Reasons to Believe in Legal Proceedings: Importance & Impact Explained

Introduction

Understanding the concept of “reasons to believe” is crucial in legal contexts, especially in matters related to taxation and investigation. This article explores why this principle is fundamental and how it impacts various judicial decisions.

Differentiating Reasons to Suspect and Reasons to Believe

To grasp the significance of “reasons to believe,” it’s essential to differentiate it from mere suspicion and understand its implications in legal proceedings.

Legal Precedents Highlighting the Importance

EXCELLENT VISION TECHNICAL ACADEMY PVT. LTD. – Allahabad High Court

Introduction:

In the case of M/S. Excellent Vision Technical Academy Pvt. Ltd. v. State of U.P. and 5 Others, the Hon’ble Allahabad High Court addressed the legality of a search conducted by the UP GST department under the provisions of the State Goods and Services Tax Act, 2017.

Facts of the Case:

M/s. Excellent Vision Technical Academy Pvt. Ltd. (“the Petitioner”) was subjected to a search by the UP GST department on January 4, 2018. Subsequently, the department issued two INS-01 (search warrants) on different dates: one on the date of the search and another on February 11, 2019. The Petitioner challenged the validity of these warrants, arguing that they lacked proper authorization and did not contain the requisite “reasons to believe” as mandated by Section 67 of the State GST Act.

Issue:

Whether the failure to record “reasons to believe” in the INS-01 documents renders the search proceedings initiated by the tax department illegal under Section 67 of the State GST Act?

Held:

The Hon’ble Allahabad High Court held that the INS-01 issued on February 11, 2019, subsequent to the search, was invalid. It noted discrepancies, suggesting that the document was fabricated after the fact. Moreover, the court observed that the tax department failed to provide the actual reasons to believe before initiating the search, as required under Section 67 of the State GST Act. Consequently, the entire proceedings stemming from the illegal search and seizure were deemed unsustainable. The court ordered the quashing of the authorization and directed the tax department to refund the amount deposited by the Petitioner pursuant to the order passed under Section 74 of the State GST Act within eight weeks.

Rakesh Kumar Saraogi – Chhattisgarh High Court

Introduction:

The case of Shri Rakesh Kumar Saraogi v. Commissioner of Income Tax, decided by the Chhattisgarh High Court, revolves around challenges to the reopening of assessments under Section 147 of the Income Tax Act, 1961. This decision addresses the mandatory requirement of furnishing “reasons to believe” by the Assessing Officer before initiating reassessment proceedings.

Facts of the Case:

Several writ petitions were filed challenging the order of the Assistant Commissioner of Income Tax, Raipur, rejecting objections against reopening of assessments for the assessment year 2010-11. The petitioners, including Shri Rakesh Kumar Saraogi and various companies, contended that they were not served with a notice under Section 148 of the Income Tax Act, and upon receiving notice under Section 142(1), they sought reasons to believe recorded under Section 147. However, the Assessing Officer provided a detailed order rejecting their application without supplying the reasons.

Issue:

Whether the Assessing Officer is required to furnish reasons to believe under Section 147 of the Income Tax Act to the assessee upon request, before proceeding with reopening of assessments?

Held:

The Chhattisgarh High Court held that under Section 147 of the Income Tax Act, the Assessing Officer must have “reasons to believe” that income chargeable to tax has escaped assessment. The court referred to the Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer, which mandates that the reasons to believe must be supplied to the assessee upon request within a reasonable time. Failure to furnish reasons renders the reopening of assessment proceedings invalid.

In this case, the court found that the petitioners were not served with notice under Section 148 of the IT Act and the reasons to believe were not supplied despite their request. The rebuttal order passed by the Assessing Officer rejecting objections without providing reasons was deemed contrary to legal principles established by the Supreme Court. Therefore, the court quashed the rebuttal order dated August 2, 2017, directing the Assessing Officer to furnish reasons to believe within six weeks. The petitioners were allowed to file objections within four weeks thereafter, and the Assessing Officer was instructed to dispose of these objections by a speaking order within a reasonable time.

M/s Agarwal Iron Industries – Supreme Court

Introduction:

In the case of Union of India & Ors. vs M/S. Agarwal Iron Industries, the Supreme Court of India addressed the legality of a search and seizure operation conducted by the Income Tax Department at the premises of Agarwal Iron Industries. The case revolves around the interpretation of Section 132(1) of the Income Tax Act, 1961, which governs the authority’s power to conduct such actions.

Facts of the Case:

Agarwal Iron Industries, engaged in the manufacture of C.I. pipes, fittings, and manholes, held a license under the Central Excise Act and regularly filed income tax returns. In February 2000, during the absence of the proprietor, a search and seizure operation was conducted by the Income Tax Department at both residential and business premises. The operation was based on suspicion that the company had concealed significant production and sales information, impacting its tax liabilities.

Issue:

The primary issue before the Supreme Court was the validity of the search and seizure conducted under Section 132(1) of the Income Tax Act. Specifically, the Court was to determine whether the search was conducted based on valid reasons and whether the procedural requirements under the Act were met.

Held:

The Supreme Court held that the High Court had erred in quashing the search and seizure without adequately examining the reasons recorded by the Income Tax Department. It emphasized that the power to conduct search and seizure is a necessary tool for revenue authorities, provided there is a reasonable belief of undisclosed income or assets. The Court noted that the High Court had failed to scrutinize the reasons recorded by the authority, which is crucial for determining the validity of such actions under the law.

In conclusion, the Supreme Court set aside the High Court’s order and remanded the case for fresh consideration. It directed the revenue to present the case file before the High Court to facilitate a thorough examination of the reasons behind the search and seizure. The decision reaffirmed the importance of procedural safeguards and the requirement for authorities to substantiate their actions with valid reasons under the Income Tax Act.

Vikas Jain – Allahabad High Court

Introduction:

In the case of Sh. Vikas Jain vs Union of India and Another, a bail application was filed under Section 439 of the Code of Criminal Procedure before the High Court of Allahabad. The applicant, Vikas Jain, sought bail in Case No. 2924 of 2023 concerning an offence under Section 132(1)(b)(i) of the Central Goods and Services Tax Act, 2017, as investigated by the Directorate General of Goods and Services Tax Intelligence (D.G.G.I), Ghaziabad.

Facts of the Case:

Vikas Jain, through his counsel, asserted his innocence and claimed he was falsely implicated in the case. It was contended that his arrest lacked legal justification, as no valid reasons were provided under the Code of Criminal Procedure. Additionally, it was argued that no notice for the recovery of GST had been issued against him, and penalties or taxes had not been quantified under the Act. The applicant had been in custody since 19th September 2023, despite the compoundable nature of the alleged offences.

Opposing the bail application, the counsel for D.G.G.I supported the Sessions Court’s decision and argued against granting bail, citing the serious nature of the allegations. However, no material contrary to the applicant’s submissions was presented.

Issue:

The primary issue before the High Court was whether bail should be granted to Vikas Jain considering the circumstances of the case, including procedural irregularities in arrest, the nature of the offences, and the applicant’s previous criminal history.

Held:

After considering the arguments and legal precedents, the High Court found it to be a fit case for granting bail. The decision was based on the principles laid down by the Supreme Court in various judgments regarding bail applications. Therefore, the High Court ordered that Vikas Jain be released on bail in Case No. 2924 of 2023 upon furnishing a personal bond and two reliable sureties to the satisfaction of the concerned court.

RAJNANDINI METAL LTD. – Punjab & Haryana HC

Introduction:

The case of Rameswar Metal House vs Assistant Commissioner (ST) heard by the Madras High Court pertains to the legality of blocking Input Tax Credit (ITC) under Rule 86A of the Tamil Nadu Goods and Services Tax (TNGST) Rules 2017. This ruling addresses significant implications for businesses regarding the utilization of ITC and the repercussions of alleged fraudulent activities by suppliers.

Facts of the Case:

Rameswar Metal House, engaged in wholesale trade of stainless steel items, had its ITC amounting to Rs. 67,75,144 blocked by the State GST authorities under Rule 86A of the TNGST Rules. This action followed previous instances where the Central GST authorities had unblocked the credit, which had been earlier blocked by the State GST authorities on different occasions.

The State GST authorities invoked Rule 86A(1)(a) and (c) of the TNGST Rules, alleging that the petitioner had availed ITC based on invoices from M/s. Kiran Distributors, a trader suspected of passing on ineligible ITC to multiple taxpayers, including Rameswar Metal House.

Issue:

 The primary issue before the Madras High Court was whether the blocking of ITC by the State GST authorities under Rule 86A was justified in the case of Rameswar Metal House. The court had to assess the legality of the State GST authority’s decision in light of the petitioner’s claim that the ITC blocking was improper.

Held:

The Madras High Court, after considering the submissions and legal precedents, upheld the decision of the State GST authorities to block the ITC. The court noted that the petitioner had availed ITC based on invoices from M/s. Kiran Distributors, which was found to be a non-existing entity engaged in passing on ineligible ITC. The court distinguished this case from the Punjab and Haryana High Court’s decision in Rajnandini Metal Limited case, highlighting the specific circumstances and evidence presented regarding M/s. Kiran Distributors.

The court emphasized that the State GST authorities had reasonable grounds to invoke Rule 86A to block the ITC, given the fraudulent activities attributed to M/s. Kiran Distributors. It granted liberty to the petitioner to challenge the impugned order before the Appellate Authority while directing the respondents to initiate recovery proceedings under Section 73 or 74 of the Act for the ineligible ITC availed.

GOLDEN COTTON INDUSTRIES – Gujarat High Court

Introduction:

In the case of M/S Golden Cotton Industries vs Union of India, the Gujarat High Court addressed the legality of an order issued under Rule 139(4) of the Central Goods and Services Tax (CGST) Rules, 2017, concerning the prohibition of certain goods. The petitioner challenged the order on the grounds that it was contrary to the provisions of Section 67(2) of the CGST Act, 2017.

Facts of the Case:

M/S Golden Cotton Industries, the petitioner, contested an order of prohibition issued under Rule 139(4) of the CGST Rules. The petitioner argued that the goods in question were duly accounted for in their books of account and were not concealed or secreted anywhere, contrary to the requirements set forth in Section 67(2) of the CGST Act, 2017. The petitioner contended that the seizure and prohibition of the goods based on this order were therefore unjustified.

Issue:

The main issue before the Gujarat High Court was whether the order of prohibition issued under Rule 139(4) of the CGST Rules, which involved goods accounted for in the petitioner’s books of account and not secreted, complied with the provisions of Section 67(2) of the CGST Act, 2017.

Held:

After considering the submissions made by Mr. Paresh Sheth, learned advocate for the petitioner, the Gujarat High Court issued a notice returnable on 21st February, 2019. The court found merit in the petitioner’s argument that the goods were not secreted as required under Section 67(2) of the CGST Act for the issuance of a prohibition order. The court directed direct service of notice to respondents No. 3 and 4 and permitted the petitioner to serve respondents No. 1 and 2 through Speed Post at their own cost. This decision implied that the court was inclined to examine the validity of the prohibition order issued against M/S Golden Cotton Industries under Rule 139(4) of the CGST Rules, based on the interpretation and application of Section 67(2) of the CGST Act, 2017.

Importance of Reasons to Believe in Natural Justice

Discussing how the principle of natural justice mandates the disclosure of reasons to believe to maintain fairness and transparency in legal proceedings.

Legal Scrutiny and Judicial Review

Exploring how courts review the adequacy and legitimacy of reasons to believe in safeguarding the rights of the assessee.

Practical Implications for Taxpayers

Advising taxpayers on understanding their rights concerning reasons to believe and its impact on their legal standing and defenses.

Conclusion

Summarizing the significance of reasons to believe in upholding principles of natural justice and ensuring procedural fairness in legal actions.