‘Reason to believe’ towards escapement of income is not, per se adequate to commence re-assessment

Considering an appeal assailing the vires of re-assessment proceedings commenced with respect to the relevant Assessment Year, the Income Tax Appellate Tribunal Bench at New Delhi observed that re-opening of assessment could not be sustained where the ‘reasons to believe’ were based on very vague and non-descript reasons and where no material providing foundation for holding such belief, was available.

A Division Bench of Mr. Chandra Mohan Garg, Judicial Member and Mr. Pradip Kumar Kedia, Accountant Member, observed that reiteration of statutory language employed in Section 147 of the Act that the Assessing Officer has ‘reason to believe’ towards escapement of income is not, per se adequate to commence re-assessment.

The Bench also clarified that a vague feeling or suspicion of the Assessing Officer towards possible escapement would not permit to reopen a completed assessment in defiance of statutory requirement of substantial nature.

The Appellant-Assessee was represented by Mr. Ashu Goel, Chartered Accountant, whereas the Respondent-Revenue was represented by Mr. Vivek Kumar Upadhyay, Sr. DR.

Inthe present appeal, the assessee has challenged the assumption of jurisdiction under Section 147 of the Act as well as confirming notional income of about Rs 41.48 Lakhs on account of client code modification.

The Assessee also raised the legal question of usurpation of jurisdiction by the Assessing Officer to reopen the completed assessment under Section 143(3) of the Act in the instant case.

On hearing the contentions of both sides, the Bench noted that the AO sought to re-open assessment based on doubts entertained regarding the correctness of the losses claimed in the transactions carried on through the National Stock Exchange. Although the AO made averments towards the modus operandi adopted by different brokers for transfer of profit and loss, no reference was made to any transaction-wise detail of such wrong-doing. The Bench observed this to a case of assumption of jurisdiction under Section 147 by recording ‘reasons to believe’ based on extremely vague reasons.

Therefore, the Bench clarified that the allegation towards escapement of income must be backed by expression ‘reasons to believe’ and such believe requires to be based on some credible or relevant material. A completed assessment could not be disturbed based on fancy or whimsical grounds or on the basis of ‘reason to suspect’ towards alleged escapement without giving reference to any relevant material which may give rise to a bona fide belief towards escapement to a reasonable person instructed in law.

As for the present case, the Bench noted that no objective material which was relevant or which gave rise to belief of escapement of income could be deciphered. There also was no clarity with regard to the nature of the information received by the AO, the Bench noted.

In this regard, the Bench clarified that the AO was expected to exercise jurisdiction under Section 147 with a scrupulous care and based on material which was unambiguous beyond any reasonable doubt. In the present case, the reasons recorded were in completed disarray. Here, the Bench clarified that simply reiterating the language of the law used in Section 147 that the AO has reason to believe towards escapement of income, was inadequate to justify commencement of proceedings.

The reasons recorded appear to be a token exercise for assumption of jurisdiction and without compliance of jurisdictional parameters, the Bench noted, and that the AO in the instant case had proceeded on a hypothesis flowing from generic information rendering the whole exercise to be arbitrary and unsustainable in law.

Hence the Bench found merit in the plea of the Assessee that the re-assessment proceedings commenced against it were not maintainable and so quashed the re-assessment notice.

Cause Title: Captive Commerce Pvt Ltd vs ACIT Central Circle, New Delhi [ITA No. 2698/Del/2018 / 2023-Enterslice-28-ITAT-Del]

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