TaxTMI 
TaxTMI 
2015 (2) TMI 213
X X X X Extracts X X X X
X X X X Extracts X X X X
....e event, there was a profit, the partners were entitled to receive interest on that capital @ 12% p.a. and, in the case of a negative capital balance, partners were to pay interest to the firm @ 12% on such negative balance. For the assessment year 2000-01, the petitioner filed his return of income showing a loss of Rs. 28,20,280/-. According to the petitioner, the loss was on account of the fact that the capital balance in various partnership firms became negative and the petitioner was obliged to pay interest @ 12% p.a. on such negative capital balance. The above return for the assessment year 2001-02 was taken up for scrutiny and a notice under Section 143(2) and under Section 142 of the Act was issued along with the questionnaire and the petitioner was required to reply to the show cause notice as well as to the questionnaire. One of the questions raised was that the petitioner had paid more interest than earned during the relevant year. The petitioner submitted his reply and explained the reasons for making the payment of interest to various partnership firm owing to the fact that his various partnership firms were reflecting a negative balance and that under the partnership ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esulting substantial business loss, it transpires that it is a case of diversion of business funds for non-business purpose." The assessing officer rejected the objections of the petitioner, on the ground, that the interest paid to the partnership firm are controlled and run by the family members/relatives of the petitioner and that such business entities are covered by the provisions of Section 40-A(2)(b) of the Act and, therefore, it is essential that a detailed investigation is to be made to ascertain the justifiability and reasonableness of such transaction, specially where exorbitant amount of interest was paid to the family concerned. In the counter affidavit, similar plea has been raised by the Income Tax Department, namely, that the partnership entity are controlled and run by the family members/relatives of the petitioner and that such partnership firms are covered by the provisions contained under Section 40-A(2)(b) of the Act. It was also submitted that paying exorbitant amount of interest to the partnership firm, which was running continuously in losses requires thorough investigation as no prudent businessman would like to be a loss sharing partner of such firm conti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The learned senior counsel further contended that the payment of exorbitant amount of interest to firms which were being run and managed by the family members and relatives of the petitioner was hit by Section 40-A(2)(b ) of the Act, which required investigation to ascertain the justifiability and reasonableness of such transaction and consequently, on this ground also the notice to re-assess the income was justified. The learned senior counsel further contended that the petitioner has an alternative remedy to contest the matter before the assessing officer and, if aggrieved, by the assessment order had a right to file an appeal and thereafter a second appeal and consequently, the remedy to file a writ petition under Article 226 was not an efficacious remedy. In support of his submission, the learned senior counsel relied upon a decision of the Supreme Court in Commissioner of Income-Tax and others vs. Chhabil Dass Agarwal, [2013]357 ITR 357 (SC) wherein the Supreme Court held that the writ petition should not have been entertained questioning the correctness of the reassessment order and the notice issued under Section 148 of the Act. Taking the plea of alternative remedy, we fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ITR 1, the Supreme Court held : "It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the Income Tax Officer can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income Tax Officer would be without jurisdiction. The important words under section 147 (a) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in comi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the court's investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts." From a perusal of the aforesaid, it is clear that where a notice is issued within four years from the end of the relevant assessment year, the jurisdiction of the Assessing Officer is conferred where he has reasons to believe that income chargeable to income tax on escaped assessment. It is settled law that the Assessing Officer having reasons to believe that there had been some omission or failure to disclose fully or truly all material facts necessary for the assessment must be based on some material facts which according to the Assessing Officer is based on some reasonable belief and which would have a material bearing on the question of under assessment. If there is no material for the formation of any belief or where the purported belief was nothing but a mere change of opinion, in that case, the Assessing Officer would have no jurisdiction to initiate proceedings u/s 147 and 148 of the Act. The Assessing Offic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad withdrawn the disallowance in respect of expenses on rent and depreciation of the guest house on the ground that since rent and depreciation were allowable u/S 30 and 32 of the Act, the same cannot be disallowed u/S 37 (4) of the Act. The Assessing Officer accepted the contention of the assessee in the original assessment order and accepted the withdrawal of the disallowance of guest house expenditure as submitted by the assessee in his revised return of income. Subsequently, a notice u/s 148 of the Act was issued on the ground that the tax audit report was not noticed by the Assessing Officer while passing the original assessment order. The Full Bench of the Delhi High Court held :- "We are unable to agree with the submission of Mr. Jolly to the effect that the impugned order of reassessment cannot be faulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the assessing officer had received information from an audit report which was not before the Income Tax Officer, but it is another thing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le 226 of the Constitution of India. The words "has reasons to believe" must not be arbitrary or irrational but must be based on reasons which are relevant and germane to the issue. The expression "reasons to believe" is not a subjective satisfaction on the part of the assessing officer. The belief has to be in good faith and must have a rational connection with the issue involved and should not be based on extraneous or irrelevant consideration. The formation of the required opinion and belief by the assessing officer is a condition precedent. Without such formation, the assessing officer will have no jurisdiction to initiate proceedings under Section 21 of the Act. The aforesaid view was also held by a Division Bench of this Court after considering various judgements of the Supreme Court in M/s S. K. Traders, Modi Nagar, Ghaziabad vs. Additional Commissioner, Grade-I, Trade Tax, Zone Ghaziabad and another, 2008 UPTC 392." and again held- "There is no quarrel with the aforesaid proposition. The reason to belief must be based on some rational basis for the Assessing Officer to form a belief that the whole or ....