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Rajendra Goud Chepur vs. ITO (AP & T High Court)
April, 18th 2017

Though Explanation 2 of s. 147 authorizes the AO to reopen an assessment wherever there is an "understatement of income", the AO is not entitled to assume that there is "understatement of income" merely because the assessee's income is "shockingly low" and others in the same line of business are returning a higher income. The invocation of the jurisdiction u/s 147 on the basis of suspicions and presumptions cannot be sustained

The notices under Section 148 was issued on the sole ground that the total income admitted by each of these petitioners, constituted a very small percentage of their gross receipts for the relevant assessment year and that therefore there was income that escaped assessment. The Assessing Officers had drawn presumably a comparison to others in the same line of business, as indicated in the reason for reopening.

(ii) But the reasons for reopening woefully fall short of the reasons that could form the basis for reopening of assessments. There is no indication in the reasons as to who are the assessees with whom any comparison was made. If the Assessing Officers had compared the gross receipts of yet another assessee in the same line of business and pointed out as to how the income returned by such assessee was at a consistently higher rate of the total receipts, the petitioners could have been in a position to point out how the admitted total income in their cases fell for short. Without making an actual comparison with named assessees in the same line of business, the Assessing Officers cannot leave it to presumptions and surmises.

(iii) The learned Standing Counsel for the respondents/ Department took us through various decisions of the Tribunal where the similar reopening of assessments made on the same line of reasons were upheld, wherever books of accounts were not maintained, estimating the income to be 5% of the gross receipts. But it appears that in those cases, the very rationale for reopening of assessment and the very jurisdiction of the Assessing Officer to reopen assessments on the basis of such flimsy reasons, was not considered. Therefore, we cannot make a comparison of the cases on hand with cases of persons who reconciled themselves to the estimation of income at 5% of either the gross receipts or the stock available on trade.

(iv) Under Section 147(1), the Assessing Officer is entitled to reopen assessment, if he has reason to believe that any income chargeable to tax has escaped assessment for the assessment year. Two conditions ought to be satisfied for the invocation of the power under Section 147. They are: (1) the existence of a reason to believe and (2) the escapement of any income chargeable to tax from assessment. The reason to believe on the part of the Assessing Officer, should arise out of concrete facts which could at least form the foundation for reopening. Without any concrete facts, reopening cannot be ordered merely on the presumption that the returned income is very shockingly lower than the total gross receipts. Therefore, we are of the considered view that the Assessing Officers completely erred in reopening assessments on the basis of either a suspicion that there is suppression of income or on the basis that persons in the same line of business are returning a higher income. Without even mentioning the comparables, no initiation of proceedings under Section 147 can be made.

(v) In the order rejecting the objections, the Assessing Officer has relied upon Clause (b) under Explanation 2 to Section 147. Clause (b) under Explanation 2 to Section 147 deals with cases where a return of income has been furnished by the assessee but no assessment has been made and the Assessing Officer notices that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return. Admittedly, the cases of none of these petitioners fall under the category of claiming excessive loss or deduction or allowance or relief in the return. The cases of the assessees are attempted by the Assessing Officers to be brought within the category of “understatement of income”, so as to invoke Clause (b) under Explanation 2.

(vi) But to come to the conclusion that there was understatement of income, it is not sufficient for the Assessing Officers to just arrive at the percentage of gross receipts that were declared as income, without even referring to other assessees whose admitted income was at a better percentage of the gross receipts than the petitioners. Therefore, the invocation of the jurisdiction under Section 147 on the basis of suspicions and presumptions cannot be sustained. Therefore, the writ petitions are allowed. The miscellaneous petitions, if any, pending in these writ petitions shall stand closed. No costs.

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