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TMI Blog2010 (3) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... AO on the ground of alleged difference in stock as per books and as per statements submitted to bank. (ii) That the learned CIT(A) has erred in confirming the action of AO in treating interest of ₹ 3,87,114 received on share application and share allotment money as income from other sources as against the claim of the appellant as income from business. 4. The assessee has also raised an additional ground, which reads as under : That on the facts and in the circumstances of the case the learned CIT(A) has erred in conforming the assessment order passed under s. 144/147 of the IT Act as no addition was made by the AO on the ground on which reopening of the case was made under s. 147/148 of the Act and addition on other issues have only been made. The assessment order in against the provision of s. 147 of IT Act, is therefore bad in law and requires to be quashed. 5. The learned counsel for the assessee submitted that the issue raised in this additional ground was purely on legal nature and no fresh inquiry into the facts was required, hence, it could be admitted at this stage. It was also on a query from the Bench, the learned counsel submitted that the issue rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income mentioned in the reasons recorded for such reopening could be made only when such other escaped income came to the knowledge of AO in the course of proceedings under s. 147 whereas in the present case, these additions had already been made in the assessment order under s. 143(3) dt. 16th March, 1998 which had been quashed, hence, no addition could be made as these did not come to the notice of AO in the course of assessment proceedings under s. 147. The assessee also pleaded that Expln. 2(b) to s. 147 was also not applicable because the assessee has disclosed all the particulars but the disallowances were made as a different view was taken by the AO. It was also contended that the present reassessment proceedings were resorted just to nullify the assessment order passed under s. 143(3) which had been quashed both by the learned CIT(A) and Tribunal. The assessee also relied on various judicial decisions in this regard. The learned CIT(A), however, held that original assessment having being annulled, hence, what remained in law, was a mere return filed by the assessee which had been simply processed by the AO under s. 143(1)(a) of the Act. The learned CIT(A) also held that not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made on this score. He further submitted that and additions which were made ultimately were based on s. 143(3) proceedings which had been quashed and, therefore, such additions could not be made in the course of reassessment proceedings as these did not come to the notice of AO in the course of reassessment proceedings. He further contended that the reopening, in the facts of the case was merely a case of pretence as there was no material having live nexus with the reasons recorded by the AO and, therefore, reassessment proceedings were void for this reason also. In this regard, he placed strong (reliance) on the decision of Hon'ble Supreme Court in the case of ITO Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220: (1976) 103 ITR 437(SC). He further contended that even after the new provisions coming into effect from 1st April, 1989, there was no change in law in respect of the aspect of existence of material and live nexus thereof with the reasons recorded by the AO in view of the fact that the words reason to believe had been retained in s. 147. The learned counsel further placed strong reliance on the decision of the Tribunal in the case of Pravin Jindal vs. ITO 12 ITJ 227 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis on which the reassessment proceedings were initiated, then, no addition could be made on other issues. 10. The learned Departmental Representative briefly narrated the facts and mainly relied on the order of CIT(A) in addition to placing reliance on the order of the Hon'ble Supreme Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30: (2007) 291 ITR 500(SC). 11. The learned counsel, in the rejoinder, contended that the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) was valid only in respect of proposition that reassessment proceedings could not be declared null and void for the reason of change of opinion in case of original assessment being processed under s. 143(1)(a) as in that situation, there could not be any opinion at the first stage. 12. We have considered the submissions made by both the sides, material on record and the orders of the authorities below. 13. In this appeal, some substantial legal issues are involved. Hence, it is imperative for us to look into the history of scheme of assessment and scope of provisions of s. 147 of the Act. As per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 153. However, there was no material departure or alteration from the scheme that prevailed under 1922 Act. The legislature, thereafter, through Direct Tax Laws (Amendment) Act, 1987, made various changes in the scheme of assessment/reassessment and consequently, rewording of provisions of s. 147. In the proposed scheme, the words reason to believe did not figure in the new s. 147. However, the legislature by the Amendment Act of 1989 reintroduced the expression has reason to believe with retrospective effect to allay the fears that the AO could reopen passed assessment on mere change of opinion or for other frivolous reasons. Thus, underling spirit that has remained there in the statute throughout is that the powers given to the AO under s. 147 should not be used in an arbitrary manner, so as to disturb the finality of concluded assessments. 14. Further, in the scheme of Act, there is a provision of one assessment for one year, meaning thereby that the income of one year cannot be assessed in another year and there cannot be two assessments for the same assessment years in respect of two types of income. This feature also results into conclusion that s. 147 is intended onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orded by him for reopening the assessment, when no addition is made on the item(s), which formed the basis of reopening (refer additional ground) ? 16. To answer these questions, we deem it fit to reproduce the s. 147 as under : 147. If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 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 (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-s. (3) of s. 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause under the new scheme of assessment, it is not necessary that in each and every case, assessment order is passed under s. 143(3) of the Act. Hence, in majority of the cases, there will not be any application of mind by the AO after the return is filed. It is because of this reason, when jurisdiction under s. 147 is exercised within 4 years from the expiry of relevant assessment year, such jurisdiction cannot be challenged on the ground that the assessee had disclosed fully and truly all material facts. Further, these cannot be a case of change of opinion where return has been accepted under s. 143(1) of the Act. It is further noticeable that assessment of any escaped income coming to the notice of AO subsequently during the course of proceedings under this section can also be included in assessment made under this section, which was the position in the old provisions also. Apart from this, there is Expln. 2, which provides for deemed escaped income giving powers to AO to exercise jurisdiction under s. 147, which is wider than provisions of erstwhile Expln. 1. 18. Now, we shall take up each question. Q. No. 1 : 19. In this regard, we consider it necessary to reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehension, suspicion or misgiving. Its meaning must depend upon and must necessarily vary with the circumstances of each case. It has also been held that information may come from external sources or even from material already on record or may be derived from discovery of new and important matters or fresh facts. It is also relevant to mention that a details available to the AO in the papers already filed before him does not become an item of information by its mere availability, but it is transmitted into an item of information, when its existence is realized or its implications are recognized. To put it differently, information also means something that the mind has acquired. In the present case, the reassessment proceedings have been initiated for the reason that the assessee was allowed set off of unabsorbed investment allowances wrongly in an application filed by the assessee under s. 154. However, ultimately, no addition has been made on this count in the order passed under s. 144/147 and the additions, which had been made in the quashed assessment order passed under s. 143(3), have only been made. As regards the wrong set off of unabsorbed investment allowances, it is noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 147 and also these are cases of different legal view in respect of which there can be another view also of the matter, hence, it cannot be considered as a case of income escaping assessment as well. Thus, we accept the contentions of the assessee in this regard. Q. No. 3 : 23. Yes, because the quashed assessment results into a situation of no assessment being made. Q. No. 4 : 24. As stated earlier, the scope of power under s. 147 is limited. It starts with the recording of reasons, wherein the AO mentions items of escaped income or under-assessed income. The first step for assuming jurisdiction under s. 147 is to record the reasons and to supply the same to the assessee and to deal with the objections, if any, raised by the assessee. It is also worthwhile to mention that proceedings under s. 147 can be dropped at that stage only and no further enquiry need to be made if the AO is satisfied with the objections/explanations of the assessee and proceedings under s. 147 stood concluded at that stages is not so, then the next step in the course of such proceedings, is necessarily an enquiry by the AO on the issue(s) recorded by him in the reasons for assuming jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to be passed. However, after amendment made w.e.f. 1st April, 1989, the position has materially changed. Now the AO initially processes the return under s. 143(1)(a) of the Act and determines the amount payable or refundable on that basis. It is not necessary for him to frame an assessment in each and every case. However, in case he chooses to verify the return and frame an assessment, he has to issue a notice under sub-s. (2) of s. 143 and require the assessee to produce his books of account and other material in support of the return. Thereafter, he can make an assessment under sub-s. (3) of s. 143 of the Act. Another important change incorporated in sub-s. (2) of s. 143 of the Act is that notice under this sub-section cannot be served on an assessee after the expiry of 12 months from the end of the month in which the return is furnished. Therefore, in a case where a return is filed and is processed under s. 143(1)(a) of the Act and no notice under sub-s. (2) of s. 143 of the Act thereafter is served on the assessee within the stipulated period of 12 months, the assessment proceedings under s. 143 come to an end and the matter becomes final. Thus, although technically no asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecified originally when the new provision was introduced w.e.f. 1st April, 1989. However, vide amendment made by the Finance (No. 2) Act, 1991, this period was enhanced to twelve months w.e.f. 1st Oct.,1991. In the present case it is an admitted position that no notice under s. 143(2) of the Act had been served to the petitioner within the stipulated period and as such his return had become final. In the background of this settled position we may now examine the validity of the letter dt. 30th July,1998 (Annex. P5), issued by the Asstt. CIT which has been upheld by the Dy. CIT vide his order dt. 26th October (Annex. P7). There can be no dispute about the argument advanced on behalf of the Revenue that in view of the amendment made in s. 147 of the Act w.e.f. 1st April, 1989, the AO could not only assess or reassess the escaped income in respect of which proceedings under s. 147 have been initiated but also any other income chargeable to tax which may have escaped assessment and which comes to his knowledge subsequently in the course of such proceedings. This proposition is not even disputed by learned counsel for the petitioner. However, what is disputed is the action of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originally. Admittedly, no such notice had been served on the petitioner within the stipulated period and, therefore, it has to be held that the AO had not found it necessary to require the petitioner to produce any evidence in support of the returns. Thus, the returns filed by the petitioner had become final. This finality could not be disturbed even in proceedings under s. 147 of the Act in respect of issues on which there is no material on record suggesting any escapement of income. In the present case except for the excessive claim of depreciation there is no material to suggest any underassessment or escapement of income under other item. There is no gainsaying the fact that in proceedings under s. 147 of the Act it is only the escaped income which has to be assessed or reassessed. Thus, we are of the considered view that as per the law laid down by the apex Court in the case of Sun Engineering Works (P) Ltd. (supra), when proceedings under s. 147 of the Act are initiated, the proceedings are open only qua items of underassessment. The finality of the assessment proceedings on other issues remains undisturbed. According to us it makes no difference whether the assessment proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Rao's case (supra), as laying down that reassessment wipes out the original assessment and that assessment is not only confined to 'escaped assessment' or 'underassessment' but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of s. 147 of the Act and the object of assessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court. The judgment must be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le adjudicating the issue of allowability of carry forward a set off of unabsorbed investment allowances. Thus, it is a case of abuse of powers given to the AO and, therefore, the action of the AO is liable to be declared null and void. Before parting, we also consider it pertinent to mention that it is a case, where reassessment has been done by applying provisions of s. 144 and in the notice issued under s. 143(2)/142(1) in the course of such proceedings, no inquiries were made at all and there is no material on record to indicate even remotely that such additions were warranted. 26. We, even at the cost of repetition, reiterate that firstly the AO should have examined the item recorded in the reasons and, if that was done, then, AO's jurisdiction would have culminated at that very stage as no addition has been made on that count and, therefore, the other additions are beyond his jurisdiction. In this regard, we consider it pertinent to reproduce the relevant findings of the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Shri Ram Singh (supra), relied on by the assessee : 9. We have considered the submissions, and have gone through the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section puts no bar on the powers of the AO, to put to tax, any other income, chargeable to tax,' which has escaped assessment, and which subsequently comes to his notice, in the course of the proceedings, but then, the prefixing words 'and also', which succeeded 'any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income'. This expression was found to be making clear, that existence of the income, for which the AO formed belief, to have escaped assessment, is a precondition, for including any other income chargeable to tax, escaping assessment, and coming to the notice of the AO subsequently, in the course of the proceedings. Thus, unless and until such income, as giving rise to form belief, for escaping assessment, continues to exist, and constitutes a subject-matter of assessment, under s. 147 'no other income' coming to the notice of the AO, during the course of the proceedings, can be roped in. 13. Thus, though by undertaking a long drawn exercise, but then, we have been able to decipher the reasons, appear to have existed in the mind of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also a case, where the initiation of proceedings was challenged. It was also held, that the affidavit of the daughter of the petitioner, formed a reasonable ground for the AO, to entertain a prima facie reason to believe, about the escapement of income, and therefore, it was held, that the proceedings cannot be said to be without jurisdiction. It was also clarified, that the Court was not going into the merits of the case of the assessee, the assessee was left free to lead evidence. In the reassessment proceedings, to show, that the expenditure incurred in the daughter's marriage was upto a specified extent, and as such, no income has escaped assessment. 18. In the present case, initiation of the proceedings is not under challenge before us, by either side, and rightly so. Therefore, the two judgments cited by the learned counsel for the Revenue, are of no assistance to the appellant. 19. Then we are referred to the judgment of Hon'ble the Supreme Court, in Bankipur Club Ltd.'s case (supra), wherein again, the question was about the jurisdiction of the AO to initiate reopening proceedings. In that case it was found, that the material on the basis of which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich obviously means, the income, which was chargeable to tax, and had escaped assessment for any assessment year, according to his 'reason to believe', and while so assessing or reassessing, he can also, in addition, assess or reassess 'any other income chargeable to tax which has escaped assessment and which may come to his notice subsequently in the course of proceedings under s. 147'. 25. The precise question, thus requiring to be considered is, as to whether, the conjunctive word used, being 'and', used between the expression '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 s. 147' is required to be given its due, or is required to be ignored, or is required to be interpreted as 'or'. Obviously because, if it is to be interpreted as 'or', then the language would read as under : '147. If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income or also any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to his 'reason to believe', had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under s. 147. 30. It is a different story that for such other income, the AO may have recourse to such other remedies, as may be available to him under law, but then, once it is found, that the income, regarding which he had 'reason to believe' to have escaped assessment, is not found to have escaped assessment, the AO required to withhold his hands, at that only. 31. To this extent, we agree with the view expressed by the Punjab Haryana High Court, in Atlas Cycle Industries' case (supra). 32. The result of the aforesaid discussion is, that the question framed, in the order dt. 23rd May, 2006, is required to be, and is, answered in the manner, that the Tribunal was not justified in holding, that the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conditions specified by us in answer to question No. 4 are satisfied, then, addition in respect of items other than the items which found mentioned in reasons recorded by the AO, can be made. However, in the present case, it is not so, hence, impugned additions are not valid in spite of Expln. 3, being brought on statute by the Finance Act, 2009, w.e.f. 1st April, 1989, because such Explanation has merely given a statutory recognition to judicial view on scope of powers of AO under s. 147 to assess or reassess the income escaped from assessment and does not extend the scope of provisions of s. 147 to make such provisions of the nature of s. 143, or does not give power of review to AO. We are further of the view that provisions of Expln. 3 merely dispense with the requirement of recording of reasons in respect of each and every item of addition as per the provisions of s. 148(2). 29. We further find that in the case of Inder Narayan Jhalani vs. Union of India (supra), the Hon'ble Madhya Pradesh High Court held that merely because action under s. 143(1)(a) were not found to be correct in law and for this reason alone, the AO's jurisdiction under s. 147/148, could not b ..... 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