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TMI Blog2002 (2) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner-bank filed its returns disclosing chargeable interest under the Act for the above three assessment years enclosing copies of its audited profit and loss account and balance-sheet. According to the petitioner, it had declared the full interest, which is chargeable to interest-tax in terms of charging section 5, read with section 2(7) of the Act. In the above three returns, the petitioner-bank returned the interest income accrued on the loans and advances but without including the interest on securities. The said income as declared by the assessee and as accepted by the Assessing Officer while framing the assessment is as follows: -------------------------------------------------------------------------- Assessment Interest Interest Interest-tax years income income levied returned assessed Date of completion -------------------------------------------------------------------------- (Rs. in (Rs. in (Rs. in crores) crores) crores) -------------------------------------------------------------------------- 1992-93 126.64 126.64 3.80 18-1-1995 (return accepted) 1993-94 225.48 225.48 6.76 18-1-1995 (return accepted) 1994-95 225.07 225.07 6.75 26-3-1997 (minor v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruly all material facts necessary for the assessment. It is contended that there was no failure or omission on the part of the assessee to disclose any particulars. According to learned counsel, in fact, the Assessing Officer issued notices under sections 8(1) and 8(2) while framing the assessments and after being satisfied with the particulars furnished by the assessee, the assessments were framed. Learned counsel contended that as the petitioner has disclosed fully and truly all material facts necessary for the assessment, the provisions of section 10(a) of the Act have no application. In support of his contention, learned counsel relied upon the decisions of the Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 and CIT v. Hemchandra Kar [1970] 77 ITR 1. Learned counsel also contended that as the respondent has not obtained any fresh information in respect of the assessment years in question, the proposed action of the respondent is merely a change of his opinion and thus reopening of the assessments on such change of opinion is without juris diction. In support of this contention, learned counsel relied upon decisions of the apex court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , interest on which is exempted. Though the petitioner filed an enclosure to the return but the debentures were not disclosed. Learned counsel also contended that this omission clearly amounts to failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Such omission on the part of the assessee clearly gives cause of action for the Assessing Officer to invoke the reassessment proceedings. Accordingly, he issued notice under section 10(a) of the Act. Learned counsel also contended that the omission committed by the assessee clearly amounts to non-disclosure of primary facts required for the assessment under the provisions of the Act and such failure would certainly provide jurisdiction to the Assessing Officer to reopen the assessment so as to tax the interest income that had escaped the assessment. Learned counsel also relied upon the following decisions in support of his contention: Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC); Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 (SC); ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission or failure as mentioned in clause (a) on the part of the assessee, the Assessing Officer has, in consequence of information in his possession reason to believe that chargeable interest assessable for any assessment year has escaped assessment or has been underassessed or has been the subject of excessive relief under this Act, he may, in cases falling under clause (a), at any time, and in cases falling under clause (b), at any time within four years of the end of that assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under section 7, and may proceed to assess or reassess, the amount chargeable to interest-tax, and the provisions of this Act shall, so far as may be, apply, as if the notice were a notice issued under that section." A perusal of the above provisions shows that "interest" means interest earned on loans and advances made in India, commitment charges and discount charges on promissory notes and bills of exchange drawn in India. "Chargeable interest" means the total amount of interest other than the interest on loans and advances made to other credit institutions and co-operative societies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the interest-tax assessment. Similarly, some other items of chargeable interest on investments have also been omitted to be charged to interest-tax. Therefore, since the income chargeable to tax has escaped assessment, the assessment is reopened under section 10 of the Interest-tax Act. Issue notices under section 10 of the Interest-tax Act, 1974, for the assessment year 1992-93." A perusal of the above reasons recorded by the Assessing Officer shows that the interest received by the assessee on debenture loans had not been assessed to tax. No doubt the reasons recorded do not disclose that there was any omission or failure on the part of the assessee, but, however, in the counter filed before this court the stand of the respondent/Department is that there was omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Hence, the reassessment proceedings. The said contention, of course, is being contested by the assessee. According to the assessee, the returns filed by it are full and complete. The returns are accompanied by copies of the audited profit and loss account and balance-sheet. The balance-sheets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tta Discount Co. Ltd. [1961] 41 ITR 191. The said decision was rendered under section 34(1)(a) of the Indian Income-tax Act, 1922. The said provision is in pari materia with the provisions under consideration and in fact, it was the predecessor provision to sections 147 and 148 of the 1961 Act. In that case, in the original assessments of the company for the assessment years 1942-43, 1943-44 and 1944-45, profits realised by the company by the sales of shares were not assessed to tax. The Income-tax Officer proposed to initiate reassessment proceedings against the company under section 34 of the Income-tax Act and in his reports to the Commissioner for the, purpose of obtaining his sanction, (as it was provided therein) he stated that at the time of the original assessments, the representation made on behalf of the company was that the sales of shares were casual transactions and in the nature of mere change of investments, which were accepted, but the result of the company's trading from year to year, however, showed that it had really been systematically carrying on the trade in the sale of investments, and that as such the company had failed to disclose the true intention behind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the assessments of the assessee and of the five members and by his reassessment orders made on January 31, 1955, included the sum of Rs.19,000 in the reassessment of the family and the sum of Rs.1,10,000 separately in the assessments of the five members in respect of the respective notes encashed by them. Two days later, i.e., on February 2, 1955, the Income-tax Officer issued a notice under section 34(1)(a) of the Indian Income-tax Act, 1922, seeking to include the sum of Rs.1,10,000 in the hands of the family. The Tribunal, being satisfied that the notes encashed by the five members belonged to the Hindu undivided family, held that the notice issued was valid. On a reference, the High Court held that the notice issued under section 34(1)(a) was not valid since it was found that when the first reassessment was made the primary facts necessary for reassessment of the family were in the possession of the Income-tax Officer, that these facts came into his possession not by virtue of any disclosure made by the family but were discovered by him otherwise; that at the time of the first reopening of the assessment of the Hindu undivided family and of the individual members the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice under section 148. He should have some prima facie grounds before him for taking action under section 148. His conclusion that there was a case for investigating the truth of alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The Income-tax Officer could not have had reason to believe that income had escaped assessment by reason of the appellant-firm's failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore held invalid. In the case of Dinesh Chandra H. Shah [1971] 82 ITR 367 (SC), the assessee, who was assessed at Calcutta, had disclosed in his return for the assessment year 1955-56, his share in the income of a 'firm. Such information was received by the Income-tax Officer at Calcutta in September, 1955, and this was recorded in the order sheet. In completing the assessment in November, 1958, the Income-tax Officer failed to include the assessee's share of profits from that firm. Thereafter, a successor to the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn oversight. In the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC), the respondent was assessed for the year 1958-59 under section 23(3) of the Indian Income-tax Act, 1922, on June 14, 1960. His total income was assessed at Rs.37,872. While making the assessment the Income-tax Officer allowed deduction of a sum of Rs.15,991 by way of expenses claimed by the respondent. The expenses included Rs.10,494 4as. 3 ps. by way of interest. According to the assessee, he produced through his authorised representative, all books of account, bank statements, and other necessary documents in connection with the return. On March 14, 1967, the respondent received notice issued by the appellant under section 148 of the Act, stating that the appellant had reason to believe that the respondent's income which was chargeable to tax for the assessment year 1958-59 had escaped assessment within the meaning of section 147 of the Act. The respondent was called upon to submit a return for that year. The respondent through his lawyer stated that there was no material on which the appellant had reason to believe that his income had escaped assessment and, therefore, the condition precedent for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for reopening assessment. The grounds or reasons which lead to the formation of the belief contemplated by section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income-tax Officer to form the above belief that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of the grounds, which induce the Income-tax Officer, is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessments, as according to the officer he had reason to believe that income of the assessee had escaped assessment since the manufacture of the photo films was an article placed under the Eleventh Schedule to the Act which was not entitled to deduction under section 80-1 of the Act. When such notices were assailed in writ petitions, the High Court quashed the notices holding that the said action of the Assessing Officer is a mere change of opinion, as according to him the opinion formed earlier by him was in his opinion incorrect holding that the reopening on such ground is not permissible. In the case of S. Sreeramachandra Murthy,[2000] 243 ITR 427 a Division Bench of this court considered the scope of section 147 of the Act. In this case, reassessment proceedings were initiated on the ground that the petitioner underestimated the cost of construction of a commercial complex constructed during the year 1992-93 and the differential cost was attributable to unexplained income. When the said notice was questioned, this court held that: "The construction of the building complex was admittedly disclosed by the petitioner in the return and in the assessment, the cost of const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently an assessment was framed on the firm in respect of the said entire amount received on account of the arbitration award. Thereafter the petitioners have been issued notice under section 148. When the said notice was assailed on the ground that there was no failure on the part of the assessee to disclose fully and truly all the relevant material, the Gujarat High Court held that the entire reasons recorded by the Income-tax Officer, to support his belief that income had escaped assessment, did not make any reference to the decision in Banyan and Berry v. CIT [1996] 222 ITR 831. In the absence of mention of that case in the order, it was not open to the officer to justify the order by reference to the said decision. The documents and assessment orders made it clear that the assessees had placed the entire facts before the assessing authority. The authority took note of all the income which accrued during the year 1988-89 and passed the orders of assessments. Since the entire facts relating to the income were made known to the assessing authority and no objective reason had been given for issuing a notice under section 148, the notices issued under section 148 were liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest-tax Act. It is premature to go into the merits of the matter as we are now concerned only with the validity of the notice. The apex court in the case of Mohinder Singh Gill v. Chief Election Commissioner, AIR 1978 SC 851, held that when a statutory functionary makes an order based on certain grounds, its validity or propriety must be judged by the reasons so mentioned and cannot, on challenge, be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge get validated by additional grounds later brought out. It is trite that a quasi-judicial order has to stand on its own legs; it has to sustain itself on its own reasons recorded therein. Its validity has to be judged by the reasons so mentioned and fresh reasons in the shape of subsequent affidavits cannot be allowed to supplement and buttress the same. Learned senior standing counsel, on the other hand relied upon a decision of the apex court in the case of S. Narayanappa v. CIT [1967] 63 ITR 219 wherein the apex court held that if there are some reasonable grounds for the Income-tax Officer to believe tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, wages, chemicals, etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year's assessment proceeding. Hence, notice was issued under section 147. Under the above facts, the apex court upheld the reassessment proceedings. In the case of Praful Chunilal Patel [1999] 236 ITR 832, a Division Bench of the Gujarat High Court considered the issue of reassessment proceedings. In this case the Assessing Officer while making the assessment for the assessment year 1993-94 found that the assessee and his three brothers had decided to form a partnership firm with two other partners; that the assessee and his other co-owners had a bungalow and that the said property was converted by the said assessee and other co-owners on August 15, 1990, from a capital asset to stock-in-trade. The fair market value of the bungalow was valued at Rs.56,00,000 by the registered valuer and the converted property was sold on September 19, 1990, to the firm. It was found that the capital account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord and the averments in the counter affidavit, it is clear that the Income-tax Officer had applied his mind to the facts, and after prima facie satisfying himself of the existence of those two conditions precedent, reached the conclusion for reopening the assessment. It is settled law that, in an administrative action, though the order does not ex facie disclose the satisfaction by the officer of the necessary facts if the record discloses the same, the notice or the order does not per se become illegal." In the case of Associated Stone Industries (Kotah) Ltd. v. CIT [1997] 224 ITR 560 the apex court considered a notice issued under section 34(1)(a) on the ground of failure by the assessee to disclose material facts. Though the court found that there was no such failure on the part of the assessee, but, however, such notice can be sustained under section 34(1)(b), if the pre-requisite conditions for the application of clause (b) are satisfied. From a conspectus of the above case law it is clear that in order to initiate valid reassessment proceedings, two conditions are required to be satisfied, viz., (i) that the Assessing Officer must have reason to believe that income charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest. Further, as there are innumberable items of investments, the interest on which is not taxable, it would not be possible to disclose all those items of investments and interest received thereon. Further, according to the assessee, the interest received on debentures was shown in the annual reports, which are filed along with the returns. According to the assessee, the annual reports were prepared in conformity with the provisions of the Banking Regulation Act. Therefore, the same would amount to full disclosure. But, according to the Department, even if such interest is not chargeable, the same is required to be disclosed under Part III of the return and interest earned on debentures was not disclosed under Part III of the return, though some other items are disclosed, the same amount to omission or failure to disclose truly and fully all material facts. This court finds merit in the above contention of the Department. When it is required specifically to disclose even the exempted interest received by the assessee under Part III of the return, the failure to disclose the same would amount to omission or failure to disclose truly and fully all material facts. Further as held b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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