Judgment:
1. This appeal filed by the Revenue is directed against the order dt.
17th Feb., 2000, of the CIT(A)-V, Mumbai, cancelling the assessment framed by the AO for the asst. yr. 1991-92 under Section 143(3) read with Section 147 on the ground that it is bad in law and invalid.
2. The facts in brief are that the assessee is a share broker in the Bombay Stock Exchange. The AO framed the assessment under Section 143(3) on 30th March, 1994, at total income of Rs. 4,43,950, wherein, he made the addition of Rs. 5,50,000 out of a total hedging loss of Rs. 47,31,947 claimed by the assessee. This loss was estimated because the assessee was not in a position to furnish the exact co-relation between the stock held by him and the value of the hedging done by him in respect of such stocks.
3. Subsequently, the AO on 13th Sept., 1995, issued a notice under Section 148 and reframed the assessment, wherein, he estimated the hedging loss at Rs. 23,65,973 which is 50 per cent of total hedging loss claimed of Rs. 47,31,947. The reasons given by the AO for re-estimating the hedging loss is that the assessee was not in a position to co-relate the entire transaction of account of hedging with its stock position on a day-to-day basis.
4. On appeal, in the impugned order, the learned CIT(A) cancelled the assessment on the ground that the AO has not discovered or, found any new material for reopening the assessment. The learned CIT(A) also observed that all the material informations were available on record at the time of framing original assessment. Therefore, the mere fact that the figure of disallowance out of hedging loss made in the original assessment was not appropriate is no ground to reopen the assessment.
For cancelling the assessment framed under Section 143(3) read with Section 147, in the impugned order, the learned CIT(A) also relied on the decision of the apex Court in the case of Calcutta Discount Co.
Ltd. v. ITO for the proposition that there was no omission or failure to disclose full and truly all material facts.
Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us on the ground that the learned CIT(A) erred in annulling the (assessment) completed, under Section 143(3) read with Section 147 of the IT Act, 1961, without appreciating the fact that : (a) assessee's assessment was reopened under Clause (c) of Expln. 2 to Section 147 of the Act.
(b) that the assessee failed to disclose duly and truly all the material facts necessary for his assessment.
5. At the time of hearing, on behalf of the Revenue, Sh. Amrish Bedi, the learned Departmental Representative, appeared and relying on the provisions contained in Expln. (2) to Section 147 of the Act submitted that under new Section 147 substituted by the Direct Tax Laws (Amendment), 1987 Expln. 2 to Section 147, wide power is given to the AO. Section 147 reads as under : 147-If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in Sections 148 to 153 referred to as the relevant assessment year).
Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
6. The learned Departmental Representative after drawing our attention to the Clause (c) of Expln. 2 to Section 147 contended that w.e.f. 1st April, 1989, the AO has wide power. Moreover, notice under Section 147/148 was issued within four years from the end of the relevant assessment year and the Hon'ble Gujarat High Court in the case of Praful C. Patel v. M.J. Makwana, Asstt. CIT has held : "As noted above, the provisions of Section 147 require that the AO should have reason to believe that any income chargeable to tax has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has a cause or justification to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. The words 'reason to believe' cannot mean that the AO should have finally ascertained the facts by legal evidence. They only mean that he forms a belief from the examination he makes and from any information that he receives. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would amount to saying that he had reason to believe that such income had escaped assessment. The justification for his belief is not to be judged from the standards of proof required for coming to a final decision." 7. The learned Departmental Representative further relied on the decision of the Hon'ble jurisdictional High Court in the case of IPCA Laboratories Ltd. v. Gayanand Meena, Dy. CIT and Ors. (2001) 251 ITR 420 (Bom) and contended that in that judgment the Hon'ble High Court held that a notice under Section 147/148 was issued within four years, wherein also the case of the Department was that the assessee has obtained excessive relief under Section 80HHC. The Hon'ble jurisdictional High Court upheld the validity of notice under Section 147/148 and also approved the judgment of the Hon'ble Gujarat High Court in the case of Praful C. Patel (supra).
8. For the aforesaid reasons, the learned Departmental Representative submitted that the impugned order (of) the learned CIT(A) be set aside and the learned CIT(A) be directed to decide the addition on merits after giving opportunity of being heard to both the sides.
9. On other hand, Shri R.R. Vora, the learned Counsel for the assessee, supported the order of the CIT(A). He relied on the Full Bench judgment of the Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB), delivered on 19th April, 2002.
The counsel for the assessee submitted that as per this decision the assessment cannot be reopened purely on the ground of change of opinion because Section 147 is substituted w.e.f. 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987 and also contains the phrase "if the AO has reasons to believe that income chargeable to tax has escaped assessment". The counsel for the assessee submitted that in this case, the AO was having no reasons to believe that the income has escaped assessment. The assessment has been reopened for the simple reason that earlier addition was made on account of non-furnishing of exact co-relation between the stock held by the assessee and value of hedging done. The earlier estimate was made at Rs. 5,50,000 and on the same facts without any fresh material or having any reasons to believe that earlier estimate of Rs. 5,50,000 made was wrong, the AO reopened the assessment and re-estimated the figure at Rs. 23,65,973. The counsel for the assessee further submitted that in the original assessment framed, the AO has neither committed any mistake in applying correct law nor there is any failure on the part of the AO to consider all the facts. In the case of IPCA Laboratories (supra), the facts of the case before the Hon'ble jurisdictional High Court was that the assessee had obtained excessive relief in original assessment than the assessee is entitled as per provisions contained under Section 80HHC(3)(c) of the Act. In this case, no excessive relief has been allowed, hence, Clause (c) to Expln. (2) to Section 147 is not applicable because there is no reason to believe that income has escaped assessment. The learned Counsel for the assessee accordingly contended that in this case there was no reason to believe that income has escaped assessment. The learned Counsel for the assessee relied on the several judgments, wherein, it is held that in order to reopen the assessment, there has to be reason to believe that income has escaped assessment. Reliance was also placed on the judgment of the apex Court in the case of Phool Chand Bajrang Lal and Anr. v. ITO and Anr. , wherein, it is held that reason to believe should not be construed as a reason to suspect. Continuing his arguments, the learned Counsel for the assessee submitted that that there has to be "reason to believe" (and it) cannot be assumed merely on account of "change of opinion" on the same basis or information and document, irrespective of the fact whether the reopening sought to be done is within 4 years or beyond 4 years. The AO can reopen the assessment within 4 years only if there is mistake of fact or law due to which there is underassessment of income or grant of excessive loss. There cannot be reopening of assessment, as no new facts have come to the knowledge, showing escapement of income.
Therefore, the learned CIT(A) is legally and factually correct in cancelling the assessment.
10. After hearing both the sides, we have carefully gone through the orders of the authorities below. From the perusal of the assessment order, we find that the AO has not mentioned the reasons for reopening the assessment. Before us also, the learned Departmental Representative could not produce the reasons for reopening the assessment. After going through the original assessment order and the assessment reframed subsequently by issuing the notice under Section 148, it appears that the assessment was reopened for the simple reason that earlier estimate of Rs. 5,50,000 made by the AO was on the lower side. Needless to add that in the original assessment also, the AO made the estimate of Rs. 5,50,000 because the assessee was not in a position to co-relate the entire transaction on account of hedging loss with its stock position on a day-to-day basis. After taking into account this aspect earlier, the AO estimated the figure at Rs. 5,50,000. Subsequently also, the position remains the same and on same facts, the successor AO estimated the figure at Rs. 23,65,973.
11. The Hon'ble Bombay High Court in the case of IPCA Laboratories Ltd. (supra) has held as under : The expression 'reason to believe' refers to the belief which prompts the AO to apply Section 147 to a particular case; that it will depend on the facts of each case; that the belief must be of an honest and reasonable person, based on reasonable grounds; that the AO is required to act not on mere suspicion, but on direct circumstantial evidence; that the expression "reason to believe" does not mean a subjective satisfaction on the part of the AO. In the present case, we are satisfied that the reasons for the belief have a rational connection with the formation of the belief.
12. It is well-settled law that whenever an assessee fails to furnish information on a particular point, the AO has no option but to make an estimate. In this case, at the time of original assessment, the assessee failed to co-relate the information and the AO estimated the figure at Rs. 5,50,000 on account of hedging loss. In the reassessment framed also, on the same facts and information, the AO estimated the hedging loss at 50 per cent of Rs. 47,31,947. This clearly indicates that the reopening has been made because estimate earlier made by the AO was found to be on the lower side. The reopening of assessment under Section 147, in our opinion, even after amended law cannot be made for making roving enquiries.
13. In this case, while framing the original assessment, there was no failure on the part of the AO to apply correct provisions of Act.
Therefore, the decisions relied by the learned Departmental Representative in the case of Praful C. Patel (supra) and followed by the Hon'ble jurisdictional High Court in the case of Ipca Laboratories Ltd. (supra) are not relevant. We also find that there is no fresh information (which) came to the possession of the AO after framing the original assessment which indicated that earlier estimate made by the AO was incorrect. The Hon'ble apex Court in the case of Phool Chand Bajrang Lal(supra) held that it is trite law that the subsequent information based on which the reassessment was proposed should be definite, specific, relevant and reliable and then only, such material would constitute to satisfy the test of reason to believe, because such reason to believe should not be construed as a reason to suspect. In other words, what is relevant is whether the material has got any rational connection or live link for the purpose of reason to believe.
To put (it) otherwise, if the informations which form the basis for the reason to believe for the Department to reopen the assessment are materials which lacks specific, relevant and reliable criterions, such materials are liable to be rejected only on the ground that they may be reason to suspect, but not reason to believe.
14. The above proposition is also supported by another decision of the apex Court in the case of ITO v. Lakhmani Mewal Das , wherein, it was held that the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief.
The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. The reasons for the information 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 ITO 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. The powers of the ITO to reopen assessment, though wide, are not plenary.
The words of the statute are "reason to believe" and not "reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the IT authorities after the assessment has been completed.
15. Having regard to the facts and circumstances of the case, we find that there is no reason to believe that income has escaped assessment and reopening has been done solely to re-estimate the hedging loss.
This, in our opinion, cannot be done because the Clause (c) of Expln. 2 to Section 147 is to be read in conjunction with main Section 147 which continues to contain the phrase "AO has reasons to believe". In this case, there is no reasons to believe but mere reasons to suspect that the estimate made by the AO in the original assessment was on the lower side and in the assessment reframed, the AO on same facts made a higher estimate, which is not permissible. We, therefore, incline to uphold the order of the CIT(A).