TaxTMI 
TaxTMI 
2014 (1) TMI 129
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee is in the business of agriculture and allied activities. The return was processed under section 143(1) and subsequently, assessment was completed under section 143(3) by Order dated 27.8.2004. On 7.01.2009 Shri B. Ramalinga Raju, the then Chairman of Satyam Computers Ltd. confessed to having fudged the accounts of that Company over the last so many years with an intention to defraud the public at large. Shri B. Ramalinga Raju and his family members have floated more than 350 companies and the assessee-company is one of them. As per the annual report of the assessee-company for the year 2001-02, Smt. B. Jhansi Rani and Sri N. Rama Raju were its Directors. The effective share-holders and the controlling Directors in all the 350 plus companies are the family members of Sri B. Ramalinga Raju. With this scenario in back ground, the cases already centralized with the ITO (OSD), Central Range-1, Hyderabad and the present case was re-opened on the reason that the fudging of accounts by Sri B. Ramalinga Raju would have a direct impact on this case and the revenues recorded and the expenditure debited in this case are manipulated to evade Income Tax. Accordingly, notice u/s. 148 of the I.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the expiry of 4 years, therefore, the Assessing Officer has not reopened the assessment on valid grounds. The Authorized Representative also has furnished the following written submission which is reproduced as under for the sake of convenience: "i) The appellant brings to the notice of the Hon'ble Commissioner of Income Tax, the judicial proposition of the apex court in the case of CIT vs. Kelvinator of India Ltd. (reported in 320 ITR 561) where in it was held that in a case where there is application of mind on the part of the assessing officer in the original assessment with the relevant material having been made available, there can be no reassessment since finality is reached, on the completion of the original assessment. The Supreme Court, after observing the changes and amendments brought about in section 147 from time to time, held at page 564 as under :- "However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the assessing officer to reopen assessments on the basis of "mere change of opinion", which cannot be per-se reason to reopen. We must also keep in mind the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore proceeding to initiate action u/s. 147. If either of these conditions is not satisfied, notice issued would be invalid. In this context it is necessary to point out that with regard to the second condition the requirement is not that omission or failure on the part of the assessee and concealment of income should be established before initiation of action but it is enough if the officer should have reason to believe that income has escaped assessment and that too on account of failure and omission. Non-existence of the above condition will make the notice invalid." ii) Applying the ratio laid down by the judicial forums, the appellant's case, there was no failure to disclose fully and truly all material facts relevant for assessment. The assessment records reveal that the assessment was completed U/s.143(3) of the Act. The entire information had been placed by the appellant before the assessing officer in the manner as directed to be submitted at the time when the original assessment was made. The assessing officer had applied his mind as noticeable from the original assessment records. The reopening of assessment on the same set of facts, (a) without proper application of min....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the case of Indian Oil Corporation vs. ITO (reported in 159 ITR 956) "that the reason to believe is not the same thing as reason to suspect". The assessing officer's belief is not supported by any evidence and what ever has been mentioned in the reasons recorded fall within the realm of suspicion. It is noticeable from the appreciation of the reasons recorded that the assessing officer proceeded on suspicion to observe that income of the appellant had escaped assessment and that by itself in law cannot constitute a reason to believe for invoking the provisions of section 147 of the I. T. Act. The proceedings evidently have been initiated for the purpose of an investigation. It is the settled law that as per the judicial decisions, the pro visions contained in section 147 cannot be used as a tool or as panoply, and thereby enabling to enable the assessing officer to conduct an investigation. The assessing officer ought to have appreciated that it is not that any and every material, however vague and indifferent or distant, remote and farfetched would warrant the formation of the belief relating to escapement of income of the appellant from assessment. In the final analysis, in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....VII, Hyderabad in sustaining the assessment made under section 143 read with 147 of the I.T. Act, 1961 is unsustainable both on facts and in law. 2. The learned CIT(A)-VII, Hyderabad, failed to note that the opinion formed by the Income Tax Officer and the recording of reasons before the issue of Notice u/s. 148 had absolutely no nexus with the issue of the reopening of the assessment and framing of the assessment and therefore, the issue of Notice u/s. 148 and the assessment made thereon is invalid, without jurisdiction, unsustainable and needs to be quashed. 3. The learned CIT(A)-VII, Hyderabad, erred in holding that the Assessing Officer had valid reasons to reopen the assessment of the appellant company to examine the veracities and financial implication between the appellant company and M/s. Satyam Computers Services Ltd. 4. The learned CIT(A)-VII, Hyderabad failed to note that an assessment made u/s. 143(3) cannot be reopened u/s. 148 beyond a period of four years as there is no failure on the part of the appellant to disclose fully and truly all the material facts relevant for the assessment made originally and therefore ought to have quashed the reassessment proceedings.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....des both non-assessment or under-assessment but it is mandated that "Reasons to believe" must necessarily show, indicate and communicate why and for what grounds/ cause any income has escaped assessment. Reasons recorded must be germane, pertinent and disclose prima facie belief that income has escaped assessment. Reasons to believe though subjective to this extent must satisfy this test. Relevancy of reason can be and should be established. When the reasons do not show any nexus or connection with the allegation of underassessment they fall in the realm of suspicion, surmise and conjecture. Reasons to believe must have a rational connection and should be relevant for the formation of a belief regarding escapement of income and should not be extraneous or irrelevant, otherwise they will be considered as invalid since they do not meet the statutory preconditions/prerequisites. The policy of law is that there should be finality in all legal proceedings. Thus stale or irrelevant issues should not and cannot be a ground to reactivate closed and concluded proceedings. The language of Section 147 of the Act stipulates that there should be reasons coupled with the belief and both the cond....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under s. 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid". 9.3. The learned Counsel relied on the decision of CIT vs. Jet Airways (I) Ltd. (2011) 331 ITR 236 (Bom.) wherein it has been held as follows : "Whereupon the issuance of a notice under s. 148 r/w s.147, the AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice; however, if after issuing a notice under s. 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tty vs. ITO (1975) 101 ITR 385 (AP), the Andhra Pradesh High Court analyzed Chhugamal Rajpal (supra) and distinguished it on the ground that since the ITO had given reasons for issuing a notice to the assessee, the mere fact that the CIT recorded "Yes" in respect of the question "Whether the CIT is satisfied that it is a fit case for issue of notice under s. 148" would not by itself vitiate the proceedings. What follows from this is that if there are reasons recorded for issuing a notice and the CIT applies his mind to those reason and even if he merely says "Yes" in respect of his satisfaction, that is good enough; but if reasons are not recorded by the AO (as in Chhugamal Rajpal) then in any case the proceedings would be vitiated, and even if the CIT says "Yes" in the appropriate column, that would not save the notice from being vitiated". 13. .. . . 14. At this stage, it is worth recalling that in Ganga Saran & Sons (P) Ltd. vs. ITO & Ors. (1981) 22 CTR (SC) 112 : (1981) 130 ITR 1 (SC), the Supreme Court noted that the expression "reason to believe" as occurring in s. 147 of the Act is stronger than the expression "is satisfied". In otherwords, mere satisfaction of the AO for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IT--Therefore, the reopening of assessment was bad in law." ".... The assessing authority cannot act on the dictates of the CIT, who had directed him to reopen the concluded assessment for the year 1991-92, as that, does not constitute an information within the scope of s. 147. Apart from this, the submission that the sanction itself was defective, for the reason that the sanction was from the CIT, whereas the authorized authority for sanction was only the Jt. CIT, particularly, as the CIT will have to act as the appellate authority against the orders passed by the assessing authority, is only reiterating the circumstance that the reopening was bad in law". "Assessing authority having acted on the dictates of the CIT who had directed him to reopen the assessment and the Tribunal having recorded a finding that there was no application of mind on the part of the assessing authority, the reopening of assessment was bad in law; reopening was invalid also for the reason that the sanction was obtained from CIT whereas the authorized authority for granting the sanction is only the Jt. CIT". "11. . . . . with this view that the assessing authority cannot act on the dictates of the CIT, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R 500 while enunciating the law on the width and ambit of the provision of section 147 of the Act stated in no uncertain terms stated that the word 'reason' in the phrase 'reasons to believe' would mean cause or justification. In other words if the Assessing Officer has cause or justification to know or suppose that income had escaped assessment it can be said to have 'reason to believe' that income had escaped assessment. The Supreme Court went on to say that the expression cannot mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The Court also observed that the final outcome of the proceedings is not relevant. In other words at the initiation stage what is required is reason to believe and not an established fact of escapement of income. The test thus laid down by the Supreme Court is that at the stage of issue of notice the only aspect to be examined is whether there was relevant material before the Assessing Officer, based on which a reasonable person could have formed the requisite belief. One is not concerned at this state whether the material would conclusively prove escapement and such a formation is within the realm ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. (2007) 294 ITR 310 affirmed." "147. Income escaping assessment.--If the AO has reason to believe that any income me chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year)." 4. On going through the changes, quoted above, made to s. 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the AO to make a back assessment, but in s. 147 of the Act (w.e.f. 1st April, 1989), they are given a go by and only one condition has remained, viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reasons to be recorded by him in writing, is of the opinion'. Other provisions of the news. 147, however, remain the same." 5. For the afore-stated reasons, we see no merit in these civil appeals filed by the Department, hence, dismissed with no order as to costs 12. We also find that CIT(A) erred in holding that the Assessing Officer had valid reasons to reopen the assessment of the assessee-company to examine the veracities and financial implications between the assessee- company and M/s. Satyam Computer Services Limited. We rely upon the decision of the Hon'ble Supreme Court in the case of Ganga Saran & Sons P. Ltd. vs. ITO and others (supra) for the proposition that if there is no rational nexus between the "reasons" and the "belief", so that on such reasons the A.O. cannot have reason to believe that any part of the income of the assessee has escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts, the notice issued by the A.O. is to be struck as invalid. 13. We also rely on the decision of Sarthak Securities Co. P. Ltd. vs. ITO (2010) 329 ITR 110 wherein it has been held as follo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n' is removed, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an inbuilt test to check abuse of power by the A.O. Hence, the A.O. has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief." 17.1. Further, para 32 at page 483 in the case of S. Ranjit Reddy (supra) reads as follows : "Same view was taken by the Third Member Mumbai Bench in the case of Telco Dadajee Dhackajee Ltd. vs. Dy. CIT, ITA.No.4613/Mum/2005, dated 12th May, 2010. Further same view was taken by Delhi High Court in the case of CIT vs. Orient Crafts Ltd. (2013) 29 taxmann.com 392 and also by Gujarat High Court in the case of Inductotherm (India) (p) Ltd. v. Dy. CIT in Special Civil Application 858 of 2006 dated 6.8.2012. Further, Bombay Bench in the case of Delta Airlines Inc. vs. ITO (International Taxation) (2013) 33 taxmann.com 192 (Mum.) 17.2. Further, at page 485 it is stated as follows : "When the matter reached to the Tribunal. the learned Judicial Member took e view that there was no fres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngible material justifying his reason to believe that income had escaped assessment. Since there was no such tangible material before the AO from which he could entertain the belief that income of the assessee chargeable to tax had escaped assessment, the Third Member held that reassessment proceedings initiated by the Assessing Officer were liable to be quashed on the ground that there was no tangible material before the Assessing Officer even though the assessment was completed originally u/s. 143(1). In our opinion, the Third Member decision of the Tribunal in the case of Telco Dadajee Dhackjee Ltd. (supra) is squarely applicable in the present case and respectfully following the same, we hold that the initiation of reassessment proceedings by the Assessing Officer itself was bad in law and the reassessment completed in pursuance thereof is liable to be quashed being invalid. We Order accordingly and allow ground No. 1 of the assessee's appeal. 18. To conclude, (i) The recording of reasons before the issue of notice under section 148 has absolutely no nexus with the assessment made. (ii) That the assessment made under sec.143(3) cannot be reopened under sec. 148 beyond period....