The Delhi High Court has quashed income tax reassessment based on AO’s estimation.
The bench of Justice Yashwant Varma and Justice Ravinder Dudeja has observed that the sole ground for reopening the assessment is the valuation of the Officer who had estimated the investment made in renovation/reconstruction of the property, even though, the petitioner had declared the cost of the property under the head “Fixed Assets and Capital WIP”. Simply relying upon the report/estimate of the Valuation Officer, AO jumped to the conclusion that the amount represents the income of the assessee chargeable to tax which has escaped assessment for the AY 2011-12 and 2010-11.
The petitioner/assessee is a Private Limited Company and is engaged in the business of trading of real estate development and running of hotels.
A search and seizure operation under Section 132(1). For the AY 2010-11, petitioner filed its return of total income under Section 139(1) of the Act on 15.10.2010, declaring ‘Nil’ income and for the AY 2011-12, the return of total income under Section 139(1) of the Income Tax Act, was filed declaring the income of Rs. 12,87,070.
The Assessing Officer issued notice under Section 153A in respect of AY 2010-11 and on 26.09.2012 in respect of AY 2011-12.
During the course of Original Assessment Proceedings, petitioner filed complete books of account, bill and vouchers for the verification by the AO.
The assessment for the AY 2010-11 was framed by the AO on 28.03.2013 at a total income of Rs. 35 Crores as against the declared income of Nil and for AY 2011-12, the Order of Assessment was framed at a total income.
The petitioner preferred appeals against the Orders of Assessment before the Commissioner of Income Tax (Appeals), which are pending adjudication.
The petitioner was directed to furnish its returns of income for the subject Assessment Year on the allegation that there has been escapement of income. The petitioner filed its reply dated 30.10.2015, submitting that the return originally filed under Section 139(1) of the Income Tax Act may be treated as return in response to the aforesaid notice under Section 148 of the Income Tax Act.
The petitioner contended that there is no material much less tangible material which could enable the AO to form a prima facie belief that the income of the petitioner company had escaped assessment. The proceedings under Section 147 can be initiated only on the basis of tangible material and not on the basis of assumptions and presumptions. Even the report of the DVO is without application of mind, as in his report, it has been stated that the petitioner has shown the investment as ‘Nil’ without taking note that the cost of the property has been declared by the petitioner under the “Fixed Assets and Capital WIP”. The DVO has estimated the cost of the property only at Rs. 211,99,57,449, whereas, the petitioner has declared the value of the property under the head “Fixed Assets and Capital WIP” at Rs. 592,13,59,681.
The department contended that the scope of proceedings before the Court while considering a notice under Section 147/148 is limited. The Court should not enter into the merits of the subjective satisfaction of the AO or judge the sufficiency of the reasons recorded, but rather, determine whether such opinion is based on tangible, concrete and new information that is capable of supporting such conclusion. The sufficiency of correctness of the material is not to be considered at this stage.
The court held that the power of the Income Tax Officer to reopen assessment though wide are not plenary, the words of statute are “reason to believe” and not “reason to suspect”. The reopening of assessment after the lapse of many years is a serious matter. The Act, no doubt contemplates the reopening of assessment if grounds exist of believing that the income of the assessee has escapement assessment. The obvious reason for that is that instances of concealed income or other income escaping assessment many times come to the notice of the authorities after the assessment has been completed. However, before action for reassessment is taken, the requirement of law is that there should be a live link of close nexus between the material before the Income Tax Officer and the belief which he was to form regarding the escapement of the income of the assessee. Once there exists reasonable grounds for the Assessing Officer to form the belief, that would be sufficient to clothe him with jurisdiction to issue notice.
“The Court is not to investigate whether the grounds are adequate or not. The sufficiency of grounds which induce the AO to act is not a justiciable issue. However, it is open to the assessee to contend that AO did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged but not the sufficiency for the reasons to believe. Expression “reasons to believe” does not mean a purely subjective satisfaction on the part of the AO. The reason must be held in good faith and cannot be merely a pretence,” the court said.
The court while allowing the appeal quashed the reassessment notice along with the proceedings initiated consequent to issuance of such notices.
Case Title: Divine Infracon Private Limited Versus DCIT
Case No.: W.P.(C) 2516/2016
Date: 09/09/2024
Counsel For Petitioner: Salil Aggarwal
Counsel For Respondent: Vipul Agrawal
