Saturday, October 30, 2010

Delhi HC: Tax evasion suspicion needs to be recorded.


The Delhi high court has ruled that the tax authorities cannot initiate assessment proceedings simply on belief of escapement of tax, or belief that some income has escaped tax, effectively curbing powers of the revenue department to open past cases. Such belief must be based on prudence which a reasonable person is required to apply, said the high court quashing the income escaping assessment proceedings initiated by the Revenue department under section 147 of the Income Tax Act against an assessee. "The formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply," said a bench comprising Chief Justice Deepak Misra and Justice Manmohan in its order. The court added that the reasons why the assessing officer believed some income had escaped tax needed to be recorded as well. According to section 147 of the I-T Act, amended through the Direct Tax Laws (Amendment) Act of 1989 which came into effect from April 1, 1989, cases could be re-opened if the assessing officer has reason to believe that the income has escaped assessment. Prior to Direct Tax Laws (Amendment) Act, 1987, the assessing officer was empowered to make back assessment on fulfilment of two conditions. One, if the assessing officer has reason to believe that by reason of the omission or failure on the part of an assessee income chargeable to tax has escaped assessment for that year. Second, notwithstanding that there has been no omission or failure on the part of the assessee, the income-tax officer has in consequence of information in his possession has reason to believe that income chargeable to tax has escaped assessment for any assessment year. The amended Act dropped these two conditions, widening the power of the assessing officer to open a case if he has reason to believe that income has escaped assessment. The high court on the plea of the assessee Sarthak Securities held the income escapement proceedings under section 147 of the I-T act, 1961 as illegal. The assessee had filed its return for the assessment year 2003-04 declaring an income of Rs 15,360. It was processed and intimation under Section 143(1) was issued on April 6, 2004 accepting the return. The company had allotted shares to four companies on March 31, 2003 for the amount of Rs 2,50,000, Rs 2,50,000, Rs 3,00,000 and Rs 2,50,000, respectively. These companies were active as per the records of the Registrar of Companies (ROC) and were assessed to income-tax. The department on March 25, 2010 issued notice under section 148 of the Act to the assessee saying that it had reason to believe that the income chargeable to tax for the assessment year 2003-04 had escaped assessment and asked the assessee to file its return for the assessment year in question. – www.economictimes.indiatimes.com

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