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TMI Blog2010 (3) TMI 1104X X X X Extracts X X X X X X X X Extracts X X X X ..... s only a question of law although the discretion is vested in the Tribunal in this regard. Further, the additional ground was taken up 15 months after the aforesaid Finance Act was enacted and there is no explanation on record for the delay thereafter. Nonetheless, since it is purely a question of law to be decided on the basis of facts available on record, the ground is admitted for adjudication in the interest of justice. Reopening of the assessment u/s 147 - interest on the fixed deposits - CIT (A) uphold the reopening of the assessment u/s 147. It was prayed that the assessment made thereafter may be cancelled. HELD THAT:- We have perused the signatures on assessment order and in the reasons recorded by the AO. On prima facie perusal of these two signatures, we are of the view that they have been made by the same person, being full in the assessment order and in initial in the recorded reasons. However, we qualify our aforesaid observation by stating that we are not handwriting experts and it is only our prima facie view. Notwithstanding the aforesaid observation, we also mention that all acts done in discharge of official duty are assumed to be done in regular cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. Therefore, we do not find any force in the argument of the ld. counsel as the facts of the case of Jamna Lal Kabra are quite distinguishable [ 1967 (4) TMI 36 - ALLAHABAD HIGH COURT] . We may once more proceed to examine the argument of the ld. counsel in respect of change of opinion , on which significant emphasis was laid by him. it is clear that the facts of that case are also distinguishable as assessment was made in that case after detailed scrutiny and u/s 143(3). The Hon'ble Court clearly mentioned that the principle of change of opinion will have no application where there was no formation of opinion at all and it seems to us that this part of the judgment applies even to an assessment made u/s 143(3). We have already held that processing u/s 143(1)(a) and an order u/s 154 thereon do not lead to inference of application of mind. Therefore, there could be no question of change of opinion. Thus, it is held that the ld. CIT(A) was right in holding that the AO properly assumed jurisdiction u/s 147 and consequently notice issued u/s 148 was valid in law. Therefore, ground No. 1 is dismissed. Non-issuance and non-service of notice u/s 143(2) - We are of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal is dismissed. - K. G. BANSAL (ACCOUNTANT MEMBER) and GEORGE MATHAN (JUDICIAL MEMBER) Salil Aggarwal, Gautam Jain, for the Appellant. Smt. Surbhi Verma Garg, for the Respondent. ORDER Per K.G. Bansal, Accountant Member. This appeal emanates from the order of the CIT (Appeals)-IX, New Delhi, passed on 22-4-2004 in Appeal No. 214/2003-04 and it pertains to assessment year 1998-99. The corresponding assessment order was framed by the Income-tax Officer, Ward 6(1), New Delhi, on 31-12-2003 under the provisions of section 147 of the Income-tax Act, 1961 (';the Act'; for short). The assessee has taken up four grounds in the appeal, in which making of the assessment under section 147 and taxation of interest income under the head Income from other sources were challenged. Ground Nos. 2, 3 and 4 regarding the merits of taxation of interest income were substituted by one ground vide letter dated 16-2-2009, which reads that the ld. CIT (Appeals) has erred both on facts and in law in upholding the action of the Assessing Officer for taxation of interest income of ₹ 16,49,441 under the head Income from other sources , instead of holding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Assessing Officer in the course of assessment proceedings under section 147. It was submitted that the assessee was unaware of the correct position of law in this behalf, which became clear only after insertion of clause (b) to the proviso to section 148 by Finance Act, 2006, retrospectively with effect from 1-10-1991. We have considered this submission also. There is no evidence on record by way of affidavit, etc., to support the aforesaid submission of the ld. counsel. Further, the additional ground was taken up 15 months after the aforesaid Finance Act was enacted and there is no explanation on record for the delay thereafter. Nonetheless, since it is purely a question of law to be decided on the basis of facts available on record, the ground is admitted for adjudication in the interest of justice. 2. Ground No. 1 is that the ld. CIT (Appeals) erred in upholding the reopening of the assessment under section 147 of the Act. It was prayed that the assessment made thereafter may be cancelled. 2.1 The facts in this regard are that the return of income was filed on 28-11-1998 declaring nil income. The same was processed under section 143(1)(a) on 26-4-1999 at nil inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval of the Additional Commissioner on or before 21-3-2003. Coming to the difference in signatures, it was her case that the assessment order carried full signatures while the recorded reasons were initialed by the Assessing Officer. 2.4 We have considered the submissions made by both the parties in this behalf. We have also perused the signatures on assessment order and in the reasons recorded by the Assessing Officer. On prima facie perusal of these two signatures, we are of the view that they have been made by the same person, being full in the assessment order and in initial in the recorded reasons. However, we qualify our aforesaid observation by stating that we are not handwriting experts and it is only our prima facie view. The ld. DR had also mentioned that the Assessing Officer had obtained approval of the Additional Commissioner before 21-3-2003 and, thus, there is no scope or occasion to argue that the note was not initialed by the Assessing Officer. We agree with her in this matter because such an approval could not have been obtained without forwarding the reasons to the Additional Commissioner although, as mentioned earlier, such an approval was not required i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable to the case of the assessee as the assessment pertains to assessment year 1998-99. The concept of the turnover was brought in this section by the aforesaid amendment. Prior to that, such a concept was not there. Therefore, the law of a wrong year has been applied while recording reasons, which cannot be done, as held by Hon'ble Bombay High Court in the case of Siemens Information Systems Ltd. v. Asstt. CIT (2007) 293 ITR 548. It was also submitted that in deciding whether jurisdiction was properly assumed for issuance of notice under section 148, the only thing to be seen is the reasons recorded before issuing the notice. When these reasons are examined, it is found that they could not have led to reason to believe that the income has escaped assessment. 2.6 In reply, the ld. DR relied on the decision of Hon'ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007) 291 ITR 500, in which it was, inter alia, held that there cannot be formation of any opinion when a return is processed under section 143(1)(a) and, thus, there is no question of change of opinion when reasons are recorded for making assessment under section 147. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de on 28-5-1999 was beyond the scope of adjustments, as it could not be under section 143(1)(a). Merely mentioning that there is no evidence to deny exemption under section 10B does not lead to an inference that there was application of mind for the simple reason that in the context of what has been stated earlier, there could have been no application of mind as the processing of the return was made in accordance with law. Therefore, we are of the view that the order dated 21-10-1999 cannot lead to an inference that the Assessing Officer considered the matter and allowed deduction under section 10B in respect of interest income. Having held so, the facts of the case are now in pari materia with the facts of the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), in which it was, inter alia held that if the Assessing Officer has reason to believe that the income escaped assessment, he will be justified in doing so in respect of income determined under section 143(1)(a), and the concept of change of opinion will not stand in his way if the condition of reason to believe is satisfied. With these preliminary remarks, we may examine other submissions of rival parties by taking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts necessary for his assessment, for that assessment year. 2.10 On comparative reading of the pre-existing law and the present law, it will become clear that the provisions contained in clause (a) and clause (b) of section 147 were re-stated in the section and the first proviso, albeit with some changes. We are not concerned with the position of law contained in clause (a) of section 147 earlier and proviso to section 147 now for the simple reason that there is no allegation of omission or failure on the part of the assessee and regular assessment has not been made under section 143(3). The law contained in section 147(b) earlier and section 147 now is similar except that the present law dispenses with the requirement of information . Both the provisions contain the expression reason to believe . None of the provisions contains any mention about the expression change of opinion , which prima facie appears to be applicable only when there has been an allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in a case where assessment was made under section 143(3). As mentioned earlier, the earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal of the assessee was dismissed, may be mentioned by us here that in that case the information was received by the ITO in the course of assessment proceedings of the subsequent year, on the basis of which reassessment proceedings were initiated under section 34(1)(b). The information was of fact, namely, that the money borrowed on which interest was paid and claimed was not wholly utilized for the purpose of business but also diverted to the partners. On comparison of the facts of these cases, it will be seen that the information was derived by analysis of the existing facts in a subsequent year in the case of Kalyanji Mavji Co. (supra). However, in this case, information of law has been received from an authority competent under the Act to pronounce law, namely, the CIT (Appeals) in an succeeding year. In the case of Indian Eastern Newspaper Society (supra), the Hon'ble Court mentioned that the information could be of fact or of law. However, when it is an information of law, it must emanate from a formal source, competent to pronounce the state of law. The audit party is not such a formal source. However, it is clear to us that the CIT (Appeals) is an authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer had granted deduction to the assessee under section 10B in respect of interest income. However, he took a different stand in assessment year 2001-02 and held that interest on fixed deposits was to be taxed under the residuary head. This order was confirmed by the CIT (Appeals) on 3-3-2003 in Appeal No. 112/2002-03. The Assessing Officer did not take any action under section 147 on passing assessment order for assessment year 2001-02, but waited for the order of CIT (Appeals) in the matter before recording his note under section 147 on 17-3-2003. These background facts cannot be ignored while deciding whether jurisdiction was validly assumed by him for issuing notice under section 148. Once his altered stand was fortified by the order of the ld. CIT (Appeals), he recorded the note to the effect that interest income of ₹ 16,49,441 has escaped assessment. In other words, he had information of law in his possession that the aforesaid income has escaped assessment. Thus, according to us, he was justified in doing so. 2.12 The ld. counsel took some objections in this regard. The first one is that the note was recorded on the basis of law which was not appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable person to have reason to believe that the income had escaped assessment. The background facts only go to support his reasons and are not intended to supplant the reasons. Even if subsequent orders of the Assessing Officer and the ld. CIT (Appeals) are ignored, the facts do lead to a prima facie inference that interest income was wrongly considered as profits and gains of business of export. The Assessing Officer was not required to prove his case to the hilt at that point of time. What is required at the time of recording reasons is that there should be some reason which has alive nexus with the formation of the belief. These ingre-dients exist in this case. Therefore, we do not find any force in the argument of the ld. counsel as the facts of the case of Jamna Lal Kabra (supra) are quite distinguishable. 2.14 We may once more proceed to examine the argument of the ld. counsel in respect of change of opinion , on which significant emphasis was laid by him. In the case of Kelvinator of India Ltd. (supra), the facts are mentioned in the decision of Hon'ble Delhi High Court that the assessment for assessment year 1987-88 was completed under section 143(3) and thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the software division and fulfilment division and even suggested allocation on a proportionate basis. The assessee made a detailed submissions in respect of allocation made by it. On examination of the details, a deduction of ₹ 4,86,62,452 was allowed under section 10A. Subsequently, a notice was issued under section 148 on the ground that excess deduction has been allowed under section 10A. The Court reiterated the principle laid down in a number of cases, cited at page 228 that a mere change of opinion cannot be a basis for reopening the assessment. Thus, this ratio would be applicable only to cases where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter. It has no application where the order of assessment does not and by its very nature cannot address itself to the aspects which are the basis of reopening of the assessment. Thus, it is clear that the facts of that case are also distinguishable as assessment was made in that case after detailed scrutiny and under section 143(3). The Hon'ble Court clearly mentioned that the principle of change of opinion will have no application where there was no formation of opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifically incorporated in the scheme of block assessment proceedings and that cannot be ignored. Thus, concurring with the judgment in the case of Smt. Bandana Gogoi (supra), it was held that issuance of a notice under section 143(2) is a pre-requisite for framing the block assessment order under Chapter XIV-B. It was also held that if an assessment order is passed without complying with section 143(2) it would be invalid and not merely irregular. Further, reliance was placed on the decision of Hon'ble Madras High Court in the case of Venkat Naicken Trust v. ITO (2000) 242 ITR 141, in which it was held that when the assessee pleads that he has not been properly served with any notice, it is for the department to place the relevant material to substantiate its plea that the assessee was served with the proper notice. Our attention was also drawn to page 1 of the assessment order, where it is mentioned in paragraph 3 that thereafter a notice under section 142(1) was issued to the assessee asking it to file various details. Thus, the case of the ld. counsel was that the notice was neither issued nor served on the assessee. 3.2 In reply, the ld. DR produced the case record mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower authorities could have verified facts during the course of assessment proceedings or soon thereafter in the appellate proceedings. The appellate order was passed on 22-4-2004, i.e., within about four months of the passing of the order under section 147. The assessee also did not take up this issue while filing the appeal on 17-5-2004. The additional ground was taken on 15-11-2007, i.e., after lapse of about 3 years and 7 months. The ground is not supported by bringing any evidence on record. No affidavit has also been filed in this regard. Therefore, the question is whether the ground is based on factual reality or not? It is no doubt true that the onus of service of notice is on the revenue, as held in the case of Venkat Naicken Trust (supra). While the cases of Pawan Gupta (supra) and Smt. Bandana Gogoi (supra) were decided under section 158BC, the provision contained in proviso (b) makes it clear that a notice under section 143(2) has to be served before completing assessment under section 147. Having not taken any step in this matter for a long period between the starting of assessment proceedings and ending with 14-11-2007, the ld. counsel now wants production of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,597, which was claimed as expenditure. There was a clear nexus between payment and earning of interest as the assessee was engaged in the business mentioned in section 10B as it stood before 1-4-2001, under which any profit and gains derived by the EOU shall not be included in the total income of the assessee. The assessee was carrying on the business of EOU only. The own funds of the assessee were not sufficient to carry on the business and, thus, borrowings from the bank were necessitated. The interest expenditure was incurred for the purpose of business. As profits were earned, they were invested in the fixed deposits for earning interest income so as to reduce the interest burden of the business. In such a situation, there was a nexus between earning and paying of the interests. Therefore, interest received could not have been treated under the residuary head of income. 4.3 To support the aforesaid contention, reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT v. Puneet Commercial Ltd. (2002) 245 ITR 550, a case decided under section 80HHC. It was held that the assessee was engaged in the business of export and the whole of the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the decision of Hon'ble Supreme Court of India in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT (1997) 227 ITR 172, in which it was held that interest earned by investing borrowed funds prior to the commencement of business is taxable under the residuary head. Further, reliance was placed on the decision of Hon'ble Supreme Court in the case of Sterling Foods (supra), in which it was held that the words derived from mean to get, to trace from a source, arise from, originate in, show the origin or formation of. The source of import entitlement could not be said to be the industrial undertaking of the assessee, which in fact is the scheme of the Central Government which grants entitlements to the assessee. The aforesaid words mean that there should be a direct nexus between profits and gains and the industrial undertaking. Therefore, it was held that the incentive received by the assessee could not be said to be the income derived from the eligible industrial undertaking. Reliance was also placed on the decision of Hon'ble Madras High Court in the case of CIT v. Monarch Tools (P. ) Ltd. (2003) 260 ITR 258, in which it was held that when surpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1B), derived by an assessee from the export of goods or merchandise. This section provides for the computation of the profits derived from such export in sub-section (3) and for this purpose, clause (baa) and the Explanation below sub-section (4C) defines the term profits of the business . Thus, the provision of this section is somewhat different from the provisions contained in sections 80HH and 10B although all these provisions do mention about profits derived from the EOU, industrial undertaking or export of goods or merchandise, as the case may be. 4.6 The facts of the case are that the assessee carries on the business of an EOU. For this purpose, overdraft facilities were taken from the bank to meet liquidity requirements. Subsequently when the assessee earned the profit, the money so generated was placed in fixed deposits with the bank. The case of the ld. counsel is that the deposits were placed with a view to reduce the interest liability and, therefore, interest income partakes the character of profits and gains of business. On the other hand, the case of the ld. DR is that there is no linkage between the borrowings from the bank and placing fixed deposits with the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prima facie the ratio of the case is against the assessee as the assessee has not proved that placing of deposits was mandatory for availing of overdraft facilities. His only case is that deposits were placed with the bank to reduce interest burden, which will happen in all such cases. That will not lead to an inference that interest income will be business income whenever interest is paid to the bank. Further, the Assessing Officer has specifically held that interest income is liable to be taxed under the residuary head and, therefore, the case is not covered under the other category. 4.10 In the case of Indian Oil Panipat Power Consortium Ltd. (supra), the Hon'ble jurisdictional High Court had a totally different question to decide, namely, whether the Tribunal was right in holding that interest accrued on funds deployed with the bank could be taxed as income from other sources and not as a capital receipt liable to be set off against pre-operative expenses. It was held that the funds deployed by the assessee were inextricably linked with the setting up of the plant and, therefore, interest earned thereon could not be treated as income from other sources. The facts of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides the basis for coming to the conclusion that interest earned on deposits placed with the bank is not business income as there is no proximate connection with the EOU in a situation where it is not shown that such deposits were necessary for availing of credit facilities. In the case of Monarch Tools (P.) Ltd. (supra), it was held that when own funds are kept in deposits with the banks, interest thereon did not have any direct or proximate connection with the business. It was mentioned that interest received by a company, which carries business, from deposits and loans could only be taxed as income from other sources. The ratio of this decision is applicable to the instant case and it also follows that if it is not business income, the interest income cannot be said to have been derived from the EOU. In the case of K. Ravindranathan Nair (supra), decided under section 80HHC, it was held that the interest income received on short-term deposits could be attributed to the export business, but it could not be said to be income derived from export business. We have mentioned earlier that section 80HHC is worded somewhat differently, nonetheless the provision does speak of profits a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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