2011 (7) TMI 361 - HC - Income Tax

Income Escaped Assessment - Allotment of shares - Whether the proceedings initiated under Section 147/148 of the Act are invalid for want of jurisdiction as the pre-conditions for initiation of the said proceedings as stipulated in Section 147 of the Act are not satisfied - Swetu Stone Pvt. Ltd. had applied for and was allotted shares in the petitioner company on payment by cheque of Rs.5 lacs - All information as enclosed as Annexure has been referred - This is the only material relied upon by the Assessing Officer - The said Annexure has been quoted - In this connection notice that M/s Swetu Stone Pvt. Ltd. is an incorporated company and the petitioner has pleaded and stated that the said company has a paid-up capital of Rs.90 lacs - The company was incorporated on 4th January 1989 and was also allotted a permanent account number in September 2001 - There is no dispute to this extent - As per the judgments of the Delhi High Court in Commissioner of Income Tax versus SFIL Stock Broking Limited (2010 (4) TMI 102 - DELHI HIGH COURT) decided against the assessee - Hence M/s Swetu Stone Pvt. Ltd. is a non-existing and a fictitious entity/person - Therefore the present writ petition is allowed and writ of certiorari is issued quashing the proceedings u/s 148 of the Act.

Summary

Issues Involved:
1. Validity of the proceedings initiated under Section 147/148 of the Income-Tax Act, 1961.
2. Requirement of "reason to believe" for income escaping assessment.
3. Adequacy of the information and evidence used to justify the reopening of assessment.
4. Proper application of mind by the Assessing Officer and Commissioner in granting approval.
5. Relevance of previous judgments and their applicability to the present case.

Detailed Analysis:

1. Validity of the proceedings initiated under Section 147/148 of the Income-Tax Act, 1961:
The petitioner challenged the notices issued under Section 148 of the Income-Tax Act on the grounds that the pre-conditions for issuing such notices were not satisfied, thus making the Assessing Officer's actions beyond jurisdiction. The court examined whether the initiation of proceedings under Section 147/148 was valid, focusing on whether the pre-conditions stipulated in Section 147 were met.

2. Requirement of "reason to believe" for income escaping assessment:
Section 147 requires the Assessing Officer to have "reason to believe" that any income chargeable to tax has escaped assessment. This belief must be recorded in writing and must be based on material evidence. The court emphasized that the sufficiency of reasons is not for the writ court to decide, but the existence of belief is subject to scrutiny. The belief must be bona fide and based on specific, relevant information. The court noted that a notice under Section 148 could be quashed if the belief is not bona fide or based on vague, irrelevant, and non-specific information.

3. Adequacy of the information and evidence used to justify the reopening of assessment:
The court reviewed the reasons recorded by the Assessing Officer, which were based on information received from the Director of Income-Tax (Investigation) indicating that the petitioner had introduced unaccounted money through accommodation entries. The court found the reasons to be extremely scanty and vague, lacking reference to any specific document or statement. The court concluded that the information provided did not establish a prima facie case of income escaping assessment and that the reasons recorded did not satisfy the requirements of Section 147.

4. Proper application of mind by the Assessing Officer and Commissioner in granting approval:
The court observed that the Assessing Officer did not independently apply his mind to the information received and mechanically accepted the vague information provided. Similarly, the Commissioner gave approval without independently verifying the information. The court cited previous judgments, including those of the Supreme Court and High Courts, which emphasized the necessity for the Assessing Officer to independently assess the information and form a belief based on material evidence.

5. Relevance of previous judgments and their applicability to the present case:
The court referred to several judgments, including ITO vs. Lakhmani Mewal Das, Ganga Saran and Sons Private Limited vs. ITO, and Phool Chand Bajrang Lal vs. ITO, to highlight the principles governing the reopening of assessments. The court found that the present case fell within the category where the information was too general and vague to justify reopening the assessment. The court also distinguished the present case from AGR Investment Limited vs. Additional Commissioner of Income Tax, noting that M/s Swetu Stone Pvt. Ltd. was not a non-existing or fictitious entity.

Conclusion:
The court allowed the writ petition, quashing the proceedings under Section 148 of the Income-Tax Act, as the reasons recorded by the Assessing Officer did not satisfy the pre-conditions of Section 147. The court emphasized the necessity for specific, relevant, and material evidence to justify the reopening of assessments and the proper application of mind by the Assessing Officer and Commissioner.