsements) and uncontroverted assertions showing production and examination of the accounts at the time of original assessments. The Income-tax Officers reasons relied substantially on conclusions in the later assessment (1970-71) which had been vacated by the Tribunal; therefore those grounds could not legitimately form an honest reason to believe at the time of recording the proposals.Conclusion: The Income-tax Officer had no valid reason to believe that income had escaped assessment; jurisdiction under section 147/148 did not exist in the circumstances.Issue (ii): Whether notices for the years 1965-66 to 1968-69 were barred by limitation under section 149(1)(b).Analysis: The Court assessed applicability of section 149(1)(b) and accepted that if only section 147(b) applied, notices for the first four years (1965-66 to 1968-69) would have been time-barred when issued in January 1974, while the last year was not time-barred. The Court, however, had already concluded that section 147(a) did not apply because primary facts were disclosed and thus limitation analysis did not alter the basic jurisdictional defect.Conclusion: While limitation would have barred action under section 147(b) for the first four years, the core finding is that reassessment under section 147(a) was not tenable because primary facts had been disclosed.Issue (iii): Whether sanction under section 151(2) accorded by the Commissioner was valid.Analysis: The statutory scheme requires the Income-tax Officer to place full and correct reasons before the Commissioner and for the Commissioner to apply his mind. The proposal to the Commissioner omitted reference to the Tribunal's dispositive order and incorrectly invoked Explanation 2 to section 153(3). The Commissioners assent was indicated by a rubber stamp; there was no material showing the Commissioner independently considered relevant records. The conduct of the officer and omission of material facts rendered the sanction mechanistic and vitiated.Conclusion: The sanction under section 151(2) was not validly or properly accorded; lack of proper sanction vitiates issuance of notices.Issue (iv): Whether the prior settlement between revenue and assessee in relation to contract business covered the work-site account and precluded reassessment.Analysis: The settlement related to computation of profits from contract business on a percentage basis; the work-site account pertained to contract works and featured in the balance-sheets that were scrutinised during settlement. No competent opposing affidavit from the Board/Directorate was produced to contradict the assessees assertion and the available record indicated the work-site account had been considered during settlement.Conclusion: The settlement did cover matters relevant to the work-site account and supports the assessees position that reopening was not tenable.Final Conclusion: The writ petition succeeds: the notices issued under section 148 are quashed because (a) primary facts relating to the work-site account were disclosed at the time of original assessments so section 147(a) does not apply, (b) the Income-tax Officers recorded reasons relied on vacated findings and did not constitute a bona fide reason to believe, (c) the sanction under section 151(2) was mechanically accorded and vitiated the proceeding, and (d) the settlement in relation to contract business encompassed the work-site account.Ratio Decidendi: Where primary facts necessary for assessment have been disclosed to the assessing authority and the reasons recorded for reopening rely on conclusions already vacated by appellate disposal, and where sanctioning authoritys approval is accorded mechanically without disclosure of material facts, reopening under sections 147/148 (and sanction under section 151(2)) is invalid and notices under section 148 must be quashed.