TMI Blog2004 (1) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... for initiation of proceedings under section 147 of the Act. It is submitted that at the time of initiation of proceedings under section 147, the Assessing Officer had in his possession information about filing an FIRs against the assessee and its sister concern on the grounds of criminal connivance in drawing fake bills of supply to the AHD, Govt. of Bihar. The Assessing Officer also had information regarding the payment made to the assessee in relation to this specific FIR in case No. RC55(A)/96-Patna lodged against the assessee. Thus, the basis of initiation of proceedings under section 147 was valid since filing of the FIR gave valid reasons to believe that the assessee had claimed false purchases and transportation expenses against its receipt from the AHD, Govt. of Bihar. The income-tax proceedings are separate proceedings from the criminal proceedings launched by the CBI and once they are validly initiated they have a separate existence of their own irrespective of the findings made in the criminal charge-sheet of the CBI. As such it cannot be said that the basis of initiation of proceedings under section 147 was non-existent at the time of initiation. 3. The ld. DR further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) that no estimation of gross profit on the sales which remained the same is not within the proceedings under section 147. Disallowance of expenses and unexplained cash credit can also not be considered as adequate ground for initiation of proceedings under section 147. 5. We have considered the submissions of the parties before us. We have also gone through the orders of the lower authorities carefully and on perusal thereof we find that the Assessing Officer has not done his job in accordance with law. The facts and circumstances leading to initiation of proceedings have not been brought out in the manner which could find favour with the CIT(A). The CIT(A) has given a very well reasoned order setting aside the orders of the Assessing Officer for all these years in view of the fact that the assessee was never a party in filing of case RC 55(A)/ 96-Patna and the department have in their own pleadings submitted that the income-tax proceedings are separate proceedings from the criminal proceedings lodged by the CBI and once they were validly initiated they have a separate existence on their own irrespective of the findings made in the criminal charge-sheet of the CBI. Here i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been claimed at Rs. 59,58,454 and Rs. 5,80,594 respectively. The assessment for assessment year 1987-88 was not made under section 143(3) or 147 of the Act. On account of above I have reason to belief that the assessee has under stated its profit for this financial year by inflated purchases and other expenses as a result of which a large portion of its income escaped assessment within the meaning of section 147 of the Income-tax Act." While adjudicating the appeals, the Commissioner (Appeals) came to the conclusion that conditions precedent for assumption of jurisdiction under the provisions of section 147 of the Income-tax Act, 1961 (in short the Act) were not satisfied in these cases. Accordingly initiation of proceedings under the provisions of section 147 of the Act was held to be bad in law. In view of these facts it becomes incumbent on this Tribunal to articulate as to whether standards of initiation of proceedings under the provisions of section 147 of the Act existed or not. For an answer to this proposition the provisions of section 147 of the Act are to be taken into account. The provisions of section 147 of the Act empowers the Assessing Officer to reassess any inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fact or situation, in the light of those circumstances. On such examination of facts, if the officer feels satisfied that taxable income has escaped assessment, the officer is said to have reason to believe that such income has escaped assessment. A belief, though justified for the purpose of initiation of proceedings under section 147 of the Act, should not be tested on the standards for final adjudication in the matter. Law to this effect was laid in Praful Chunnilal Patel v. M.J. Makwana, Asstt. CIT [1999] 236 ITR 832 (Guj.) wherein the Assessing Officer had over-looked something at the first assessment as a result of which taxable income has escaped assessment that could itself provide a cause or justification for a belief to the Assessing Officer that such income had escaped assessment and in the case the Assessing Officer was held to be ex facie justified in initiating the proceedings on such basis. 4. Now it will be taken into consideration as to whether there were reasons to believe with the Assessing Officer to proceed with the reassessment under the provisions of section 147 of the Act. He takes into consideration that as per the returns filed for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of weighing the standards of reopening of an assessment with the standard which are to be applied at the time of final adjudication. He was oblivious of the fact that when a case is registered against the assessee, with allegations that fraudulent withdrawals were made by it, without making any supply to a Government department, it is a situation or circumstances which surcharges the atmosphere. Common populace take such situation with anxiety and look for the result of the investigation and in many cases the result of the trial. Such instances have a bearing in the mind of the public and they form an opinion about the instances, the person involved in the act and the surrounding circumstances. The Assessing Officer, being a responsible public servant, was under an obligation to take note of such situations, which persuaded him to form a belief, as done in the case. When process of law was in momentum, it ignited the throughts of the Assessing Officer to consider as to whether the facts regarding income chargeable to tax were disclosed fully and truly by the assessee. In making a chain of events he went through the contents of the FIRs registered, noted the payments received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and surrounding circumstances, would be sufficient for an Assessing Officer to form an opinion that on account of non-disclosure of material facts fully and truly income has escaped assessment?" Per Shri K.K. Gupta, Accountant Member. - As we differ in our views in the above mentioned IT Appeals we refer below the given question for consideration of Third Member as provided in sub-section (4) of section 255 of the Act and request the Hon'ble President accordingly. Question for reference: "Whether on the basis of information available on account of registration of charge-sheet by the CBI in the case of assessee's relatives and their concerns would be sufficient for an Assessing Officer to form an opinion that on account of non-disclosure of material facts regarding fake withdrawals from AHD, Govt. of Bihar, full and true income has escaped assessment in the case of the assessee?" THIRD MEMBER ORDER Per Shri M.A. Bakshi, Vice President. - The appeals of the Revenue for the assessment years 1987-88 to 1989-90 had come up for decision before the Patna Division Bench. However, since there was a difference of opinion between the Members of the Bench, I was nominated by the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CBI in regard to the payments made from various treasuries and AHD offices of Govt. of Bihar. A public interest litigation was filed in the High Court of Patna and the Hon'ble High Court vide order dated 11-3-1996 in C.W.J.C. No. 602/96(R) directed the CBI to investigate the cases relating to misappropriation of Govt. funds by officers and suppliers of AHD, Govt. of Bihar. The Income-tax Department was also directed to take action against the suppliers for bogus supplies and withdrawal of money from AHD of Govt. of Bihar. The aforesaid order of the Hon'ble Patna High Court was confirmed by the Hon'ble Supreme Court in its judgment dated 19-3-1996 in SLP No. 58(A)/96. The directions contained in the said order of the Hon'ble High Court in the case of Sushil Kumar Modi v. State of Bihar 1996 (1) P.L.J.R. 561 at page 581 being relevant are reproduced hereunder:- "I would, accordingly, direct the Central Bureau of Investigation (CBI) through the Director, to enquire and scrutinize all cases of excess drawals and expenditure in the department of Animal Husbandry in the State of Bihar during the period 1977-78 to 1995-96 and lodge cases where the drawals are found to be fraudule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about bogus supplies by some of the members of Malik family and the accommodation entries of purchases having been given on payment of commission, to the sister concern of the assessee, viz., Malik Enterprises, the Assessing Officer initiated proceedings under section 147 purportedly on the belief that income of the assessee assessable for assessment years 1987-88 to 1991-92 had escaped assessment. The reasons recorded by the Assessing Officer for reopening of the assessment have been reproduced by the Ld. Judicial Member in his order and, therefore, it may not be necessary to reproduce the same. The Assessing Officer issued notices under section 148 for the respective assessment years on 10-2-1998 which were served on the assessee on 2-3-1998. The assessee asked the Assessing Officer to give reasons for reopening of the assessments for the respective assessment years. The assessee was asked to file the return of income after which the reasons for reopening of the assessee would be communicated to them by the Assessing Officer. The assessee informed the Assessing Officer that the return originally filed may be treated in response to the notice under section 148 and again demanded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way on election duty, how he could have signed the Memo of Appeal in the case of the respondent on 20-4-2001 at Patna. 10. This objection has not taken by the assessee before the Division Bench and is not subject-matter of difference of opinion before me. Since the Third Member has limited jurisdiction in regard to the point of difference, I refrain from giving any opinion about the claim made by the assessee's learned representative before me for the first time. 11. As is evident from the facts stated above, the whole issue revolves around the validity of reopening of assessments for the respective assessment years. There seems to be a doubt about the absence of the name of the respondent in the FIR No. RC 55(A)/96-Pat. expressed by the CIT(A). The Assessing Officer as well as the Ld. Judicial Member has specifically pointed out that the assessee is co-accused in FIR No. RC 55(A)/96-Pat. The CIT(A) has recorded a finding to the contrary. I have reproduced the names of the accused mentioned in FIR No. RC 55(A)/96-Pat. in para-5 above. It is evident from the names of the accused that whereas no specific name of the suppliers has been mentioned in the said FIR, all the concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired 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. 14. In the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, their Lordships of the Supreme Court held as under:- "The reasons for the formation of the belief contemplated by section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time we have to bear in mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 assessee for the assessment year 1944-45. The Appellate Assistant Commissioner, on appeal, set aside the order and directed the Officer to redo the assessment after giving the assessee an opportunity to cross-examine the parties examined by the officer. The Income-tax Officer, without issuing a fresh notice of reassessment, enquired further into the matter: P's books of account were produced to prove the payment to the assessee, some witnesses were examined in the presence of the assessee, and a fresh order of assessment was made. This order was affirmed by the Tribunal. On a reference, the High Court held that the reassessment was valid, and that the officer had acted rightly in giving effect to the order of the Appellate Assistant C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82 ITR 147, their Lordships of the Supreme Court held as under:- "The words 'reason to believe' suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the 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." 18. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year's assessment proceedings. The commencement of reassessment proceedings was valid." 20. In the case of S. Narayanappa v. CIT [1967] 63 ITR 219 at page 222 (SC) it was held as under:- "...the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any of his income, profits or gains chargeable to income-tax has escaped assessment." It was further held at page 478 by the Hon'ble Supreme 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the proceedings for reassessment. But there must be some ground for reasonable belief that there had been a non-disclosure etc. of material facts resulting in escapement of income. (ix) For determining whether initiation of reassessment proceeding was valid, it is only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. (x) The sufficiency or the correctness of the material is not a thing to be considered at this stage. Since the belief 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. 24. On the analysis of the above legal principles, it emerges that whereas the 'reason to belief cannot be equated with the 'reason to suspect' it is equally not necessary that there should be ample evidence on record to establish the actual escapement of income so as to form a reasonable belief that the income of the assessee has escaped assessment. One has to keep in mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. of Bihar, against little or no supply. It also gave fires to a reasonable belief that the expenses incidental to supply such as purchases and expenses on transportation were wrongly claimed by the assessee to avoid a higher returned income and higher incidence of tax. As per return for assessment year 1989-90 filed and available on record the assessee has shown to have received on total payment of Rs. 79,98,500 against sales whereas the purchases and freight expenses have been claimed at Rs. 59,58,454 and Rs. 5,80,594 respectively. The assessment for assessment year 1987-88 was not made under section 143(3) or 147 of the Act. On account of above, I have reason that the assessee has under stated its profit for this financial year by inflated purchases and other expenses as a result of which a large portion of its income escaped assessment within the meaning of section 147 of the Income-tax Act." 25. The reasons for other assessment years are more or less same. Question before me is as to whether on the basis of facts of this case the Assessing Officer had reason to believe that the income of the assessee had escaped assessment. It is not disputed that in the year 1996, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reopen an assessment by the Assessing Officer is subject to the condition that he has reasons to believe that the income as escaped assessment. It is also established from judicial principles laid down by the Hon'ble Supreme Court referred to elsewhere in this order that the formation of belief need not necessarily result into reassessment. The material sufficient for formation of the belief need not be sufficient for making the assessment/ reassessment. The Assessing Officer should not act arbitrarily, nor should he pretend of having a reasonable belief for reopening of an assessment. Reopening is also not valid if there is no live link or nexus between the material relied upon and the perception of the belief. 26. In this case, the fodder scam had become well known not only in the State of Bihar but because of its publicity all over India. The Hon'ble High Court had also admitted the public interest litigation and directed the CBI and the Income-tax Department to investigate and initiate such action as may be considered fit. There was evidence on record to establish the involvement of members of the Malik family in the scam. The assessee had withdrawn substantial amount from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proof required for coming to a final decision. A belief though justified for the purpose of initiation of the proceedings under section 147, may ultimately stand altered after the hearing and while reaching the final conclusion on the basis of intervening scrutiny. At that stage where he finds cause or justification to believe that such income has escaped assessment, the Assessing Officer is not required to base his belief on any final adjudication of the matter. In my considered view on the facts of this case, any reasonable person would believe that the assessee-firm, a unit of Malik group, would not be an exception to the fraudulent withdrawals from the AHD, Government of Bihar. As pointed out earlier, validity of initiation of proceedings is dependent on the formation of the belief. It gives the Assessing Officer the right to reopen a completed assessment. The provisions of the Income-tax Act clearly provides the procedure for making the reassessment after the initiation has validly been made. Provisions of section 143(2) and (3) are applicable in respect of making a reassessment after having been validly initiated. Even where proceedings are reopened validly, the assessee is g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the learned Judicial Member that the reopening of assessment for the respective assessment years has validly been initiated. 29. The records may be placed before the Division Bench for announcing the majority judgment. ORDER There was a difference of opinion between the Members of the Bench and the following questions were referred to the 3rd Member for his opinion: Point of dispute as per Ld. Judicial Member "Whether registration of a case with the CBI, on the allegation that the assessee received a sum of Rs. 79,98,500 from AHD, Govt. of Bihar without making any supplies and obtaining accommodation entries of purchases against commission and surrounding circumstances, would be sufficient for an Assessing Officer to form an opinion that on account of non-disclosure of material facts fully and truly income has escaped assessment." Point of dispute as per Ld. Accountant Member "Whether on the basis of information available on account of registration of charge sheet by the CBI in the case of assessee's relatives and their concerns would be sufficient for an Assessing Officer to form an opinion that on account of non-disclosure of material facts regarding fake withdraw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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