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Commissioner Of Income-Tax v. Smt. Paramjit Kaur
Judgment Summary — Reference under section 256(1) of the Income-tax Act, 1961
Factual and Procedural Background
The Revenue referred a question of law to this Court under section 256(1) by the Income-tax Appellate Tribunal (Amritsar Bench) arising from its order dated 19 April 1996 in I.T.A. No. 967 (Asr.)/1995 relating to assessment year 1989–90. The specific question posed was whether the Tribunal was right in law in quashing the assessment for AY 1989–90 by holding that the notice under section 148 was invalid.
The assessee had filed an original return declaring nil income. The Assessing Officer (AO), upon receiving information from the survey wing that Neta Metal Works had prepared a demand draft for Rs. 83,040 payable at Chandigarh in favour of M/s Coal India Ltd. which was not accounted for in the assessee's books, issued a notice under section 148. The AO recorded reasons and framed an assessment under section 143(3) assessing income of Rs. 83,040 on 2 September 1994.
On appeal the first appellate authority (Deputy Commissioner of Income-tax (Appeals)) upheld the validity of the section 148 notice but set aside the addition of Rs. 83,040 and remitted the matter to the AO to frame a fresh assessment after allowing the assessee a reasonable opportunity to be heard. The assessee appealed to the Tribunal, which on 19 April 1996 held that the AO had failed to incorporate material and his own satisfaction for reopening the assessment and therefore the reopening was invalid. The matter was then referred to this Court by the Revenue.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in quashing the assessment order for assessment year 1989–90 by holding that the notice under section 148 is invalid?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437 (Hon'ble Supreme Court) | The reasons forming the AO's belief must have a rational connection with escapement of income; there must be a direct nexus between material coming to the AO's notice and his belief that income has escaped assessment. Material must not be vague, indefinite, far-fetched or remote; the belief must be held in good faith and not as a pretence. While courts cannot substitute their view on adequacy of material, not every piece of material suffices to reopen an assessment. | The Court applied these principles to conclude that the AO acted on mere suspicion based on information from the survey circle without examining or corroborating it, and failed to record his own satisfaction on sufficient material. Consequently, the notice under section 148 was invalid and reassessment could not be sustained. |
Court's Reasoning and Analysis
The Court's reasoning follows the statutory framework and established principles governing reassessment under the Income-tax Act:
- Statutory context:
- Section 147 empowers the AO to assess/reassess escaped income when he has "reasons to believe" that income chargeable to tax has escaped assessment; the power is wide but not plenary.
- Section 148 prescribes the procedure to initiate reassessment proceedings by issuing a notice to the assessee.
- Requirements for valid reassessment:
- There must be sufficient material before the AO; he cannot act on whim or mere suspicion.
- The material must be real and there must be a nexus between the material and the alleged escapement of income.
- The AO must record reasons showing due application of mind and must act on "reasons to believe" and not merely "reasons to suspect".
- Application of precedent:
- The Court relied on the Supreme Court decision in ITO v. Lakhmani Mewal Das which requires a rational connection between the material and the formation of belief that income escaped assessment and warns against acting on vague, indefinite or far-fetched information.
- Assessment of facts in this case:
- The AO initiated reassessment solely on information from the survey circle that the assessee had obtained a demand draft for Rs. 83,040 not recorded in books.
- The AO did not examine or corroborate that information before recording his own satisfaction that income had escaped assessment.
- Because the AO acted on uncorroborated survey information and failed to record adequate material showing his satisfaction, his action amounted to acting on suspicion rather than on reasons to believe.
- The Tribunal had concluded that the AO failed to incorporate the material and his satisfaction; the Deputy Commissioner of Income-tax (Appeals) had recorded that there was insufficient evidence for the addition and remanded for further investigation, evidencing contradictory findings at the first appellate level.
- Conclusion of reasoning:
- On the facts, the AO's notice under section 148 lacked the requisite foundation of recorded reasons based on adequate material and therefore was invalid. The Tribunal's quashing of the reassessment was upheld.
Holding and Implications
Holding: The question of law is answered against the Revenue and in favour of the assessee. The Court held that the notice issued under section 148 for reassessment was invalid because the Assessing Officer had not recorded sufficient material and his own satisfaction to justify reopening the assessment.
Implications:
- Direct effect: The reassessment framed by the AO for the assessment year 1989–90 (addition of Rs. 83,040) was quashed as the initiation under section 148 was invalid; the Tribunal's order setting aside the reassessment was affirmed by this Court.
- Broader implications: The opinion applies established principles (as in ITO v. Lakhmani Mewal Das) reaffirming that an AO must have real material and record reasons showing due application of mind before reopening assessments; the Court did not purport to lay down any novel legal principle beyond affirming existing law.
This summary is prepared strictly from the information contained in the provided opinion and does not add or infer facts or arguments not present in the original text.
Ajay Kumar Mittal, J.:— This reference under section 256(1) of the Income-tax Act, 1961 (for short “the Act”), has been made to this court at the instance of the Revenue by the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (for brevity “the Tribunal”), arising out of its order dated April 19, 1996, in I.T.A No. 967 of (Asr.)/1995 relating to the assessment year 1989–90 raising the following question of law:
“Whether, on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal is right in law in quashing the assessment order for the assessment year 1989–90 by holding that the notice under section 148 is invalid?”
2. The facts are that the assessee filed her original return declaring nil income and the Assessing Officer on receiving the information from survey wing of the Income-tax Department that Neta Metal Works prepared a demand draft for a sum of Rs. 83,040 payable at Chandigarh in favour of M/s. Coal India Ltd., which was not accounted in the assessee's books of account, issued a notice under section 148 of the Act. The Assessing Officer after recording reasons framed the assessment under section 143(3) of the Act at an income of Rs. 83,040 on September 2, 1994. On appeal by the assessee, the first appellate authority upheld the validity of notice under section 148 of the Act but set aside the assessment on the addition made by the Assessing Officer and remitted the matter to him to frame a fresh assessment after allowing reasonable opportunity of being heard to her. The assessee took the matter in second appeal and the Tribunal vide its order dated April 19, 1996, held that since the Assessing Officer had failed to incorporate material and its satisfaction for reopening the assessment, the same was invalid.
3. We have heard learned counsel for the parties.
4. Section 147 of the Act defines the power and jurisdiction of the Assessing Officer for making an assessment or reassessment of escaped income. Section 148 of the Act, on the other hand, provides for initiation of the reassessment proceedings with issuance of a notice on the assessee concerned. Section 147 empowers the Assessing Officer to assess or reassess income chargeable to tax if he has reasons to believe that the income for any assessment year has escaped assessment. The power conferred under this section is very wide, but at the same time it cannot be stated to be a plenary power.
5. The Assessing Officer can assume jurisdiction under the said provision provided there is sufficient material before him. He cannot act on the basis of his whim and fancy, and the existence of material must be real. Further, there must be nexus between the material and escapement of income. The Assessing Officer must record reasons showing due application of mind before taking recourse to reassessment proceedings. Still further the Assessing Officer can assume jurisdiction for reassessment proceedings provided he has reasons to believe but the same cannot be taken recourse to on the basis of reasons to suspect.
6. In ITO v. Lakhmani Mewal Das, [1976] 103 ITR 437, the hon'ble Supreme Court, while interpreting the provisions of section 147 of the Act, held as under (page 448):
“… the reasons for the formation of the belief must have a rational connection with 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 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 far fetched, 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, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.”
7. The Tribunal while allowing the appeal of the assessee came to the conclusion that it was essential for the Assessing Officer before issuing notice to record his own satisfaction on the basis of material and should not have acted merely upon the information received from the survey circle. It was further noticed that the Deputy Commissioner of Income-tax (Appeals) had recorded that there was not sufficient evidence for making addition of Rs. 83,040 in the hands of the assessee and the matter was remanded to him to further investigate for connecting the amount of the draft with the escaped income of the assessee still it was held that the initiation of reassessment was valid. The Tribunal concluded that contradictory findings had been recorded by the Deputy Commissioner of Income-tax (Appeals) and held the reopening to be invalid.
8. It is undisputed that the Assessing Officer had initiated reassessment proceedings on the basis of information received from the survey circle that the assessee had got prepared a demand draft for a sum of Rs. 83,040 which was not accounted in the books of account of the assessee. The Assessing Officer had not examined and corroborated the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings. The Assessing Officer had thus acted only on the basis of suspicion and it cannot be said that the same was based on the belief that the income chargeable to tax had escaped income. The Assessing Officer has to act on the basis of “reasons to believe” and not on “reasons to suspect”. The Tribunal had, thus, rightly concluded that the Assessing Officer had failed to incorporate the material and his satisfaction for reopening the assessment and, therefore, the issuance of notice under section 148 of the Act for reassessment proceedings was not valid.
9. In view of the above, the question of law referred to this court is answered against the Revenue and in favour of the assessee.
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