2009 (9) TMI 572 - HC - Income Tax

Court Requires Relevant Reasons for Income Escapement; Justifies Section 147 Action

Commissioner of Income-tax Versus. Shiv Shakti Flour Mills P. Ltd.

The court concluded that the Assessing Officer's action under section 147 of the Income-tax Act must be based on relevant and rational reasons, with a ... Reassessment proceedings – validity of assessment u/s 147 - reversal of the assessment order already passed on consideration of the materials on record – Held that: - Reading of the orders reveal the reason, i.e., the assessee has reflected the transport subsidies received by him in the reserve and surplus account and not in the profit and loss account in the relevant assessment years, which had resulted in escapement of assessment. The Assessing Officer took into consideration the relevant materials and did not take the decision on irrelevant or irrational materials. The Assessing Officer, at this stage, is not required to finally ascertain the facts by legal evidence, which stage shall come thereafter and not at the stage of formation of belief, within the meaning of section 147 of the Act. In the instant cases, it is not in dispute that the action under section 147 of the Act has been taken within the time allowed. The first proviso to section 147, therefore, is not applicable in the cases in hand – Order of ITAT set aside – assessment proceedings u/s 147 valid – decided in favor of revenue Issues Involved:1. Whether the initiation of proceedings under section 147 of the Income-tax Act, 1961, is permissible for reversing an assessment order already passed on the consideration of materials on record.2. Whether the Assessing Officer was justified in initiating proceedings under section 147 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Permissibility of Initiating Proceedings under Section 147:The court examined whether the initiation of proceedings under section 147 of the Income-tax Act, 1961, for reversing an assessment order already passed on the consideration of materials on record, is permissible. The court noted that the Assessing Officer (AO) must record his 'reason to believe' to take action under section 147, whether it pertains to assessment years before or after April 1, 1989. The expression 'reason to believe' must be understood in the context of section 147, and the AO must record his reasons, which are open to scrutiny by higher courts.The court referred to various judicial pronouncements, including the apex court's decisions in Sheo Nath Singh and Lakhmani Mewal Das, which state that the belief must be that of an honest and reasonable person based on reasonable grounds, and there must be a live link between the material and the belief. The court also cited Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that under section 143(1)(a), no assessment is made, and there is no formation of opinion by the AO, thus no question of change of opinion arises when taking action under section 147.The court concluded that the AO's action under section 147 must be based on relevant and rational reasons, and the materials on which the AO forms his belief must have a bearing on the question of escapement of income.2. Justification of AO in Initiating Proceedings under Section 147:The court examined whether the AO was justified in initiating proceedings under section 147. The court noted that the AO had found that the assessee omitted to credit transport subsidies to its profit and loss account, instead crediting them in the reserve and surplus account, resulting in escapement of income. The AO issued notices under section 148 after concluding that this resulted in escapement of income within the meaning of section 147.The court referred to the amended provisions of section 147, which require only one condition to be fulfilled: the AO must have 'reason to believe' that income has escaped assessment. The court emphasized that there must be a live link between the materials and the belief, and the reasons must be held in good faith and cannot be based on extraneous or irrelevant considerations.The court found that the AO had reasons to believe that income chargeable to tax had escaped assessment, as the transport subsidies were not shown in the profit and loss accounts but in the reserve and surplus account. The court held that the AO's action was justified, as the reasons were material and relevant, and the AO took into consideration the relevant materials.Conclusion:The court set aside the common order dated September 16, 2005, passed by the Income-tax Appellate Tribunal, which had dismissed the appeals preferred by the Revenue on the grounds that the AO's action was based merely on a change of opinion and on materials already on record. The court remitted the matter to the Tribunal for its decision on whether the transport subsidy is an income chargeable to tax under the Act. The appeals were allowed with no costs.