Information from Investigating Wing cannot be sole basis for forming belief that income escaped assessment – High Court
In a recent judgment, Hon’ble Delhi High Court has held that information received from Investigating Wing cannot be the sole basis for forming a belief that income of the assessee has escaped assessment. It was incumbent upon the Assessing Officer to take further steps, make further enquiries and garner further material and if such material indicate that the income of the assessee has escaped assessment and then form a belief that the income of the assessee has escaped assessment.
ABCAUS Case Law Citation:
4244 (2024) (08) abcaus.in HC
Important Case Laws relied upon:
ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC)
In the instant case, the Petitioner/assessee had filed a Writ Petition with prayer to set-aside the impugned notice issued u/s 148 of the Income Tax Act, 1961 (the Act) by the Income Tax Department/Revenue.
The Petitioner was a company engaged in the business of freight forwarding. In consideration of the services performed in the business carried on by the petitioner company, customers used to make payment of the service charges and other charges, to the petitioner company, both by cheques and/or through banking channels including electronic transfers and in some cases by cash and in many cases by the combination of cheques and cash.
The case of the assessee was reopened under Section 147 of Act by issuing notice under Section 148 of the Act on the ground that income has escaped assessment. The Petitioner company after filing the return of income in response to notice under Section 148 of the Act, requested for the reason recorded, which was supplied.
As per the reasons recorded it had been stated that on the sole basis of information received from the Deputy Director of Income Tax (DDIT), the AO formed ‘reason to believe’ that income to the extent of cash deposited in the bank account of the petitioner company has escaped assessment.
The petitioner filed objections to the reopening of the assessment submitting, inter alia, that “reason” recorded is solely based on the DDIT’s letter and there is no independent exercise of quasi-judicial power on the part of the Assessing Officer and that the belief of escapement of income was in fact the belief of DDIT and not of the respondent Assessing Officer.
It was also submitted by the petitioner in its objections that the cash deposits in the bank account, being part of books of accounts and being out of service charges income, which had already been accounted for as income in the profit and loss account, could not have led for forming ‘reason to believe’ of escapement of income. It was also submitted in the objections that there is no date on the reason recorded and hence it cannot be ascertained as to whether the reason was recorded prior to the issue of notice under Section 148 of the Act.
However, the objections were disposed without dealing with any of the objections raised by the petitioner company as to the reopening of the assessment.
The Hon’ble High Court observed that the power to reopen the assessment under Section 147 is a potent power and cannot be exercised lightly. Said power cannot be invoked casually or mechanically. Formation of belief by the Assessing Officer that income has escaped assessment is the heart of the provision. The reasons recorded must be based on some tangible material and the same should be evident from the reading of the reasons and this constitutes the mandatory requirement of Section 147 of the Act.
The Hon’ble High Court stated that it is well settled through number of decisions of the Hon’ble Supreme Court and Hon’ble High Courts that concluded assessments cannot be reopened merely on suspicion and the Assessing Officer must have “reason to believe” that income has escaped assessment and this is quite different from merely having a reason to suspect.
The Hon’ble High Court noted that in the instant case, in the reasons recorded, the Assessing Officer after reproducing the information received from DDIT, (Investigation) Unit, drew the conclusion of escapement of income.
The Hon’ble High Court observed that the Hon’ble Supreme Court had explained that expression “reason to believe” would mean justification to know or suppose that income had escaped assessment. While, it is correct that it is not necessary for the Assessing Officer to finally ascertain whether income had escaped assessment, nonetheless, the Assessing Officer must have sufficient cause to believe that it has.
The Hon’ble High Court noted that in the instant case, there was no “close nexus” or “live link” between tangible material and the reason to believe that income has escaped assessment. The information received from the Investigating Unit of the Revenue cannot be the sole basis for forming a belief that income of the assessee had escaped assessment. Having received information from the Investigating Wing, it was incumbent upon the Assessing Officer to take further steps, make further enquiries and garner further material and if such material indicate that the income of the assessee had escaped assessment and then form a belief that the income of the assessee has escaped assessment.
The Hon’ble High Court further noted that clearly, in this case, the Assessing Officer had not acquired any material to form such belief. There was not even a line of reason which may justify the formation of the belief.
The Hon’ble High Court opined that reopening of assessment for the assessment year in question by the Assessing Officer did not satisfy the requirement of law in terms of Section 147 & 148 of the Act.
Consequently, the writ petition was allowed. The impugned reassessment notice issued under Section 148 of the Act and any further proceedings were set aside.
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