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2016 (9) TMI 857 - GUJARAT HIGH COURT

2016 (9) TMI 857 - GUJARAT HIGH COURT - TMI - Reopening of assessment - Entitlement to claim u/s.54F - Held that:- For initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. 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 the established fact of escapement of income. At the stage of i .....

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from the end of the relevant assessment year, when the said material was already before him when the original assessment was made. Any such attempt on his part would be based on mere change of opinion. - To reiterate when a claim was processed at length and after calling for detailed explanation from the assessee, the same was accepted, merely because a certain element or angle was not in the mind of the Assessing Officer while accepting such a claim, cannot be a ground for issuing notice f .....

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ent. Even otherwise, the method of valuation is in order and since the valuations are made under two different Acts, they cannot be made basis for reopening of valuation. - Decided in favour of assessee. - TAX APPEAL NO. 1071 of 2006 With TAX APPEAL NO. 1072 of 2006 With TAX APPEAL NO. 1073 of 2006 - Dated:- 17-6-2016 - MR. KS JHAVERI AND MR. G.R.UDHWANI, JJ. FOR THE APPELLANT : MR BS SOPARKAR,ADVOCATE for MRS SWATI SOPARKAR, ADVOCATE FOR THE OPPONENT : MR NITIN K MEHTA, ADVOCATE ORAL JUDGMENT ( .....

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tions raised in case of all the three assessees, who happens to be co-owners of a property. 2. Since the facts are identical in these appeals, we may refer to the facts leading to the filing of Tax Appeal No.1071 of 2006. Return of income was filed on 30th June 1995, declaring an income of ₹ 15,48,954/-, ₹ 15,48,310/- and ₹ 15,54,757/- i.e. respectively for each of the three assessees. The assessment, in each case, was made vide order under Section 143 (3) dated 29th March 1996 .....

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he income as originally returned. 3. In respect of its claim under Section 54F of the Act, it was explained by the assessee that it had released its share in the property being residential house at Shahpur, Ahmedabad on 23.7.1995 and, therefore, it did not own any other residential property as on the date of the transfer of original asset i.e. on the transfer of which the capital gains to it during the relevant previous year arose, or the transferred property . As regards the date of transfer, i .....

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nsidered as a residential house, were not, met, so as to, without prejudice to its averment of the property having been transferred only on 28th March, 1995, disentitle it for its claim u/s. 54 F. 3.1 The same, however, did not find favour with the A.O., who proceeded to reassess the assessee s income u/s. 143(3) r. w. s. 147 of the Act. With reference to the Memorandum of Possession , on the basis of which the transfer of the original asset had taken place, it was found by him that the same sto .....

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perty to a Carpenter, and was located in the same locality as the Shahpur Property, which stood admittedly used by the assessee, along with others of the family, as a residential property. As such, it was contended by him that, in fact, the assessee on the day of transfer, i.e., 24-3-1995, owned, not one but two properties, i.e. besides the transferred property /original asset. Whether the tenantcarpenter utilized the same for his residential or commercial purposes was not relevant, inasmuch as .....

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on was raised by the assessee. Aggrieved, the assessee preferred an appeal before the learned CIT (A), contesting, in the first place, the reopening of the assessment as being bad in law. 3.3 The assessee contended non-supply of the reasons (for reopening) in the appellate proceedings, even as the A.O states to have had supplied the same in response to the assessee s request therefore on the first date of hearing, i.e., . 19-1-1999. The same, dated at 17-2-1997, stand reproduced by the learned C .....

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he computation of long term capital gain for the current assessment year. As such, it transpired that the reasons for reopening were entirely different than that claimed by the Assessing Officer in his order. Further, it was observed by the learned C1T(A) that the A.O. had framed the assessee s Wealth-tax assessment u/s. 16(3) r. w. s. 17 of the Wealth-tax Act, 1956 on 24-3-1998 in response to the return of income filed on 12-1-1996, accepting the value thereof at the stated amount, i.e., ₹ .....

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raised by the audit party, and which is not permissible in view of the judicial pronouncements, the principal among them being in the case of Indian and Eastern Newspaper Society Vs. CIT [(1979) 119 ITR 996 (SC)]. Further, it was pointed out by the learned CIT(A) that the value of the property(asset) under the Wealth-tax Act is to be computed under the provisions of that Act r.w. relevant Rules, so that it has no bearing on the it has no bearing on the value as adopted for the Income-tax purpose .....

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iled by the assessee. 4. While admitting these appeals, this Court framed following question of law:- Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the reopening proceedings are valid, legal and within the jurisdiction of the Respondent? 5. Mr.Soparkar, learned counsel for the appellant contended that the reopening notice was issued to assess the difference in valuation for income tax and wealth tax, whereas in the reassess .....

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or. He submitted that in the present case there is a change of opinion. He further submitted that there is no new information or evidence in possession of the concerned officer, which was not there before him when he framed the original assessment order. He submitted that original return declaring total income of ₹ 15,48,954 was filed on 30.6.1995, for which assessment was made on 29.3.1996 and within four years i.e. on 17.2.1997, on audit objections revised notice was issued and Income Ta .....

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the Wealth-tax return by the assessee, therefore, become redundant, in the matter; the reopening jurisdiction can be validly assumed even if there has been an omission on the part of the A.O. (as per the amended law), and further, the learned CIT (A) himself observing that the valuation under the Wealth-tax law is subject to a different valuation regime. What needs, therefore, to be seen is whether, the information brought to his notice, through the agency of the audit party, for which purpose .....

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neither it is open for the Courts to go into the sufficiency of the reasons; the sole guiding criteria being whether the material had a rational and direct nexus/ bearing with the formation of the belief [Kantamani Venkata Narayana and Sons v. First Additional IOT, [1967] 63 ITR 638 (SC)], Phoolchand Bhajranglal v. ITO 203 ITR 456 (SC). The property may have been valued under the Wealth-tax Act on net maintainable rent basis, so that different considerations would apply, but the rent earning pot .....

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of framing of the original assessment, so as to be considered as a case of change of opinion. We, therefore, uphold the same, reversing the order of the learned CIT (A). He further contended that the basis for valuation under the Wealth tax Act and the Income Tax is different. In that view of the matter, when capital gain was already taken into consideration by the Assessing Officer, again original assessment cannot be changed on the basis of valuation report of wealth tax. It was also contende .....

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ort of his submissions. (i) Commissioner of Income Tax v. Kelvinator of India Ltd. reported in [2010] 320 ITR 561 (SC):- On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act [with effect from 1st April, 1989], the .....

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quot;mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind the conceptual difference between power to review and power to re-assess. The Assessing Officer has no power to review; he has the power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of re-opening the assessment, review would take .....

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Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the Companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant port .....

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ings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression has reason to believe' in place of the words for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same." For the afore-stated re .....

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r carries on charitable activities. In the return of income filed by it, the petitioner had specifically claimed deduction of ₹ 32,40,212/- and ₹ 45,00,000/- totalling to ₹ 77,40,212/- as a Charitable Trust registered under section 12AA of the Act by the Commissioner of Income Tax. During the course of assessment proceedings the Assessing Officer had issued notice pursuant to which the petitioner had given its reply explaining as to why it was entitled to the said deductions. T .....

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s not eligible for exemption to the tune of ₹ 77,40,212/- for the year under reference since, the Assessing Officer has not disallowed the exemption while finalizing the assessment under section 143(3) of the Act. Thus, it appears that the belief that income chargeable to tax escaped assessment is that of the Revenue Audit Party and not of the Assessing Officer. In the circumstances, the condition precedent for exercise of powers under section 147 of the Act, namely, that the Assessing Off .....

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ng examined the admissibility of the claims made by the petitioner, has allowed the deduction under section 11 of the Act. Under the circumstances, the reopening of assessment appears to be based on a mere change of opinion, that too, the opinion of the Revenue Audit Party and not that of the Assessing Officer. The Supreme Court in the case of Commissioner of Income Tax v. Kelvinator of India Ltd., (2010) 320 ITR 561, has held that one needs to give a schematic interpretation to the words reason .....

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Act, cannot be sustained. (iii) Agricultural Produce Market Committee v. Income- Tax Officer reported in [2013] 355 ITR 400 (Guj) Held, allowing the petition, that the the assessment was completed on scrutiny. In the post-assessment period, the audit party raised objections and the Assessing Officer had in internal communication, strongly objected to them. No material emerged to indicate any independent application of mind by the Assessing Officer. The facts on the contrary clearly established t .....

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d by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore i .....

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in ITA No.555/2012 Page 11 of 14 effect place an assessee in whose case the return was processed under Section 143(1) in a more vulnerable position than an assessee in whose case there was a fullfledged scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure .....

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ch an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed. 14. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought to be relied upon by the revenue to point out the difference between an "assessment" and an "intimation". The context in which those observations were made has to be kept in mind. They were made to point out that where an "intimation" is issued under .....

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as the ingredients of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected to proceedings for reopening. The court also emphasised that the only requirement for disturbing the finality of an intimation is that the assessing officer should have "reason to believe" that income chargeable to tax has escaped assessment. In our opinion, the ITA No.555/2012 Page 12 of 14 said expression should apply to an intimation in the same manner and subject to the .....

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venue would be prepared to concede that position. It is nobody‟s case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made u .....

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sment. In doing so, it is further open to the assessee to challenge the reasons recorded under section 148(2) on the ground that they do not meet the standards set in the various judicial pronouncements. 15. In the present case the reasons disclose that the Assessing Officer reached the belief that there was escapement of income "on going through the return of income" filed by the assessee after he accepted the return under Section 143(1) without scrutiny, and nothing more. This is not .....

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reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred under section 147. (v) Dhruv Parulbhai Patel v. Assistant Commissioner of Income-Tax reported in [2014] 45 taxmann.com 20 (Gujarat):- 7. What thus emerges from the above discussion is that the reasons on which the notice for reopening is issued lacks validity. Section 54E of the Act was neither applic .....

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Income-tax Officer reported in [2011]335 ITR 234 (Guj). (vi) Aavkar Infrastructure Company v. Deputy Commissioner of Income-tax, Circle-9 reported in [2016] 67 taxmann.com 39 (Gujarat):- 7. A perusal of the reasons recorded shows that the Assessing Officer, in the assessment proceedings in relation to the assessment year 2011-12, noticed that the cost of construction claimed by the petitioner for the project in question was ₹ 4,662/- per square yard, which appeared to be less in compariso .....

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sessment year 2007-08, no expenses had been debited to the profit and loss account of the assessee and also in the balance sheet part of the return of income, no inventory or stock in process was seen. Accordingly, the Assessing officer formed the belief that the assessee has under reported the cost of investment made by it by ₹ 22,76,698/- in the on-going project and artificially inflated the profit from the project as it was getting benefit of deduction under section 80IB(10) of the Act. .....

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e assessee and as estimated by the DVOs office. It is the case of the learned counsel for the respondents that the Assessing Officer has duly applied his mind by referring to the return of income and noting that no expenses have been debited in the profit and loss account and also that the balance sheet or the return of income does not indicate any inventory or stock in process. Therefore, there is application of mind on the part of the Assessing Officer to the report of the DVO warranting assum .....

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ing to indicate that the Assessing Officer has independently applied his mind to the record of the case to ascertain as to whether the cost of investment as declared by the assessee was in fact under reported as recorded therein. The entire basis for reopening the assessment is the report of the DVO and the difference of cost as computed by him, which according to the Assessing Officer is the extent of income which has escaped assessment. 9. This court in the case of Vinayak Builders v. BD Garsa .....

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verting to the facts of the present case, the Assessing Officer, except for referring to the profit and loss account, which as noted hereinabove, would not reflect any profit as the assessee had not claimed any profit, and to the balance sheet part of the return of income, the Assessing Officer has made no effort to ascertain as to whether, in fact, the assessee has expended more amount than disclosed in the return of income. In the opinion of this court, while the report of the DVO may form the .....

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the correctness or otherwise of the contents of the report of the DVO. 10. In the aforesaid premises, the court is of the view that considering the material before the Assessing Officer and the nature of inquiry made by him, except for the report of the DVO, there was no tangible material for the Assessing Officer to form the belief that income chargeable to tax has escaped assessment. As held by the Supreme Court in the case of Assistant Commissioner of Income Tax v. Dhariya Construction Co. ( .....

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the claim of deduction. It cannot be stated by any stretch of imagination that such claim of deduction under Section 80IB(8A) of the Act was not examined by the Assessing Officer in the original assessment. It may be that he did not raise specific query to allowability of the claim on the premise that the petitioner was doing scientific research for and on behalf of the companies. However, merely for the failure of the Assessing Officer to raise such a question, in our opinion, would not authori .....

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mmissioner of Income Tax, Delhi-IV v. Indian Sugar and General Industry Export Import Corpn. Ltd. reported in [2008] 170 Taxman 229 (Delhi):- 7. Having gone through the decision of this Court, we find that it has been held that there must, nevertheless, be an independent examination of the materials collected by the audit party in its report and it is only thereafter that the AO must come to an independent conclusion that there was an escapement of income. 8. Insofar as the present case is conce .....

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e note that the AO had applied his mind to the contents of the audit objection before issuing a notice under s. 148 of the Act. On the contrary, the note suggests that the notice was issued mechanically as a result of the audit objection. 9. Learned counsel for the assessee points out that all the facts were before the AO at the time when the assessment was made and that being the position, it cannot be said that there was any error or omission committed by the AO while framing the original asse .....

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ubmissions made before us following aspects emerge: 1) Assessment previously framed after scrutiny is sought to be reopened within a period of four years from the end of relevant assessment year. There is nothing conclusive on record to suggest that the question of assessees claim for exemption from capital gain under section 54 was examined by the assessing officer. 2) Undisputedly, however, the claim of the assessee was under section 54 and not 54E of the Act. 3) The assessing officer in the r .....

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ke and referred to the correct statutory provision. The fact that reference under section 54E was however, not an error is manifest from the reasons recorded. It referred to the requirement of investing the surplus fund for a minimum period of 36 months. Such requirement flows from section 54E of the Act and not section 54. Section 54 in fact requires the assessee to acquire a new unit within a year or build himself within three years. In the later case he has to invest the surplus in specified .....

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h of condition therein therefore simply did not arise. It is well settled that notice for reopening has to be sustained and supported only on the basis of reasons recorded by the assessing officer and not with the help of extraneous ground, material or possible improvement. Reference in this respect can be made to the decision of this Court in the case of Aayojan Developers vs. Income-tax Officer reported in [2011]335 ITR 234 (Guj). 8. Under the circumstances, notice dated 25.3.2014 is quashed. .....

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uthority to reconsider the case within four years on the basis of audit report. He has relied upon following decisions in support of his submissions. (i) Sun Pharmaceutical Industries Ltd. v. Deputy Commissioner of Income Tax (No.2) reported in [2013] 353 ITR 474 (Guj):- 33. In view of the above settled legal position, at this stage, we do not find that the reasons recorded lack validity. The above observations of various decisions noted would also be relevant when we examine whether such escape .....

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the rate of 24% on the outstanding amounts. Counsel for the petitioner, however, submitted that in the tax audit report, the petitioner had disclosed that the petitioner company and Aditya Medisales are closely associated. In our opinion, this would not be a sufficient disclosure. From the facts on record, it was not possible for the Assessing Officer to ascertain that the petitioner received interest from Aditya Medisales which was higher than the normal rate of interest. Three essential facts .....

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interest received. However, from such figures, it was not possible for the Assessing Officer to ascertain these vital facts. Section 147 of the Act, explanation 1 provides that production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of foregoing proviso . In the present case, even from the account books and other evide .....

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only to those assessees who disclose all material facts truly and fully. 36. In the case of Phool Chand Bajrang Lal (supra), the Apex Court held as under: Where the transaction itself, on the basis of subsequent information was found to be a bogus transaction, mere disclosure of that transaction at the time of original proceedings could not be said to be a disclosure of true and full facts and officer would have jurisdiction to reopen the concluded assessment in such a case. 37. In the present c .....

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ssee in this respect. At any rate, by applying such explanation, it can be easily gathered that the assessee failed to disclose fully and truly all material facts. Counsel for the petitioner, however, vehemently contended that these were not primary facts. Only primary fact was that the assessee had earned interest income. We are, however, of the opinion that in the context of the close connection between the petitioner and Aditya Medisales, the fact that the assessee was eligible for deduction .....

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ssued beyond the period of four years from the end of the relevant assessment year whereas in the present case, such notice is issued within four years. In that view of the matter, the contention of the counsel for the petitioner that full facts were available on record before the Assessing Officer when the assessment was previously framed after scrutiny would be of no avail. (ii) Dishman Pharmaceuticals and Chemicals Limited v. Deputy Commissioner of Income-Tax (OSD) (No.1) reported in [2012] 3 .....

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rt of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year. (ii) Both the above conditions are conditionprecedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen assessment beyond four years of the end of assessment year. (iii) Such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of .....

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sary for assessment would not be conclusive. Nor, absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs. (v) Such reasons must emerge from the reasons recorded by the Assessing Officer and cannot be supplied through an affidavit filed before the Court. However, Gujarat High Court in the case of Aayojan Developers v. Income Tax Officer [Supra] has accepted the view t .....

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he basis of such primary disclosures. In other words, once the assessee discharges his duty of stating all the primary facts, what inferences and conclusions should be drawn is the duty of the Assessing Officer. (vi) At the time of ascertaining whether the notice was validly issued, what could be the probable conclusion of fresh assessment if re-opening is permitted, is not the inquiry of the Court. In other words, the merits of the proposed action, through opening of the assessment, cannot be g .....

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ent did not hold the belief at any point of time, either before or after recording reasons, that income of the assessee has escaped assessment on account of erroneous computation of loss and it is required to be held that the exercise of recording reasons on the file is a mere pretence to give validity to the exercise of power for assuming jurisdiction. In other words, it was a colourable exercise of jurisdiction and cannot be sustained in law. 11. In the result, the impugned notice dated 12th M .....

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uot;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. The function of the Assessing Officer is to administer the statute with solici .....

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uot;, but not the 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 formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO Vs. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) .....

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we would have perhaps allowed the petition and quashed the notice. In the present case, however, the Assessing Officer was convinced that on third ground recorded in the reasons, income chargeable to tax had escaped assessment. It is true that such ground was also brought to her notice by the audit party and that by itself would not mean that she was acting at the instance of the audit party. As held by the Supreme Court in case of Commissioner of Income-Tax v. P.V.S Beedies Private Limited, re .....

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ion whether the asset for which the depreciation was claimed was put to use before 30th September of the year under consideration, and therefore, whether full depreciation at the specified rate during the year under consideration was allowable. (vi) V. Jagmohan Rao and Others v. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh reported in [1970] 75 ITR 373:- 5. The first question arising in this case is whether the proceeding under Section 34 is legally valid. It was contended b .....

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for this argument. It is not true to say that the assessee brought all the relevant facts before the Income-tax Officer. On the contrary he deliberately suppressed the fact that there was a compromise between himself and the plaintiffs under which he was entitled to the whole of the income from the mill. At any rate the Privy Council's decision which determined the rights of the parties irrespective of the compromise did constitute definite information within the meaning of Section 34 of th .....

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y Council, on appeal from that decision, held that interest on arrears of rent payable in respect of agricultural land was not agricultural income. As a result of this decision the Income-tax Officer initiated reassessment proceedings under Section 34(1)(b) of the Income-tax Act and brought the amount of ₹ 93,604 to tax. In these circumstances, it was held by this Court, firstly, that the word " information " in Section 34(1)(b) included information as to the true and correct sta .....

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here that part of the income had escaped assessment. The decision of the Privy Council, therefore, was held to be information within the meaning of Section 34(1)(b) and the proceedings for reassessment were validly initiated. In our opinion, the principle of this decision governs the present case and it must be held that the proceedings initiated under Section 34 for the assessment year 1944- 45 were legally valid. It was stated on behalf of the appellant that in any case the Income-tax Officer .....

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34 in terms states that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under Section 22(2) and may proceed to assess or reassess such income, profits or gains. It is, therefore, manifest that once assessment is reopened by issuing a notice under Subsection (2) of Section 22 the previous under-assessment is set as .....

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ore proceeding with the matter, it will not be out of place to mention that following facts are emerging from record. It is clear that when capital gain was already taken into consideration by the Assessing Officer, again original assessment cannot be changed on the basis of valuation report of wealth tax. Wealth tax valuation report was available with the same officer, when the original assessment was made. In that view of the matter, while considering the matter on the Income Tax, Wealth Tax v .....

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cation. 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. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed .....

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