Commissioner Of Income Tax, ... vs Batra Bhatta Company
2008 Latest Caselaw 1275 Del

             THE HIGH COURT OF DELHI AT NEW DELHI

%                                     Judgment delivered on: 08.08.2008

+      ITA 109/2008

COMMISSIONER OF INCOME TAX, DELHI-XI ...                         Appellant

                                   - versus -

BATRA BHATTA COMPANY                                         ... Respondent

Advocates who appeared in this case:

For the Appellant : Mr R.D. Jolly with Mr Paras Chaudhary For the Respondent : Mr S.R. Wadhwa

CORAM:-

HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether Reporters of local papers may be allowed to see the judgment ? Yes

2. To be referred to the Reporter or not ? Yes

3. Whether the judgment should be reported in Digest ? Yes

BADAR DURREZ AHMED, J (ORAL)

1. This appeal has been filed by the revenue in respect of the

assessment year 1996-97 against the decision of the tribunal in ITA

1186/Del/2003 dated 23.02.2007.

2. The facts are few. The assessee had sold agricultural land at Rs

57,37,500/- in March, 1996 and in its return had claimed exemption

under the provisions of Section 2 (14) of the Income-tax Act, 1961

(hereinafter referred to as „the said Act‟). The assessee‟s claim was

that the agricultural land sold by it was not a capital asset.

Consequently, no capital gains accrued at the hands of the assessee and

he was not required to pay any tax thereon.

3. Although, it appears that an intimation under Section 143(1)(a)

had been sent, the appellant‟s case throughout has been that it did not

receive any such intimation. In any event, nothing turns upon this. The

main issue involved in this appeal is with regard to invocation of the

provisions of Section 147 of the said Act. The Assessing Officer had

issued a notice under Section 148 of the said Act for re-assessment on

30.03.2000. The reasons recorded for issuing such a notice and for

invoking the provisions of Section 147 of the said Act were disclosed

as under :-

"The assessee firm has sold an "agricultural land" for Rs.57,37,500/- in March 1996 and claimed exemption under provisions of section 2(14). The claim of assessee that the land is agricultural and hence not a capital asset requires much deeper scrutiny. The cost of acquisition is shown at Rs.4,41,279/-.

I have reasons to believe that the income from capital gain to tune of Rs.52.00 lacs has escaped assessment for F.Y. 95-96. Issue notice u/s 148".

Thereafter, the Assessing Officer completed the assessment holding

that the land sold by the assessee was located at a distance of less than

8 Kms. from the municipal limits of Gurgaon and consequently it was a

capital asset within the meaning of Section 2(14) of the said Act. The

Assessing Officer determined that long term capital gain of Rs

50,56,185/- had accrued to the assessee and was subjected to tax.

4. The assessee, being aggrieved by the said assessment order,

preferred an appeal before the Commissioner of Income-tax (Appeals).

The Commissioner of Income-tax (Appeals) observed that the "reasons

to believe" should not be arbitrary or irrational, but must be based upon

relevant and material facts. The Commissioner of Income-tax

(Appeals) also observed that by saying that the issue "requires much

deeper scrutiny", no belief could be said to have been formed entitling

the issuance of a notice under Section 148 in order to initiate re-

assessment proceedings. He also observed that in the present case the

purpose behind the issuance of the notice under Section 148 appeared

to be to reopen the assessment when, in the original return filed by the

assessee, all the material facts had already been mentioned and no new

facts or any other material had been brought to the file from the date on

which the earlier return had been processed to the date the reasons were

recorded. Consequently, he held that the jurisdiction assumed by the

Assessing Officer under Section 147 and the issuance of notice under

Section 148 were illegal. Therefore, the Commissioner of Income-tax

(Appeals) annulled the assessment.

5. Being aggrieved, the revenue preferred an appeal before the

Income-tax Appellate Tribunal. The tribunal considered the various

facts and circumstances as well as the case law cited on behalf of the

parties. The tribunal observed that once the assessment has been

completed, the Assessing Officer can frame a fresh assessment only

after complying with the conditions laid down in sections 147 and 148

of the said Act. Jurisdiction under Sections 147 and 148 of the said Act

can be assumed only after recording reasons. The tribunal observed

that considering the reasons recorded in the present case, it seems that

at the time of recording of the reasons on 30.03.2000, the Assessing

Officer had no information in his possession and did not have any

material to form a belief that the land sold by the assessee was not

agricultural land. The tribunal observed that the Assessing Officer

merely wanted to verify the claim of the assessee and that is why it is

noted in the reasons recorded that "the claim of assessee that the land is

agricultural and hence not a capital asset requires much deeper

scrutiny". The tribunal concluded that a mere desire for making a

further enquiry does not confer jurisdiction upon the Assessing Officer

for re-assessment. Consequently, the tribunal, after considering various

decisions, including the decision of the Supreme Court in the case of

Chhugamal Rajpal v. S.P. Chaliha & Others: 79 ITR 603 (SC),

dismissed the appeal of the revenue and affirmed the order passed by

the Commissioner of Income-tax (Appeals) saying that the initiation of

the proceedings under Section 147 and issuance of notice under Section

148 were without jurisdiction and were illegal. The assessment framed

by the Assessing Officer on 31.03.2002 was also annulled.

6. Having considered the arguments advanced by the counsel for the

parties and after examining the matter in detail, we are of the view that

the tribunal as well as the Commissioner of Income-tax (Appeals) came

to the correct conclusion. A reading of the reasons recorded does not

disclose that the Assessing Officer, in fact, had reasons to believe that

any income had escaped assessment. It is not just the belief of the

Assessing Officer that is material, but such a belief must be based on

certain reasons. The first sentence of the reasons recorded is merely a

statement of fact that the assessee firm sold agricultural land for Rs

57,37,500/- in March 1996 and claimed exemption under the provisions

of Section 2 (14). The second sentence is merely exploratory in nature

in the sense that it says that the claim of the assessee that the land is

agricultural and hence not a capital asset "requires much deeper

scrutiny". There is no indication as to on what information or on what

material the Assessing Officer harboured the belief that the claim of the

assessee required deeper scrutiny. In fact, as recorded in the order of

the Commissioner of Income-tax (Appeals), no new material is on

record after the filing of the return and till the issuance of the notice

under Section 147. The proceedings under Section 147 are not to be

invoked at the mere whim and fancy of an Assessing Officer and it has

to be seen in every case as to whether the invocation is arbitrary or

reasonable. The decision of the Supreme Court in Chhugamal Rajpal

(supra) is clearly applicable to the facts of the present case. In the case

before the Supreme Court, the purported reasons recorded for

reopening the assessment were inter alia:-

"It appears that these persons are name-lenders and the transactions are bogus. Hence, proper investigation regarding these loans is necessary."

The Supreme Court did not find that these were sufficient reasons for

reopening the assessment. With regard to the sentence "hence, proper

investigation regarding these loans is necessary", the Supreme Court

observed that this conclusion that there is a case for investigation as to

the truth of the alleged transactions is not the same thing as saying that

there are reasons to issue a notice under Section 148. The Supreme

Court further observed as under:-

"... he must give reasons for issuing a notice under Section

148. In other words, he must have some prima facie grounds before him for taking action under Section 148. Further, his report mentions: "Hence, proper investigation regarding these loans is necessary." In other words, his conclusion is that there is a case for investigating as to the truth of the alleged transaction. That is not the same thing as saying that there are reasons to issue notice under Section 148. Before issuing a notice under Section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under Section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his

assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income- tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of Section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under Section 148. From the report submitted by the ITO to the CIT, it is clear that he could not have had reasons to believe that by reason of the assessee‟s omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year; nor could it be said that he, as a consequence of information in his possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the ITO had any material before him which could satisfy the requirements of either cl.(a) or cl. (b) of s. 147. Therefore, he could not have issued a notice under s. 148."

7. We feel that the observations of the Supreme Court in the

aforesaid decision clearly apply to the case at hand. Merely because

the Assessing Officer felt that the issue required „much deeper

scrutiny‟, is not ground enough for invoking Section 147. It is not

belief per se that is a pre-condition for invoking Section 147 of the said

Act but a belief founded on reasons. The expression used in Section

147 is - "If the Assessing Officer has reason to believe" and not - "If

the Assessing Officer believes". There must be some basis upon which

the belief can be built. It does not matter whether the belief is

ultimately proved right or wrong, but, there must be some material

upon which such a belief can be founded. In the present case, the

Commissioner Income-tax (Appeals) as well as the Tribunal have

found as a fact that there was no material upon which the Assessing

Officer could have based his belief that income had escaped

assessment. The decisions cited by Mr Jolly, who appeared on behalf

of the revenue, namely, Income-tax Officer v. Selected Dalurband

Coal Co. Pvt. Ltd: 217 ITR 597, Raymond Woolen Mills Limited v.

Income-tax Officer and Others: 236 ITR 34 and Assistant

Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers Pvt.

Ltd: 291 ITR 500 do not say anything different. In Dalurband Coal

Co. (supra), the Supreme Court observed that at the stage of issuance

of notice under Section 148 of the said Act, "the only question is

whether there was relevant material, as stated above, on which a

reasonable person could have formed the requisite belief". Again, in

Raymond Woolen Mills Ltd (supra), the Supreme Court, while

refusing to interfere with the re-assessment proceedings, observed that-

"[w]e have only to see whether there was prima facie some material on

the basis of which the Department could reopen the case". Lastly, in

Rajesh Jhaveri (supra), the issue raised before the Supreme Court was

whether failure to take steps under Section 143 (3) of the said Act

would render the Assessing Officer powerless to initiate re-assessment

proceedings in cases where intimations under Section 143 (1) had been

issued. The Supreme Court held that so long as the ingredients of

Section 147 are fulfilled, the Assessing Officer would be within his

rights to initiate „re-assessment‟ proceedings irrespective of whether

steps for a regular assessment under Section 143 (3) had been taken or

not. While so deciding, the Supreme Court considered the expression

"reason to believe" as appearing in Section 147 in the following

manner:-

"Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word „reason‟ in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment."

xxxx xxxx xxxx xxxx xxxx

"At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is „reason to believe‟, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief."

(Underlining added)

8. We have already noticed that in the present case, the

Commissioner Income-tax (Appeals) as well as the Tribunal have

returned the concurrent finding of fact that there was no material before

the Assessing Officer on the basis of which the Assessing Officer could

have maintained a belief that the agricultural land sold by the assessee

was a capital asset within the meaning of Section 2 (14) of the said Act.

In fact, the Assessing Officer did not even have such a belief. And, as

the expression „requires much deeper scrutiny‟ indicates, the Assessing

Officer was embarking on mere exploration without any belief, much

less a belief based on reason and materials.

9. Consequently, we find that there is no error in the decision of the

Tribunal which is impugned before us. No substantial question of law

arises for our consideration. The appeal is dismissed.

                                     BADAR DURREZ AHMED, J


August 08, 2008                            RAJIV SHAKDHER, J
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