[2008] 168 Taxman 39 (Punjab & Haryana)/[2009] 311 ITR 38 (Punjab & Haryana)

[06-08-2007]

[2008] 168 Taxman 39 (Punjab & Haryana)

HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax, Jalandhar
v.
Smt. Paramjit Kaur*
M.M. KUMAR AND AJAY KUMAR MITTAL, JJ.
IT REFERENCE NO. 18 OF 1998
AUGUST 6, 2007

Section 147 of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of
primary facts - Assessment year 1989-90 - Whether Assessing Officer can assume jurisdiction
for reassessment proceedings, provided he has reasons to believe, but same cannot be taken
recourse to on basis of reasons to suspect - Held, yes - Assessing Officer had initiated
reassessment proceedings on basis of information received from department's survey wing
that a demand draft, got prepared by assessee, was not accounted for in her books of account
- Whether since Assessing Officer had not examined and corroborated information so
received before recording his own satisfaction of escaped income and initiating reassessment
proceedings, it could be said that Assessing Officer had acted only on basis of suspicion and,
therefore, issuance of notice under section 148 for reassessment proceedings was invalid -
Held, yes
FACTS

The Assessing Officer, on receiving the information from the department's survey wing that the assessee
prepared a demand draft, which was not accounted for in her books of account, issued a notice to the assessee
under section 148 and thereafter completed reassessment by adding amount of draft to income of the assessee.
On appeal, the first appellate authority upheld the validity of notice under section 148, but set aside the
assessment as regards the addition made by the Assessing Officer and remitted the matter back to him to frame
a fresh assessment after allowing reasonable opportunity of being heard to the assessee. On second appeal, the
Tribunal held that since the Assessing Officer had failed to incorporate material and its satisfaction for
reopening the assessment, the same was invalid.
HELD

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. 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. 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. [Para 4]
In the instant case, it was 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 which
was not accounted for in the books of account of the assessee. But 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 could not be said that the same was based on belief that the income chargeable to tax had
escaped assessment. 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 for reassessment proceedings was not valid. [Para 6]
CASE REFERRED TO

ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) [Para 5].
Sanjiv Bansal for the Applicant. Ms. Monika Goyal for the Respondent.
JUDGMENT

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 19-4-1996 in ITA 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 ld. ITAT 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 assessment under section 143(3) of the Act at an income of Rs. 83,040
on 2-9-1994. 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 19-4-1996 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 re-assess 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. 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.
5. 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 :—
". . . 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
 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, 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." (p. 448)
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 Dy.
CIT(A) 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 Dy. CIT(A) and held the reopening to
be invalid.
6. 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 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.
7. In view of the above, the question of law referred to this Court is answered against the revenue and in favour
of the assessee.
■■

*In favour of assessee.