Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 against the order dated 10.04.2024 passed by the Income Tax Appellate Tribunal, whereby the ITAT dismissed the Revenue’s appeal and allowed the assessee’s appeal by holding that the notice issued under Section 148 under the erstwhile reassessment regime was invalid.

The respondent assessee, East Delhi Leasing Pvt. Ltd., is engaged in the business of financing and leasing. The reassessment proceedings were initiated on the basis of Suspicious Transaction Reports (STRs) indicating large inflow and outflow of funds through the assessee’s bank accounts, predominantly involving related entities. The ITAT held that the reopening was based merely on “reason to suspect” and not on “reason to believe”, relying extensively on a recent Supreme Court judgment rendered in the context of criminal law.

Issues Involved

Whether the ITAT was justified in applying principles governing criminal jurisprudence, particularly the standard of proof “beyond reasonable doubt”, to assess the validity of reassessment proceedings under Section 148 of the Income-tax Act, and whether such an approach vitiated the ITAT’s order.

Appellant’s Arguments

The Revenue contended that the ITAT committed a serious error in law by importing criminal law principles into tax reassessment proceedings. It was argued that the standard under Section 148 is not proof beyond reasonable doubt, but existence of objective and tangible material giving rise to a reasonable belief that income has escaped assessment. Reliance was placed on binding Supreme Court precedents including ITO vs. Lakhmani Mewal Das and DCIT vs. M.R. Shah Logistics.

Respondent’s Arguments

The assessee sought to support the ITAT’s reasoning and contended that the reassessment was initiated merely on the basis of suspicion arising from fund movements, which were integral to its financing and leasing business. It was argued that mere circulation of funds between related entities did not give rise to any presumption of income escaping assessment.

Court Order / Findings

The Delhi High Court held that the ITAT had clearly misdirected itself in law by applying principles of criminal jurisprudence, including the test of proof beyond reasonable doubt, to proceedings governed by the Income-tax Act. The Court observed that such principles are confined to penal statutes and have no application to the concept of “reason to believe” under Section 148.

The Court reiterated that under settled law, the Assessing Officer must possess tangible material having a rational nexus with the formation of belief that income has escaped assessment, but the sufficiency or adequacy of such material is not to be judicially examined at the stage of reopening. The Court relied upon the authoritative pronouncements of the Supreme Court in Lakhmani Mewal Das and M.R. Shah Logistics in this regard.

The Court held that once the ITAT’s reasoning was founded entirely on an incorrect legal principle, the consequential findings on merits were also rendered unsustainable. However, the Court consciously refrained from expressing any opinion on the merits of the reassessment itself.

Important Clarification

The Court clarified that the distinction between “reason to suspect” and “reason to believe” under Section 148 must be examined within the framework of tax jurisprudence alone. Criminal law standards of proof or evidentiary thresholds cannot be imported into reassessment proceedings under the Income-tax Act.

Final Outcome

The appeal filed by the Revenue was allowed to the extent indicated. The Delhi High Court set aside the order dated 10.04.2024 passed by the Income Tax Appellate Tribunal and remanded the matter to the ITAT for fresh adjudication on merits, after granting due opportunity of hearing to both parties. All rights and contentions of the parties were left open, and no opinion was expressed on the merits of the case.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686638_PR.COMMISSIONEROFINCOMETAX1VsEASTDELHILEASINGPVT.LTD..pdf

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