TaxTMI 
TaxTMI 
TaxTMI 
2004 (8) TMI 23
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....sment year 1973-74. By issuing the said notice, the Income-tax Officer proposed to reopen the assessment of the appellant-company for those three years. The Income-tax Officer issued those notices under section 148 of the Income-tax Act on grounds which are identical in nature. The said notice under section 148 of the Act was issued on the ground as follows: "1. On the basis of information available in (a) the auditors' observations in the annual reports of Peerless for 1986 (assessment year 1987-88) and 1987-88 (15 months ending on March 31, 1988, relevant to the assessment year 1988-89); (b) the Supreme Court's observations in the case of RBI v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 ; and (c) the report of the Reserve Bank of India on inspection of the books of Peerless conducted in 1979, the following facts of accounting of income and liabilities of the assessee-company came to light. (1) The Social Welfare Scheme Fund is in excess of the total liability of the company towards the certificate holders. (2) The company has been retaining in the fund amounts forfeited on surrender of certificates and liabilities already provided thereon on a....
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....e reason to believe that, by reason of the omission and failure on the part of the assessee, the Peerless General Finance and Investment Co. Ltd., to disclose fully and truly all material facts necessary for its assessment for the assessment year 1981-82, income exceeding Rs. 50,000 has escaped assessment for that year." So it appears from the said notice that the Income-tax Officer preferred to issue the same on the basis of the information available to him and those are: (a) Auditor's observation in the annual reports of Peerless for the assessment years 1987-88 and 1988-89; (b) The Supreme Court's observation in the case reported in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663 ; and (c) The report of the Reserve Bank of India on inspection of the books of Peerless conducted in 1979. Thus it is clear that the Assessing Officer's reason to believe that there was suppression of income by the appellant-company was on the basis of those three items mentioned above. In this respect, it is relevant to look into the provisions of section 147 regarding income escaping assessment. Section 147 of the Income-tax Act, provides: "If, ....
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.... of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice." So the proviso to section 151 provides that in our case, the sanction of the Chief Commissioner or Commissioner is required. Keeping all these things in mind let us now see whether the Assessing Officer was justified in issuing notice to the appellant-company for the purpose of reopening the assessment of the said company for the years 1981-82, 1980-81 and 1973-74. Law in this respect has been clearly laid down in the case reported in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191. At page 199 of the said decision, the hon'ble Supreme Court has clearly laid down the conditions which are required for the Assessing Officer for reopening of any assessment for a particular year. The decision of the hon'ble apex court runs as follows: "To confer jurisdiction under this section to issue notice in respect of assessments beyond the period of four years, but within a period of eight years, from the end of the relevant year two conditions have theref....
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....learly laid down in the said section that the Assessing Officer can reopen the assessment of a particular year if he has reason to believe that there was omission or failure on the part of an assessee to make a proper return under section 139 of the Act for any particular assessment year. So the main thing is that, the Assessing Officer must have reason to believe that there was omission or failure on the part of the assessee to disclose fully its income. In the decision reported in Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC), the meaning of the word "has reason to believe" has been elaborately discussed. In the said decision, the hon'ble court held to the effect : "The important words under section 147(a) are 'has reason to believe' and the 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 coming to the belief, but the court can certainly examine ....
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....Reserve Bank of India and inspection of the books of Peerless conducted in the year 1979. Let us now discuss the present case on the basis of legal principles as discussed above. We have already pointed out that the Assessing Officer has got enough 11 power for reopening the assessment of a particular company for a particular year, provided he has reason to believe that the income of the asses-see for a particular year escaped assessment due to suppression of the said income by the assessee concerned. It is the admitted position that three reasons were cited by the Assessing Officer in issuing notice under section 148 of the Income-tax Act in the name of the appellant-company. Let us now look into those reasons and see how far the Assessing Officer was justified in issuing the said notice. One of such reasons was the Supreme Court's observation in the case of Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. [1987] 61 Comp Cas 663. We have perused the said judgment of the hon'ble Supreme Court wherein it has been observed: "... we have no information about the findings in the course of the inspection. Evidently, nothing objectionable was found. This is appa....
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....t was for the Reserve Bank of India or the Central Government to take action or to grant permission as may be provided under the Foreign Exchange Regulation Act, 1973. The hon'ble apex court clearly held (headnote) : "That, however, could not be a ground for the Income-tax Officer to assume jurisdiction to start reassessment proceedings either under section 147(a) or section 147 (b) of the Act on the ground that it would be 'in consequence of information' in his possession in the shape of these two letters." The same analogy can be drawn so far as the case in our hand is concerned. If there is any unhealthy practice being followed by the appellant-company, then in that event it is for the Central Government or the Reserve Bank of India to take appropriate action against the company. But simply due to this observation, it cannot be said that the appellant-company suppressed its income for the relevant assessment year. As such, we are of the opinion that the Assessing Officer was not justified in issuing the notice under section 148 of the Income-tax Act on the basis of the observation of the hon'ble Supreme Court in the case cited above. The Assessing Officer further preferred to i....
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.... notice for reopening the assessments on the basis of the auditor's observation in the annual reports of Peerless for the year 1986 (1987-88). It appears that on the basis of the said observation of the auditor, the Assessing Officer proposed to reopen the assessment for the years 1980-81,1981-82 and for the assessment year 1973-74. The copy of the said auditor's report has been filed in connection with this hearing. It appears that nowhere in the auditor's report it was stated that there was suppression of material information in respect of the account of those three years. The observation of the auditor for the assessment year 1987-88 cannot have reasonable nexus or live link for the account statement as filed by the assessee in respect of the years 1973-74, 1980-81 and 1981-82. Nowhere in the auditor's report does it appear that it has been mentioned therein that there was misstatement or suppression of facts in respect of the return filed by the company in respect of those three years. If we look into the auditor's report then it will appear that simply some discrepancies have been pointed out in the said report. But that does not mean that there was suppression of material fac....
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.... the case reported in 159 ITR (SC) then it will appear that the hon'ble Supreme Court was of the opinion that on the basis of the auditor's report alone, it could not be said that the assessee had failed to disclose fully and truly all the basic facts at the time of the original assessment for the relevant assessments years. Moreover, we have already pointed out that nowhere in the auditor's report it was mentioned therein that there was suppression of material facts and the assessee failed to disclose its income fully and truly for a particular year. The auditor's report can at best be taken into consideration for the particular year for which the audit was done. But the said report cannot be the basis of the formation of the reasonable belief of the Assessing Officer in respect of the accounts for earlier years, as claimed by the learned advocate for the Revenue. So, on the basis of the said auditor's report, in our opinion, the assessment of the appellant-company for the years 1973-74, 1980-81 and 1981-82 cannot be reopened. The learned advocate for the Revenue further argued that in respect of 15 the impugned notice the appellant-company has got an alternative forum for redres....
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....y held that there is no material which have a rational connection or a live link or a direct nexus with the formation of the requisite belief under section 147(a) of the Income-tax Act as laid down in the decision reported in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC). The learned judge was of the opinion that it would be sufficient for the Assessing Officer if he was prima facie satisfied about the alleged suppression of material fact by an assessee. In this respect he preferred to rely upon the auditor's report and was of the opinion that as the Assessing Officer was prima facie satisfied about the suppression of the material fact so he was justified in issuing such notice for the purpose of reopening the assessment. We regret we cannot agree with this observation. The law is now well settled by the hon'ble apex court, as discussed above, that the reason for the formation of the belief must have a rational connection with or relevant bearing with the information received. Rational connection, postulates that there must be direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of the belief that there has been ....