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TMI Blog2025 (5) TMI 1595X X X X Extracts X X X X X X X X Extracts X X X X ..... any reason to believe that the petitioner's income for AY 2011-12 had escaped assessment. It is the petitioner's case that the impugned notice has been issued based on surmises and suspicion, and not on the basis of any tangible material, which would furnish any reason to believe that the petitioner's income for AY 2011-12 had escaped assessment. PREFATORY FACTS 3. The petitioner is a company incorporated under the Companies Act, 1956 and is engaged in the business of trading in shares, securities, equity and currency derivatives, mutual funds, and providing DP Services. During the previous year relevant to AY 2011-12, the petitioner's turn-over was Rs. 1,54,917.76 Crores and it had filed its return of income declaring a taxable income of Rs. 1,02,04,640/-. 4. The petitioner's return was picked up for scrutiny and the assessment proceedings that ensued, culminated in an assessment order dated 31.01.2014 passed under Section 143 (3) of the Act. The AO assessed the petitioner's income at Rs. 1,04,93,646/- by adding an amount of Rs. 1,88,506/- as well as an amount of Rs. 1,00,500/- on account of penalty and ROC fee respectively to the petitioner's returned income. 5. The petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder. ANALYSIS 13. At the outset, it would be relevant to refer to the reasons recorded by the AO for initiation of the reassessment proceedings and issuance of the impugned notice. The relevant extracts of the said reasons are set out below: "2. A letter was received from the office of ADIT(Inv.), Unit-1(3), Mumbai dated 21.03.2018 in the case of the assessee company, M/s CNB Finwiz Pvt. Ltd. passing on information about the tax-evasion detected by them. As per the information, M/s DMC Education Ltd, is a penny stock listed with BSE and trading in this scrip is suspicious and this company has been used to facilitate introduction of income of members of beneficiaries in the form of exempt capital gain or short term capital loss in their books of accounts. The financials of the company for the relevant period do not show any substantial change so as to support such huge share price movement. The sharp rise in the market price of this entity is not supported by financial fundamentals of the company. Both purchase and sale of the shares are concentrated within few persons/ entities which were either non-filers or have filed nominal return of income. 3. Subsequently, trade data o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closely held penny stock of M/s DMC Education Ltd. 8. On perusal of the-above information received from ADIT (Inv.), Unit-1(3), Mumbai and other related details of the assessee and M/s DMC Education Ltd., it is clear to me that the assessee has entered into these transactions to evade payment of due taxes. These are sham transactions and I am convinced that they should be brought to taxation. 9. Therefore, I have reason to believe that the sum of at least Rs. 1,11,89,099/- has escaped assessment. In this case a return of income for the A.Y. 2011-12 was filed and scrutiny assessment u/s 143 (3) of the Act has been completed on 31.01.2014, It is also submitted that the assessee had not disclosed the true and full information for the A.Y. 2011-12. Therefore, there is failure on part of the assessee to disclose the information truly and fully. In this case, four years from the end of relevant assessment year have elapsed and income which has been escaped assessment is more than Rs. 1 lac. Accordingly, in this case, the only requirement to initiate proceedings u/s 147 is reason to believe which has been recorded above." 14. It is apparent from the above that the AO's reason for iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DEL was Rs. 1,67,70,490/- and the same was a miniscule fraction of the total turnover of Rs. 2,53,11,60,37,185/-. 19. The question whether the jurisdictional condition of the AO having reason to believe that the petitioner's income for AY 2011-12 has escaped assessment needs to be addressed bearing in mind the import of the expression 'reason to believe' as used in Section 147 of the Act. The jurisdictional precondition requiring the AO to have reason to believe that income of an assessee has escaped assessment, for reassessing/assessing the income relating to past assessment years, has been included in the provisions for reopening of the assessments over the past century. The said condition also finds mention in Section 34 of the Income Tax Act, 1922, which required existence of definite information leading to discovery of income escaping assessment. The words "reason to believe" as used in Section 147 of the Act was substituted by the words "for reasons to be recorded by him in writing, is of the opinion" by virtue of the Direct Tax Laws (Amendment) Act, 1987. However, certain reservations were expressed that the change in language may give arbitrary powers to the AO to reop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion: it must be founded upon information." 21. Although Justice J.C. Shah had penned a dissenting opinion, there was no difference of opinion regarding his exposition of expression "reason to believe" as used in Section 34 (1) (a) of the Income Tax Act, 1922. 22. In Chhugamal Rajpal v. S.P. Chaliha & Ors. (1971) 1 SCC 453, the Supreme Court considered the question whether in the given facts, the Income Tax Officer has any reason to believe that the assessee's income had escaped assessment. It would be instructive to refer to the following extracts of the said decision: "5. In his report the Income Tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under Section 148. The material that he had before him for issuing notice under Section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the CIT, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications "it appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of Section 147. Therefore he could not have issued a notice under Section 148. Further the report submitted by him under Section 151 (2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under Section 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under Section 148. To Question 8 in the report which reads "whether the Commissioner is satisfied that it is a fit case for the issue of notice under Section 148", he just noted the word "yes" and affixed his signatures thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under Section 148. The important safeguards provided in Sections 147 and 151 were lightly treated by the Income Tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under those provisions as of little importance. They have substituted the form for the substance." 23. It is clear from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of the said expression "reason to believe" as used in Section 147 of the Act. 27. The present discussion would not be complete without reference to the oft cited decision of the Supreme Court in The Income-Tax Officer, I Ward, District VI, Calcutta and Ors. v. Lakhmani Mewal Das (1976) 3 SCC 757. In the said case, the respondent's tax assessment for assessment year 1958-59 was sought to be reopened. The Income Tax Officer had mentioned two grounds in his report for reopening of the assessment. The first was that one Shri Mohan Singh Kanayalal, who was shown as one of the creditors of the assessee, had confessed that he was only lending his name. The second was that names of some known name lenders were mentioned in the list of creditors of the assessee. The Supreme Court found that there was nothing in the confession of Mohan Singh Kanayalal that indicated that the same related to the loan to the assessee and not to some other person. There was also no indication as to when the confession was made and thus held that there was no material to infer that the confession related to the financial year 1957-58. Insofar as the second ground - that the list of creditors included the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in Section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in Section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, farfetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. 12. The powers of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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." 29. We also consider it apposite to refer to the following observations made by the Supreme Court in CIT v. Kelvinator India of Ltd. (2010) 2 SCC 723: "6. We must also keep in mind the conceptual difference between power to review and power to reassess. The assessing officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of "change of opinion" is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. 7. One must treat the concept of "change of opinion" as an in-built test to check abuse of power by the assessing officer. Hence, after 1-4-1989, the assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre-condition to the assumption of jurisdiction under section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment." 31. The question whether the AO has any reason to believe that the petitioner's income had escaped assessment must be tested considering the meaning and import of the said expression as enunciated in the aforementioned decisions. 32. In the present case, the Revenue claims that the AO's reasons to believe that the petitioner's income for AY 2011-12 has escaped assessment is premised on the information as provided by the Investigation Wing. A brief analysis of the said information as gleaned from the reasons recorded by the AO, indicates that the Investigation Wing had flagged the following: (i) that DEL was a penny stock listed with BSE and trading in the said scrip was "suspicious"; and (ii) that the stock of DEL was being "used to facilitate introduction of income of members of benefici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pear to be borrowed from general observations made by the Investigation Wing. Further, the observations made by the AO in paragraph 5 are clearly general observations. 37. The AO found that during AY 2011-12, the petitioner had traded in the scrip of DEL to the extent of Rs. 1,11,89,100/-. And, on this basis, the AO concluded that the investment was (i) bogus; (ii) intended to create an adjustment or set off in the books; and (iii) it was the petitioner's money that was "routed through closely held penny stock". The AO also observed that the transactions in DEL were sham transactions and not brought to taxation. 38. The inference drawn by the AO does not stem from the fact that the petitioner had traded in the scrip to the extent of Rs. 1,11,89,100/-. The fact that the petitioner had sold and purchased shares of DEL on the stock market would not lead to a reason that the transactions were fraudulent or that the petitioner had routed its own money. The said inferences are based on mere suspicion fuelled by the information that DEL is a penny stock and that the shares of DEL were concentrated in the hands of few shareholders which were either non-filers or had filed nominal returns ..... X X X X Extracts X X X X X X X X Extracts X X X X
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