2006 (6) TMI 142 - AT - Income Tax

Income Escaping Assessment - initiation of assessment proceedings u/s 147 - notice issued u/s 148 - HELD THAT- In the instant case on the reasons recorded it is apparent that the learned Assessing Officer entertained an honest belief that assessee's income chargeable to tax had escaped assessment. The belief was based on application of mind on relevant facts. I, therefore, see no merit in grounds of appeal Nos. 1 and 2 taken by the assessee. The same are rejected. In the appeals before me the dispute relates to the assessment of a sum for assessment year 1997-98 and assessment year 1998-99 assessed by the Assessing Officer on account of interest income of the assessee on fixed deposits with the bank. It is seen that interest income earned by an assessee on surplus funds of a mutual society deposited with a banking institution are covered by the principle of mutuality, as held by Hon'ble Delhi High Court in their judgment in the case of DIT v. All India Oriental Bank of Commerce Welfare Society 2003 (1) TMI 704 - DELHI HIGH COURT . In my opinion the authorities below have erred in distinguishing the E aforesaid judgment of Hon'ble Delhi High Court on the ground that the assessee is a co-operative housing society whose income was not exempt u/s 11. Hence, respectfully following the judgment of Hon'ble Delhi High Court above mentioned, I direct deletion of the additions made in orders u/s 147 read with section 143(3) for both assessment years 1997-98 and 1998-99. In the result, these two appeals are partly allowed.

Summary

Issues:
Initiation of proceedings under section 147 based on interest income on bank deposits. Completion of assessment under section 147 without disposing of preliminary objections.

Analysis:

Issue 1: Initiation of proceedings under section 147
- The appeals were filed against the order of the CIT(Appeals) for assessment years 1997-98 and 1998-99.
- The Assessing Officer initiated proceedings under section 147 based on interest income on bank deposits that had escaped assessment.
- The reasons to believe were recorded by the Assessing Officer, indicating the income earned by the assessee from bank deposits.
- The appellant argued that the interest income fell within the principle of mutuality, citing Tribunal orders and court pronouncements.
- The Accountant Member held that the Assessing Officer had bona fide reasons to believe that income had escaped assessment based on relevant material.
- The correctness of the reasons could be examined in appellate proceedings, but the sufficiency of reasons could not be questioned.
- The initiation of proceedings under section 147 was deemed valid as the Assessing Officer had an honest belief supported by relevant facts.

Issue 2: Completion of assessment without disposing of preliminary objections
- The appellant contended that the assessment order under section 147 was invalid as the preliminary objections were not disposed of by the Assessing Officer.
- Citing the judgments in the cases of GKN Driveshafts (India) Ltd. and Arvind Mills Ltd., the appellant argued that a speaking order on objections was necessary before completing the assessment.
- The Accountant Member acknowledged the requirement for the Assessing Officer to dispose of objections by passing a speaking order.
- However, there was no express provision for an interim order on objections under the Income-tax Act.
- The Accountant Member held that the infirmity in this case was an irregular exercise of jurisdiction, not a lack of inherent jurisdiction.
- The Accountant Member directed the deletion of additions made in the assessment orders for both years based on interest income, following the judgment of the Hon'ble Delhi High Court.

Conclusion:
- The appeals were partly allowed, with the additions made in the assessment orders for both years being deleted based on the principle of mutuality regarding interest income on bank deposits by the mutual society.

This analysis provides a detailed overview of the issues involved in the legal judgment, including the reasons for initiation of proceedings under section 147 and the completion of assessment without addressing preliminary objections. The Accountant Member's decision and reasoning are outlined for each issue, ensuring a comprehensive understanding of the judgment.