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TMI Blog2002 (4) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year under reference is 1987-88. The relevant previous year is July 1, 1985, to June 30, 1986. The assessee maintained guest houses in Delhi, Bombay and Faridabad, wherefor it incurred the following expenses: ------------------------------------------------------- Particulars Amount (Rs.) ------------------------------------------------------- 1. Rent 1,76,000 2. Expenses 91,485 -------------- 2,67,485 3. Depreciation 66,441 -------------- 3,33,926 --------------------------------------------------------- A return of income declaring income of Rs.1,62,890 was filed on June 29, 1987, by the assessee wherewith computation of income, annual report, tax audit report, etc., were also filed. As it did not claim deduction for the expenses as enumerated hereinbefore, a revised return was filed on October 5, 1989, along with a letter of the same date, wherein it was contended that rent for a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,56,523, whereby a sum of Rs.2,42,441 (rent of Rs.1,76,000 and depreciation of Rs.66,441) incurred on the maintenance of guest houses was disallowed and added to the total income. Though the assessment was reopened on the alleged ground of various disallowable claims but except for the aforenoted disallowance, neither any other claim was disallowed nor any addition was made. In support of his order of reassessment the Assessing Officer purported to have relied upon the order of the Commissioner of Income-tax (Appeals) for the assessment year 1986-87, which was passed on July 27, 1990, although the assessment was reopened on April 20, 1990. The contention of the assessee is that the Assessing Officer could not have taken recourse thereto, particularly, having regard to the fact that the Income-tax Appellate Tribunal (in short "the Tribunal"), on appeal, had allowed similar expenses for the assessment year 1986-87. The assessee preferred an appeal against the order of reassessment dated September 24, 1990, whereupon the Commissioner (Appeals) by an order dated August 23, 1991, quashed the reassessment proceedings holding that the assessee had disclosed all the facts. It was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would come within the purview of the expression "information" as contained in section 147 of the Act and thus the order of reassessment cannot be said to be illegal or without jurisdiction. Learned counsel in support of his aforementioned contention strongly relied upon the decision of the apex court in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191; Praful Chunilal Patel v. M.J.Makwana, Asst. CIT [1999] 236 ITR 832 (Guj) and Bawa Abhai Singh v. Deputy CIT [20021 253 ITR 83 (Delhi). Mr. Jolly would submit that Circular No. 549, dated October 31, 1989, issued by the Central Board of Direct Taxes (in short "the CBDT"), cannot be taken note of for the purpose of construction of section 147 of the Act, inasmuch as, a circular cannot override the statutory provisions. Mr. Jolly, in this connection, has drawn our attention to a decision of the apex court in Union of India v. Suresh C. Baskey, AIR 1996 SC 849 [1996] 11 SCC 701. Dr. Debi Prasad Pal, learned senior counsel appearing on behalf of the assessee, on the other hand, would contend that the expression "reason to believe" contained in section 147 of the Income-tax Act denotes that the same must be based on a chang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation allowance has been computed, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been underassessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may in cases falling under clause (a) at any time within eight years and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-section: Provided that-- (i) the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian Income-tax Act, 1922 (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2.--Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section." Section 147 of the Act as it stands with effect from April 1, 1989, reads as follows: "147. If the Assessing Officer, has reason 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 (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case is picked up for scrutiny and a regular assessment order is passed under section 143(3). The Amending Act, 1987, has, therefore, rationalised the provisions of section 147 and other connected sections to simplify the procedure for bringing to tax the income which escapes assessment, especially in non-scrutiny cases. Thus, the Amending Act, 1987, has substituted a new section 147 which contains simplified provisions as follows: (i) Separate provisions contained in clauses (a) and (b) of the old section have been merged into a single new section, which provides that if the Assessing Officer is of the opinion that income chargeable to tax for any assessment year has escaped assessment, he can assess or reassess the same after recording in writing the reasons for doing so. (ii) The requirements in the old provisions that the Income-tax Officer should have 'reason to believe' or 'information in possession' before taking action to assess or reassess the income escaping assessment, have been dispensed with. (iii) The existing legal interpretation that once an assessment has been reopened, any other income that has escaped assessment and comes to the notice of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnished, but no assessment has been made (i.e., in a non-scrutiny case)--if the assessee is found to have understated his income or claimed excessive loss, deduction, allowance or relief in the return. (iii) Where an assessment has been made (i.e., in a scrutiny case)--if income chargeable to tax has been underassessed or assessed at too low a rate or if any excessive relief or loss or depreciation allowance or any other allowance under this Act has been allowed." From a bare perusal of the provisions contained in section 147 of the said Act, as it stood up to March 31, 1989, it is evident that to confer jurisdiction under section 147(a) of the Act two conditions were required to be satisfied, viz., (1) the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment; and (2) he must also have a reason to believe that such escapement occurred by reason of either; (a) omission or failure on the part of the assessee to make a return of his income under section 139 or (b) omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. The aforementioned requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the Income-tax Officer having reason to believe that there has been underassessment and (ii) his having reason to believe that such underassessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of four years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the Income-tax Officer has reason to believe that underassessment has resulted from non-disclosure of material facts, cannot therefore be accepted." In Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 (SC), a three judge-Bench of the apex court held that although disclosure of a new fact therein may be an information within the meaning of the aforementioned provisions, this opinion of law would not be, as regards a contention on the part of the Revenue that the expression "information" in section 147(b) refers to realisation by the Income-tax Officer that he has committed an error while making the original assessment. The apex court said: "... that he has committed an error when making the original assessment. It is said that, when upon receipt o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same set of facts. While passing the original orders of assessment the order dated February 28, 1994, passed by the Commissioner of Income-tax (Appeals) was before the Assessing Officer. That order stands till today. What the Assessing Officer has said about the order of the Commissioner of Income-tax (Appeals) while recording reasons under section 147 he could have said even in the original orders of assessment. Thus, it is a case of mere change of opinion which does not provide jurisdiction to the Assessing Officer to initiate proceedings under section 147 of the Act. It is also equally well settled that if a notice under section 148 has been issued without the jurisdictional foundation under section 147 being available to the Assessing Officer, the notice and the subsequent proceedings will be without jurisdiction, liable to be struck down in exercise of writ jurisdiction of this court. If 'reason to believe' be available, the writ court will not exercise its power of judicial review to go into the sufficiency or adequacy of the material available. However, the present one is not a case of testing the sufficiency of material available. It is a case of absence of material a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may make an assessment or reassessment, or recomputation, as the case may be. The word 'assess' refers to a situation where the assessment was not made in the normal manner while the word 'reassess' refers to a situation where an assessment is already made, but it is sought to be reassessed on the basis of this provision. In cases where the Assessing Officer has not made an assessment of any item of income chargeable to tax while passing the assessment order in the relevant assessment year, it cannot be said that such income was subjected to an assessment. In the assessment proceedings, the Assessing Officer would ascertain on consideration of all relevant circumstances the amount of tax chargeable to a given taxpayer. The word 'assessment' would mean the ascertainment of the amount of taxable income and of the tax payable thereon. In other words, where there is no ascertaining of the amount of taxable income and the tax payable thereon, it can never be said that such income was assessed. Merely because during the assessment proceedings the relevant material was on record or could have been with due diligence discerned by the Assessing Officer for the purpose of assessing a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat what cannot be done directly cannot be done indirectly. If the Income-tax Officer does not possess the power of review, he cannot be permitted to achieve the said object by taking recourse to initiating a proceeding of reassessment or by way of rectification of mistake. In a case, of this nature the Revenue is not without remedy. Section 263 of the Act empowers the Commissioner to review an order which is prejudicial to the Revenue. In Bawa Abhai Singh's case [2002] 253 ITR 83 (Delhi), a Division Bench of this court of which one of us (D.K. Jain J.) is a Member, clearly held: "The crucial expression is 'reason to believe'. The expression 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. Such a belief may not be based merely on reasons but it must be founded on information. As was observed in Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC), the expression 'reason to believe' is stronger than the expression 'is satisfied'. The belief entertained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer should have reason to believe that income has escaped assessment, which belief can be reached in any manner and is not qualified by a precondition of faith and true disclosure of material fact by an assessee as contemplated in the pre-amended section 147(a) of the Act and the Assessing Officer can under the amended provisions legitimately reopen the assessment in respect of an income which has escaped assessment. Viewed in that angle the power to reopen assessment is much wider under the amended provision and can be exercised even after the assessee has disclosed fully and truly all the material facts. To similar view were the conclusions of this court in Rakesh Aggarwal v. Asst. CIT [1997] 225 ITR 496, it is to be noted at this juncture that the twin conditions must be fulfilled if the case is one which is covered by the proviso to section 147 operative with effect from April 1, 1989." It is evident from the afore-extracted portion of the decision that it is not an authority for the proposition that a mere change in the opinion would also confer jurisdiction upon the Assessing Officer to initiate a proceeding under section 147 of the Act as was contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1999] 237 ITR 889 (SC). Since these circulars are beneficial to assessees, such benefit can be conferred also on assessees who have approached the Settlement Commission under section 245C of the Act on such terms and conditions as contained in the circular. In our opinion, it is for this purpose that section 245F of the Act has empowered the Settlement Commission to exercise the power of an income-tax authority under the Act. We must clarify here that while exercising the power derived under the circulars of the Board, the Commission does not act as a subordinate to the Board but will be enforcing the relaxed provisions of the circulars for the benefit of the assessee in the process of settlement." The Board in exercise of its jurisdiction under the aforementioned provisions had issued the circular on October 31, 1989. The said circular admittedly is binding on the Revenue. The authority, therefore, could not have taken a view, which would run counter to the mandate of the said circular. Clause 7.2 as referred to hereinbefore is important. From a perusal of clause 7.2 of the said circular it would appear that in no uncertain terms it was stated as to under what circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aulted as the same was based on information derived from the tax audit report. The tax audit report had already been submitted by the assessee. It is one thing to say that the Assessing Officer had received information from an audit report which was not before the Income-tax Officer, but it is another thing to say that such information can be derived by the material which had been supplied by the assessee himself. We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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