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TMI Blog2004 (5) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... nitiated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in holding that the Assessing Officer was precluded from taking action under section 147 because of his failure to complete assessment under section 143(3) as the law had changed w.e.f. assessment year 1989-90 and the case laws referred to were in respect of assessments completed prior to the new provisions. 2. The CIT(A) was not correct in stating that the time limit of one year for issue of notice under section 143(2) applied to proceeding initiated under section 147 also as proceedings under section 148 is only a reassessment proceeding and not the original assessment. 3. The CIT(A) erred in holding that the Assessing Officer had mechanically signed the reasons recorded for issue of notice under section 148 as there is nothing on record to indicate that there was lack of application of mind. 3. All the three grounds of appeal relate to the validity of initiation of proceedings under section 147 of the Act. This is the main issue. It has been observed by the Assessing Officer that the income-tax returns for assessment year 1989-90 was filed on 15-12-1989 by declaring income at Rs. 15,09,530. The case was processed under section 143(1)(a) on 22-1-1990. Thereafter proceedings we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Late AMKM Kuruppan Chettiar v. CIT [1969] 72 ITR 403 (SC); and Ghanshyamdas v. Regional Asstt. CIT [1964] 51 ITR 557 (SC) whereby it has been held that return filed voluntarily by the assessee cannot be ignored by the Assessing Officer and after the assessment proceedings have been initiated, income cannot be said to have escaped assessment until a final order of assessment is passed on the pending proceedings. For this proposition he has relied on the decision of Hon'ble Calcutta High Court in the case of Smt. Sova Sarkar v. ITO [1983] 139 ITR 386 whereby it has been held that when return has been filed by the assessee, it cannot be ignored by the ITO and he will have no jurisdiction to issue a notice under section 148 without completing the assessment. He has also relied on the judicial pronouncement of the Hon'ble Allahabad High Court in the case of S.P. Kochhar v. ITO [1984] 145 ITR 255 wherein it was held that so long as assessment is pending, the assessing authority cannot have reason to believe that income for the relevant assessment year has escaped assessment. He has further held that from these judgments it is clear that after picking up the case for scrutiny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dismissing the petition of the assessee/appellant, held that the only requirement of section 147 is that the Assessing Officer must have good reason to believe that some income had escaped assessment. Once this belief is well-founded, recourse to reassessment proceedings cannot be said to be illegal. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate reassessment proceedings and failure to take steps under section 143(2) will not render the Assessing Officer powerless to initiate the reassessment proceedings. In this inference the Hon'ble Allahabad High Court has relied on the decision of the Hon'ble Calcutta High Court in the case of Jorawar Singh Baidv. Asstt. CIT [1992] 198 ITR 47. The learned DR has further argued that proceedings under section 147 are also within time. According to her 18th January, 1993 was the date of service of notice under section 148 and the limitation runs from end of the financial year 1993 i.e. 31-3-1993 upto two years i.e. 31-3-1995. Hence limitation for completing the assessment under section 147 should be upto 31-3-1995 whereas the present assessment has been completed on 24-1-995. Hence asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the month in which return is filed is applicable even to a return filed under section 148 of the Act and since the notice was not issued within this period, the assessment was time barred. 6. The learned AR has relied on the judicial pronouncements as relied upon by the CIT(A). The learned AR has filed sequence of the events separately which are noted below: - S. No. Event Actual Date of Event Time limit under the Act Remarks 1. Return of Income of Rs. 15,09,530 filed u/s 139(1) of the Act 15-12-89 31-12-89 Return filed in time u/s 139(1) of the Act. 2. Issued intimation u/s 143(1)(a) accepting the Return. 22-1-90 31-3-91 3. Issued notice u/s 143(2)- hearing fixed for 18-6-90. 23-5-90 30-6-90 Notice issued in time in terms of proviso to section 143(2) i.e., end of the Financial Year in which the return is filed or expiry of six months from the end of the month in which the return is furnished, which-ever is later, i.e., 31-3-1990 or 30-6-1990, whichever is later. 4. Order u/s 143(3) not passed. 31-3-92 Assessment time-barred in terms of time limit in section 153(1)(a) of the Act which is two years from the end of the assessment year. 5. Issued notice u/s 147/148 15-12-92 Note : No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng reasons under section 147, he could have said even in the original orders of assessment. Thus, it was a case of mere change of opinion which did not provide jurisdiction to the Assessing Officer to initiate proceedings under section 147 of the Act. Therefore, the notices issued for reassessment for all the assessment years were not valid. 7. The learned DR has vehemently argued that the Hon'ble Delhi High Court's judicial pronouncement is clearly distinguishable from the facts and circumstances of the present case because in the present case the original assessment under section 143(3) had not been completed. While in the case of judicial pronouncement relied upon it was a case of completed assessment under section 143(3). In the present case intimation issued by Assessing Officer under section 143(1)(a) was not assessment order under section 143(3). The question of change of opinion by Assessing Officer did not arise. The Assessing Officer in the present case had not only not changed his opinion but found new facts regarding excessive deduction claimed under section 80-O of the Act. Hence, she has argued that in the present case the judicial pronouncement is not applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imitation. The initiating proceeding under section 147 was within limitation period of section 149 and the completion of assessment under section 147 was within limitation period of section 153. Hence, there is no infirmity or invalidity in the Assessing Officer's order. 10. We have also noted the reasons recorded by the Assessing Officer for coming to the belief that the income chargeable to tax had escaped assessment and action under section 147 was warranted in the case. Clearly the assessee had claimed excessive deduction under section 80-O by claiming it wrongly on gross amount instead of the net income. The assessee had also wrongly claimed deduction of entertainment expenses. The action under section 147 on account of claim of excessive deduction was fully covered by Explanation 2(b) of section 147. 11. Hence after having heard both the parties, perusing the material on record and considering provisions of law and the judicial pronouncements of the different High Courts we are of the view that the proceedings under section 147 had been validly initiated and the assessment framed under section 147 was proper and valid. Explanation 2(b) to section 147 of the Act is applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the assessee, inter alia, challenged the legality/validity of the assessment order on various grounds which are mentioned in paragraph 5 of the CIT(A)'s order and also paragraph 5 of the order of my learned brother. 5. The CIT(A) considered the submissions of the assessee. He also considered the remand report of the Assessing Officer. The CIT(A)'s finding could be summarized as under: - (i) It is admitted fact that when the original return of income was filed through notice under section 143(2) was issued, no assessment order under section 143(3) was made up to 31-3-1992, i.e. the limitation period provided under section 153(1)(a) of the Act. (ii) On receipt of notice under section 148, the assessee intimated the Assessing Officer vide his letter dated 16-2-1993 that the return filed by it originally may be treated as a return filed in response to notice under section 148 of the Act. Section 148(1) provides that a return is filed in response to notice under section 148, then the provisions of this Act shall so far as may be apply accordingly as if such return were required to be furnished under section 139 of the Act. Thus, the notice under section 143(2) should have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the limitation mentioned in proviso to section 143(2) does not apply to the reassessment proceedings under section 148 of the Act. (iii) The CIT(A) has erred in holding that Assessing Officer has mechanically signed the reasons recoded for issue of notice under section 148 of the Act as there is nothing on record to indicate that there was lack of application of mind. 8. We have therefore address ourselves to the findings of the CIT(A) and the challenge of the revenue to those findings. 9. Section 147 of the Act reads as under:- 147. If the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year). 10. Under the newly substituted sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoked by the Assessing Officer, if it is a case of escapement of assessment of income for a particular year. But mere fresh application of mind to the same set of facts are mere change of opinion. 13. Section 148 provides that before making the assessment, reassessment or re-computation of income, the Assessing Officer shall serve upon the assessee a notice. Sub-section (2) of section 148 provides that before issuing any notice under this section, the Assessing Officer shall record his reason for doing so. The combined reading of sections 147 and 148 makes it clear that firstly the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment and before issuing notice under section 148, the Assessing Officer shall have to record the reasons. Both these conditions were prescribed in the pre-amended section 147 as well as in the section after the amendment w.e.f.1-4-1989. Under the section, the Assessing Officer can clothe himself with the jurisdiction only after recording the reasons for reopening the assessment. In fact, even under the Act of 1922, this was a pre-condition for assumption of jurisdiction. Since recording of reasons is a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Ganga Saran Sons (P.) Ltd. has held that reason should be such which can lead to a belief. These cannot be a mere pretence, fanciful or arbitrary or irrational. It is admitted position that the sufficiency of the material cannot be investigated but certainly whether there was any material at all for formation of belief can always be examined by a court. These views also find support from the decision of Hon'ble Rajasthan High Court in the case of Sardar Kehar Singh v. CIT [1992] 195 ITR 769. 17. Hon'ble Delhi High Court in the case of Bawa Abhai Singh v. Dy. CIT [2002] 253 ITR 833 and in the case of United Electricals Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 has held as under: - Crucial expression (reason to believe) predicates that the Assessing Officer must hold a belief..........by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. 18. Keeping in view the settled legal position, if we see the reasons recorded by the Assessing Officer, it is abundantly clear that the initiation of proceedings under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessing Officer has not applied his mind before issue of notice under section 148 of the Act. So called reasons recorded by the Assessing Officer have been given in para 14 of the CIT(A)'s order. Admittedly, the notice under section 148 has been issued within four years so the question of taking approval of the CIT for the issue of such notice did not arise. It is also settled law that it is the Assessing Officer's reason to believe which was relevant. The reading of the reasons itself makes it clear that the reasons were not recorded by the Assessing Officer. The words hence if approved, notice under sect ion 148 may be issued itself was indicative of the fact that some staff member had put the note which was mechanically approved by the Assessing Officer without application of his mind. Needless to say, it is not the appraisal of the Assessing Officer but the subjective satisfaction of the Assessing Officer which is important for formation of belief. The CIT(A) has, therefore, rightly held that the Assessing Officer has initiated reassessment proceedings under section 147 without application of his mind. The initiation of reassessment proceedings on this count ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of this Act shall, so far as may be, apply accordingly as if such return were return required to be furnished under section 139. 2. The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so. 24. The use of the words and the provisions of this Act shall so far as may be, apply accordingly as if such return were a return required to be furnished under section 139 is of great importance. The use of above words are not by way of clarification. These are the substantive provisions of law. This section makes it clear that when a return is filed in response to notice under section 148, such return will be deemed to be a return under section 139 and the provisions of the Act so far as may apply to such return will also be applicable. As the notice under section 143(2) is issued on a return filed under section 139, the natural conclusion will be that the Assessing Officer if he considers it necessary and expedient, shall issue a notice under section 143(2) of the Act requiring the assessee to produce any evidence on which he may rely in support of the claim. Thus, the proviso to section 143(2) which provided for limitation per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than the monetary limit prescribed by the Board, the question arose as to whether the procedural provisions of section 144-B will be applicable or not. The Hon'ble Supreme Court considered the issue and held as under: - As to the argument based upon sections 144-A, 246 and 263, we do not doubt that assessments under section 143 and assessments and reassessments under section 147 are different, but in making assessments and reassessments under section 147 the procedure laid down in sections subsequent to section 139, including that laid down by section 144-B, has to be followed. 26. Hon'ble Punjab Haryana High Court in the case of Mrs. Rama Sinha v. CIT [2002] 256 ITR 481 had considered similar issue. In this case, the return was filed in response to notice under section 148 of the Act. The question arose as to whether the procedure laid down for an assessment under section 143(3) on a return filed under section 139 of the Act will be applicable to the returns filed in response to notice under section 148 of the Act. The Hon'ble Court after considering the issue held as under: - Once a return in pursuance of notice under section 148 of the Income-tax Act, 1961 is file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The Assessing Officer issued notice under section 142(1) but not under section 143(2). The Assessing Officer framed the order under section 143(3) of the Act. The Bench considered as to whether the order under section 143(3) could be made without issue of notice under section 143(2) of the IT Act. The Bench held as under: - The notice under section 143(2) is not merely procedural in nature but is a mandatory provision. Once the valid return under section 148 is filed by the assessee, the provision on the assessment of return filed under section 139 shall apply due to the mandatory provision of section 148 itself. 30. In view of the above, we are, therefore of the view that the CIT(A) has rightly held the assessment order to be invalid as the same was made on the notice under section 143(2) of the Act issued beyond the period of limitation prescribed under proviso to section 143(2) of the Act. 31. We find that ld. DR's arguments were centered mainly on two counts firstly that the notice under section 148 of the Act has been issued within the limitation period and secondly the reassessment has also been completed within the limitation period. There is no dispute about it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... President to refer the case to Third Member under section 255(4) of the Act for his opinion on the following points: Whether on the facts and in the circumstances of the case the Judicial Member is right in upholding action of the Assessing Officer under section 147 reversing CIT(A)'s order on the grounds that: (1) The reasons recorded and the formation of belief that there was escapement of income for initiating the action under section 147 were proper and valid; (2) There was no change of opinion of Assessing Officer because assessment under section 143(3) had not been completed in the case and processing of return under section 143(1)(a) was not tantamount to assessment under section 143(3). (3) Since there was no assessment the provisions of explanation 2(b) of section 147 was applicable in the case. (4) Since the assessee had claimed excessive deductions including the deduction under section 80-O on gross amount instead of net amount, there was understatement of income by the assessee and hence provision of Explanation 2(b) of section 147 was applicable in the case. (5) The initiation of proceeding and completion of assessment under section 147 was within the limitation p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id as to whether any reference under section 255(4) of the Act is required as to whether the initiation of reassessment proceedings was valid or not. However, in case, the Hon'ble President, ITAT decides to refer the points to the opinion of Third Member, I propose the following points for the opinion of the Third Member:- (i) Whether the Judicial Member was justified in holding that the initiation of proceedings under section 147 was valid or the Accountant Member was justified in holding that the initiation of reassessment proceeding was invalid inasmuch, as nowhere the Assessing Officer has recorded his satisfaction to the effect that 'he had reason to believe' that 'any income chargeable to tax has escaped assessment? (ii) Whether the Accountant Member was justified in holding that the so called reasons recorded by the Assessing Officer had any live link with the material available with the Assessing Officer? (iii) Whether the Accountant Member was justified in holding that the reasons recorded, if any, was without application of mind of the Assessing Officer as the same was put to Assessing Officer or his approval only? (iv) Whether it is only Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Assessing Officer? (iii) Whether the Accountant Member was justified in holding that the reasons recorded if any was without application of mind of the Assessing Officer as the same was put to Assessing Officer for his approval only? (iv) Whether it is only Assessing Officer's reason to believe which was necessary before issue of notice under section 148 of the Act? 2. At the initial stage of hearing it was seen that in fact there is no difference of opinion on question Nos. 3 to 5 as framed by the learned JM. The learned AM, in para 32 of his order, has clearly observed that there is no dispute to the contention of the DR that if no order has been passed on a valid return, then in view of Explanation to section 147; it will be a case of deemed escapement of income. In the same para he has also observed that there is no dispute that proceedings under section 147 were initiated within the period of limitation and the assessment has also been completed within the limitation period. Further, learned AM has not expressed any opinion regarding Question Nos. 2 4. The only dispute between the learned members centers round the validity of initiation of re-assessment proceedings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve that there was escapement of income on account of excessive claim under section 80-O and wrong claim of assessee regarding entertainment of expenses. Hence, the proceedings were validly initiated under section 147 (Paras 8 to 11 of the order of learned JM). 5. On the other hand, the learned AM opined (i) that reasons recorded by the Assessing Officer revealed that initiation of proceedings under section 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 under section 147 were not validly initiated. 6. The learned counsel for the assessee has reiterated the reasons given by the learned AM while the learned DR has relied on the reasonings given by the learned JM. Hence, the same need not be repeated. 7. After considering the submissions of both the parties and going through the orders of both the learned Members, I am inclined to agree that the reasonings given by the learned AM. To appropriate the controv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to bear in mind that it is not any and every material howsoever vague and indefinite or distant, remote and far-fetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words definite information which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague indefinite far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence. Another decision which I would like to quote is the decision of the apex court in the case of Ganga Saran Sons (P.) Ltd. wherein their Lordships observed as under: The important words in section 147(a) are has reason to believe and there words are stronger than the words is satisfied . The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears from the language that some staff official put up a note before the Assessing Officer seeking his approval before issuing notice under section 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 under section 147 cannot be resorted to for making roving enquiries. As noted in the earlier para, the Hon'ble Supreme Court has clearly held that belief must be held in good faith and could not merely be a pretence. In view of the same, it has to be held that provisions of section 147 cannot be invoked merely for making investigation or roving enquiries. Therefore, even on this account, such proceedings were bad in law. 10. In view of the above discussion, I am entirely in agreement with the view expressed by learned AM. Accordingly, it is held that re-assessment proceedings under section 147 were not validly initiated. The matter wou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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