“Reason To Believe” U/S 148A(C) Income Tax Act Amended To “Info Which Suggests”; Thorough Consideration Of Assessee's Reply Not Necessary: Allahabad HC

The Allahabad High Court has held that a pointwise consideration of objections that may be raised by an assessee in response to a notice issued to him under Section 148 A(b) is not necessary while passing an order under Section 148A(d) of the Income Tax Act, 1961.

Section 148A of the Income Tax Act, 1961 relates to procedure of inquiry to be followed by an Assessing Officer prior to issuance of notice under Section 148 of the Act for income that may have escaped assessment. Section 148A provides an opportunity of hearing to the assesee before deciding whether a case for reassessment of tax returns can be made against an assessee by an assessing officer.

Section 148A(c) provides that an assessing officer shall “consider” the reply of assesee, if any, furnished in response to notice under Section 148A(b). Thereafter, order has to be passed under Section 148A(d) based on material on record, including the reply of the assesee, if any.

The bench comprising of Justice Saumitra Dayal Singh and Justice Donadi Ramesh held that “read in conjunction, Section 148A(b), (c) and (d) would require that assessing authority may not act whimsically or capriciously or on extraneous material or in ignorance of the reply that may have been furnished by the assessee (to the show cause notice issued under Section 148A(b) of the Act), at the same time, that provision does not obligate the assessing authority to specifically deal with the individual objections, pointwise, or to record detailed reasons while making the 'decision' that it is a 'fit case' to initiate reassessment proceedings, in the case of an assessee.”

The Court held that by way of amendment, the stricter test of 'reason to believe' was done away with and was replaced by a lighter test by using the word 'information which suggests' for initiating proceedings under Section 148A. Thus, the Court held that the subjective 'decision' of the Assessing Authority could not be faulted for non-consideration of details of the reply by an assesee.

Factual Background

Petitioner had filed his income return for the Assessment Year 2020-21 without any scrutiny being recorded against the same. On 19.02.2024, a show cause notice under Section 148A(b) of the Income Tax Act was issued against him proposing to initiate reassessment proceedings for the year 2020-21.

In the notice issued to the petitioner, it was alleged that he had made bogus sales worth Rs.7.39 crore to a firm that had provided accommodation entries. It was stated that on the basis of an independent search it had been established that this firm had not been engaging in any actual business and was merely a provider of accommodation entries.

In his reply, petitioner referred to entries recorded in his books of accounts and statements of profits and loss and other records of the firm in question to establish that the sales made were valid. The Assessing Authority passed an order under 148A(d) on the basis of oral submissions recorded during the course of the independent investigation and also on the basis of the reports of the Inspector of Income Tax, Central Circle-19, New Delhi. The Assessing Authority also relied on the fact that the notices issued to the firm in question were not responded to, in establishing that it was an accommodation entry provider.

Challenging the order under Section 148A(d), counsel for petitioner argued that the amended version of Section 148A(c) of the Act obligated the assessing authority to “consider” the reply submitted in response to the show cause notice issued under Section 148A(b). It was submitted that the authority did not consider the petitioner's objections as to the absence of relevant material to initiate reassessment proceedings.

It was further submitted that only on such consideration could the assessing authority decide on the basis of the material available with it, whether it was a 'fit case' to initiate reassessment proceedings. Counsel for petitioner concluded that this not being the case, the order passed under Section 148A(d) was unsustainable in law and passed without jurisdiction.

Counsel for respondent submitted that the pre-requirement of recording a reason to believe before initiating reassessment proceedings had been done away with by the amendment made to the statute. It was stated that the same could not be re-read into the statute in the manner argued by the petitioner. It was contended that since the show-cause notice was issued to the petitioner and the order under Section 148 A(d) was passed after submission of his reply, no procedural lapses had occurred.

Further, it was submitted that there were sufficient grounds to initiate reassessments proceedings against the petitioner. It was found in the reports of the Inspector of Income Tax that none of the places of business of the firm from which petitioner is alleged to have made bogus sales with, had any business activity whatsoever. This, along with the fact that the said firm had not responded to the show cause notices issued to them, were grounds enough for the assessing authority to reassess the petitioner.

High Court Verdict

The Court held that the rule to record 'reason to believe' did not exist. Examining Section 148A of the Act in its entirety, the Court held that the prerequisites to initiate proceedings under the said section were: Information to suggest escapement of income and enquiry regarding the same if necessary; Issue of notice to give assessee an opportunity to respond to information available against him; and decision of the assessing officer based on information available with him along with reply of assessee to conclude whether it is a 'fit case' for reassessment.

The Court held that on the basis of the same, it was evident that the legislature had shifted from the strict test of recording 'reason to believe' and substituted the same with a lighter 'decision' of the assessing officer to conclude whether it was a 'fit case' for reassessment.

The Court observed that in reaching such 'decision' the assessing authority was obligated to consider only the material which was relevant and the reply, if furnished by the assessee. It was further observed that the assessing authority could not act without application of mind. However, it was not a statutory obligation that the assessing officer must record specific reasons and deal with each and every objection that raised by assesee, held the Court.

The Court held that “so long as that exercise is bona fide and not mindless, perverse or patently contrary to the law etc., and so long as that 'decision' made by the assessing authority-to initiate such reassessment proceedings is not unconnected/disjuncted or contrary to the 'suggestion' directly arising from the 'information'/relevant material received by him-that income has escaped assessment, no minute/detailed examination of that 'decision' is required to be made.”

The Court held that it was not mandatory for the assessing authority to record reasons and deal with the objections raised by the petitioner. It was held that the 'information' present with the assessing authority was sufficient to suggest 'escapement of income' at the hands of the petitioner.

Further, regarding the non-existence of the accommodation entry providing firm, it was held that satisfactory evidence emanated from the fact that none of the notices issued to said firm were ever responded to and that no business activity was found at any of their mentioned addresses, a fact that was not disputed by the petitioner.

“As noted above, the 'suggestion' is clearly seen to have arisen on their own strength of the 'information'/relevant material. Thus, the subjective 'decision' that it is a 'fit case' to initiate reassessment proceedings, (notwithstanding the objection raised by the petitioner) may not be faulted,” held the Court.

Dismissing the writ petition, the Court directed the reassessment proceedings to be continued.

Case Title: Rahul Sachan v. Income Tax Officer [WRIT TAX No. - 799 of 2024]

Counsel for Petitioner: Rahul Agarwal

Counsel for Respondent: Gaurav Mahajan

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