2004 (5) TMI 247 - AT - Income Tax

Validity of initiation of proceedings u/s 147 - Application of time limit for notice u/s 143(2) to proceedings initiated u/s 147 - difference of opinion between the Judicial Member and the Accountant Member - Third member order - intimation u/s 143(1)(a) of the Act was issued - Though the notice u/s 143(2) was issued, no order u/s 143(3) was passed. HELD THAT - learned JM held (i) that in view of Explanation 2(b) to section 147, the Assessing Officer could validly issue notice u/s 147 on 15-12-1992 despite the fact that assessment could not be completed in pursuance of notice u/s 143(2) dated 23rd May, 1990; (ii) that assessee had claimed excessive deduction u/s 80-O which resulted in escapement of income; and (iii) that Assessing Officer had reasons to believe that there was escapement of income on account of excessive claim u/s 80-O and wrong claim of assessee regarding entertainment of expenses. Hence, the proceedings were validly initiated u/s 147. Learned AM opined (i) that reasons recorded by the Assessing Officer revealed that initiation of proceedings u/s 147 was for the purpose of examination only; (ii) that there was no material with the Assessing Officer for formation of belief that there was escapement of income; (iii) that reasons were not recorded by Assessing Officer himself which resulted in non application of mind by Assessing Officer. Hence, it was held that proceedings u/s 147 were not validly initiated. Third member- A bare perusal of the facts clearly reveals that nowhere the Assessing Officer has recorded that he had reasons to believe that there was escapement of income. What has been mentioned is that assessee had claimed entertainment expenses on higher side but no material worth the name has been mentioned by him for coming to such conclusion. Further, he has merely expressed his doubts about the various expenses incurred by the assessee and regarding donation of Rs. 5 lakhs received by the assessee. It is the settled legal position that before initiation of reassessment proceedings the Assessing Officer must have some material/ evidence in his possession on the basis of which he could have formed the belief that income had escaped assessment. Further, there must be live link between such material and formation of belief. These are the conditions precedent or initiating the proceedings u/s 147. The learned DR has not been able to point out any material to justify the action of the Assessing Officer. The reasons recorded do not indicate any material on the basis of which it could be said that there was escapement of income. The learned JM has upheld the action of Assessing Officer merely by stating that assessee had excessively claimed the deduction u/s 80-O and wrongly claimed deduction of entertainment expenses. But there is no material worth the name for coming to such conclusion. Even excessive claim u/s 80-O was never the basis for re-opening the assessment u/s 147. Therefore, in my opinion, the learned AM was justified in holding that initiation of proceedings u/s 147 was bad in law. Besides this, the so called reasons recorded by Assessing Officer shows that there was non application of mind on the part of the Assessing Officer. It appears from the language that some staff official put up a note before the Assessing Officer seeking his approval before issuing notice u/s 148. Further, it appears that such note was put up in order to make investigation into the claim of the assessee regarding various expenses incurred by it. The so called reasons clearly shows that the Assessing Officer wanted to make investigations into the claim of the assessee regarding entertainment expenses and other expenses as well as the donation of Rs. 5 lakhs. In my opinion, the proceedings u/s 147 cannot be resorted to for making roving enquiries. Therefore, even on this account, such proceedings were bad in law. Thus, I am entirely in agreement with the view expressed by learned AM. Accordingly, it is held that re-assessment proceedings u/s 147 were not validly initiated. The matter would now go back to the regular Bench for necessary orders.

Issues Involved:
1. Validity of initiation of proceedings u/s 147.
2. Application of time limit for notice u/s 143(2) to proceedings initiated u/s 147.
3. Whether the Assessing Officer applied his mind in recording reasons for issuing notice u/s 148.
4. Validity of reassessment proceedings and assessment order.

Summary:

1. Validity of initiation of proceedings u/s 147:
The main issue in this case was the validity of the initiation of proceedings u/s 147. The Assessing Officer issued a notice u/s 148 after the original assessment became time-barred. The CIT(A) held that the proceedings u/s 147 were invalid as the Assessing Officer had not completed the assessment within the limitation period and had mechanically signed the reasons for issuing the notice u/s 148 without proper application of mind. The Tribunal, however, held that the initiation of proceedings u/s 147 was valid as the Assessing Officer had reasons to believe that income had escaped assessment due to excessive claims under section 80-O and other expenses. The Tribunal relied on Explanation 2(b) to section 147, which allows reopening of assessment if no assessment has been made and the Assessing Officer notices that the assessee has understated income or claimed excessive deductions.

2. Application of time limit for notice u/s 143(2) to proceedings initiated u/s 147:
The CIT(A) held that the time limit for issuing notice u/s 143(2) applied to proceedings initiated u/s 147 as well. The Tribunal, however, disagreed, stating that the limitation for assessment u/s 143(3) and 147 is separate. The Tribunal noted that the notice u/s 148 was issued within the limitation period, and the assessment was completed within the prescribed time, making the proceedings valid.

3. Whether the Assessing Officer applied his mind in recording reasons for issuing notice u/s 148:
The CIT(A) observed that the reasons for reopening the assessment were recorded by a staff member and mechanically approved by the Assessing Officer, indicating a lack of application of mind. The Tribunal, however, found that the reasons recorded by the Assessing Officer were sufficient to form a belief that income had escaped assessment, thus justifying the initiation of proceedings u/s 147.

4. Validity of reassessment proceedings and assessment order:
The CIT(A) held that the reassessment was invalid as the notice u/s 143(2) was issued beyond the statutory period. The Tribunal, however, upheld the reassessment, stating that the proceedings u/s 147 were validly initiated, and the assessment was completed within the limitation period. The Tribunal emphasized that the provisions of Explanation 2(b) to section 147 were applicable, and the judicial pronouncements relied upon by the CIT(A) were not applicable to the facts of the present case.

Separate Judgment by Third Member:
The Third Member agreed with the Accountant Member, holding that the reassessment proceedings u/s 147 were not validly initiated. The Third Member noted that the reasons recorded by the Assessing Officer did not indicate any material for forming a belief that income had escaped assessment and that the initiation of proceedings was for the purpose of investigation only, which is not permissible u/s 147. The Third Member also observed that the reasons recorded showed non-application of mind by the Assessing Officer, as they were put up by a staff member for approval. Consequently, the reassessment proceedings were held to be invalid.

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