The Allahabad High Court bench of Justice Surya Prakash Kesarwani and Justice Jayant Banerji has ruled that once the notice under Section 148 of the Income Tax Act, 1961, issued by the assessing authority was declared without jurisdiction, the subsequent proceedings, including the re-assessment order, cannot be sustained.
The petitioner/assessee submitted an objection to the “reason to believe” recorded by the assessing authority. In his objection, the petitioner has specifically stated that he has not entered into any transaction amounting to Rs. 45 lakhs during the year under consideration, which has been made the basis for recording the “reason to believe” and issuing a notice under Section 148 of the Income Tax Act, 1961. The petitioner has also produced documentary evidence to show that no transaction of Rs. 45 lakhs, as alleged, was entered into by the petitioner.
The petitioner contended that on totally baseless and unfounded grounds, a notice under Section 148 of the Income Tax Act, 1961, was issued by the department and, in a most arbitrary manner, the objection of the petitioner was not considered by the assessing authority and was arbitrarily rejected.
The court observed that the assessing officer under Section 147 has the power to re-assess any income which escaped assessment to tax for any assessment year subject to the provisions of Sections 148 to 153. The power to reassess under Section 147 has been incorporated so as to empower the Assessing Authorities to re-assess any income on the ground that it escaped their knowledge.
The court clarified that the words “reason to believe” suggest that the belief must be bona fide and must be that of an honest and reasonable person based upon reasonable grounds and that the Income Tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip, or rumour. His vague feeling that there might have been some escapement of income from assessment is not sufficient. The reasons for the formation of the belief must be based on tangible material and must be based on 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 assessment year. In other words, the material on which the assessing authority bases its opinion must not be arbitrary, irrational, vague, distant, or irrelevant. If the grounds for the formation of “reason to believe” are of an extraneous character, the same would not warrant the initiation of proceedings under Section 147 of the Act, 1961.
“If, there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the income of the assessee has escaped assessment, it can take action under Section 147 of the Act, 1961.” If the grounds taken for initiating reassessment proceedings under Section 147 of the Act, 1961 are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court because the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. The existence of the belief can be challenged, but not the sufficiency of the reasons for the belief. The belief must be held in good faith and should not be a mere pretence,” the court said.
While granting the writ petition, the court ordered the department to deposit Rs.5000/- with the High Court Legal Services Committee, High Court, Allahabad, within three weeks, or the amount would be recovered as a fine.
Case Title: Uphill Farms Private Limited Versus UOI
Source: livelaw.in
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
