2010 (2) TMI 271 - HC - Income Tax

Reassessment under s.148 set aside; AO lacked reasonable belief under Explanation 2(b) to s.147 requirement

Prashant S. Joshi and Dattaram Shridhar Bhosale Versus Income-tax Officer

HC held the reassessment notice issued under s.148 invalid and set it aside. The court found no basis for the AO to form the requisite belief that income ... Validity of reassessment notices issued u/s 148 - reason to believe that income chargeable to tax had escaped assessment - HELD THAT:- It is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of section 147. Explanation 2 to section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation 'where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.' For the purpose of clause (b) to Explanation 2, the Assessing Officer must notice that the assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return. The taking of such notice must be consistent with the provisions of the applicable law. The act of taking notice cannot be at the arbitrary whim or caprice of the Assessing Officer and must be based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief is the sine qua non for a valid exercise of power. In the present case, having regard to the law laid down by the Supreme Court it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147. In these circum-stances, the petition shall have to be allowed by setting aside the notice u/s 148. Issues Involved:1. Validity of reassessment notices issued under Section 148 of the Income-tax Act, 1961.2. Whether the amounts received by the petitioners on retirement from the partnership firm are chargeable to tax.Issue-wise Detailed Analysis:1. Validity of Reassessment Notices Issued Under Section 148:The principal challenge in these proceedings is to the notices issued by the first respondent under section 148 of the Income-tax Act, 1961, proposing to assess the income of the petitioner for the assessment years 2005-06 and 2006-07 on the ground that there is reason to believe that income chargeable to tax had escaped assessment within the meaning of section 147. The petitioners argued that the validity of reassessment has to be determined on the basis of reasons recorded. The reasons recorded only refer to the fact that the payment made by the partnership firm to the retiring partners has been treated as revenue expenditure. From this, it does not follow that the amount becomes a revenue receipt in the hands of the assessee.The court emphasized that the reasons recorded by the Assessing Officer for reopening an assessment are the only reasons that can be considered when the formation of the belief is impugned. The recording of reasons is a check against arbitrary exercise of power. The reasons recorded must be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose the mind of the Assessing Officer and should be self-explanatory. The court cited previous judgments to support this principle, such as N. D. Bhatt, IAC of I.T. v. I. B. M. World Trade Corporation and Hindustan Lever Ltd. v. R. B. Wadkar, Asst. CIT (No. 1).The court found that the only reason recorded by the Assessing Officer was that the Commissioner of Income-tax (Appeals) had allowed a claim for treating the payment to the retiring partners as revenue expenditure. The court held that this could not reasonably lead to the belief that the receipts had escaped assessment within the meaning of section 147.2. Whether the Amounts Received by the Petitioners on Retirement from the Partnership Firm are Chargeable to Tax:The petitioners argued that assuming the stand of the Department is that the amount is chargeable as capital gains, this would be contrary to the law laid down by the Supreme Court in successive decisions that an amount paid to a retiring partner in a partnership firm does not amount to a transfer within the meaning of section 2(47). The court referenced several judgments, including CIT v. Mohanbhai Pamabhai and Addl. CIT v. Mohanbhai Pamabhai, where it was held that an amount paid to a partner upon retirement, after taking accounts and upon deduction of liabilities, does not involve an element of transfer within the meaning of section 2(47).The court also noted that the reliance on clauses (iv) and (v) of section 28 to sustain the belief was misplaced. Section 28(iv) specifies the value of any benefit or perquisite arising from business or the exercise of profession, which does not apply to benefits paid in cash or money. Clause (v) refers to any interest, salary, bonus, commission, or remuneration received by a partner from the firm, which does not include payments made to a partner in realization of his share in the net value of the assets upon his retirement from a firm.The court concluded that there was no basis for the first respondent to form a belief that any income chargeable to tax had escaped assessment within the meaning of section 147. The reasons recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of section 147.Conclusion:The court allowed Writ Petition No. 2287 of 2009 by quashing and setting aside the notice dated January 19, 2009, and Writ Petition No. 59 of 2010 by quashing and setting aside the notices dated January 23, 2009, and February 9, 2009. The rule was made absolute with no order as to costs.