1. This appeal of the assessee is directed against the order passed by CIT(A)-II, Agra on 29th Oct., 1997 for the asst. yr. 1991-92.
2. With the original memo of appeal, about 9 grounds of appeal were taken and thereafter, additional ground of appeal was also taken during the course of hearing. However, it is noted that the grounds of appeal were overlapping, therefore, concise grounds of appeal including the additional ground of appeal have been filed by the learned Counsel for the assessee. No objection has been raised by the learned Departmental Representative. Hence, the same has been accepted. In the concise grounds of appeal, the first ground taken is that initiation of proceedings under Section 148 in the present case has been done at the behest and under the directions of CIT(A). As such, the action under Section 147/148 is bad in law rendering thereby the entire assessment as void ab initio, and hence, non est in law, which may be quashed.
3. The facts of the issue are that the assessee company came into existence on 16th Oct., 1989. However, no return of income was filed.
Therefore, the AO issued notice under Section 142(1) on 8th Jan., 1992.
The assessee filed return of income on 31st Dec, 1993 declaring nil income. The return of income for the year under consideration was due on 31st March, 1993. The return of income being a belated return, was an invalid return in the eye of law. However, the AO proceeded to act upon the invalid return of income and passed the assessment order under Section 143(3) on 30th March, 1994 at the total income of Rs. 23,72,180. The above assessment order was set aside by the CIT(A) with the following observation: The return was filed beyond the period prescribed under Section 139 and the AO was required to regularize the return. The return being invalid could not have been acted upon and in order to set right the infirmity the assessment has to be restored to his file for framing fresh assessment after regularizing the return as all the proceedings taken up consequent upon filing of an invalid return also become invalid. While framing fresh assessment the AO should observe all the legal formalities namely issue of summons etc. on the concerned parties. He should also allow the appellant the benefit for those amounts which appear in names of existing assessee as it is for these individuals to prove the source of investment made by them in the company and the appellant should not be burdened with proving the genuineness of amounts in those cases where the amounts are owned by these persons.
4. Thereafter, the AO recorded the reasons for reopening the case for the year under consideration. The reasons recorded on 6th Dec, 1995 have been submitted at p. 28 of the paper book, which is filed by the assessee during the course of hearing before us. The same is reproduced as under: The assessee has failed to file its return of income for asst. yr.
1991-92 within statutory time-limit i.e., 31st March, 1993. The return filed by the assessee for asst. yr. 1991-92 on 31st Dec, 1993 being an invalid return, has therefore been filed. On perusal of records, it is found that the assessee company has raised fresh share application money amounting to Rs. 21,91,900 and unsecured loan to the extent of Rs. 2,62,000 and sources of which are unexplained at the hands of assessee company to the total of such deposits amounts of Rs. 24,53,900.
Keeping in view of above facts, I have, therefore, reason to believe that income of Rs. 24,53,900 has escaped assessment for asst. yr.
1991-92. Hence, it is established that it is a fit case to issue notice under Section 148 r/ws. 147 of IT Act.
5. After recording the above reasons, notice under Section 148 was issued and in response to that notice, it was submitted that the return of income filed originally on 31st Dec, 1993 may be treated as return of income filed in compliance to the notice issued under Section 148 of the Act.
6. The learned Counsel for the assessee during course of hearing before us filed a paper book containing total pp. 89 which is placed on record. He invited our attention to p. 28 of the paper book, where the reasons have been recorded and the same have been reproduced above. The learned Counsel for the assessee argued that in the reasons recorded on 6th Dec, 1995, the AO has mentioned that the assessee has failed to file its return of income within the statutory time-limit i.e., 31st March, 1993 and the return filed on 31st Dec, 1993 was an invalid return, therefore, the same has been filed. The learned Counsel argued that it is incorrect to say that the invalid return was filed, rather the AO has acted upon the said invalid return of income and the assessment order was framed under Section 143(3) on 30th March, 1994. A copy of the said original assessment order is placed at pp. 3 to 22 of the paper book. The learned Counsel further argued that the AO has further recorded for reopening of the assessment that "I have, therefore, reason to believe that income of Rs. 24,53,900 has escaped assessment for the asst. yr. 1991-92. Hence, it is established that it is a fit case to issue notice under Section 148 r/w Section 147 of the IT Act." The learned Counsel for the assessee has vehemently argued that there was no reason to believe that income of Rs. 24,53,900 has escaped for the asst. yr. 1991-92. In fact, all these information have already been provided by the assessee while filing the return of income on 31st Dec, 1993. If that was an invalid return of income, then the AO should not have acted upon the invalid return of income filed on 31st Dec, 1993. The AO has acted upon the invalid return of income and framed the assessment order under Section 143(3) of the Act on 30th March, 1994, at the income of Rs. 23,72,180. The learned Counsel argued that in the assessment order, it is nowhere mentioned that income escaped to be assessed. Rather, the assessment originally made and after reopening under Section 148, the income was assessed at the same income. It is further submitted that the original assessment order was set aside to regularize the invalid return of income on the basis of which the original assessment order was framed. No notice under Section 148 could be issued at the behest of the higher authorities. In support of his submissions he has relied upon the judgment of Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das , The reasons for the formation of the belief contemplated by Section 147(a) of the IT Act, 1961, for the reopening of an assessment must have a rational connection 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 the material facts.
The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the ITO to draw the correct inference from the primary facts. It is not the responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If an ITO draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment.... The reasons for formation of the belief must be held in good faith and should not be mere pretence.
8. The learned Counsel for the assessee pleaded that the assessee had filed true and full facts before the AO by filing return of income on 31st Dec, 1993 and in case that was the invalid return of income, the AO should not have acted upon the same and he should not have framed assessment order under Section 143(3) of the Act. After completion of the assessment order no fresh information was gathered by the AO to draw an inference that the income has escaped assessment. The learned Counsel further argued that the notice under Section 148 was issued at the behest of the CIT(A). There was no omission or failure on the part of the assessee to disclose full and true material matters, necessary for framing fresh assessment. As such, the action on the part of the AO was illegal and bad in law. It support of his submissions, he relied upon the decision of Calcutta High Court in the case of Smt. Santosh Debi Baid v. ITO . In that case the assessee furnished returns for the asst. yrs. 1956-57 to 1960-61 before the ITO and the assessment was completed by the ITO for the aforesaid years in due course. The CIT cancelled the assessment orders under Section 33B of the Indian IT Act, 1922, on 22nd Dec, 1962 and directed fresh assessments in accordance with law by the ITO having proper jurisdiction over the case after due enquiry. Notices of reassessment were issued to the assessee on 27th Nov., 1964 by the ITO, Central Circle, Calcutta, under Section 148 of the IT Act, 1961, for the asst.
yrs. 1956-57 to 1959-60. The assessee challenged the validity of the assessment notices. Hon'ble Calcutta High Court held that: The sole ground on which the proceedings were sought to be reopened against the assessee under Section 148 of the 1961 Act was that the original assessments had been cancelled by the CIT under Section 33B of the 1922 Act. There was no indication of any omission or failure on the part of the assessee to disclose fully or truly any material facts necessary for assessment in the course of the original assessment proceedings. The original returns were filed by the assessee in the original proceedings on the basis that the ITO had jurisdiction over the assessee's case. Therefore, it cannot be said that there was no filing of the returns or that the returns filed were a nullity. At the highest it was only an irregularity which had been condoned by the assessing ITO. The conditions precedent for the assumption of jurisdiction under Section 147(1) of the IT Act, 1961, not having been fulfilled, the ITO has no jurisdiction to issue the impugned notice under Section 148 of the Act.
9. The learned Counsel for the assessee has further argued that the reasons were recorded at the behest of the CIT(A) while any procedural defect cannot amount to get jurisdiction as is held by Hon'ble Madras High Court in the case of CIT v. T.R. Rajakumari as under: There is a clear-cut distinction between jurisdiction and procedure and a defect in procedure will not normally amount to lack of jurisdiction. Section 147(a) of the IT Act, 1961 sets out certain conditions for invoking the power and jurisdiction under that section. If those conditions are not satisfied, there is no jurisdiction for the officer to reassess under that section. Even if the conditions precedent set out in Section 147(a) are treated as matters of procedure, still the contemplated procedure has to be followed for attracting the jurisdiction under that section. Hence, the extreme contention that even if the statutory provisions had not been followed still the order of reassessment has to be taken as valid cannot be accepted.
A condition precedent for initiating reassessment proceedings is the reasonable belief of the ITO that income had escaped assessment.
Hence, when initiation of reassessment proceedings was stated to be on the direction of the CIT the reassessment proceedings are invalid even though on the facts it is established that there was non-disclosure by the assessee.
10. The learned Counsel argued that if the return of income filed by the assessee on 31st Dec, 1993 was invalid then he should have not acted upon the said return of income. After framing the assessment order, the AO cannot say that there was escapement of income. In support of his submissions, he relied upon the decision of Supreme Court in the case of Gemini Leather Stores v. ITO , wherein the Hon'ble Supreme Court has held as under: While making a best judgment assessment, the ITO had discovered certain transactions evidenced by the drafts which the assessee had not disclosed. In spite of this discovery, arid the knowledge of all the material facts the ITO did not make necessary enquiries and draw proper inferences as to whether the amounts invested in the purchase of the drafts could be treated as part of the total income of the assessee during the relevant year.
Held that it was plainly a case of oversight and the ITO could not take recourse to Section 147(a) to remedy the error resulting from his own oversight and that therefore, the notice under Section 148 should be quashed.
11. The learned Counsel further submitted that the reasons recorded by the AO on 6th Dec, 1995 were false reasons so far as it is mentioned that the return of income originally filed on 31st Dec, 1993, was filed and he has reason to believe that an income of Rs. 24,53,900 escaped the assessment for the asst. yr. 1991-92. On the basis of false reasons, the AO cannot get jurisdiction to issue notice under Section 148. As such the notice under Section 148 is illegal and invalid, which is based on false reasons recorded, which is apparent from the facts of the case.
12. The learned Counsel further argued that the valid course of action for the AO was that he should have framed assessment order under Section 144 of the IT Act when he noted an invalid return of income. He further argued that the CIT(A)-II, Agra restoring the original assessment order to the file of the AO, it is mentioned in para 2.1 that "the appeal is consequently to be taken for allowed for statistical purposes". Therefore, according to the learned Counsel for the assessee when the appeal of the assessee was allowed, he has no grievance. The aggrieved party was Revenue for which it should have filed the appeal before the Tribunal. On the other hand, the learned Departmental Representative argued that the matter was restored to the AO by the CIT(A) in order to set right the infirmity and to frame fresh assessment. In such circumstances, if the assessee was aggrieved then he should have filed second appeal before the Tribunal against the directions given by the CIT(A). The learned Departmental Representative further argued that the AO has acted according to the directions given by the CIT(A).
13. We have carefully considered the rival submissions and also gone through the paper book filed by the learned Counsel for the assessee.
14. We noted from the reasons recorded by the learned AO on 6th Dec, 1995 that the return filed on 31st Dec, 1993 for the asst. yr. 1991-92 is beyond the 'statutory time-limit. Therefore, the same is an invalid return and hence, the same was filed. This is patently wrong and distorted recording of facts. Actually the return was not filed, but on the basis of that invalid return, order under Section 143(3) was passed by the AO. We also noted that there was no difference in the income originally assessed and subsequently assessed by issuing notice under Section 148 of the Act. Therefore, the AO further erred in mentioning that he has reasons to believe that income of Rs. 24,53,900 has escaped assessment in the asst. yr. 1991-92. In fact, there was no reason before the AO to believe that income escaped assessment for the asst.
yr. 1991-92. The notice issued under Section 148 on false recording of reason to believe, cannot be held a valid proceeding. Therefore, subsequent action is also invalid and illegal.
15. We also noted that the fresh assessment order was made under Section 143(3) r/w Section 251 of the IT Act, 1961, meaning thereby, the fresh assessment order has been made at the behest and on the directions of the CIT(A). The Hon'ble Madhya Pradesh High Court in the case of Yeshwant Talkies v. CIT has held that the ITO for expressing his satisfaction for taking action under Section 147 was the directions of the CIT, which on the material collected by the ITO was not at all information or a new fact found. Therefore, the ITO could not record his satisfaction to initiate proceedings under Section 147(b) and hence, the reassessment proceedings were held invalid.
Further Hon'ble Patna High Court in the case of Sheo Narain Jaiswal and Ors. v. ITO and Ors. has held that if the ITO does not form his own belief but merely acts at the behest of any superior authority, it must be held that the assumption of jurisdiction under Section 148 of the Act was bad for non-satisfaction of the condition precedent. We also noted that the reason to believe was not in good faith as there was no new material or information, on which the AO could form a reason to believe and it is a false recording that the AO has filed the belated return. The Hon'ble Supreme Court, as already discussed in the case of ITO v. Lakhmani Mewal Das (supra), has held that the reasons for formation of the belief must be held in good faith and should not have been mere pretence.
16. Hon'ble jurisdictional High Court of Allahabad has held in the case of Girdhar Gopal Gulativs. Union of India and Anr. (2004) 188 CTR (All) 532 : (2004) 269 ITR 45 (All) that once the assessment was proposed to be made under Section 143(3) of the Act, it is presumed that all the necessary enquiries have been done and the AO cannot issue notice under Section 148 after the assessment has been made unless there is deliberate concealment or there is information that income had escaped assessment. The Hon'ble High Court has further held that the record showed that for the asst. yr. 1996-97, a detailed inquiry had been held by the AO before making the assessment. Therefore, the notice under Section 148 was passed only on change of opinion. Hence, it was invalid. In the instant case, the assessment order was passed under Section 143(3) of the Act and no new information was brought on record.
Therefore, the action of reopening the assessment is invalid.
17. Keeping in view the above facts and circumstances, we quash the assessment order and hold the same illegal and invalid ab initio. This ground of appeal is allowed.
18. Since the assessment has been held invalid on legal ground, therefore, we need not to consider the other grounds raised on the merits of the case.
1. On receiving the draft order from my learned Brother I have discussed the same with him and since I am unable to agree with the view expressed by him I am constrained to write my separate dissenting order.
2. As far as the facts are concerned there is no dispute inasmuch as there was a return filed by the assessee in response to notice under Section 142(1) of the Act wherein certain additions were made by the AO. The assessee challenged these additions in appeal before the CIT(A) who, taking note of the fact that the return filed was beyond the period as prescribed under Section 139 restored to the AO with the direction to regularize the same.
3. There is also no dispute over the issue that notice under Section 148 within the prescribed time was issued to the assessee in order to regularize the same. It is also an admitted fact that in response to this, the assessee stated that the return of income filed originally on 31st Dec, 1993 may be treated as return of income filed in compliance to the notice under Section 148 of the Act. In the fresh round also additions were made which were challenged by the assessee before the CIT(A) on merit. However, before the CIT(A) there was no representation and the action of the AO was confirmed in an ex parte order. Aggrieved by this, the assessee is in appeal. Before the Tribunal the assessee has challenged the addition on merits and also the invocation of Section 147/148 of the Act.
4. In the draft order sent by the learned AM vide paras 14 to 16 the assessment has been quashed for the reason that the assessment has been reopened on the basis of the direction given in the CIT(A)'s order and the AO has not formed his own opinion. The issue which requires, consideration is that can the direction given in appeal by the CIT(A) to the AO to regularize the assessment be considered to be "information" within the terminology as applied by judicial pronouncements.
5. The undisputed fact that emerges is that the original assessment was set aside with certain direction, as a result of the appeal of the assessee against the addition on merits. This set aside order stands on record and has not been challenged as such not upset by any higher forum. The position as a result of this is that there is no assessment with respect to the assessee and thus this income in the year under consideration has not been assessed and as such is materially and significantly different from cases where different view is attempted to be taken on same facts and thus unsettle a settled position. Thus, in these peculiar facts can the present proceeding be regarded in the light of judgment where different view has been taken which has been the basis for quashing the reopening. Undisputedly the fact that glaringly emerges is that can the AO form the belief in these circumstances that income assessable to tax has escaped assessment. It is seen that the action is neither barred by limitation nor by judgments where the principle has been laid that different view on same facts is not appropriate. The fact also remains undisputed that reasons have been recorded. The sufficiency and adequacy of the recording of reasons is not open to challenge and there are a plethora of judgments which have laid down this ratio. Thus, sufficiency of reasons cannot be examined unless shown to be perverse. In the facts of the case no perversity has been argued, the only facile argument has been that reopening is on the direction of the CIT(A). Thus, in the facts of the present case reasons have been recorded and it is not even a case of change of opinion on same facts. Thus, what devolves for consideration is can the directions/findings/observations given in appellate orders constitute as "information" which the AO took cognizance of and formed a belief that income has escaped assessment.
6. The decisions relied upon by my Brother are not applicable on account of the fact that as has already been observed and demonstrated that the present case is not a case where a different view has been taken by the AO and he has as such unsettled a settled position. The word 'information' is of wide connotation and can include the direction/finding or observation given by the CIT(A) in appeal since once having noticed that a return filed was beyond the period the only course of action open was to restore it for regularizing the same and this direction has been carried out and has not been challenged.
7. There is also evidence on record, and no dispute over the issue as has been already observed that the reasons have been recorded by the AO. The sufficiency or the adequacy of the reasons as observed is also not an issue which is open to challenge in the present proceedings. The only relevant fact is that there must be a live link or nexus with the reopening. In the facts of the present case it is nobody's case that there is no live link. The relevance and the nexus of the same itself is evident from the facts of the case. This is also not a case where the AO has considered the material and formed his opinion in the first round which stands on record and in the second round has sought to change the same and disturb the earlier finding with a different view subsequently on same facts. Here the facts at the cost of repetition are that the AO (sic-assessment) in the first round was set aside for regularizing the same as the return was filed beyond the time prescribed under the Act. As a result of this the income brought to tax in the present proceedings was not assessed at all. In the reassessment the issue settled is not being unsettled as even in the first round the income was identically treated.
8. It is worth pointing out that in fact in Chatturam Horilram Ltd. v.CIT the Supreme Court has laid down that where earlier assessment proceedings had been taken but failed to result in a valid assessment owing to a lacuna in the law despite the chargeability of the income to tax, it would be a case of chargeable income escaping assessment. It may also be relevant to refer to another decision of the apex Court rendered in the case of CIT v. Narsee Nagsee & Co.
wherein it has been held that the income is said to have escaped assessment within the meaning of this section even where there was a failure to charge the income entirely due to oversight or inadvertence on the part of the IT authorities. In fact their Lordships in Maharajadhiraj Sir Kameshwar Singh v. State of Bihar have held that the section is not confined to cases where income has not been returned and also covers cases where income is included in the return made by the assessee but is left unassessed by the AO.9. Their Lordships have held in Esthuri Aswathiah v. ITO and CIT v. Bidhu. Bhusan Sarkar that no doubt income cannot be said to have escaped such assessment within the meaning of this section if the assessment proceedings in respect of that income are still pending and have not yet terminated in a final order. However, the AO's noting "not assessed" or "not assessable" or "no proceeding" or "filed" would ordinarily amount to a final order lawfully terminating the assessment proceedings and thereafter action can be taken under this section. The pedantic argument that no information was available with the AO on facts is as such not correct.
10. In the facts of the present case reliance has been placed by my Brother in para 15 of the proposed draft in the case of Yeshwant Talkies (supra) wherein the facts considered are reproduced as under: After the completion of the original assessment of the assessee, the ITO received certain audit objections that in the original assessment of the assessee, certain expenses allowed in respect of gratuity, bonus, etc., were not properly allowed. Consequent to the audit objections, the ITO made enquiries and discovered reasons for the disallowance of some of the items. The ITO initiated proceedings under Section 147(b) and completed the reassessment after disallowing certain items. The assessee filed an appeal to the CIT(A) and contended that the ITO had no jurisdiction to reopen the assessment under Section 147(b) because, at the time of the original assessment, the ITO had allowed all the claims after necessary enquiries. The assessee further contended that the ITO considered the matter afresh after receiving the opinion of the audit party, which did not constitute information within the meaning of Section 147(b) on the basis of which the ITO could record his satisfaction.
The CIT(A) accepted the contention of the assessee and annulled the assessment. The Tribunal held that the initiation of reassessment proceedings by the ITO was valid but remanded the matter to the CIT(A) for consideration on merits. On a reference, the assessee contended that the ITO had sent a report to the CIT asking him to take action under Section 263 since no new information had been collected by him for initiating action under Section 147(b) and, hence, the reassessment proceedings were invalid.
11. The facts appreciated therein were diametrically distinct inasmuch as therein the first assessment order stood on record and only on the basis of the audit objection it was sought to be revised. Their Lordships in those facts rendered the judgment as the final position was sought to be disturbed merely on the basis of audit report. In the facts of the present case the original assessment wherein identical additions were made has been set aside and the reopening is only to regularize the original return which was beyond the period. Thus in the facts of the present case it was not a situation where a settled position was being arbitrarily or whimsically being unsettled and nor was it a situation where a different view was being taken on same facts as was the case in Yeshwant Talkies (supra).
12. The next judgment relied upon by my Brother in the proposed draft is of Sheo Narain Jaiswal and Ors. (supra). The undisputed facts therein were that the AO was of the view that a particular amount should not be assessed and the AO sending the proposal also expressed his doubts about taxability of the amount and initiated proceedings only on the instruction of the CIT and Asstt. CIT who held the view that a particular amount should be assessed. It was on these facts where a settled issue was being unsettled on the basis of instruction where the AO admittedly was of the view that amount was not taxable.
Thus, in those facts it could not be said that the AO had formed its belief that income has escaped assessment since his own belief was that it was not taxable and the notice was issued only on the instruction of CIT and Asstt. CIT. In the facts of the present case AO was of the view that income was assessable and notice was given to regularize the return and it was not a case of unsettling a settled position and was clearly a case where AO had formed his own belief that income had escaped assessment. To take a contrary view would be a situation of misreading the principle and proposition of law laid down by the Court.
Accordingly, it is seen that the judgment in the case of Narain Jaiswal (supra) on facts is not applicable as it operates in the realm of entirely different and distinguishable facts and operate in the domain of unsettling a settled position on whims and the AO therein expressed his doubts that the amount was assessable and acted contrary to his belief only on the instruction of the CIT and Asstt. CIT.13. In the same para i.e., para 15 of the proposed draft order reliance has been placed on 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) (supra).
The reopening was on the confession of one MK and it is on these facts their Lordships came to the conclusion that there was no direct/live link with the information received so as to resort to reopening. Thus, the settled position on the basis of flimsy information was frowned upon which is not the case in the facts of the present case.
14. Similarly in the case of ITO v. Lakhmani Mewal Das (supra) their Lordships held that the formation of belief must be held to be in good faith and should not be a mere practice (sic-pretence). This principle in the facts of the present case in fact helps the Revenue and goes against the assessee as nowhere in the record has it been the case of the assessee that the reopening suffers from mala fide and is not in good faith. The facts as appearing before their Lordships in the Supreme Court were that legitimately concluded assessment order was sought to be disturbed only on the basis of some confession by MK which was held to be a case of reopening not in good faith and a live and direct nexus was found wanting.
15. On a careful reading of these judgments it is seen that the issue can and has to be resolved on the basis of peculiar and specific facts of each case. The Courts are unanimous in their approach with respect to the recording of reasons. They have categorically held that the reasons for the formation of the belief contemplated by Section 147 of the IT Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the formation of this 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 Courts have also been categoric in their approach that the Courts cannot go into the deficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening the assessment. In the facts of the present case it cannot be said that the "information" available with the AO was vague and indefinite or distant, remote or far fetched, as such it could not warrant the formation of the belief relating to escapement of the income of the assessee from assessment.
The reason for the formation of the belief must be held to be in good faith and should not be a mere pretence. In the facts of the present case the reasons are not vague, distant, flimsy, indefinite, far fetched or remote, but in fact are direct having a direct and definite live link/nexus and in my opinion once the reopening is not barred by limitation and is on the basis of reasons recorded which form a direct and live link/nexus and the proceedings cannot be quashed on the ground of being illegal and invalid ab initio.
16. In para 16 of the proposed draft reliance has been placed on the judgment of Girdhar Gopal Gidati (supra) wherein assessment completed under Section 143(3) after a detailed inquiry on the basis of (report of) DVO was sought to be disturbed which was held to be a case of change of opinion on the same facts.
17. Accordingly, for the detailed reasons given hereinabove, the facts and circumstances of the case, after a careful analysis of the judgments of different High Courts relied upon by my esteemed Brother and the law as laid down by the apex Court, I am of the view that the ground No. 1 in the original ground substantiated by ground No. 1 in concise grounds challenging the proceedings under Section 147 is dismissed. Ordered accordingly. The remaining grounds which survive are ground Nos. 2.1 to 2.3, 3.1 to 3.2, 4.1 to 4.2 and ground No. 5 in original grounds substituted by ground Nos. 2(a) and 2(b); ground No.3, ground Nos. 4.1 and 4.2 and ground No. 5 challenging the additions on merits.
18. In view of the fact that in the proposed draft order these grounds have not been addressed as relief has been granted to the assessee wherein the assessment order itself has been quashed on a legal ground and taking note of the fact that before the first appellate authority the impugned order was passed ex parte. Accordingly in the aforementioned facts and circumstances I deem it fit and proper to restore this issue to the file of the CIT(A) with the direction that he may decide the same in accordance with law by way of a speaking order.
Needless to say that the assessee will be afforded an opportunity of being heard.
19. In the result the appeal of the assessee is partly allowed for statistical purposes.
Since there is difference of opinion between the Members while adjudicating the captioned appeal, the following question Is referred to the Hon'ble President of the Tribunal for deciding the same as contemplated in Section 255(4) of the IT Act: In the facts and circumstances of the case is the action of the learned AM correct in quashing the assessment or is the action of the JM correct in upholding the assessment?" 1. On a difference of opinion, the President, Tribunal has referred the following question for my opinion as Third Member, which reads as under: In the facts and circumstances of the case, is the action of the learned AM correct in quashing the assessment or is the action of the JM correct in upholding the assessment? 2. The assessee company came into existence on 16th Oct., 1989. The assessment year involved in this case is asst. yr. 1991-92. As required under Section 139 of the Act it was to file the return of income before a specified date. It did not file the same. The AO issued notice under Section 142(1) on 8th Jan., 1992 to file it within 30 days. The assessee filed the return of income beyond the said 30 days on 31st Dec, 1993 declaring net agricultural income of Rs. 1,42,567. The return of income is thus a belated return. The AO proceeding on the said return of income passed the assessment order under Section 143(3) on 30th March, 1994 at the total income of Rs. 23,72,180. The said assessment order was set aside by the CIT(A) with the observations that "The return was filed beyond the period prescribed under Section 139 and the AO was required to regularise the return. The return being invalid could not have been acted upon and in order to set right the infirmity the assessment has to be restored to his file for framing fresh assessment after regularising the return as all the proceedings taken up consequent upon filing of an invalid return also become invalid." 3.The AO, however, issued notice under Section 148 by recording the following reasons: The assessee has failed to file its return of income for asst. yr.
1991-92 within statutory time limit i.e. 31st March, 1993. The return filed by the assessee for asst. yr. 1991-92 on 31st Dec, 1993 being an invalid return, has therefore been filed. On perusal of records, it is found that the assessee company has raised fresh share application money amounting to Rs. 21,91,900 and unsecured loan to the extent of Rs. 2,62,000 and source of which are unexplained at the hands of assessee company to the total of such deposits amounts to Rs. 24,53,900.
Keeping in view of above facts, I have, therefore, reason to believe that income of Rs. 24,53,900 has escaped assessment for asst. yr.
1991-92. Hence, it is established that it is a fit case to issue notice under Section 148 r/w Section 147 of the IT Act.
4. In response to this notice, the assessee opted the return of income filed originally on 31st Dec, 1993, to be a return of income filed in compliance to the notice issued under Section 148 of the Act. An assessment on the basis of these proceedings was made by AO. It is upheld by CIT(A) and is subject-matter of this appeal before the Tribunal.
5. Before the Tribunal the assessee challenged the issue of reopening notice and the contention of the assessee has been that the AO is not right in mentioning in the reasons recorded on 6th Dec, 1995, that the assessee has failed to file its return of income within the statutory time limit i.e., 31st March, 1993 and that the return filed on 31st Dec., 1993 was an invalid return and therefore, the same has been filed. It is because an assessment order thereon was framed under Section 143(3) on 30th March, 1994; that there was no reason to believe that income of Rs. 24,53,900 has escaped for the asst. yr. 1991-92; that in fact, all the information with true and full facts have already been provided by the assessee while filing the return of income on 31st Dec, 1993; that if it were an invalid return of income, the AO should not have acted upon such invalid return of income and framed the assessment order under Section 143(3) of the Act on 30th March, 1994; that in the assessment order, it is nowhere mentioned that income escaped to be assessed, rather, in the assessment originally made and that made after reopening under Section 148, the income was assessed at the same income; that the original assessment order was set aside to regularise the invalid return of income on the basis of which the original assessment order was framed; that notice under Section 148 issued was thus at the behest of the higher authorities and therefore cannot be valid in view of the judgment of Supreme Court in the case of ITO v. Lakhmani Mewal Das ; that after completion of the assessment order no fresh information was gathered by the AO to draw an inference that the income has escaped assessment; that there was no omission or failure on the part of the assessee to disclose full and true material matters necessary for framing fresh assessment, that as such, the action on the part of the AO was illegal and bad in law in view of the decision of Calcutta High Court in the case of Smt. Santosh Debi Baid v. ITO ; that any procedural defect cannot amount to get jurisdiction as is held by Hon'ble Madras High Court in the case of CIT v. T.R. Rajakumari ; that after framing the assessment order, the AO cannot say that there was escapement of income as held in the Supreme Court decision in Gemini Leather Stores v. ITO ; that the reasons recorded by the AO on 6th Dec, 1995 were false reasons insofar as it mention that the return of income originally filed on 31st Dec., 1993 was filed and he had reason to believe that an income of Rs. 24,53,900 escaped the assessment for the asst. yr. 1991-92 and on the basis of such false reasons, the AO cannot get jurisdiction to issue notice under Section 148; that the valid course of action for the AO was that he should have framed assessment order under Section 144 of the IT Act, when he noted that it was an invalid return of income; that as the CIT(A) allowed the appeal of the assessee by restoring the matter to the file of the AO, mentioning "the appeal is consequently to be taken as allowed for statistical purposes", the assessee had no grievance to have filed an appeal before the Tribunal. On the other hand, the contention of the Revenue had been that the matter was restored to the AO by the CIT(A) in order to set right the infirmity and to frame fresh assessment. In such circumstances, if the assessee was aggrieved then he should have filed second appeal before the Tribunal against the direction given by the CIT(A) and that the AO has acted according to the directions given by the CIT(A); and that the return being invalid the AO was justified in issuing notice as there was escapement of income as the assessment made thereon was invalid.
6. There struck a difference of opinion between the two Members of the Tribunal. The learned AM held the proceedings as invalid and quashed the order. He held that the fact that return filed on 31st Dec, 1993 for the asst. yr. 1991-92 was beyond the statutory time-limit and therefore, invalid and hence, it was filed, is patently wrong and distorted recording of facts by AO; that actually the return was not filed, but on the basis of that invalid return, order under Section 143(3) was passed by the AO; that there was no difference in the income originally assessed and subsequently assessed by issuing notice under Section 148 of the Act and therefore, the AO further erred in mentioning that he has reasons to believe that income of Rs. 24,53,900 has escaped assessment in the asst. yr. 1991-92; that in fact, there was no reason before the AO to believe that income has escaped assessment for the asst. yr. 1991-92; and that the notice issued under Section 148 on false recording of reason to believe, could not be held a valid proceeding due to which the subsequent action was also invalid and illegal. He also noted that the fresh assessment order was made under Section 143(3) r/w Section 251 of the IT Act, 1961, meaning thereby, the fresh assessment order has been made at the behest and on the directions of the CIT(A) was not permissible in view of the decisions of the Madhya Pradesh High Court in the case of Yeshwant Talkies v. CIT , the Patna High Court in the case of Sheo Narain Jaiswal and Ors. v. ITO . Referring to ITO v. Lakhmani Mewal Das (supra) he also noted that the reason to believe was not in good faith as there was no new material or information, on which the AO could form a belief and it is a false recording on the fact that the AO has filed the belated return. Noticing the jurisdictional High Court of Allahabad in the case of Girdhar Gopal Gulati v. Union of India , he held that once the assessment was proposed to be made under Section 143(3) of the Act, it is presumed that all the necessary enquiries have been done and the AO cannot issue notice under Section 148 after the assessment has been made unless there is deliberate concealment or there is information that income had escaped assessment and that therefore, the notice issued under Section 148 was passed only on change of opinion, hence invalid.
7. The learned JM opined otherwise. She held that the proceedings were valid. According to her the original assessment was set aside with certain direction as a result of the appeal of the assessee against the addition on merits; that this set aside order stands on record and has not been challenged as such nor upset by any higher forum and therefore there is no assessment with respect to the assessee and thus the income in the year under consideration has not been assessed and as such, it is materially and significantly different from cases where different view is attempted to be taken on same facts and thus unsettle a settled position; that the action is neither barred by limitation nor by judgments where the principle has been laid that different view on same facts is not appropriate; that the reasons have been recorded and in absence of perversity, the sufficiency and adequacy thereof is not open to challenge; that it was only a facile argument that reopening was on the direction of the CIT(A); that it was not even a case of change of opinion on same facts; that the word 'information' is of wide connotation and can include the direction/finding or observation given by the CIT(A) in appeal since once having noticed that a return filed was beyond the period the only course of action open was to restore it for regularizing the same and this direction has been carried out and has not been challenged; that what is relevant fact is that there must be a live link or nexus with the reopening; that it is also not a case where the AO has considered the material and formed his opinion in the first round which stood on record and in the second round AO has sought to change the same and disturb the earlier finding with a different view subsequently on same facts; that the assessment order in the first round was set aside for regularizing the same as the return was filed beyond the time prescribed under the Act and as a result of this the income brought to tax in the present proceedings was not assessed at all. The cases of Chatturam Horilram Ltd. v. CIT : CIT v. Narsee Nagsee & Co. ; Maharajadhiraj Sir Kameshwar Singh v. State of Bihar referred to support her opinion. The facts in the cases of Yeshwant Talkies (supra), Sheo Narain Jaiswal and Ors. (supra), the case of ITO v. Lakhmani Mewal Das (supra), were found diametrically distinct.
Accordingly, in the aforementioned facts and circumstances, she deemed it fit and proper to restore the issue to the file of the AO with the direction that he may decide the same in accordance with law by way of a speaking order and giving the assessee an opportunity of being heard.
8. The contentions of the learned Counsel of the assessee Shri Y.K.Kapoor are--(1) that the assessee having complied with the notice under Section 142 of the Act issued by the AO filed the return, submitted to the jurisdiction of AO who framed assessment and, therefore, the Department is precluded to say that the return was invalid and that there was deemed waiver by the Department by the issue of notice under Section 143(2) and making assessment. Reference is invited to the decision of Calcutta High Court in the case of Smt. Santosh Debt Baid v. ITO (supra), Punjab High Court in the case of Bibi Gwdarshan Kaur (Deed.) v. CIT , Special Bench decision of theSmt. Krishna Verma v. Asstt. CIT (2007) 109 TTJ (Del) (SB) 193 : (2007) 107 ITD 1 (Del)(SB) 54 110; (2) that there is no information or a live link between the information and the reasons recorded and consequently the reassessment is bad in view of the decision of the Supreme Court in the case of ITO v. Lakhmani Mewed Das (supra); (3) that the reopening was not by the AO but at the behest of the CIT(A) and is therefore not valid in law; (4) that there was no need for the assessee to question the order of the CIT(A) and carry it in further appeal because it was in favour of the assessee and therefore the assessee can challenge the validity of reassessment in view of the decision of the Madhya Pradesh High Court in the case of CIT v. Princess Sarla Kumari and; (5) that reopening is not valid as the earlier return was pending because the order made thereon originally was set aside by the CIT(A) and therefore the fresh proceedings for reopening are bad in law.
9. The learned CIT-Departmental Representative, Shri C.L. Ambesh on the other hand, submitted that the return was not within the time and, therefore, it was invalid and, consequently, income escaped assessment which entitled the AO to initiate proceedings under Section 147 of the Act. He also relied upon the decisions referred to in the order proposed by the learned JM in this regard.
10. Parties are heard and their rival submissions carefully considered.
The return filed beyond the required date in Section 142 was belated.
Though having not filed within the time allowed under Sub-section (1) of Section 139 or under a notice issued under Sub-section (1) of Section 142, it could have been valid if the same was filed within the prescribed time under Section 139(4) that is before the expiry of one year from the end of the relevant assessment year or before the completion of assessment, whichever is later. There was no assessment and one year period expired on 31st March, 1993. The return filed on 31st Dec, 1993 was thus not in accordance with provisions of law and was thus invalid. It was also so held by the CIT(A) and having not challenged it became final even otherwise.
11. It might be true that an assessment on that return was originally made by the AO. But that has no bearing in determining the validity of the return; firstly, because no assessment in law can be made on an invalid return and the mere fact of making an assessment by the AO on an invalid return would be of no consequence; and secondly, because on appeal of the assessee, the assessment was set aside by CIT(A) by observing that it was made on an invalid return and was to be regularized. The order of the CIT(A) had thus become final as no further appeal there against was filed either by the assessee or the Department. The position, as a result of this, is that there was no valid return and there was no assessment much less a valid one with respect to that return and thus the income of the year under consideration has not been assessed and considered to have escaped assessment. The case of Smt. Santosh Debi Baid (supra) before Calcutta High Court was under the 1922 Act and the return was held to be not a nullity but was an irregularity which could have been condoned by the AO. This case thus is of no help to the assessee.
12. The contention of the assessee that having issued notice under Section 142 the AO could have completed the assessment by resorting to provisions of Section 144 has also no force. Even if that were so, the fact remains that there was no assessment and by virtue of provisions of the Expln. 2, Clause (a) it could be deemed a case of escapement of income. Again if the return were valid no assessment has been made and it would be a case of escaped assessment under Clause (b) to the Explanation. The Explanation for the sake of convenience is reproduced hereunder: 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: (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (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.
13. In the case of Bibi Gurdarshan Kaur (supra) return was held to be valid and that remained to be disposed of and that is why the reopening was held to be invalid. This was a case under 1922 Act whereunder the provisions of Clauses (a) and (b) as found in the Explanation aforesaid were not there at that time. This case therefore does not help the assessee.
14. The contention of the assessee that the reopening was not by the AO but at the behest of the CIT(A) and is therefore not valid in law in my opinion has no force. The return filed on 31st Dec, 1993 by the assessee was invalid and the AO had on that ground reopened the assessment and this is what he has stated in the reasons recorded, namely: "The assessee has failed to file its return of income for asst.
yr. 1991-92 within statutory time-limit i.e., 31st March, 1993. The return filed by the assessee for asst. yr. 1991-92 on 31st Dec, 1993 being an invalid return, has therefore been filed". It was his decision and that it was on the direction or behest of the CIT(A). Even otherwise the CIT(A) has only stated that return was invalid and the consequent order of assessment was also invalid. After observing this he stated the return was to be regularized and that cannot be said to be a direction to AO to issue notice under Section 148 of the Act. The contention of the assessee therefore has no force and is rejected.
15. The income that has escaped assessment is brought to tax by reopening the assessment under Section 147 which reads as under: 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 (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
16. On a close reading of the provisions aforesaid it would be evident that the notice for reassessment can be issued only if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. Thereafter, subject to the provisions of Sections 148 to 153, he may 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 re-compute the loss or the depreciation allowance or any other allowance, as the case may be.
17. This is however subject to an embargo that where an assessment under Sub-section (3) of Section 143 or this section has already been made for the assessment year, no action shall be taken for reopening under this section after the expiry of four years from the end of the assessment year, unless escapement is by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. The notice under Section 142(1) was issued on 8th Jan., 1992 before the close of the return and the assessee filed the return not within the period prescribed therein but much beyond that; even after the expiry of period prescribed under Section 139(4) of the Act. There was thus a failure of the assessee by not filing the return as contemplated in the proviso. But that saves only the period applicable for reopening even beyond 4 years. There is however no dispute in this case on this issue.
18. What we are concerned with in this case is, whether there was reason to believe that there was chargeable income which escaped assessment within the ken of this section. The reason to believe and the basis for the reopening, as stated in the reasons recorded, is that the assessee company has raised fresh share application money amounting to Rs. 21,91,900 and unsecured loan to the extent of Rs. 2,62,000 and source of which are unexplained at the hands of assessee company to the total of such deposits amounts to Rs. 24,53,900. Is it a reason or a valid reason in law in forming the belief that income has escaped assessment? Where it remained unexplained? 19. It is true that the sufficiency and adequacy of the reasons is not open to challenge in view of settled position of law and judgments on the issue and that sufficiency of reasons cannot be examined unless shown to be perverse and also that on the facts of the case no perversity has been alleged. It is however to be kept in mind that AO has to form a belief that there was the income that has escaped assessment and that escapement has to be based on the reason recorded giving a prima facie of the escapement of income chargeable to tax.CIT v. Bedi & Co. (P) Ltd. (1998) 145 CTR (SC) 309 : (1998) 230 1TR 580 (SC) by observing that "the facts on record apparently indicate that the transaction was one of loan. The circumstances relied upon by the Revenue, namely, that the loan had been advanced without security, that the loan had not been repaid and no interest on the loan was paid by the assessee and that the agreement of loan was executed contemporaneously with two other agreements with regard to supply of machinery and construction of building for the paper mill cannot, without any further material, lead to the inference that the amount was not a loan but business income. It appears to us that the last mentioned circumstance support the plea of the assessee that the said amount was received as loan". This was also a case of reopening under Section 147. The facts were that on 5th Dec, 1961, an order of regular assessment of the assessee was passed for the asst. yr. 1960-61 for which the relevant accounting year ended on 31st May, 1959.
Subsequently, it came to the notice of the ITO that a sum of Rs. 32,58,500 had been received by the assessee purporting to be a loan advanced under agreement dt. 15th Nov., 1958, entered into between the assessee and Parsons and Whittemore. The assessee promoted Mandya National Paper Mills (for short "the paper mills"). The capital requirement of the paper mills was proposed to be met by issue of equity and redeemable preference shares of rupees two crores and by arranging supply of machinery of Rs. 1.82 crores from two of the associates of Parsons and Whittemore. In that connection, three agreements including the loan agreement in question, were entered into among different parties on the same date. On the said information, the ITO reopened the assessment of the assessee and issued notice under Section 147(a) of the IT Act on 25th Nov., 1968. Finding that the reply given to the said notice was not satisfactory, and disbelieving the plea that the amount was advanced as a loan, the ITO treated it as income received from business and accordingly passed the order of assessment, under Section 144 of the IT Act, bringing to tax the said amount of Rs. 32,58,500 on 2nd Dec, 1970. It. was in this context the Supreme Court held that it was a loan and not income.
21. This case was under the 1922 Act where there was no provision like Section 68 of the present Act. But that would not make much difference as under this section also loan or capital introduction is not income straightaway. It has to satisfy the conditions prescribed therein. This Section 68 reads as under: Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
22. By this section also it is not that every loan or capital receipt is income chargeable to tax. It is only when the assessee offers no explanation about the nature and source of sum is found credited in the books of an assessee or when the explanation offered by him is not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee. Therefore when the return was invalid and the assessment made thereon was also invalid, where was the question of an explanation by the assessee and where was the occasion with the AO to form an opinion and hold that the assessee did not either offer an explanation or that the explanation was not satisfactory. The information in the return or the assessment which was set aside as invalid cannot constitute information for forming an opinion by the AO, It is no information in the eye of law for even prima facie view of income chargeable to tax.
23. There is also no information from any source outside the assessment proceedings which may cast any doubt that what is credited by the assessee in the books of the assessee was not or could not be genuine.
Unless there is specific information in the hands of the AO to have a prima facie view to the effect that such loan or capital credits could not be explained by the assessee to his satisfaction, a notice for reopening the assessment cannot be issued. We may refer to in this connection the Delhi High Court decision in the case of United Electrical Co. (P) Ltd. v. CIT (2002) 178 CTR (Del) 192 : (2002) 258 ITR 317 (Del) where the assessee had also received certain loans. The said loans were not doubted as the return was accepted under Section 143(1} of the Act. Subsequently the AO making the assessment on the assessee received some communication from the AO assessing the creditor. In the said communication the creditor had accepted that he has been giving entries for the loans. In view of the said communication, the AO of the assessee reopened the assessment. Even in such circumstances, it was held by the Delhi High Court that there is no reason for upsetting the original assessment merely on the basis of communication received from the AO of the creditor and without any further enquiry. The High Court observed that the statement of the creditor did not include the name of the assessee nor did it make a direct reference to the assessee and therefore the same cannot be considered to be valid reference to the assessee and therefore the same cannot be considered to be valid information for the purpose of reassessment under Section 147. In the present case also, apart from the fact that certain credits are appearing in the books of the assessee there is nothing which could be considered as an information much less a valid information for the purpose of reopening the assessment of the assessee under Section 147. In spite of the fact that the creditor had accepted that he has been giving entries for the loans, the reopening was held to be unjustified in absence of specific reference of the assessee in the statement of the creditor. In the present case even the general statement by any body was not there to view the credits as not genuine.
24. It might be true that the word information is of wide connotation and can include the direction/finding or observation given by the CIT(A) in appeal since once having noticed that a return filed was beyond the period the only course of action open was to restore it for but that was only to regularizing the return and that would be of no consequence as the notice for reopening itself was bad and the CIT(A) had already held that the earlier return and the assessment were invalid.
25. In Chatturam Horilram Ltd. v. CIT (supra), the Supreme Court has laid down that where earlier assessment proceedings had been taken but failed to result in a valid assessment owing to a lacuna in the law despite the chargeability of the income to tax, it would be a case of chargeable income escaping assessment. In the case of CIT v. Narsee Nagsee & Co. (supra) it was held that the income is said to have escaped assessment within the meaning of this section even where there was a failure to charge the income was entirely due to oversight or inadvertence on the part of the IT authorities. In Maharqjadhirqj Sir Kameshwar Singh v. State of Bihar (supra) the Supreme Court held that the section is not confined to cases where income has not been returned and also covers cases where income is included in the return made by the assessee but is left unassessed by the AO. But one should not loose sight of the fact that these were the cases where the changeability of the income to tax was not in dispute.
26. The Supreme Court held in Esthuri Aswathiah v. ITO (supra) and CIT v. Bidhu Bhusan Sarkar (supra), that no doubt income cannot be said to have escaped such assessment within the meaning of this section if the assessment proceedings in respect of that income are still pending and have not yet terminated in a final order. However, the AO's noting "not assessed" or "not assessable" or "no proceeding" or "filed" would ordinarily amount to a final order lawfully terminating the assessment proceedings and thereafter action can be taken under this section. But in this case no valid return was there which was required to be disposed of.
27. In ITO v. Lakhmani Mewed Das (supra) the reopening was on the confession of one MK stating that he was only a name lender and it is on this facts the Supreme Court came to the conclusion that there was no direct/live link with the information received so as to resort to reopening. Thus, the settled position on the basis of flimsy information was frowned upon which is not the case in the facts of the present case. As observed earlier there is no information on record to doubt the loans and capital introduced by the assessee. This case of the Supreme Court will apply in this case with greater force.
28. It is well-settled that reason to believe is not the same thing as reason to suspect and that belief cannot be based on suspicion. In our opinion there no material in the present case even to suspect that credits are not genuine. In our opinion therefore the reopening of the assessment of the assessee are without any reasons and the information.
There is no nexus between reasons recorded and the genuineness of the loans and capital credited in the books of the assessee. It is therefore to be held that the reopening was invalid and the reassessment is to be quashed.
29. It is a trite law that to reopen an assessment under Section 147 of the Act there must be a reason and that reason, must have a rational connection or relevant bearing on the formation of the belief that there was income which escaped assessment. 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 because of the failure of the assessee to disclose fully and truly all material facts.
The Courts are consistent in their approach that they cannot go into the sufficiency or adequacy of the material and substitute their own opinion for that of the ITO on the point as to whether action should be initiated for reopening the assessment. The reason for the formation of the belief must be held to be in good faith and should not be a mere pretence.
30. On the facts of the present case it cannot be said that there was any "information" available with the AO raising any doubt about the credits of loan and capital. Therefore, there was no reason with the AO to believe that income escaped assessment for the asst. yr. 1991-92.
The notice issued under Section 148 without existence of any reason to believe, cannot be held valid. Therefore, the subsequent assessment is also invalid and illegal.
31. On the facts and in the circumstances of the case, therefore the action of the learned AM is correct in quashing the assessment and not the action of the learned JM in upholding the assessment.
1. The above appeal by the assessee was heard by the Division Bench.
The first ground of appeal of the assessee reads thus: (1) The initiation of proceedings under Section 148 in the present case has been done at the behest and under the directions of CIT(A).
As such, the action under Section 147/148 is bad in law rendering thereby the entire assessment as void ab tnitio, and hence non est in law. It may kindly be quashed.
2. In respect of the aforesaid ground of appeal, there was a difference of opinion between the learned AM and the learned JM and, therefore, the following question was referred for consideration by the Hon'ble Third Member: In the facts and circumstances of the case, is the action of the learned AM correct in quashing the assessment or is the action of the JM correct in upholding the assessment? 3. The Hon'ble Third Member has concurred with the view of the learned AM and has held that there was no existence of reason to believe for issue of notice under Section 148 of the Act. The assessment was, therefore, held to be invalid and illegal. In accordance with the majority view, it is held that the notice under Section 148 is not valid and legal and, therefore, the assessment under Section 148 is quashed.