TMI Blog2010 (2) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... g of section 147. held that-there was absolutely no basis for the Assessing Officer to form a belief that any income chargeable to tax had escaped assessment within the meaning of substantive provisions of section 147. The notices were not valid and liable to be quashed. Appeal is allowed. - 2287 of 2009 and 59 of 2010 - - - Dated:- 22-2-2010 - CHANDRACHUD D. Y. DR., DEVADHAR J. P. JJ JUDGMENT The judgment of the court was delivered by 1. Dr. D. Y. Chandrachud J .-Rule, by consent made returnable forth-with. Counsel for the respondents waive service. With the consent of counsel, both the petitions are taken up for final hearing. 2. The principal challenge in these proceedings is to the notices issued by the first respondent under section 148 of the Income-tax Act, 1961 pro-posing to assess the income of the petitioner for the assessment years 2005-06 and 2006-07 on the ground that there is reason to believe that income chargeable to tax had escaped assessment, within the meaning of section 147. By a deed of partnership dated May 5, 2003, the petitioner entered into a partnership with two other persons. The business of the partnership consisted of developin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent to drop the reassessment proceedings. This request was rejected on the ground that since the petitioner had relinquished his right to be a partner in the partnership firm, any amount received in excess of the capital balance in the partnership was chargeable to tax under the Income-tax Act, 1961. 5. In the companion petition, the reasons furnished on February 19, 2009 to the petitioner are to the same effect. The objections of the petitioner were rejected on November 16, 2009. The order disposing of the objection mentions that the assessment of the partners has been validly reopened since in the case of the firm, the payments made to the partners on their retirement has been allowed as revenue expenditure which has become chargeable to tax in the hands of the partners. Reliance has been placed on the provisions of section 28(iv) and section 28(v). The order records that it is settled law that a retirement from the partnership does not result in a transfer under section 2(47). 6. In the first writ petition, an order of assessment was passed by the first respondent on November 18, 2009. In an affidavit filed by the first respondent, it has been stated that the order of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as validly issued under section 147. 9. Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 163, 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 the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlies section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his mind through reasons recorded by him. He has to speak through his reasons . . . The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the Assessing Officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The Assessing Officer, in the event of challenge to the reasons must be able to justify the same based on material available on record. . . . That vital link is the safeguard against arbitrary reopening of the con-cluded assessment. The reasons recorded by the Assessing Officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which are lacking in material particulars would get supplemented, by the time the matter reaches to the court, on the strength of affidavit or oral submissions advanced." 12. The only reason that has been recorded by the Assessing Officer is that the Commissioner of Income-tax (Appeals) by his order dated September 17, 2008, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ordinarily constitute 'transfer' in the accepted connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But even in this artificially extended sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partner-ship." 14. The Gujarat High Court held that there is, in such a situation, no transfer of interest in the assets of the partnership within the meaning of section 2(47). When a partner retires from a partnership, what the partner receives is his share in the partnership which is worked out by taking accounts and this does not amount to a consideration for the transfer of his interest to the continuing partners. The rationale for this is explained as follows in the judgment of the Gujarat High Court (page 405): "What the retiring partner is entitled to get is not merely a share in the partnership assets; he has also to bear his share of the debts and liabilities and it is only his share in the net partnership assets after satisfying the debts and liabilities that he is entitled to get on retirement. The debts and liabilities have to be deducted from the value of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship firm and was inter alia paid an amount of Rs. 4,77,941 as his share in the remaining assets of the firm. The Division Bench of this court had held that the transaction would have to be regarded as amounting to a transfer within the meaning of section 2(47) inasmuch as the assessee had assigned, released and relinquished his share in the partnership and its assets in favour of the continuing partners. This part of the judgment was reversed in appeal by the Supreme Court in Tribhuvandas G. Patel v. CIT [1999] 236 ITR 515. Following the judgment of the Supreme Court in Sunil Siddharhbhai [1985] 156 ITR 509, the Supreme Court held that even when a partner retires and some amount is paid to him towards his share in the assets, it should be treated as falling under clause (ii) of section 47. There-fore, the question was answered in favour of the assessee and against the Revenue. Section 47(ii) which held the field at the material time provided that nothing contained in section 45 was applicable to certain transactions specified therein and one of the transactions specified in clause (ii) was distribution of the capital assets on dissolution of a firm. Section 47(ii) was subsequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issuance of a notice under section 148, the Assessing Officer must have reason to believe that income has escaped assessment and at that stage an established fact that income has escaped assessment is not required. The Supreme Court held thus (page 511): "Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion . . . At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date on which reasons were recorded by the Assessing Officer, the Revenue had challenged the order of the Commissioner of Income-tax (Appeals) before the Tribunal. One of the grounds of appeal is that the assessee had claimed in the income-tax returns that his share of Rs. 50 lakhs received from the firm as a capital asset was not exigible to tax. The Revenue, therefore, submitted that when the recipient claimed the receipt as capital expenditure, in the hands of the firm, the payment is also to be treated as capital expenditure. 20. For all these reasons, it is evident that there was absolutely no basis for the first respondent to form a belief that any income chargeable to tax has escaped assessment within the meaning of the substantive provisions of section 147. Explanation 2 to section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation "where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return." For the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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