9911796707
TMI Blog2016 (9) TMI 1255X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax [2016 (8) TMI 522 - SUPREME COURT ]. Reopening of assessment - Held that:- Since all material facts were already there on record and no tangible material was available before the AO, therefore we hold that the reassessment proceedings initiated by the AO are bad in law. Disallowing the service charges made to Shri Industrial Services by invoking the provision of section 40A(2)(b) - Held that:- Since the Director of the assessee company is also the proprietor of Shri Industrial Suppliers and he is the key person for both the concerns, therefore, diversion of income of the assessee company to the proprietary concern of the Director is clearly visible and therefore the same in our opinion comes within the purview of section 40A(2)(b) of the I.T. Act. We therefore hold that the AO was justified in disallowing 50% of such payment as excess payment to the relatives as per provisions of section 40A(2)(b). However, the CIT(A) in our opinion is not justified in enhancing the same to 23,27,592/- in the instant case only on the ground that Mr. Navlakha has incurred meager expenditure of 3,40,371 out of the total receipt of 27,02,000/-. There may be so many reasons for incurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to decide the same in line with the following observation : "Since the Tribunal has not considered this aspect of the case, we are of the view that it would be appropriate and proper to set aside the decision of the Tribunal and to remand the proceedings back to the Assessing Officer for a fresh determination and assessment in accordance with the law. We order accordingly. Upon remand, it is clarified that assessing officer shall not consider himself to be bound by the decision of Tribunal dated 19th of March 2001 for assessment year 1994-95, 1995-96, 1996-97, in view of the concession in those terms which has been made during these proceedings by the assessee. In order to facilitate a fresh exercise being carried out in terms of the order passed by this court, the impugned order of the Tribunal dated 31st of August 2006 is set aside. However, it is clarified that all the rights and contentions of the revenue on all aspects of the case on merit are kept open. The order of remand, it is clarified shall also be with respect to disallowance that have been effected under section 40A(ii) of the Income Tax Act, 1961. In view of the order of remand, it is not necessary for this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warehousing as taxable service it has obtained certificate of registration from Central Excise Commissioner, Pune-1 on 9-9-2002, which means that the service tax cell of the custom and Central Excise Department recognizes the warehousing activity as services. (c) The assessee further submitted that the company is rendering services to its client on daily basis, excluding holidays from 9.30 a.m. to 5 O'clock, and no possession is given to the client as seen by the agreement and the warehouses are located in "Industrial Zone" as per zoning of the area by Govt. of Maharashtra. (d) It was submitted that the Pune Bench of the Tribunal in assessee's own case for AY 1994-95 to 1996-97 has decided the appeal in its favour and held that even the lease rental received by it is incidental to the warehousing business carried out by the assessee company. Since there is no change in the facts about the assessee as well as the method of warehousing business carried out, the same should be followed. (e) The assessee has also taken warehouses on lease from the other parties and given the same along with service facilities to his client. The warehousing of goods, their secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been done in the case of the assessee. (n) That the warehousing activity is incidental to leasing of warehouse carried out by the assessee company is an activity involving a property of the complexity and becomes a commercial asset and the assessee company is not simply renting out warehouse premises per se. Even the lease charges received are inextricably linked to the composite warehousing business activity and therefore the income there from would fall within the ambit of income from Business. (o) It was further submitted that the AO while completing the assessment for the A.Y. 2001-02 has not considered the following decisions : i. CIT Vs. National Storage Pvt. Ltd. reported in 66 ITR 596 ii. Karnani Properties Ltd. Vs. CIT reported in (1971) 82 ITR 547 (SC) iii. East India Housing & Land Development Trust Ltd. Vs. CIT West Bengal iv. V.N. Rukari & Sons Vs. ITO, Ward-3(7), Pune Various other decisions were also relied upon by the assessee. 8. However, the AO was not satisfied with the arguments advanced by the assessee. The para-wise comments of the AO to the various submissions made by the assessee are as under : "a. The contention of the assessee that as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of gross receipt. This by no stretch of imagination can be called as no change in facts. The order of the Hon'ble ITAT for 1994-95 to 1996-97 were not accepted in principle however, the appeal was not filled because of the tax effect being less than threshold limit for filling appeal. Since there was change in the facts , the Assessing Officer had correctly taxed the income derived from the leased property as Income from the House property. f. With respect to the claim of the assessee that it has incurred substantial expenses on providing various services and that the expenses claimed by the assessee company are genuine and supported by documentary evidences, it is stated that the Income tax Act 1961 provides computation mechanism for each head of income. Once it has been decided that a particular receipt is to be taxed under a particular head of income, the computation mechanism provided for that head of income is to be followed for arriving at the taxable income and only the expenses allowable under the heads of income are allowed. g. With respect to the claim of the assessee that the CIT-II Pune has passed u/s. 264 in the case of Sajjad Husain Gabrani, Prop of Store ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had leased out about 10,250 sq.ft. warehouse to be used as factory to the client called Lipton Tea for storing, and blending of Tea in the year 1985. Subsequently, the Hindustan Lever Limited took over the business of Lipton Tea and expressed its need of a larger space for new factory for manufacturing and blending of tea for its 100% Export Oriented Unit. The assessee then constructed a factory on an area of 68,000 sq.ft. as per the requirement of Hindustan Lever Limited for Export Oriented Unit The new factory was constructed at total cost of ₹ 4.99 Cr. out of which ₹ 1.44 Cr was financed by the Hindustan Liver Ltd as security deposit and balance was financed out of bank loans. The Hindustan Lever Limited is carrying out the manufacturing and blending of tea in this factory since March 2000 by employing of about 400 employees and installing huge plant & machinery along with furniture and fixtures. 12. He analysed the lease agreement with Hindustan Lever Ltd. and noted that : 1. The lease was for a period of 10 years with effect from 01-112000 for the premises comprising of a factory admeasuring 68,000 sq.ft. on a monthly rent of ₹ 4,45,000/-. 2. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed only as Income from House Property." 14. The AO further noted that the assessee has warehouses at two places, namely, Phursungi and Dhankawadi. At Phursungi approximate area of the warehouses, as explained by the assessee is about 2,16,000 sq.ft. Out of this, about 70,000 sq.ft. is owned by the assessee company and the remaining of about 1,50,000 sq.ft. has been constructed by the assessee company on the land leased from the sister concerns, Directors and their relatives and about 30,000 sq.ft. area at Dhanakwadi, is leased by the assessee from M/s. Kamdhenu Chemicals, a sister concern. There are about 20 galas/Warehouse Units with independent entry/exit having separate shutters/doors which are let out or given on rent to the customers as per their requirements. The area of these Galas/Warehouse units varies from 650 sq.ft. to 5000 sq.ft. and the segment of let out during the year has varied from 6 months to 3 years. 15. The AO further observed : a. that the company is rendering services to its client on daily basis excluding holidays from 9.30 am to 5 O' clock and that possession is not passed to the clients and the warehouses having double locking where in one key is kep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 12-03-2001 also cannot be applied in the A.Y. 2001-02 and subsequent years as facts of the case have changed. Till March, 2000 the Lipton tea was occupying approximately 30,000 sq.ft. out of which only 10,250 sq.ft. was for factory and 20,000 sq.ft. was for the warehousing. In such a situation the Hon'ble Tribunal was justified in holding that lease rental from merely 10,250 sq.ft. of property was only a minor part of total 1,50,000 sq.ft. of warehouses and subservient to the dominant activity of the warehousing. 18. However, with the construction and lease of the new factory having area 66,000 sq.ft. in March 2000, has changed the facts drastically and the area of leased factory vis-à-vis warehouse has gone up from 5% to about 31% in terms of area and about 30-45% in terms of gross receipts. Hence the letting out of the property cannot be regarded as subservient to the warehousing activity by any stretch of imagination. In fact, keeping in view the overall warehousing activity where occupancy of the warehouses varies from 60-80% only and the uncertainly attached to it, the leased rentals constitutes the main stay of the assessee company. 19. In view of the above disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the entire bank loan was utilized for the construction of the warehouses leased out the AO was not justified in allowing only 31% of the bank interest as allowable deduction from the computation of income from house property. Since the entire loan obtained from Federal Bank, Pune has been utilized exclusively for the purpose of construction of the warehouse which has been leased out to M/s. HUL the AO was not justified in allowing only 31% of the interest on such bank loan out of such rental income which has been treated by the AO as income from house property. The disallowance of depreciation by the AO was also challenged before the CIT(A). 22. However, the Ld.CIT(A) was not satisfied with the explanation given by the assessee. Rejecting the submissions made before him and distinguishing the various decisions cited before him he held that the AO is fully justified in treating the lease rental income as 'income from house property'. He observed that the gross receipts of the leasing activity varies between 30 to 40% out of the total gross receipts of the assessee and consumed about 31% of the total area which clearly indicates that the leasing profit cannot be regarded as sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity is in the nature of business activity the income of the appellant has to be assessed as business income and hence CIT(A) has erred in taxing the leasing activity separately. 2. On the facts and in the circumstances of the case and without prejudice to the above the CIT(A) has erred in holding that considering the total lease charges received leasing activity is dominant and not subservient to the warehousing activity. 3. On the facts and in the circumstances of the case and without prejudice to the above the CIT(A) has erred in allowing only 31% of total interest on bank loan while computing the income from house property overlooking the fact that the entire bank loan is utilized only for the purpose of construction of leased warehouses. 4. On the facts and in the circumstances in the case, the CIT(A) has erred in disallowing 31% of the total depreciation holding that the same is attributable to the leased warehouses." 25. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). He submitted that the assessee is a private limited company incorporated in the year 1973. Referring to the copy of Memorandum and Articles of Association, copy of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to decide the issue of validity of reopening for A.Yrs. 2000-01, 2002-03, 2003-04 and 2004-05. 27. The Ld. Counsel for the assessee drew the attention of the Bench to the observation of the Hon'ble High Court while setting aside the issue to the file of the AO and submitted that instead of examining the terms of the lease deed and decide as to whether the leasing profit is subservient to the warehousing profit or otherwise the AO has erroneously considered the area leased out of the total warehouse area. He drew the attention of the Bench to the Memorandum and Articles of Association of the company and the lease agreement executed with Hindustan Lever Ltd. Referring to the copy of the lease deed with Hindustan Lever Ltd. he submitted that the assessee has not merely leased out the 4 walls of the warehouse. It has provided essential and necessary services of supervisory, loading and unloading, handling, security, transporting etc. to all the clients including Hindustan Lever Ltd. on daily basis during working hours. The assessee has incurred expenditure on Electricity, Maintenance, Staff etc. which proves that the leasing is a complex activity directly linked with the main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smissed the appeal filed by the Revenue. The Revenue approached the Hon'ble High Court. The Hon'ble High Court upheld the order of the CIT(A) vide order dated 05-09-2002 holding that the income derived by letting out of the properties would not be 'income from business' but could be assessed only as' income from house property'. The assessee filed appeal before the Hon'ble Supreme Court and the Hon'ble Supreme Court allowed the appeal filed by the assessee holding that letting out of the properties is infact is the business of the assessee and therefore the assessee has rightly disclosed the income under the head 'income from business' and it cannot be treated as 'income from house property'. He submitted that since the main objects of the assessee company is to carry on the business of warehousing, cold storage and refrigeration in all its branches and activities and to provide facilities and godowns for proper and safe storage of valuable agricultural and horticultural products and to provide goods and services of all kinds in connection there with and to provide warehousing godowns and warehousing facilities for goods of all description of agricultural and allied products, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess. What has to be deduced is to whether the letting out of the property constitutes a dominant aspect of the transaction or whether it was subservient to the main business of the assessee of carrying out warehousing activities. The first submission which has been urged on behalf of the assessee, to the effect that the decision of the Tribunal rendered on March 19, 2001 for the assessment years 1994-95, 1995-96 and 1996-97 ought to have been considered, but has not been considered by the Tribunal, cannot be brushed aside as without substance. Be that as it may, during the course of the hearing of these proceedings we have considered the earlier judgment of the Tribunal. Ex facie, a perusal of the earlier judgment would show that that the Tribunal has not made a reference to the detailed terms and conditions of the warehousing agreements entered into by the assessee or to the lease agreement by which the factory came to be leased out. Consequently, upon considering the position in this regard counsel appearing on behalf of the assessee has fairly stated that the assessee would not consider that the earlier decision of the Tribunal be regarded as binding. In so far as the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms which has been made during these proceedings by the assessee. In order to facilitate a fresh exercise being carried out in terms of the order passed by this court, the impugned order of the Tribunal dated August 31, 2006 is set aside. How-ever, it is clarified that all the rights and contentions of the assessee and the Revenue on all aspects of the case on the merits are kept open. The order of remand, it is clarified shall also be with respect to the disallowance that has been effected under section 40A(ii) of the Income-tax Act, 1961. In view of the order of remand, it is not necessary for this court to express any view one way or the other on the questions of law involved. The appeal is accordingly disposed of. No costs." 33. We find the AO after considering the submission of the assessee, which have already been narrated in the preceding paragraphs, treated the lease rental received by the assessee from the lease of 68,000 sq.ft of the factory to Hindustan Lever Ltd. as 'income from house property' and treated the warehousing activities carried out by the assessee on the remaining warehouses as 'business income' which has been upheld by the Ld. CIT(A). 34. It is the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 18. To let on lease or on hire the whole or any part of the real and personal property of the Company on such terms as the Company shall determine, to enter into such arrangements as the Company may think proper with any public authority for buildings, chawls and tenements as the property of the Company or on the property of others or to let the same either to the employees of the Company or to others and upon such terms as the Company may think proper." 37. From the statement showing year-wise details of total receipts as per profit and loss account, warehousing charges and service charges from Hindustan Lever Ltd. etc. a copy of which is placed at page 212 of the paper book, we find the details are as under : F.Y. Total Rcpts as Per P&L Warehousing charges Lease Rent From HLL % of Lease Rent to Total Receipts Warehousing charges received from HLL % of warehsg ch. Received from HLL to the total warehsg ch. A B=C+D C D E = (D/B)*100 F G = (F/C)*100 2000 - 01 10,313,426.00 7,598,434.00 2,714,992.00 26.32 4,836,240.00 63.65 2001- 02 17,686,971.33 11,817,590.33 5,869,381.00 33.18 11,066,970.00 93.65 2002 - 03 19,580,172.66 13,910,172.66 5, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rental income as 'income from house property'. In appeal the Ld.CIT(A) allowed the appeal of the assessee by holding that such rental income is 'income from business'. The Tribunal upheld the action of the CIT(A). On further appeal by the revenue the Hon'ble High Court vide order dated 05-09-2002 allowed the appeal filed by the revenue holding that income derived by letting out of the properties would not be 'income from business' but can be assessed only as 'income from house property. The assessee filed appeal before the Hon'ble Supreme Court. The Hon'ble Supreme Court allowing the appeal filed by the assessee held that letting of the properties infact is the business of the assessee and therefore the assessee has rightly disclosed income under the head 'income from business'. The relevant observation of the Hon'ble Supreme Court read as under : "From the aforesaid facts, it is clear that the question which is to be determined on the facts of this case is as to whether the income derived by the company from letting out this property is to be treated as income from business or it is to be treated as rental income from house property. We have heard the learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties. Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [44 ITR 362 (SC)]. That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: - "We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature." We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of renting his property and the rent which he receives is in the nature of his business income. 2.According to the learned counsel appearing for the assessee, the aforestated judgment in the case of Chennai Properties (supra) has referred to all the judgments on the subject and more particularly, the judgment in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC) which has summed up as under:- "As has been already pointed out in connection with the other two cases where there is a letting out of premises and collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The dividing line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned." 5. The learned counsel also submitted that the assessee is a private limited company and even as per its Memorandum of Association its business is to deal into real estate and also to earn income by way of rent by leasing or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business and that is of leasing its property and earning rent therefrom. Thus, even on the factual aspect, we do not find any substance in what has been submitted by the learned counsel appearing for the Revenue. 11. The judgment relied upon by the learned counsel appearing for the assessee squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and therefore, the income so earned should be treated as its business income. 12. In view of the law laid down by this Court in the case of Chennai Properties (supra) and looking at the facts of these appeals, in our opinion, the High court was not correct while deciding that the income of the assessee should be treated as Income from House Property. 13. We, therefore, set aside the impugned judgments and allow these appeals with no order as to costs. We direct that the income of the assessee shall be subject to tax under the head "Profits and gains of business or profession". 42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000-01, 200203 to 2008-09 were also set aside by the Tribunal relying on the decision of the Hon'ble Bombay High Court and directing the AO to decide the issue accordingly. The tribunal also directed the AO to decide the issue of validity of reopening of A Y s of 2000-01, 2002-03, 2003-04 & 2004-05. 47. The AO, in order to assess the entire receipts both warehousing and lease charges as property income had issued the notices u/s. 148 for A.Y. 2000-01, 2002-03 to 2004-05. The AO provided the reasons for issuing the notices u/s 148. The assessee raised the objections for the reasons recorded. The AO rejecting the objections justified the reopening of the assessments on the ground that the returns of all these assessment years were processed u/s. 143(1). AO relied on the decision of Supreme Court in the case of Rajesh Javeri Stock Brokers P Ltd. - 291 ITR 500. In appeal the Ld.CIT(A) upheld the action of the AO in reopening the assessments which were completed u/s.143(1). 48. The Ld. Counsel for the assessee submitted that all the details relating to warehousing receipts inclusive of lease charges have been truly and fully disclosed in the returns of income supported with the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings initiated by the AO. It is the submission of the Ld. Counsel for the assessee that in absence of any tangible material available with the AO he cannot reopen the assessments since all material facts were already there on record. It is the submission of the Ld. Departmental Representative that the assessments for the above four years have been completed u/s.143(1). Therefore, in view of the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. reported in 291 ITR 500 the CIT(A) was justified in upholding the reassessment proceedings. 52. We find merit in the arguments of the Ld. Counsel for the assessee that in the absence of any tangible material, the AO cannot reopen the assessment u/s.147 even when the assessment has been completed u/s.143(1). We find the Mumbai Bench of the Tribunal in the case of H.V. Transmission Ltd. (Supra) has held that reassessment proceedings initiated by the AO in absence of any tangible material before him is invalid even though the assessments have been completed originally u/s.143(1). The relevant observation of the Tribunal from Para 8 onwards read as under : "8. We have considered the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. When the matter reached to the Tribunal, the learned Judicial Member took the view that there was no fresh material to support the formation of the belief of the AO that income chargeable to tax had escaped assessment and in the absence of any fresh tangible material, he came to the conclusion that it was not permissible for the AO to reopen the assessment. The learned Accountant Member, however, took a different view relying on the decision of Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and the matter, therefore, was referred to a Third Member for resolving inter alia, the following point of difference: "Whether on the facts and circumstances of the proceedings initiated by the AO u/s 147 is liable to be confirmed or quashed when there was no fresh material available with the AO and the assessment had been completed originally u/s 143(1)." The Third Member agreed with the view taken by the learned Judicial Member relying mainly on the decision of Hon'ble Supreme Court in the case of Kelvinator of India Ltd. (supra) and Eicher Ltd. 320 ITR 561. It was held by the Third Member that section 147 applies both to section 143(1) as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue in respect of additions made in the said assessment have become infructuous and we do not deem it necessary or expedient to decide the same. 10. In the result, the appeal of the assessee is allowed whereas the appeal of the Revenue is dismissed." 53. We find the Hon'ble Delhi High Court in the case of Orient Craft (Supra) has also decided an identical issue holding that in absence of any tangible material which came to the possession of the AO subsequent to the issue of intimation, reassessment proceedings initiated u/s.147 is bad in law. In that case also the assessee filed its return of income on 31-10-2012 declaring total income of ₹ 45,35,395/-. Return was processed u/s.143(1) on 27-02-2002 by accepting the returned income. In the said return claim of ₹ 8,74,20,642/- was made u/s.80HHC and ₹ 13,35,65,316/- u/s.10B the assessee was a 100% Export Oriented Unit undertaking and was entitled to substantial amounts as Duty drawback DEPB Premium etc. which were declared in the profit and loss account. The AO issued a notice u/s.148 on 15-08-2005 on the ground that income chargeable to tax had escaped assessment. According to the reasons recorded for reopening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words "reason to believe" have to be understood in a liberal manner where the finality of an intimation under Section 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in Section 147; it makes no distinction between an order passed under section 143(3) and the intimation issued under section 143(1). Therefore it is not permissible to adopt different standards while interpreting the words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143(3) cannot apply where only an intimation was issued earlier under Section 143(1). It would in effect place an assessee in whose case the return was processed under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue that an intimation cannot be equated to an assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri (supra) would also appear to be self-defeating, because if an "intimation" is not an "assessment" then it can never be subjected to section 147 proceedings, for, that section covers only an "assessment" and we wonder if the revenue would be prepared to concede that position. It is nobody‟s case that an "intimation" cannot be subjected to section 147 proceedings; all that is contended by the assessee, and quite rightly, is that if the revenue wants to invoke section 147 it should play by the rules of that section and cannot bog down. In other words, the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1). It follows that it is open to the assessee to contend that notwithstanding that the argument of "change of opinion" is not available to him, it would still be open to him to contest the reopening on the ground that there was either no reason to believe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Industrial Suppliers which is the proprietary concern of Mr.G.M. Navlakha Director of the assessee company. He noted that the service charges has been paid for providing all the industrial services such as loading, unloading, security etc. The AO applying the provision of section 40A(2)(b) disallowed an amount of ₹ 13,51,000/- being 50% of such service charges. In appeal the Ld.CIT(A) referring to the profit and loss account of Shri Industrial Suppliers found that it had earned net profit of ₹ 23,61,629/- which works out to 87.42% of such receipts. Therefore, the CIT(A) held that there was no basis for payment of service charges. He treated the net profit at 10% and held that reasonable expenditure that the assessee can claim is only ₹ 3,74,408/- as against ₹ 13,51,000/- disallowed by the AO. He accordingly enhanced the disallowance by ₹ 9,76,592/-. 59. Aggrieved with such order of CIT(A) the assessee is in appeal before us. 60. The Ld. Counsel for the assessee submitted that this approach of the CIT(A) is devoid of any merit and law. The reasonability has to be decided on the basis of the fair market value of the goods and services etc and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived at ₹ 42,93,005/- the assessee has paid an amount of ₹ 27,02,000/- to Shri Industrial Suppliers as handling charges out of such handling charges. Mr. G.M. Navlakha has incurred only meager expenditure of ₹ 3,40,371/- and thereby earned huge income of ₹ 23,61,629/- which is 87.4% of the receipts. Since the Director of the assessee company is also the proprietor of Shri Industrial Suppliers and he is the key person for both the concerns, therefore, diversion of income of the assessee company to the proprietary concern of the Director is clearly visible and therefore the same in our opinion comes within the purview of section 40A(2)(b) of the I.T. Act. We therefore hold that the AO was justified in disallowing 50% of such payment as excess payment to the relatives as per provisions of section 40A(2)(b). However, the CIT(A) in our opinion is not justified in enhancing the same to ₹ 23,27,592/- in the instant case only on the ground that Mr. Navlakha has incurred meager expenditure of ₹ 3,40,371 out of the total receipt of ₹ 27,02,000/-. There may be so many reasons for incurring of less expenditure by the Director. Considering the totality ..... X X X X Extracts X X X X X X X X Extracts X X X X
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