AO Lacked Tangible Material To Form A Belief That Income, Chargeable To Tax Had Escaped Assessment: Delhi High Court Quashes Reassessment Notice

The Delhi High Court has held that AO did not have the tangible material on record that could have persuaded him to form the belief that income, otherwise chargeable to tax, had escaped assessment.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia, the AO, did not employ diligence while triggering the reassessment proceedings against the petitioner or assessee. Because AO realized that the information received by him from ITO (Nahan) concerned the preceding period, he attempted to commence reassessment proceedings under Section 147/148 of the Income Tax Act by simply comparing the “source of funds” reflected under various heads in the balance sheets for the preceding AY and the AY in issue.

The Assessing Officer (AO) initiated assessment/reassessment proceedings vis-à-vis the petitioner/assessee concerning Assessment Year (AY) 2011-12 via notice dated March 31, 2018, issued under Section 148 of the Income Tax Act.

The assessee contended that information based on which the AO formed 'reason to believe' that income otherwise chargeable to tax had escaped assessment had not been furnished by him to the petitioner or assessee. The “reason to believe”, as recorded by the AO, alludes to the communication dated March 12, 2018 received from the Income Tax Officer (Nahan) and an FIR and chargesheet filed by the Central Bureau of Investigation (CBI), which included the names of the directors of the petitioner or assessee. Neither the communication nor the FIR and chargesheet have been furnished to the petitioner or assessee.

The assessee urged that it be a case of “borrowed satisfaction”. The AO needed to independently verify the information and the material that had reached him.

The department contended that the assessee did not respond to the communication dated March 20, 2018. The AO had no option but to trigger reassessment proceedings against the petitioner or assessee by issuing the impugned notice.

The court noted that the AO had, perhaps, no tangible material available with him to form the belief that income, otherwise chargeable to tax, had escaped assessment. The phraseology used by the AO reveals that he “suspected” that income chargeable to tax had escaped assessment. The approach of the AO breached the other well-established principle of law that suspicion and conjecture cannot form the basis for triggering reassessment proceedings against an assessee.

Counsel For Petitioner: Rano Jain

Counsel For Respondent: Prashant Meharchandani

Case Title: Saraswati Petrochem Pvt. Ltd. Versus Income Tax Officer

Citation: 2023 LiveLaw (Del) 1137

Case No.: W.P.(C) 10802/2018

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