2024 (1) TMI 1490 - HC - Income Tax

Reopening under Section 147 quashed as tax authorities had only reasons to suspect, not reasons to believe income escaped

Saurashtra Finstock Pvt. Ltd. Versus Assistant Commissioner of Income Tax Circle-11 (1) (2).

Saurashtra Finstock Pvt. Ltd. Versus Assistant Commissioner of Income Tax Circle-11 (1) (2). - 2024:BHC - OS:1068 - DB 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a notice under Section 148 of the Income Tax Act is valid where the Assessing Officer's recorded reasons disclose only a desire to verify information or to make enquiries (i.e., reasons to suspect) rather than a formed reason to believe that income chargeable to tax has escaped assessment. 2. Whether receipt of information from investigation or other sources, without more, can constitute the requisite 'reasons to believe' to reopen an assessment under Section 147/148. 3. Whether a statement by the Assessing Officer that information 'has to be verified to check the genuineness' and that 'proper hearing and opportunity will be given' supplies the statutory satisfaction required for issuance of a Section 148 notice. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Section 148 notice where only 'reasons to suspect' exist Legal framework: Section 147 (read with Section 148) permits reopening of an assessment only when the Assessing Officer has a reason to believe that income chargeable to tax has escaped assessment; the jurisdictional precondition is a formed belief, not mere suspicion or desire for further enquiry. Precedent Treatment: The Court applied and followed earlier decisions which hold that reasons indicating a wish to verify or examine details cannot substitute for reasons to believe (see referenced authorities within the judgment). Interpretation and reasoning: The recorded reasons in the instant matter explicitly state the need to 'verify' information received from sources and to 'examine' certain details; they do not record any satisfaction or belief that taxable income has escaped assessment. The Court treated such language as indicative of suspicion or intent to investigate rather than a statutory belief justifying reopening. Ratio vs. Obiter: Ratio - A Section 148 notice is invalid if the reasons recorded show only suspicion or a desire to make enquiries and do not disclose a reason to believe that income chargeable to tax has escaped assessment. This is the operative legal principle applied to quash the notice. The discussion distinguishing verification from belief operates as binding ratio in this judgment. Conclusions: The impugned notice was quashed because the reasons recorded amounted to reasons to suspect rather than reasons to believe; reopening in such circumstances is impermissible. Issue 2 - Effect of information received from sources/investigation wing Legal framework: While information from sources or investigative wings may trigger enquiries, statutory power to reopen assessments requires the Assessing Officer's satisfaction (reason to believe) that income chargeable to tax has escaped assessment. Precedent Treatment: The Court relied on prior authorities which held that mere receipt of information does not ipso facto create the requisite reason to believe; verification or further enquiry cannot stand in for the AO's formed belief. Interpretation and reasoning: The AO's reliance on information 'received from sources' and statement that it 'has to be verified to check the genuineness' demonstrates that the AO had not reached the necessary satisfaction but intended to undertake verification. The Court reasoned that such an approach is contrary to the statutory requirement and earlier jurisprudence: the principal condition is the presence of reasons to believe at the time the notice is issued. Ratio vs. Obiter: Ratio - Receipt of information without an accompanying recorded satisfaction that income has escaped cannot sustain a notice under Section 148. This is applied as the decisive legal standard in the decision. Conclusions: Reliance solely on information from sources or the Investigation Wing, absent recorded reasons constituting a belief of escapement of income, is insufficient to validate a Section 148 notice; the impugned notice was therefore unsustainable. Issue 3 - Whether offer of hearing and request for documents cure defective reasons Legal framework: Statutory validity of a Section 148 notice is assessed by the reasons recorded at the time of issuance; subsequent offers of hearing or requests to produce documents do not convert mere suspicion into a bona fide reason to believe. Precedent Treatment: The Court reiterated authorities holding that the AO's post hoc verification intentions cannot retrospectively supply the precondition of belief required when the notice was issued. Interpretation and reasoning: The AO's statement promising 'proper hearing and opportunity' and asking for documents was treated as procedural fairness but not as the foundational satisfaction required by Section 147/148. The Court emphasized that procedural steps cannot substitute for the statutory mental satisfaction that must exist prior to reopening. Ratio vs. Obiter: Ratio - Offers of hearing or procedural safeguards do not cure the absence of recorded reasons amounting to a reason to believe; such remedial steps are not a substitute for the statutory jurisdictional condition. Conclusions: The AO's procedural statements and invitations for explanation do not validate the notice when the recorded reasons reflect only an intention to verify; the notice was accordingly quashed. Cross-references and Consolidated Conclusion All issues converge on the single legal principle: issuance of a notice under Section 148 requires recorded reasons demonstrating the Assessing Officer's belief that income chargeable to tax has escaped assessment; a record reflecting only suspicion, desire to verify, or receipt of information from sources without recorded satisfaction is inadequate. Applying that principle, the Court set aside the impugned notice as lacking the requisite reasons to believe.