2007 (1) TMI 657 - AT - Income Tax

Summary

The core legal questions considered in this judgment pertain to the validity and legality of reopening an income tax assessment under Section 147 of the Income Tax Act, 1961. Specifically, the issues addressed include:

1. Whether the reopening of the assessment under Section 147 was valid and based on sufficient material, particularly when the reopening was proposed under Section 147(b), which was no longer in existence at the time of reopening.

2. Whether the balance sheet seized during the search, particularly page No. 53 of Annexure A-9, constituted valid material to form a reason to believe that income had escaped assessment for the relevant assessment year.

3. Whether reopening the assessment on the basis of findings or assessments relating to subsequent assessment years is permissible.

4. Whether the Assessing Officer (AO) had properly recorded reasons and formed a bona fide belief prior to initiating reassessment proceedings as required under Section 148.

5. Whether the approval accorded by the Deputy Commissioner of Income Tax (Dy. CIT) for reopening was valid or was given in a mechanical manner without due application of mind.

6. Whether the AO could make additions beyond the specific grounds on which the reassessment was reopened.

Issue-wise Detailed Analysis

1. Validity of Reopening under Section 147 and Reference to Section 147(b)

The AO reopened the assessment relying on Section 147(b), a provision which ceased to exist with effect from 1st April 1989. The assessee contended that reopening under a non-existent provision was illegal and bad in law, relying on a Calcutta High Court judgment which held that proceedings initiated under Section 147(b) cannot be converted into proceedings under Section 147(a) unless conditions precedent are met. The AO's proposal to the Dy. CIT mentioned Section 147(b), but the Dy. CIT approved the reopening stating "Yes, it is a fit case".

The Court noted that the AO did not mention Section 147(b) in the reasons recorded for reopening and that the reopening was in fact under Section 147, which permits reassessment if the AO has reason to believe income has escaped assessment. The Court held that the erroneous reference to Section 147(b) in the proposal was a mere technical defect, which did not vitiate the reopening. The Court relied on the principle that if the conditions for reopening under Section 147 exist, the reopening is valid notwithstanding the erroneous invocation of a repealed subsection. Thus, this objection was rejected.

2. Reliance on Seized Balance Sheet (Page 53 of Annex. A-9) as Basis for Reason to Believe

The AO based the reopening on a seized document during search operations, specifically a balance sheet for the financial year relevant to the assessment year under consideration. This balance sheet showed assets exceeding liabilities by Rs. 3,16,800, indicating undisclosed income. The assessee argued that this document was a rough working or related to subsequent years and lacked corroboration from books of account or seized assets.

The Court examined the seized document and found it to be directly relevant to the assessment year. The Court noted that the difference in assets and liabilities could result from undisclosed profits or bogus liabilities. The AO had confronted the assessee's representative during the search about these documents, who did not deny their authenticity. The Court held that the seized balance sheet constituted sufficient material to form a reason to believe that income had escaped assessment. The Court emphasized the distinction between "reason to believe" and mere suspicion, requiring a rational nexus between material and belief. The seized document was found to have such nexus. Therefore, the reopening was held to be bona fide and valid.

3. Reopening Based on Subsequent Assessment Years

The assessee argued that reopening the assessment based on findings or assessments in subsequent years was impermissible, relying on judgments that held reopening must be based on information specific to the year under consideration and not on mere suspicion or inferences from subsequent years.

The Court distinguished the facts, noting that in this case, the reopening was based on specific seized material directly related to the assessment year, not merely on subsequent assessments. The Court also referred to authoritative Supreme Court and High Court decisions which held that reopening based on fresh and specific information obtained in subsequent assessments is valid if it exposes the concealment or falsity of the original assessment. The Court concluded that reliance on seized material found during search operations, even if discovered later, justified reopening. Hence, this objection was also rejected.

4. Requirement of Recording Satisfaction and Reasons Prior to Reopening

The assessee contended that the AO failed to record proper reasons or satisfaction before issuing notice under Section 148, relying on a Rajasthan High Court decision where reasons were recorded after notice issuance and were held invalid.

The Court found that in the present case, reasons were recorded before issuing the notice, as evidenced by the forwarding letter to the Dy. CIT and the approval date preceding the notice date. The Court held that the mere incorrect reference to assessment years in the reasons (mentioning 1991-92 onwards instead of the relevant year) was not fatal, as the seized document itself related to the relevant year. The Court distinguished the cited case on facts and held that the AO had complied with the requirement to record reasons before reopening. Thus, this ground was rejected.

5. Validity of Approval by Dy. CIT

The assessee argued that the Dy. CIT's approval was mechanical and without application of mind, relying on a Punjab & Haryana High Court decision where approval was held invalid due to non-compliance with statutory conditions.

The Court noted that the reopening was not challenged on the ground that the income escaping assessment was below the statutory threshold requiring approval. The Dy. CIT's approval was based on the proposal containing specific amounts and reasons. The Court held that the approval could not be treated as mechanical merely because of the erroneous reference to Section 147(b). Section 292B of the Act allows curing such defects. Therefore, the approval was valid and this objection was dismissed.

6. Scope of Additions in Reassessment Proceedings

The assessee contended that the AO made additions beyond the specific ground for reopening, which was illegal. The AO reopened on the basis of difference in assets and liabilities of Rs. 3,16,800 but made an addition of Rs. 2,55,179 based on undisclosed profits shown in the seized balance sheet.

The Court examined the seized balance sheet and found that the difference in assets and liabilities could arise from undisclosed profits or other adjustments such as bogus liabilities. The addition made by the AO represented the suppressed profit portion of the difference and was thus directly related to the ground for reopening. The AO also made additions for sundry creditors, deposits, old stock differences, etc., all based on the same balance sheet. The Court held that the AO could assess or reassess such income which comes to his notice subsequently during the reassessment proceedings under amended Section 147, which allows reassessment of other income chargeable to tax discovered during proceedings. However, the Court emphasized that the initial ground for reopening must result in addition before other income can be assessed. Since the addition on the ground of suppressed profit was made, the AO was justified in making related additions. This plea was rejected.

Legal Framework and Precedents

The Court extensively referred to Section 147 of the Income Tax Act, both pre- and post-amendment, emphasizing the requirement of "reason to believe" that income chargeable to tax has escaped assessment. The Court relied on Supreme Court decisions such as HO v. Lakhmani Mewal Dass and Ganga Saran & Sons (P) Ltd. v. ITO, which clarified that "reason to believe" requires a rational nexus between material and belief, and is stronger than mere suspicion.

Further, the Court distinguished judgments relied upon by the assessee, clarifying that reopening based on fresh and specific information obtained subsequently is valid, citing Raymond Woollen Mill's Ltd. v. ITO, Ess Kay Engineering Co. (P) Ltd. v. CIT, and Shri Pal Jain v. HO.

The Court also noted the legal position that the AO must record reasons before issuing notice under Section 148 and that approval by the superior officer must be based on due application of mind, but errors in citing repealed provisions are curable under Section 292B.

Regarding scope of additions, the Court referred to judgments holding that the AO may assess other escaped income discovered during reassessment proceedings, provided the original ground for reopening results in addition.

Conclusions

The Court concluded that:

• The reopening of assessment under Section 147 was valid and based on sufficient material, despite the erroneous reference to Section 147(b).
• The seized balance sheet was a valid and direct basis for forming reason to believe that income had escaped assessment.
• Reopening on the basis of specific information obtained during subsequent assessment years or search is permissible.
• The AO complied with the statutory requirement of recording reasons prior to issuing notice under Section 148.
• The Dy. CIT's approval was valid and not merely mechanical.
• The AO was justified in making additions related to the ground for reopening and other income discovered during reassessment proceedings.

Accordingly, the Court upheld the order of the CIT(A) sustaining the reopening and dismissed the assessee's grounds challenging the validity of reassessment initiation.

Significant Holdings

"The expression 'reason to believe' used in Section 147 has special significance. It does not mean 'reason to suspect'. It is reasonable belief of a honest and reasonable person based upon reasonable grounds... The reasons for the formation of the belief contemplated under Section 147 necessary for reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief."

"The mere fact that Section 147(b) was erroneously mentioned in the proforma would not vitiate the initiation of reassessment proceedings for the assessment year under consideration."

"If the AO has initiated the reassessment proceedings in respect of income that has escaped assessment, he may 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."

"The approval accorded by the Dy. CIT, Central, cannot be treated as mechanical merely because of the erroneous mention of Section 147(b) in the proposal. Section 292B will take care of such defect."

"The AO was justified in making the addition of Rs. 2,55,179 representing suppressed profit shown in the seized balance sheet which was directly related to the ground on which the assessment was reopened."