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TMI Blog2006 (10) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... this fact alone would be sufficient to justify the reopening of assessment, because mere inadequacy of material for formation of belief would not make reopening of assessment invalid provided facts recorded in the reasons justify the inference that income chargeable to tax has escaped assessment. Thus, we hold that reference to a wrong bank account number alone in the reasons so recorded will not make assumption of jurisdiction to reopen the assessment as invalid. Other references can also lead to formation of belief that the income has escaped assessment. Merely not filing of return of income will not result into an inference that any deposit in the bank account . was chargeable to tax and therefore, had escaped assessment, even if that amount exceeded minimum amount chargeable to tax, i.e., exceeded the exemption limit. We derive support for this conclusion from the decision of M.P High Court in Biaora Constructions (P.) Ltd. v. DIT [ 2005 (9) TMI 37 - MADHYA PRADESH HIGH COURT] for the proposition that if an amount as recorded in the regular books then it cannot be said to be concealed. Thus, where an amount is recorded in the regular books, it will not be automatically inferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder mentions that the assessee had made purchases from various persons, but purchase of Rs. 6,00,000 has been shown from Saraf Medicinal and Botanical Garden. In other words, it was not a case of bogus purchases, but was a case of unverifiable purchases. For unverifiable purchases books can be rejected and profit can be estimated. Since the profit declared by the assessee is about 50 per cent and there is no material to show that the assessee would have earned more profit, then addition made by the Assessing Officer and confirmed by the CIT(A) cannot be sustained. As a result, on merits also the addition of Rs. 6,00,000 cannot survive. As a result, we allow the appeal filed by the assessee. - Smt. Diva Singh Judicial Member And D. C. Agrawal Accountant Member For the Assessee : Naveen Gargh For the Department : D. R. Kurup ORDER D. C. AGRAWAL (ACCOUNTANT MEMBER) . 1. These are three appeals two of which are filed by the Revenue one for the assessment year 1998-99 and other for the assessment year 1999-2000 and third, i.e., I. T. A. No. 02/ Agr./2003 is filed by the assessee for the assessment year 1998-99. Since all the three appeals relate to the inter-connected issues, we take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of assessment proceedings, notices under section 143(2)/142(1) were issued by the Assessing Officer. He noted that the assessee had shown purchases of Rs. 6,00,000 of herbs from M/s. Saraf Medicinal and Botanical Garden, which is a concern run by Shri Jugal Kishore Soni who is also the President of M/s. Saraf Gramodyog Sansthan, i.e., the assessee' s co-operative society. A payment of Rs.1,22,000 was made during the financial year 1997-98 against those purchases and balance sum was shown as liability in the balance-sheet. The Assessing Officer noted that M/s. Saraf Medicinal and Botanical Garden could not supply herbs to the assessee because entire crop of herbs cultivated by it (i.e., M/s. Saraf Medicinal Botanical Garden) was devastated on December 8, 1997, due to thunderstorm, hence, the said concern was not in a position to sell these items to the assessee during the financial year 1997-98. During the course of survey on October 7, 1999, no bills or challans could be traced, which could substantiate the sales made by this concern to the assessee. All the payments in relation to these purchases are stated to be made in cash. Even where it is shown that payment is made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrect bank account No. is CC-5 and not OD A/c 686. The correct bank account number has been subsequently mentioned in all the correspondence made by the Assessing Officer with the assessee. According to the Assessing Officer, the action under section 148 was taken mainly on the ground that the assessee was not assessed to tax and no return of income was filed by him for the assessment year 1998-99. 6. The learned Commissioner of Income-tax (Appeals) rejected the grounds of the assessee against reopening of the assessment by observing as under : I have carefully considered the facts of the case, submissions of the authorised representative comments of the Assessing Officer and the position of law. In my opinion, this ground of appeal deserves to fail. From the reasons recorded by the Assessing Officer and the perusal of records it is clear that the appellant was not assessed to tax earlier. For the year under reference no return was filed by it. In the absence of any return, the Assessing Officer had no occasion to verify the deposits shown in the bank account. The only course left with the Assessing Officer to verify the deposits in bank account was to obtain a return of income for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially checked up that the said amount was recorded in the regular books, then he could not have reopened the assessment. 9. On the other hand, the learned Departmental representative submitted that the Assessing Officer has correctly made allegations about the income having escaped assessment because the assessee had not filed the return of income and hence whatever deposits he had in the bank account remained unexplained and liable to be assessed as income of the assessee. Secondly, clerical mistake made by the Assessing Officer while recording the reasons would be taken care of by section 292B. The intention of the Assessing Officer has to be seen while recording the reasons. The intention was to mention that deposit in the bank account were not explained, as the assessee had not filed the return of income and, therefore, income has escaped assessment. Circumstantial evidence available with the Assessing Officer in this regard has also to be seen, which are that more than 70 bank accounts were found during the course of survey on the basis of which the Assessing Officer inferred that income chargeable to tax has escaped assessment. He relied on the decision of the hon'ble De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, income has escaped assessment. 12. Thus, following questions arise for consideration : (i) Whether the Assessing Officer had adequate material to form belief to initiate reassessment proceedings. (ii) Whether those materials had rational connection with the formation of belief. (iii) Whether the Assessing Officer had formed the proper belief, which he is required under law before assuming jurisdiction. (iv) Whether the Assessing Officer can refer to subsequent material/ proceedings to justify the reopening of the assessment. (v) Whether any mistake in recording the reasons can be deemed to have been corrected or taken care of section 292B. 13. Regarding the first question, we find that a survey was carried out by the Assessing Officer and large amount of material like bank pass book etc. were found and impounded. The assessee had not filed the return of income for this assessment year. Therefore, one could say that the Assessing Officer had enough material to justify the initiating action under section 148(1). 14. Regarding question No. 2, we notice that while recording the reasons, the Assessing Officer had only confined to bank account No. OD A/c 686 with Central Bank of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Hindustan Metal Works [1993] 202 ITR 978 and of the hon'ble Allahabad High Court in K. M. Bansal v. CIT [1992] 195 ITR 247. There are many other authorities supporting this view. Thus, we hold that reference to a wrong bank account number alone in the reasons so recorded will not make assumption of jurisdiction to reopen the assessment as invalid. Other references can also lead to formation of belief that the income has escaped assessment. 16. The next question is whether formation of belief was legally proper on the basis of material brought in the reasons. For this purpose let us refer to section 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank account was not recorded in the regular books then certainly, there is prima facie material to form a belief that such deposits were liable to be taxed under section 69 and hence, income chargeable to tax has escaped assessment. Therefore, we are of the considered view that unless the Assessing Officer asked for an explanation from the assessee before initiating action under section 148(1) and recorded the reasons therefor or verifies the deposits with the books of account, if maintained, the Assessing Officer could not have come to the belief that income chargeable to tax has escaped assessment. Filing of return or not filing of return would depend whether final income as per profit and loss account drawn by the assessee on the basis of books of account reflect taxable income or not. Merely not filing of return of income will not result into an inference that any deposit in the bank account was chargeable to tax and therefore, had escaped assessment, even if that amount exceeded minimum amount chargeable to tax, i.e., exceeded the exemption limit. We derive support for this conclusion from the decision of the Madhya Pradesh High Court in Biaora Constructions P. Ltd. v. Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act. 21. Thus, as per this section any clerical mistake in the notice or summons or proceedings undertaken by the Assessing Officer will not be held invalid merely because of any mistake defect or omission if they are in conformity with or according to the intent and purpose of the Act. Recording of reasons for reopening of the assessment is an act anterior to initiating proceedings under section 148(1), which start with issue of notice under that section. Thus, any mandatory requirement for assumption of jurisdiction cannot be said to be covered by section 292B which comes into operation only when valid proceedings are initiated. Any invalid proceedings for assumption of jurisdiction cannot be corrected by section 292B. For this proposition, we rely on the decision of hon'ble Allahabad High Court in Sri Nath Suresh Chand Ram Naresh v. CIT [2006] 280 ITR 396. In that case, the notice was issued in the name of wrong person. The assessment proceedings were held not valid. This shows that act of assumption of jurisdiction under section 148(1) extends up to the issuance of corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deposit of Rs. 1,02,047 is explained, is borne out from the verification of the regular books during assessment proceedings. Had the Assessing Officer really verified the deposit with the regular books before issuing notice under section 148(1) then he could not have got jurisdiction to reopen the assessment. It is, therefore, clear that the Assessing Officer avoided to verify the deposit with the regular books and intended to reopen the assessment. This cannot be said to be a valid assumption of jurisdiction. 23. In this regard we consider it appropriate to refer to some decisions given by various courts, which support our view, we have taken in the present case. (i) In Dass Friends Builders P. Ltd. v. Deputy CIT [2006] 280 ITR 77, the hon'ble Allahabad High Court held that belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable and based on reasons, which are relevant. It must be in good faith and not mere pretence, should have a rational connection and relevant bearing on the formation of belief, and should not be extraneous or irrelevant. The material should be relating to the particular year for which assessment is sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... belief ; and (f) reasons recorded must show application of mind by the Assessing Officer. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well-reasoned document before issuance of notice for reassessment. Similarly, in the present case, examination would be required to come to the inference that deposit in the bank account were chargeable to tax and hence, they have escaped assessment. No such examination is recorded in the reasons so recorded in the present case. (iv) In Smt. Jaswant Kaur Sehgal v. CIT [2004] 271 ITR 475 the hon'ble Gauhati High Court held that the Assessing Officer should have reason to believe that because of the eventualities enumerated in clause (a) and/or (b), income chargeable to tax has escaped assessment and the reasons in support of such belief had to be recorded by him before issuing notice under section 148. The above requirements are mandatory. The reasons have to be cogent, convincing and existing and should not be unreal or imaginary. The belief has to be bona fide and not a pretence. (v) In ITO v. Electro Steel Castings Ltd. [2003] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases. Learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) has wrongly confirmed the addition because he ignored the fact that the Assessing Officer has himself given finding that the assessee might have made purchases from elsewhere. Thus, it could not be a case of bogus purchases, but the purchases not verifiable. 26. On the other hand, the learned Departmental representative supported the order of the Assessing Officer and the Commissioner of Income-tax (Appeals). 27. After considering the rival submissions, we are of the view that entire addition of Rs. 6,00,000 cannot be sustained. It is because the declared sales of the assessee are of Rs. 4,52,819 and closing stock is of Rs.15,50,000. The closing stock is valued at cost. The gross profit rate declared by the assessee on sales of Rs. 4,52,819 is Rs. 2,26,786, which is about 50 per cent. If the purchases of Rs. 6,00,000 are added then profit will jump to Rs. 8,26,786 which would be about 182.50 per cent. This is unreasonable and cannot be sustained in law. Further, we notice that the Assessing Officer in the assessment order mentions that the assessee had made purchases from various pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by reason of any mistake or omission. 3. That the finding of the learned Commissioner of Income-tax (Appeals)-II, Agra is bad in law and on facts as the same are contrary to the ratio of decision of the hon'ble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 wherein it was held that sufficiency and correctness of material need not to be looked at initial stage for initiating reassessment proceedings. 4. That the decision of the learned Commissioner of Income-tax (Appeals)-II, Agra being erroneous in law as well as on facts be set aside and that of the assessment order be restored. 33. The facts relating to this case are similar to the facts mentioned in appeal of the assessee for the assessment year 1998-99. The assessment was reopened by recording the following reasons : In this case, a survey under section 133A of the Income-tax Act, 1961, was carried out by the Department at the business premises of Shri Jugal Kishore Soni, Forest Range Barrier, Talbehat, Distt. Lalitpur on October 7, 1999. During the course of survey operations, various incriminating documents, bank pass-books/cheque books and books of account were found at the premises, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, on this basis, one cannot justify or cure the defect in the reasons recorded by the Assessing Officer. Here the issue is as to whether the reasons had any live link with the formation of belief or not. For this purpose, one only has to see the reasons recorded by the Assessing Officer. Any lacuna or deficiency in such reasons cannot be cured or removed by any subsequent Act or material. This view finds support from the Gujarat High Court' s decision in the case of Saradbhai M. Lakhani v. ITO [1998] 231 ITR 779. In the aforesaid decision it has been held that the validity or otherwise of the reasons should be gone into on the basis of facts mentioned therein. It is not open to the authorities to justify the action on the basis of further reasons supplied in the form of affidavits. In this case, before the High Court it was contended that the reopening was done mainly on the basis of the Gujarat High Court' s decision in the case of Banyan and Berry v. CIT [1996] 222 ITR 831. The court found that there was no reference of this decision in the reasons recorded by the Assessing Officer. On these facts, the High Court held that in the absence of mention of that decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of income. It is, therefore, held that the notice issued under section 148 was bad in law. Since the notice itself has been held to be bad in law, the subsequent actions including the finalization of assessment also become bad in law. The assessment framed by the Assessing Officer is, therefore, annulled. It may, however, be added that the Assessing Officer would be free to take action under section 148 after recording proper reasons based on relevant material, as per law. 35. Thus, the learned Commissioner of Income-tax (Appeals) held the proceedings to be invalid on the ground that the reasons were not properly recorded and the material relied upon by the Assessing Officer had no link with the formation of belief about escapement of income. 36. The learned Departmental representative raised the same arguments as he has taken in the year 1998-99 to support the order of the Assessing Officer. 37. On the other hand, the learned Authorised representative submitted that the return of income was filed on April 26, 2000. Thus, the assessment was pending and in the meantime, notice under section 148 was issued on December 4, 2000. Thus, during the course of pendency of return, notice ..... X X X X Extracts X X X X X X X X Extracts X X X X
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