Can assessing officer issue notice u/s 148 on the basis of report of investigation wing. Is reassessment u/s 147 valid despite the fact he has given the reasons of opening case that investigation department has carried out investigation and found that assessee had escaped income. I think in this case assessing officer has no personal or independent reasons and has not applied his own mind. If we do not comply the notice and proceeding then ex-parte assessment will be valid or against us. what should we do?
Two issues :
1. One whether an A.O can issue notice for reassessment on the basis of information given by other persons like Audit or Investigation wing or some other source?
2. What should be proper course of action for you in case a notice for reassessment is served.
What you should do if you are served with a notice u/s 148?
The proper course of proceeding after a notice for reassessment is served on any any person under section 148 has been laid down by the Supreme Court in GKN Drive Shaft India Ltd vs ITO [2003] 259 ITR 19 .The relevant portion is given below:
“we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the noticee is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment.”
In plain words , the proper course of action in case notice u/s 148 is served, both for You and the A.O are :
1.You have to file the return of income in response to notice u/s 148.
2.After that ,If you desire, can seek reasons for issuing notices.
3.The Assessing Officer is bound to furnish reasons within a reasonable time, if asked for by you.
4.You can object the reasons of reopening at this stage
5.The Assessing Officer has to dispose of the objections by passing a speaking order
6.Then only, he can proceed with the assessment.
Therefore, I suggest you to file the return and submit written objection on the reasons . If the assessing officer rejects your objection , file an appeal before CIT(A) against the order of rejection as per Apex Court’s judgment. But always reply to the questionnaire given to you by the A.O or appear on scheduled time before the A.O . But never forget to write in each submission made by you that you are filing submission only under protest. Do not let the order passed u/s 144 as ex-parte.
Whether Notice u/s 148 be issued on third party’s information?
The power to issue notice comes from section 147 which uses words “reason to believe” in the opening line of the provision u/s 147 . An extract of said section is given below
“147. If the Assessing Officer 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”
Supreme Court in ITO vs Lakhmani Mewal Das [1976 ]103 ITR 437 has lucidly explained that power of assessing officer to mean that law has provided phrase “reasons to believe” and not “reasons to suspect” . The relevant portion of the said order is given as under :
“The fact that the words "definite information" which were there in section 34 of the Act of 1922, at one time before its amendment in 1948, are not there in section 147 of the Act of 1961, would not lead to the conclusion that action can now be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.
The powers of the Income-tax Officer 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 income-tax authorities after the assessment has been completed.”
The reason of believe was subject matter of many a court case and different courts have given varied judgments . But, in most of the case, on question of sufficiency of reasons of belief, the department won the case. The reason was that the court , while deciding the issue whether there was “reason to believe “ examines facts on the basis of which the notice was issued. In most of the case , it was found that there was really reason to believe.for the A.O . Such cases were
1. Munilal Ramdayal. vs Income-Tax Officer, Baripada, And Others. [ ORISSA High Court ] 76 ITR 151
2. Shriyans Prasad Jain. vs R. K. Bhalla, Income-Tax Officer, Company, Circle, Bombay. [ BOMBAY High Court ] 94 ITR 34
3.Grahams Trading Co. (India) Limited. vs Income-Tax Officer, Central Circle I, And Others. [ CALCUTTA High Court ] 105 ITR 1. In this case , the notice issued on getting information from CBI was held valid. Read the lines below”
“When the assessee fails to disclose the note of Chartered Accountant along with the balance-sheet, whether the provisions of s. 147(a) are applicable ? Also whether the report of the Central Bureau of Investigation can form a basis for issue of notice under this section ? The non-disclosure of the Chartered Accountant's note along with the balance-sheet could be considered as a failure of the assessee to disclose the relevant facts fully and truly. The purport of Central Bureau of Investigation formed basis for the Income-Tax Officer's belief that income had escaped assessment. This was in accordance with the requirements of the statute. This report need not have being disclosed earlier, since the report which was submitted to the High Court later on showed that there was some basis for the Income-Tax Officer to invoke s. 147. The notices issued as per this section are valid.”
Therefore , in your case if notice u/s 148 was issued on basis of some information or investigation which solidly proved that some income has escaped assessment , the notice may be held valid by appellate authority .
But, as you have written , if the notice is based merely on an opinion of the investigation wing without any backing of evidence or information , I feel the Court will give you favourable judgment if the legality of the notice is challenged. For example ,Madras High Court in CIT vs Mettur Chemical & Industrial Corpn. [2000]242ITR 119 held , that reassessment based merely on the audits’ party ‘s remark would be invalid under the law.
Similarly Delhi High Court in Duncan Service Ltd vs ITO [1992] 198 ITR 264 referred the Apex court judgment on an issue whether the legal opinion of Audit can form the basis of reopening the assessment u/s 147 of the I T Act and held that A.O has to apply his mind before issuing the notice. Read the extract of relevant portion
“In Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, the Supreme Court has held that the report of the internal audit party of the Income-tax Department is no information within the meaning of section 147(b) of the Income-tax Act, 1961. The Supreme Court has further held : "In every case, the Income-tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice, he can reasonably believe that income has escaped assessment". Thus, in the present case, there was no information as required by law before the authorities nor the condition precedent before issuing notices under section 148 has been satisfied as the officer did not apply his mind and come to his own conclusion before acting on the audit report.”
Therefore , in my opinion :
1. The “reason to believe “ which became basis for issue of notice u/s 148 is challengeable in court of law.
2. There has to be application of mind by the A.O before initiating the reassessment proceeding.
3. The information given by other source can be reason for issuing notice, but there has to be some substance in those information support A.O's "reason to believe"
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