Reassessment Notice Based on Mere Reason to Suspect Without Definite Escapement Belief Is Invalid and Quashed

ORDER

1. This appeal is filed by the assessee against the order of ld. ADDL/ JCIT (A)-1, Mumbai [“Ld. CIT(A)”, for short] dated 27.03.2026 for the Assessment Year 1998-99 raising following grounds of appeal :-

“1. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred both in law and on facts in upholding the validity of the notice issued under Section 148 of the Income-tax Act, 1961. The said notice is bad in law as it has been issued without proper recording and furnishing of reasons, thereby failing to satisfy the mandatory conditions precedent for assumption of jurisdiction under Section 147. Accordingly, the impugned notice is liable to be quashed as void ab initio.

2. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the additions made by the Ld. AO without appreciating that no proper opportunity of being heard or rebuttal was afforded to the appellant. The failure to provide such opportunity is in gross violation of the principles of natural justice and are therefore unlawful, and liable to be deleted.

3. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of long-term capital loss amounting to Rs.5,45,105/-. The said disallowance is contrary to the facts on record and settled principles of law. and is therefore liable to be deleted.

4. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of short-term capital loss amounting to Rs.5,20,825/-. The said disallowance is arbitrary, unjustified, and contrary to law, and is therefore liable to be deleted.

5. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in confirming the addition made by the Learned Assessing Officer on account of disallowance of travelling expenses incurred for travel to the USA amounting to Rs.1,50,000/-. The said disallowance is without proper appreciation of facts and evidence on record, and is therefore liable to be deleted.”

2. Brief facts of the case are, the assessee duly filed his return of income for the Assessment Year 1998-99 on 31.03.1998, declaring a Gross Total Income of Rs.22,06,990/- and a total tax liability of Rs.6,37,070. Thereafter, the Income Tax Department initiated reassessment proceedings by issuing a notice under Section 148 of the Income-tax Act, 1961 (for short ‘the Act’) dated 11.01.2001. In response thereto, the assessee duly complied with all the notices issued during the reassessment proceedings and furnished the requisite explanations along with the supporting documents as called for by the Assessing Officer. Upon completion of the reassessment proceedings, the AO passed an assessment order under Sections 143(3) read with 147 of the Act for the Assessment Year 1998-99, making following six (6) additions aggregating to Rs.14,89,612/- to the returned income of the assessee :-

3. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A) challenging the additions made by the Assessing Officer. Although the appeal was instituted on 24.08.2002, the learned CIT (A) passed the impugned appellate order only on 27.03.2026, resulting in an inordinate delay of nearly 24 years in the disposal of the first appeal. By the said order, the ld. CIT (A) granted partial relief to the assessee while sustaining Addition Nos. 1, 2 and 6, as set out in the table above, made by the Assessing Officer.

4. Aggrieved with the aforesaid order, assessee filed an appeal before us.

5. At the time of hearing, ld. AR of the assessee submitted as under :-

6. On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.

7. Considered the rival submissions and material placed on record. At the time of hearing, ld. AR specifically argued legal issue raised vide Ground No.1 regarding notice issued u/s 148 issued without ‘reason to believe’. I observed that the jurisdiction to reopen an assessment under Section 147 of the Act can be assumed only upon fulfillment of the statutory pre-condition that the AO has “reason to believe” that any income chargeable to tax has escaped assessment. I further observed that the reasons recorded by the AO do not disclose any “reason to believe” that income chargeable to tax had escaped assessment. The reasons merely recorded certain observations requiring verification, which, at the highest, amount to a “reason to suspect” and not a “reason to believe” as mandated under Section 147 of the Act. I further observed from the assessment order that AO has nowhere recorded a belief that any income chargeable to tax had escaped assessment. The reasons merely indicate that certain claims required verification or that certain supporting particulars were not available on record. I observed that such observations do not satisfy the statutory requirement of formation of a bona fide belief regarding escapement of income. Further, I observed that the assessee had duly furnished its Profit and Loss Account and Balance Sheet along with the return of income and if the Assessing Officer had found any material in the said documents indicating escapement of income, the proper course available under the Act was to issue a notice under Section 143(2) of the Income-tax Act and undertake a scrutiny assessment or other method available at his disposal. However, no such notice was issued, which clearly demonstrates that the Assessing Officer had not formed any opinion, much less a bona fide “reason to believe”, that any income chargeable to tax had escaped assessment. Thereafter, the Assessing Officer initiated reassessment proceedings by issuing a notice under Section 148 of the Act without first forming the statutory “reason to believe” as mandated under Section 147(1) of the Act. Such assumption of jurisdiction is contrary to the express requirements of Section 147 of the Act.

8. I observed that the expression “reason to believe” is fundamentally different from “reason to suspect.” However strong a suspicion, it cannot confer jurisdiction under Section 147. The AO must possess tangible material leading to the formation of a bona fide belief that income chargeable to tax has escaped assessment. I observed that the findings of ld. CIT(A) are contrary to the settled position of law.

9. In support of the above proposition, I find force from the judgment of the Hon’ble Supreme Court in Sheo Nath Singh(supra), wherein it was held that “reason to believe” postulates belief founded on relevant material and not mere suspicion, gossip or rumour.

10. Further, in the case of Signature Hotels (P) Ltd. (supra) of the Hon’ble Delhi High Court, it was held as under:-

“For the A.Y. 2003-04, the return of income of the assessee company was accepted u/s.143(1) of the Income-tax Act, 1961 and was not selected for scrutiny. Subsequently, the Assessing Officer issued notice u/s.148 which was objected by the assessee. The Assessing Officer rejected the objections. The assessee company filed writ petition and challenged the notice and the order on objections.

The Delhi High Court allowed the writ petition and held as under:

“(i) Section 147 of the Income-tax Act, 1961, is wide but not plenary. The Assessing Officer must have ‘reason to believe’ that income chargeable to tax has escaped assessment. This is mandatory and the ‘reason to believe’ are required to be recorded in writing by the Assessing Officer.

(ii) A notice u/s.148 can be quashed if the ‘belief’ is not bona fide, or one based on vague, irrelevant and non-specific information. The basis of the belief should be discernible from the material on record, which was available with the Assessing Officer, when he recorded the reasons. There should be a link between the reasons and the evidence/material available with the Assessing Officer.

(iii) The reassessment proceedings were initiated on the basis of information received from the Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs.5 lakhs during F.Y. 2002-03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income.

(iv) Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, had a paid-up capital of Rs.90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to the quashed.”

11. Respectfully following the aforesaid decisions, I am of the considered view that the mandatory jurisdictional conditions prescribed under Sections 147 and 148 of the Act were not satisfied in the present case. Accordingly, I quash the impugned notice issued under Section 148 which is without jurisdiction, contrary to the statutory mandate. Hence, I quash the assessment and allow the legal Ground No.1

12. Since I have quashed the assessment on the legal issue, the other grounds raised are not adjudicated at this stage and the same are kept open.

13. In the result, the appeal filed by the assessee is allowed.