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TMI Blog2004 (1) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... uiries which revealed that transactions with the above mentioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. ITO [1993] 203 ITR 456 (SC)". 1.2 It is seen from para 3 from the consolidated appellate order for assessment years 1990-91 to 1994-95 that reopening of the assessments for assessment years 1990-91 to 1993-94 has been held to be bad in law and accordingly the reopened assessments have been cancelled. The CIT(A) has taken the following grounds for doing so:- (i) In the reassessment order no escaped income has been taxed. The Assessing Officer has rejected the books of account on the basis of his observations in the assessment order for assessment year 1994-95 and has estimated the income at a higher figure. (ii) An assessment which was made under section 143(3), cannot be reopened unless there be any specific evidence regarding escapement of income. 'Reasons to believe' means that there is proper identification and quantification of the escaped income. No such i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Works [1993] 202 ITR 978, 985 (All.) (iii) CIT v. Chandball Rice Mills (P.) Ltd. [1993] 203 ITR 368, 372 (Cal.) The AR contends that it is a must that there are reasons to believe that taxable income of the concerned year has escaped assessment. That it is not sufficient that there are materials for the subsequent year showing escapement of income; such material should be there for the relevant year also. That the ITI's report is for assessment year 1994-95 and it does not mean that the same also applies to assessment year 1993-94. That the materials before the Assessing Officer in this case have no nexus with 1993-94. According to the AR the Inspector's report is vague. That the Inspector's report is not final for which reason the Assessing Officer was still calling for information from the assessee even after the receipt of the Inspector's report. The AR referred to the decision of Calcutta High Court in Reform Flour Mills (P.) Ltd. v. CIT [1973] 88 ITR 150. The successor-Assessing Officer had taken a different view on the same materials which were available before the Assessing Officer who had made the original assessment. On the basis of this decision the AR wanted to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation where the Managing Director of the Creditor Company had denied the loan. The Apex Court in this case have held that the information with the Assessing Officer should be reliable and relevant. To quote from the placitum on page 458: "Since the belief is that of the ITO, sufficiency of the reasons for forming the belief is not for the court to judge, but it is open to an assessee to establish that there in fact existed no belief or that the belief was not a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the ITO and examine whether there was any material available on the record from which the requisite belief could be formed by the ITO and further whether that material had any rational connection with or a live link for the formation of the requisite belief" The Court went ahead as reported on page 459: By the Court: "One of the purposes of section 147 is to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of the original assessment and when that falsity comes to notice, to turn around and say: 'You accepted my lie, now you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bona fide inference that taxable income had escaped assessment. At the initial stage the matter need not be so conclusive and yet there should be some substance in it. The material required at the initial stage cannot be as exhaustive and complete as the material required during the subsequent assessment of the income. The fact that during the assessment proceedings the Assessing Officer gets satisfied that there was no escapement of income will not also show that the reopening of the assessment itself was wrong or on the basis of inadequate material. 6.2 In the facts of this case, we find that for the assessment year 1994-95 certain inquiries, etc. had been made which showed that sundry creditors shown by the assessee were not correct. As many of the sundry creditors for this year were covered by the said finding for the following year, so it could be said that the Assessing Officer was quite justified in forming his reasons to believe for this year on the basis of inquiries, etc. done for the next year. For assessment year 1994-95 the Income-tax Inspector who had visited the given address of a large nos. of sundry creditors in Feb. 1995 had gathered the information that many of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , enquiries with respect of 49 sundry creditors for the assessment year 1994-95 were made. It was found that transactions with 25 persons were not genuine. The persons appearing in the list of sundry creditors were stated to have supplied various materials etc. to the assessee. The assessee has shown transactions with a number of persons out of the 25 persons, the transaction with whom found to be not genuine for asstt. year 1994-95, in the present asstt. year I had reason to believe that income of the assessee has escaped assessment for the asstt. Year 1993-94. Notice under section 148 was issued on 14-3-1995 and was served on assessee on 15-3-1995. In response to the notice, the assessee filed a letter dated 10-4-1995 stating that the return already filed under section 139(1) may be treated as filed in compliance to the notice under section 148." 6. For resorting to proviso under section 147 of the I.T. Act he recorded as follows: - "In course of inquiry for asstt. year 1994-95 following persons were found to be non-existent: - 1. Rafique Ansari 2. Mohan Roy 3. Kishan Ram 4. Hari Ram 5. Shyam Suppliers 6. Bharat Timber Traders 7. Sethi Traders 8. Shankar Enterprises and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantification of such escaped income is absolutely necessary for forming reason to believe. I am afraid no such identification and quantification has been made in the appellant's case in any of the four years for which the escapements have been reopened. In this view of the matter I do not find any valid reason for reopening of the assessments by taking action under section 147 of the I.T. Act for asstt. years 1990-91 to 1993-94." 8. This order has been challenged by the revenue. Shri S. Ghosh, ld. DR of the revenue vehemently objected to the order of the CIT(A). He submitted that the ld. CIT(A) did not examine the matter correctly and in right perspective. It was not correct that the Assessing Officer did not have any material to form a reasonable belief that there was no escapement of income in this asstt. year. He submitted that while making enquiry for the asstt. year 1994-95 the genuineness of the creditors was examined and verified. An Income-tax Inspector was deputed to serve notices. Out of 49 creditors 25 creditors were found to be non-genuine and those non-genuine creditors were also listing for this asstt. year. That material was sufficient for the Assessing Officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier the Assessing Officer was required to make it in writing but after the amendment brought in provision of section 147 of the I.T. Act w.e.f. 1-4-1988 no such record of satisfaction is required but there is introduction of strong words "has reason to believe" provision of section 147 of the I.T. Act. These words are stronger than the word "is satisfied". For forming the reasonable belief, therefore, the Assessing Officer must have certain materials and his belief should not be arbitrary or irrational. It must be reasonable or in other words must be based on reasons which are relevant and material as held by the Hon'ble Supreme Court in the case of Ganga Saran & Sons Ltd. Similar view has been taken by the Hon'ble Calcutta High Court in the case of Ram Narain Bhojnagarwalla v. ITO [1970] 77 ITR 653 though it was decided keeping in view the old provision but the principle of law is somewhat same. In that case it has been held that forming of belief is to be on the basis of certain materials. It is not enough for the Assessing Officer to have the material in his possession. He must perform further necessary mental act of accepting the material and information as reliable and conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments and informations. On 14-3-1995 itself the Assessing Officer recorded his reason to believe that there escaped assessment for the assessment year 1993-94. Since materials are yet to be collected for the assessment year 1994-95 and so on what basis it can be said that the Assessing Officer formed a reasonable belief that there escaped assessment of income for the assessment year 1993-94. In my considered view the ld. CIT(A) has rightly observed that the Assessing Officer did not have material before him on the basis of which he could have entertained a reasonable belief that there escaped assessment and that is why he further observed that the reopening of the assessment by taking recourse to provision under section 147 was invalid and bad in law. His observations are justified. There is no merit in the grounds raised by the revenue. 11. In the result, the appeal is dismissed. ORDER UNDER SECTION 255(4) OF THE I.T. ACT. Since there is difference of opinion amongst the Members constituting the Division Bench, Patna on the undermentioned issues and hence the same is referred to the Hon'ble President, ITAT for necessary action: - "1. Whether in the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice under section 148 to the assessee calling for the return of income for the assessment of escaped income. Following reasons were recorded by the Assessing Officer before issue of notice under section 148 :- "In course of inquiry for assessment year 1994-95 following persons were found to be non-existent :- 1. Rafique Ansari 2. Mohan Roy 3. Kishan Ram 4. Hari Ram 5. Shyam Suppliers 6. Bharat Timber Traders 7. Sethi Traders 8. Shankar Enterprises and transaction with certain other persons like Satpal Singh, Mazid Khan etc. have been found to be non-genuine. I have reason to believe that the income of the assessee has escaped assessment. Issue notice under section 148 of the I.T. Act. Though a list of sundry creditors were disclosed in the return of the income but notice under section 148 is being issued in view of the enquiries which revealed that transactions with the above mentioned sundry creditors were non-genuine or bogus or does not represent correct nature of transaction and the notice is being issued in view of this new facts and fresh information and in view of the decision of the Supreme Court in case of Phoolchand Bajranglal v. JTO[1993] 203 ITR 456 (SC)." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment on these facts was valid:- Phool Chand Bajrang Lal's case Selected Dalurband Coal Co. P. Ltd. 's case Sun Engg. Works P. Ltd. 's case Praful Chunilal Parel's case It was, accordingly, pleaded that the view expressed by the Ld. Accountant Member may be preferred to the view taken by the Ld. Judicial Member. 5. The learned counsel for the assessee, on the other hand, contended that the initiation of proceedings for assessment year 1993-94 is merely on the basis of suspicion and not on any relevant material pertaining to assessment year 1993-94. It was pointed out that in assessment year 1994-95 enquiry was conducted by the Assessing Officer and admittedly the Inspector of the Income-tax Department had given a report to the ITO about 25 creditors appearing to be bogus. According to the learned counsel, the report of the Inspector is vague and the very fact that the Assessing Officer was making enquiries in regard to the sundry creditors for assessment year 1994-95 establishes the fact that the report of the Inspector was not conclusive. With reference to the order sheet entries, it was contended that the enquiry on 14-3-1995 had not been completed by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons for assessment year 1993-94 that income has escaped assessment. The question involved in this appeal is as to whether the Assessing Officer could have reason to believe that the income of the assessee had escaped assessment. At this stage, it may be relevant to refer to some reported decisions of Hon'ble Supreme Court relevant to the issue involved herein. 7. In the case Of JohriLal(HUF), their Lordships of the Supreme Court held as under:- "The formation of the required belief by the Income-tax Officer before proceedings can be validly initiated under section 34(1)(a) is a condition precedent: the fulfilment of this condition is not a mere formality, it is mandatory, and failure to fulfil that condition would vitiate the entire proceedings. Further, the formation of the required belief is not the only requirement: the officer is further required to record his reasons for taking action under section 34(1)(a) and obtain the sanction of the Central Board or the Commissioner, as the case may be." 8. In the case of Lakhmani Mewal Das, their Lordships of the Supreme Court held as under:- "The reasons for the formation of the belief contemplated by section 147(a) of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hindu undivided family by the Income-tax Officer, Trichy. Pending the assessment proceedings, that officer received information from the Income-tax Officer, Erode, that P had paid secretly to the mortgagee during the relevant accounting period a sum of Rs. 1,50,000 which was not included in the compromise decree. The assessee, however, denied having received that amount. Referring to the assessee's denial the Assessing Officer recorded in the order sheet on May 27,1945: "The Income-tax Officer, Erode, should be asked to give further details and to ask P to produce evidence of payment. In any event, this should come for consideration only in the assessment year 1945-46 as only the excess over Rs. 2,76,000 plus legal expenses can be treated as interest income in the hands of the assessee and so, the assessment for 1944-45 should not be held up pending further investigation." The Assessing Officer completed the assessment on February 12, 1946, without including that amount. Thereafter, the officer made further inquiry and on March 9, 1953, issued a notice under section 34(1)(a) of the Income-tax Act, 1922 for reassessment and included the sum of Rs. 1,50,000 in the income of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court." 11. The Hon'ble Supreme Court in the case of Sri Krishna P. Ltd. v. ITO [1996] 221 ITR 538 held as under:- "The Income-tax Officer can issue notice under section 148 of the Income-tax Act, 1961, proposing to reopen an assessment only where he has reason to believe that on account of either the omission or failure on the part of the assessee to file the return or on account of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year, income has escaped assessment. The existence of the reason(s) to believe is intended to be a check, a limitation, upon his power to reopen the assessment. Section 148(2) imposes a further check upon the said power, viz,, the requirement of recording of reasons for such reopening by the Income-tax Officer. Section 151 imposes yet another check upon the said power, viz., the Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficiency of the grounds which induced the Income-tax Officer to act is not a justiciable issue. It is of course open for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it differently, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section." 14. In the case of Ganga Saran & Sons P. Ltd., their Lordships of the Supreme Court held as under:- "It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court- "We are not persuaded to accept the argument of Mr. Sharma that the question regarding truthfulness of falsehood of the transactions reflected in the return can only be examined during the original assessment proceedings and not at any stage subsequent thereto. The argument is too broad and general in nature and does violence to the plain phraseology of sections 147(a) and 148 of the Act and is against the settled law laid down by this court. We have to look to the purpose and intent of the provisions. One of the purposes of section 147 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude." 16. The legal principles that emerge from the aforementioned decisions may be summarized as under :- (i) That for valid reopening of assessment after four years, the Assessing Officer should have reason to believe that the income of the assessee had escaped assessment by reason of omission or failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief is that of the Assessing Officer, the sufficiency of the reasons for forming the belief is not for the Court to judge, but it is open to an assessee to establish that there, in fact, existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. 17. Applying the aforementioned principles of law laid down by the Hon'ble Supreme Court, it is not difficult to record a finding that the material available to the Assessing Officer on the date of recording of the reasons was not sufficient for forming a belief that the income of the assessee for assessment year 1993-94 had escaped assessment. As pointed out earlier, the enquiry relating to assessment year 1994-95 itself was in progress and no final conclusion had been arrived at, at the time of recording the reasons for the assessment year 1993-94. It also observed from the reasons recorded for the assessment year 1993-94 that the Assessing Officer has not pointed out that some of the creditors appearing for assessment year 1994-95 also appeared in assessment year 1993-94. Thus the only information available to the Assessing Officer at the time of issue of notice an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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