2024 (3) TMI 253 - HC - Income Tax

AO cannot reopen assessment under section 147 with mere suspicion, must have reason to believe income escaped assessment

Chandni J. Ahuja Versus The Union of India, The Income Tax Officer – 16 (2) (3) /Assessing Officer Mumbai

Chandni J. Ahuja Versus The Union of India, The Income Tax Officer – 16 (2) (3) /Assessing Officer Mumbai - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the Assessing Officer had a valid 'reason to believe' under Section 147 of the Income Tax Act, 1961, that income chargeable to tax had escaped assessment for the Assessment Years 2010-11, 2011-12, and 2012-13, sufficient to justify reopening the assessments.(b) Whether the reasons recorded for reopening the assessments, based on information from the Central Information Branch (CIB) regarding large share transactions, constituted a valid basis for reopening or amounted to mere suspicion or fishing enquiry.(c) The extent to which the Assessing Officer can rely on material beyond the recorded reasons to justify reopening assessments under Section 148.(d) The procedural requirements for reopening assessments, including the necessity of a 'reason to believe' and the role of objections filed by the assessee.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Validity of 'reason to believe' for reopening assessmentsThe legal framework under Section 147 of the Income Tax Act mandates that reopening of an assessment can only be done if the Assessing Officer has a 'reason to believe' that income chargeable to tax has escaped assessment. This is a subjective satisfaction that must be based on tangible material and not mere suspicion.The notices issued to the petitioner for reopening the assessments were based on CIB information indicating large share transactions during the relevant years. The reasons stated that due to these transactions, the Assessing Officer had reason to believe that income had escaped assessment and therefore needed to verify the matter by reopening.However, the Court noted that the reasons recorded did not explain how the CIB information led to the belief that income chargeable to tax had escaped assessment. The reasons merely stated the existence of large share transactions and the need for verification, which the Court found amounted to suspicion rather than a formed belief.The Court referred to precedents such as the decisions in Darpan P. Chandaliya v. Income Tax Officer and Nivi Trading Limited v. Union of India, which held that seeking further details or verification cannot substitute for the requirement of a reason to believe. The Court emphasized that mere receipt of information or suspicion does not justify reopening; there must be a clear basis for the belief that income has escaped assessment.The Court found that the Assessing Officer's reliance on CIB information without linking it to escaped income was insufficient. Even the order rejecting the petitioner's objections conceded that the CIB information 'may not be genuine,' further weakening the basis for reopening.Issue (c): Reliance on material beyond recorded reasonsThe Respondents argued, relying on Commissioner of Income Tax v. Podar Cement Pvt. Ltd. and Income Tax Officer v. Biju Patnaik, that the Assessing Officer's satisfaction could be demonstrated through material beyond the recorded reasons, including affidavits and other documents.The Court rejected this argument, relying on a recent decision in Sun Tan Trading Co. Ltd. v. Deputy Commissioner of Income Tax, which clarified that the validity of reopening must be judged solely on the reasons recorded at the time of issuing the notice. Allowing justification beyond the recorded reasons would render the requirement of recording reasons a mere formality and defeat the statutory scheme.Section 151 of the Act requires prior approval for reopening based on the recorded reasons, underscoring the importance of the reasons themselves. The Court held that the Assessing Officer must have a genuine reason to believe at the time of recording, and cannot rely on subsequent material to justify reopening.Issue (d): Procedural aspects and treatment of objectionsThe Court noted the procedural steps prescribed by the Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer, which requires that after issuing a notice under Section 148, the Assessing Officer must provide the recorded reasons to the assessee, who may file objections. The Assessing Officer is then bound to dispose of such objections by passing a speaking order justifying the reopening based on the recorded reasons.In the present case, the Assessing Officer rejected the petitioner's objections by stating the need for further investigation due to doubts about the genuineness of CIB information. The Court observed that this response did not amount to a reasoned satisfaction that income had escaped assessment but rather confirmed the absence of such belief.The Court emphasized that the Assessing Officer's role is administrative but must be exercised within the statutory framework, requiring a bona fide reason to believe and a proper recording and communication of such reasons.3. SIGNIFICANT HOLDINGSThe Court made the following crucial legal determinations:'The reasons as recorded do not indicate any link between the material obtained from the C.I.B. and the reasons to believe that income chargeable to tax has escaped assessment. In the absence of any indication of how the material obtained has led to the belief the income chargeable to tax has escaped assessment, the reasons prima facie, do not disclose any reason to believe that income chargeable to tax has escaped assessment.''If the interpretation as sought by Mr. Chhotaray is given then, it would lead to the recording of reasons being an empty formality as the Assessing Officer would always be able to justify the reopening by not only referring to the reasons but also surrounding material and circumstances. The same can never be the intention of the provisions of Section 147 of the Act.''Just because some information has been received from CIB does not entitle the Assessing Officer to reopen assessment. The reasons must be founded on the satisfaction of the Assessing Officer that income chargeable to tax has escaped assessment. Once that is not to be found, then, the impugned notice cannot be sustained.''What we find is that there are no reasons to believe but only reasons to suspect. Hence, reopening of assessment is not satisfactory.''If more details are sought or some verification is proposed, that cannot be a substitute for the reasons which led AO to believe that an income chargeable to tax has escaped assessment.'On the facts, the Court concluded that the Assessing Officer did not have a valid reason to believe that income had escaped assessment but only had a reason to suspect, which is insufficient under the law to reopen assessments. Consequently, the notices dated 20th March 2015 and the order rejecting objections were quashed and set aside.