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Case Number

Special Civil Applications Nos. 3827 and 3829 of 1997

Judges

Hon'ble Mr. Justice Kumaran Sreedharan
Hon'ble Mr. Justice Mohit Shantilal Shah

Acts

s. 143(3) of the IT Act.

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

(Based exclusively on the text of the provided opinion.)

The petitioners are assessees under the Income-tax Act and former partners of the firm "M/s Bharat Vijay Construction Co." For the assessment year 1988-89 they filed returns showing, inter alia, receipt of Rs. 47,82,922.50 each as their respective shares of an arbitration award relating to the Daman Ganga Dam project. The total arbitration award in favour of the firm was Rs. 1,91,31,690.

The Assessing Officer (AO) passed an assessment order dated 9 March 1990 and later an order under s.155 dated 24 July 1992. In the firm's assessment for the relevant year an amount (variously described in the papers) was taken into account and the firm's assessment and related tax consequences were the subject of appeals (the firm's appeal to the Tribunal was pending at the time of this opinion).

On 13 March 1997 notices under s.148 of the Income-tax Act were issued to the petitioners, alleging that income chargeable to tax for the assessment year 1988-89 had escaped assessment. The petitioners challenged the validity of those s.148 notices by filing the present petitions.

Legal Issues Presented

Whether the notices issued under s.148 of the Income-tax Act (dated 13 March 1997) were validly issued on the basis of a legally sufficient "reason to believe" that income had escaped assessment for the assessment year 1988-89.
Whether the stated reasons recorded by the ITO amount to no more than a change of opinion by the tax authority, and if so, whether such a change of opinion can justify issuance of a notice under s.148.
Whether a judicial decision (specifically Banyan & Berry vs. CIT) can constitute the "information" or justification for issuing a s.148 notice, and — relatedly — whether the officer may rely on a judicial decision not mentioned in the recorded reasons to sustain the notice.

Arguments of the Parties

Petitioners' Arguments

The recorded "reason for belief" by the ITO was effectively only a change of opinion and a change of opinion cannot be the basis for issuing a notice under s.148 of the Act.
The petitioners had placed the relevant facts (including receipt of their shares of the arbitration award) before the assessing authority in their returns and accompanying submissions.

Revenue's Arguments

The Revenue contended that a judicial pronouncement (specifically the decision in Banyan & Berry vs. CIT) constituted information warranting issuance of the s.148 notice — i.e., an authoritative judicial pronouncement can be the information supporting issuance of a notice.
The Revenue relied on the proposition (cited from CIT vs. Ratanlal Lallubhai) that a judicial decision by a competent authority can supply the information supporting the officer's "reason to believe."
Factual narrative supplied in the AO's reply affidavit described the firm's dissolution, transfer of business to a private company, the arbitral award in favour of the firm, payment to the four partners, and subsequent steps by the Dy. CIT and assessments; the Revenue relied on this background to justify issuing notices to the partners.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Banyan & Berry vs. CIT (1996) 222 ITR 831 (Guj)	Held (as described in the opinion) that where circumstances are similar, the persons who actually received the amounts (partners) should be assessed.	The Revenue sought to rely on this decision as information justifying the s.148 notices. The Court observed, however, that the ITO's recorded reasons did not mention Banyan & Berry, and therefore the officer could not retrospectively rely on that decision to validate the notices.
CIT vs. Ratanlal Lallubhai (1978) 112 ITR 985 (Guj) (TC 51R.1472)	The proposition (as cited by the Revenue) that a judicial decision by a competent authority can constitute the information supporting the issue of a notice under s.148.	The Revenue invoked this authority to support reliance on Banyan & Berry. The Court noted the principle but held that because the ITO's reasons did not refer to the judicial decision, the officer could not justify the notice by invoking it after the fact.
Calcutta Discount Co. vs. ITO (1961) 41 ITR 191 (SC) (TC 51R.779)	High Courts may intervene to prevent executive action that is without jurisdiction and likely to cause undue harassment; "reason to believe" must be more than suspicion or mere change of opinion and must be an objectively substantiated satisfaction.	The Court relied on this principle to assess the sufficiency of the ITO's recorded reasons and concluded that the reasons did not establish an objective satisfaction. Applying this principle, the Court quashed the s.148 notices.

Court's Reasoning and Analysis

The Court proceeded on the factual record that the petitioners had declared (in returns and an annexure) receipt of their shares of the arbitration award and had submitted explanatory material (an Exhibit 'E' statement describing the nature of the receipt as a capital collection). The firm itself had been assessed and an order under s.155 had been passed; the firm's assessment and additions were the subject of appeals, with the firm's appeal pending before the Tribunal.

The ITO's recorded reasons (annexed to the Revenue's reply) stated that the petitioners received their one-quarter share of the arbitration award during the relevant year and that the amount had not been included in the petitioners' taxable income; accordingly the ITO stated he had reason to believe income chargeable to tax had escaped assessment and issued notices under s.148.

The Court focused on two principal analytical points:

The content of the ITO's recorded reasons must be examined on their face; the officer cannot, in court, rely upon extraneous or subsequently advanced reasons (for example, a judicial decision) unless such information appears in the reasons themselves. The Court therefore rejected any attempt by the Revenue to justify the notices by pointing to the Banyan & Berry decision when that decision was not referred to in the reasons recorded by the ITO.
The constitutional and statutory requirement that an officer have an objective "reason to believe" (not mere suspicion or a mere change of opinion) before issuing a notice under s.148. Taking Calcutta Discount Co. as the guiding authority, the Court held that the recorded reasons in this case did not demonstrate an objective satisfaction; instead they amounted to no more than a change of opinion about the taxability of amounts the petitioners had disclosed.

The Court also recorded a practical concession made by the petitioners' counsel: if the firm's pending appeal resulted in quashing the assessment against the firm on the basis of Banyan & Berry, the ITO might then be in a position to invoke ss.147 and 148 — but only after such an eventuality actually occurred. Because that contingency had not occurred, the Court proceeded on the present record.

On the facts before it — where the petitioners had disclosed the receipts and where the assessing authority had been made aware of the relevant material — the Court concluded that no objective reasons sufficient to found a "reason to believe" were recorded by the ITO. Accordingly, the issuance of the s.148 notices could not be sustained.

Holding and Implications

Holding: The petitions were allowed and the notices dated 13 March 1997 issued to the applicants under s.148 of the Income-tax Act were quashed; the Rule was made absolute. The Court made no order as to costs.

Implications:

Direct effect: The specific s.148 notices issued to these petitioners on 13 March 1997 were quashed, thereby preventing the respondents from proceeding under those notices on the present record.
Limitation on reliance: The opinion emphasizes that an officer must record objective grounds constituting a "reason to believe" in the reasons for belief; the officer cannot sustain a s.148 notice in court by relying on additional reasons (including judicial decisions) not mentioned in the recorded reasons.
No broader novelty claimed: The Court did not purport to lay down a new rule of law beyond applying established authorities (for example, Calcutta Discount Co.). The opinion confined itself to quashing the impugned notices on the facts and recorded reasons before the Court. The Court also acknowledged the possibility of future action under ss.147/148 if subsequent events (such as a favourable outcome for the firm on appeal) were to occur.

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Saradbhai M. Lakhani v. Income-Tax Officer

1. Rule. With the consent of the parties, the petitions are taken up for final disposal.

The petitioners are assessees under the IT Act for the last several years. They were partners of firm, under the name and style of "M/s Bharat Vijay Construction Co.". They were assessed during the asst. yr. 1988-89 under s. 143(1) of the Act. They were served with notice dt. 13th March, 1997, issued under s. 148 of the Act, stating that income for the asst. yr. 1988-89 has escaped assessment' within the meaning of s. 147 of the IT Act. Validity of these notices are questioned in these petitions. Issues raised for quashing the notices are the same. So, we consider it advantageous to dispose of these petitions by a common judgment.

2. Facts alleged by the petitioners in these petitions are identical. They are as follows :

Petitioners filed return for the asst. yr. 1988-89, enclosing therewith income and expenditure account, wherein it showed an amount of Rs. 47,82,922.50 by way of receipt from Daman Ganga Dam arbitration. How this amount was arrived at was also shown in an Annexure to the return. An amount of Rs. 1,91,31,690 received on account of the Daman Ganga Dam work was shown distributed to four partners in equal shares, each getting about Rs. 47,82,922.50. Along with the return, petitioners submitted Exhibit 'E' Note :

"... In pursuance of arbitration award in connection with claim of Bharat Vijay Construction Co. (the business of which has been taken over and continued by a private limited company) the assessee as the erstwhile partner of a firm received sums during the year. Since this amount represents collection by the assessee of a right allotted to him and held by him on capital account, it is not liable to tax and hence, not included in the returns of taxable income. Further, also as the assessee is not carrying any business, the question of considering this amount as business income does not arise and hence, not included in the return of taxable income ..."

The AO passed assessment order dt. 9th March, 1990. Order under s. 155 of the it act was passed on 24th July, 1992. Copy of that order is marked as Exhibit 'G'. For the asst. yr. 1988-89, Bharat Vijay Construction Co. was assessed taking into consideration entire amount of Rs. 1,91,31,690 received on account of Daman Ganga Dam construction. Thereafter, petitioners have been issued with notice under s. 148, requiring them to file return for the asst. yr. 1988-89.

3. The AO filed reply affidavit dt. 30th July, 1997. Contention taken therein are to the following effect :

Bharat Vijay Construction Co. was dissolved on 24th October, 1984, when Bharat Vijay Construction Pvt. Ltd. was incorporated specifically with the object of purchasing the business of the firm. Before the firm was dissolved, they have undertaken work of Daman Ganga Project and completed the same on 22nd March, 1983. On 5th November, 1984, the business of the firm was transferred to the private limited company except the right to receive pending claims in connection with Daman Ganga Project. Arbitrator, who went into the claim, passed an award for Rs. 1,91,31,690 on 6th November, 1986 in favour of the firm. Partners applied to the Court for getting the amount directly. Payment was made on 21st April, 1987, to the four partners of the erstwhile firm, each getting Rs. 47,82,922. The partners showed the receipt of the amount in their returns of income and claimed exemption as capital receipt. Dy. CIT (Asst.), Special Range, where the firm was assessed, passed order, making addition of Rs. 1,91,31,690 and intimated the share of income to the respective AOs, where partners were assessed, to be assessed in the hands of the partners. Consequently, order under s. 155 was passed on 24th July, 1992, when the shares of award were assessed to tax after deduction of firm's tax. The firm preferred appeal before the CIT(A), who confirmed the addition. Aggrieved by the order, the firm went in appeal to the Tribunal and the case is still pending. Meanwhile, this Court, in Banyan & Berry vs. CIT (1996) 222 ITR 831 (Guj), took the view that persons, who would be assessed in situation similar to the present case, are the partners, who actually received the amount. Notice under s. 148 was issued after obtaining necessary approval from the CIT, Surat.

4. Along with the reply affidavit, order passed by the ITO on 20th February, 1997, giving the reason for the belief that income has escaped assessment, has been annexed. For a proper understanding of the reasons, we read the same :

".. In pursuance of arbitration award in connection with the pending claim of M/s. Bharat Vijay Construction Co., the assessee as an erstwhile partner of a firm has received amount of award of Rs. 47,82,922 (1/4th share of total award of Rs. 1,91,31,690) during the financial year relevant to asst. yr. 1988-89. This amount of award should be assessed in the hands of the assessee as the same was actually received by him as an erstwhile partner of the firm. But, the amount of award received has not been included in the total taxable income by the assessee.

In view of the above, I have reason to believe that for the year ending 22nd October, 1987 (asst. yr. 1988-89), the income for the assessee chargeable to tax has escaped assessment and, therefore, notice under s. 148 of the Act, is being issued ..."

Learned counsel representing the petitioners advanced an argument that the reason for the ITO's belief that income has escaped assessment is only a change of opinion and that cannot be the basis for issuing a notice under s. 148 of the Act. This argument has been sought to be replied by the learned counsel representing the Revenue by stating that an authoritative judicial pronouncement can be the information warranting the issue of the notice. According to the Revenue, this Court in CIT vs. Ratanlal Lallubhai (1978) 112 ITR 985 (Guj) : TC 51R.1472 took the view that a judicial decision by a competent authority can be the information supporting the issue of notice. Decision in Banyan & Berry's case (supra) clearly provided that the entire amount covered by the arbitration award should have been assessed in the hands of the partners who received the same. In view of that information, it is contended that impugned notice is unassailable.

5. The entire reasons recorded by the ITO, to support his belief that income has escaped assessment, quoted earlier in this judgment, did not make any reference to the decision of this Court in Banyan & Berry (supra). In the absence of mention of that case in the order, it is not open to the officer to justify the order by reference to the said decision. Validity or otherwise of the reason should be gone into on the basis of the facts mentioned therein. It is not open to the authorities to justify the action on the basis of further reasons to be supplied in the form of affidavits.

6. In the instant case, Bharat Vijay Construction Co., the partnership firm, was assessed for the asst. yr. 1988-89. Rs. 1,43,25,205 was found divisible in the said assessment order passed under s. 143(3) of the IT Act. Consequently, each sharer was found entitled to Rs. 35,81,301. Aggrieved by that assessment order, the firm preferred appeal before the AAC. When the firm failed before that authority, they took up the matter before the Tribunal and the case is pending.

We would like to add that when confronted with the argument of Mr. Joshi for the Revenue that if, in the pending appeal filed by the firm, the assessment order passed against the firm is quashed on the basis of the decision in the case of Banyan & Berry (supra), the assessment made against the petitioner in respect of the income treated as received from the firm may also fail, Mr. Shah for the assessee fairly stated that, in that event, the ITO may be in a position to invoke the powers under ss. 147 and 148, but not before any such eventuality arises. We are, therefore, proceeding on the basis of this concession.

7. Petitioners, in their return for the asst. yr. 1988-89, showed the receipt of Rs. 47,82,922.50 as one-third of the amount received from Daman Ganga Project. In the order passed under s. 155 of the it act for the asst. yr. 1988-89, the officer observed :

"... In view of the above, the assessee has not declared the share of profit from M/s. Bharat Vijay Construction Co. as the award was pending. The assessment of M/s. Bharat Vijay Construction Co. as well as Bharat Vijay Construction Pvt. Ltd. are done by the Dy. CIT, Special Range-1, Surat. The assessment of the firm of M/s. Bharat Vijay Construction Co. has been decided by the Dy. CIT, Special Range-1, Surat on 27th March, 1991. The Dy. CIT, Special Range-1, Surat has been intimated the share income of the assessee from the firm of M/s. Bharat Vijay Construction Co. for asst. yr. 1988-89. Since the share income not assessed previously and submission made by the assessee is part of the return, was accepted under s. 143(1)(a). Share income communicated by now requires to be taxed in the hands of the assessee. Since the return was accepted under s. 141(1)(a) of the Act, the assessment requires to be rectified under the provisions of s. 155 of the Act. .."

The documents and assessment orders referred to earlier make it clear that assessee placed the entire facts before the assessing authority. That authority took note of all the income accrued during the year 1988-89 and passed the orders of assessments. Thereafter, impugned notices have been issued. The short question is whether the issue of these notices is sustainable or not. Where the action of an executive authority is without jurisdiction and is likely to subject one to lengthy proceedings and unnecessary harassments, it is well settled, the High Courts are to issue appropriate orders to prevent such consequences (vide Calcutta Discount Co. vs. ITO (1961) 41 ITR 191 (SC) : TC 51R.779. Before issuing notice under s. 148 of the IT Act, the officer should have reason to believe. The said reason to believe cannot be reason to suspect. It is settled law that reason to believe can never be the outcome of a change of opinion. It is essential that before any action is taken by the officer, the officer should substantiate his satisfaction. Reasons recorded in the instant case, which were quoted earlier, do not bring out any ground, making out an objective satisfaction arrived at by the officer. No reason other than those recorded by the officer therein can possibly be urged to sustain his action either. Since the entire facts relating to the income were made known to the assessing authority and no objective reason has been given for issuing a notice under s. 148, we are constrained to quash the impugned notices issued to the applicants in these Special Civil Applications.

In view of what has been stated above, the petitions are allowed and notices dt. 13th March, 1997 issued to the applicants herein are quashed. Rule is made absolute accordingly. We make no order as to costs.

Saradbhai M. Lakhani v. Income-Tax Officer

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioners' Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Saradbhai M. Lakhani v. Income-Tax Officer

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