In most cases such notices cannot be served after four years from the end of the relevant assessment year. However, such period gets extended to six years from the end of the relevant assessment year where income chargeable to tax which has escaped assessment amounts to or is likely to amount to Rs 1 lakh or more for that year. Further, a notice under section 148 can only be issued by an AO who is an Assistant Commissioner or Deputy Commissioner. In any other case where the AO is below such rank, the notice can be issued only if the Joint Commissioner is satisfied that the reasons recorded by AO justify the issue of such notice. The proviso to section 151(1) of the Act provides that after the expiry of four years from the end of relevant assessment year, notice under section 148 cannot be issued unless the Chief Commissioner or the Commissioner, as the case may be, is satisfied, on the reasons recorded by the AO concerned, that it is a fit case for the issue of such notice. These are some in-built safeguards to prevent arbitrary exercise of power by an AO to fiddle with a completed assessment.
The Delhi High Court has emphasized the need for the Commissioner to exercise his power with due diligence, taking into account the material on record. According to the Court, reason to believe can only arise on the basis of facts which are before the relevant authorities. In United Electrical Co. P. Ltd. v CIT (258 ITR 317), the company which was engaged in the business of manufacturing electrical goods, filed its return of income for the assessment year 1996-97 declaring an income of Rs.9,26,867. The return of income was accompanied by various documents and annexures including the audit report and the list of loans. One of the loans was for Rs.7,40,000 raised from VFL Company, and, according to the petitioner, the loan was taken on two different dates through account payee cheques, tax was deducted from the interest paid thereon and credited to the Central Government, and the loan was repaid in April 1977 by account payee cheque. No notice was received by the petitioner under section 143(2) within 12 months from the date of filing the return. On May 5, 2002, the petitioner received a notice under section 148. The reason for reopening the assessment was that VKJ, director of VFL, had stated that VFL had received cash from the petitioner and deposited the same in the bank and, thereafter, a cheque of equal amount was given. The statement of VKJ recorded by the AO was too general: it neither mentioned any name, much less the name of the petitioner, nor did VKJ furnish subsequently any list of creditors.
On a writ petition challenging the validity of the notice, the Delhi HC held that section 147 of the Act authorises the AO to assess or reassess the income chargeable to tax, if he has reason to believe that the said income for any assessment year has escaped assessment. The power conferred under the said section, particularly after April 1, 1989, is no doubt very wide but it cannot be said to be plenary. The amended section 147 provides that where AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may apply the provisions of sections 148 to 153 and assess or reassess the income which has escaped assessment. Section 148(2) of the Act mandates that before issuing notice to the assessee under section 148(1), for filing the return, the AO should record his reasons for doing so. Therefore, formation of reason to believe and recording of reasons are imperative before the AO can re-open a completed assessment.
In Bawa Abhai Singh v. Dy. CIT (253 ITR 83), a Division Bench of the Delhi HC, speaking through Chief Justice Arijit Pasayat (as his Lordship then was), held that the crucial expression reason to believe predicates that the AO must hold a belief.... by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons, inducing the belief. Such a belief should not be based merely on reasons but it must be founded on information. In Ganga Saran and Sons P. Ltd. v ITO (130 ITR 1), their Lordships of the Supreme Court, inter alia, observed that the expression reason to believe is stronger than the expression is satisfied.
Thus, the existence of tangible material for the formation of opinion is a pre-requisite for initiation of action under section 147 of the Act. In case of challenge, it is open to the Court to examine whether there was material before the AO, having rational connection or relevant bearing to formation of the belief that is claimed to have been held at the time when he issued the notice. However, the Court cannot, for the purpose of ascertaining validity of the notice, examine the sufficiency of the reasons for the belief (see S. Narayanappa v CIT (63 ITR 219)).
The Delhi HC held that when a challenge is made to the action under section 147 of the Act, what the Court is required to examine is whether some material exists on record for the AO to form the requisite belief and reasons for the belief have a rational nexus or a relevant bearing to the formation of such belief and are not extraneous or irrelevant for the purpose of the said section. However, the sufficiency of the grounds which induced the AO to act under the said section is not a justiciable issue. The Court in the present case quashed notices under section 148 on grounds that there was no sufficient material on the basis of which the Commissioner could have accorded his sanction for reopening the assessment. While the aforesaid decision turns on its own facts, the strict rule for the applicability of section 147 read with the relevant provisions has been emphasized by the Court.