2009 (9) TMI 572 - HC - Income Tax

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

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 ... Reason to believe - escaped assessment - reopening assessment under section 147 - intimation under section 143(1)(a) not an assessment - change of opinion - Explanation 2 to section 147Intimation under section 143(1)(a) not an assessment - reopening assessment under section 147 - change of opinion - Whether initiation of proceedings under section 147 was impermissible because the assessments had been completed under section 143(1) and the reopening amounted to a prohibited change of opinion - HELD THAT: - The Court accepted the proposition that after the 1989 amendment an intimation under section 143(1)(a) is not an assessment and no formation of opinion by the Assessing Officer takes place at that stage. Consequently, the bar of 'change of opinion' that applies where a prior assessment order has been passed under the pre-amendment scheme does not automatically preclude action under section 147 post-amendment. The amended section 147 requires only that the Assessing Officer has 'reason to believe' that income has escaped assessment; such belief may be formed even on material already placed before the Assessing Officer with the original return, provided the statutory conditions (including the proviso) are satisfied. The Court relied on the apex court's decision in Rajesh Jhaveri Stock Brokers P. Ltd. to hold that formation of belief under section 147 may be for whatever reason and that there is no finality to the assessment at the intimation stage under section 143(1)(a). Accordingly, reopening merely on materials already on record does not ipso facto amount to an impermissible change of opinion where the statutory test for 'reason to believe' is otherwise met. [Paras 16, 17, 19, 20]Reopening under section 147 was not impermissible merely because the intimation under section 143(1)(a) had been issued; the Assessing Officer could form 'reason to believe' even on materials already filed, subject to the proviso to section 147.Reason to believe - escaped assessment - Whether the Assessing Officer's recorded reasons for initiating proceedings under section 147 were legally adequate in the present cases - HELD THAT: - The Court examined the Assessing Officer's orders and held that the requisite 'reason to believe' must be rationally connected to the materials and must appear from the order itself. Judicial scrutiny can determine whether relevant materials existed to form the belief, but the court will not ordinarily probe the sufficiency of reasons beyond their material relevancy. In the present cases the orders disclosed the material basis of the belief - namely, that transport subsidies were reflected in the reserve and surplus account instead of the profit and loss account - and the Assessing Officer did not act on extraneous or irrelevant material. The Assessing Officer is not required at the stage of forming belief to finally ascertain facts by legal evidence; that is a later stage in the proceedings. [Paras 13, 14, 18, 21]The reasons recorded in the reopening orders satisfied the requirement of being material and relevant; the reopening was not vitiated for want of recorded reasons.Explanation 2 to section 147 - escaped assessment - Whether the question of taxability of the transport subsidy was finally decided by the Tribunal - HELD THAT: - The Court observed that the Tribunal had decided the appeals only on the two preliminary grounds (change of opinion and reliance on materials already on record) and had not gone into the substantive question whether the transport subsidy constituted income chargeable to tax. Because the merits on taxability were not examined below, that issue required fresh adjudication by the Tribunal. The Court therefore set aside the Tribunal's common order insofar as it rested on those two grounds and remitted the matter for decision on the substantive issue of taxability of the subsidy. [Paras 22]The question whether the transport subsidy is income chargeable to tax is remitted to the Tribunal for fresh consideration on merits.Final Conclusion: The Tribunal's common order dismissing Revenue's appeals is set aside insofar as it held reopening was barred as a change of opinion or because the materials were on record; the Assessing Officer could validly initiate proceedings under section 147 on the recorded reasons and within time. The case is remitted to the Tribunal to decide on the substantive question whether the transport subsidy is income chargeable to tax. 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.