TMI Blog1998 (11) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... of the re-assessment proceedings on the ground of appellants omission and failure to disclose fully and truly all material facts necessary for assessment, even in absence of any such reason mentioned by the Income-tax Officer in the reasons recorded by him for issuing notice under section 148. 3. The CIT(Appeals) has erred in upholding the validity of section 148 notice by referring to and relying upon reasons and material extraneous to the contents of section 148 notice. 4. The CIT(Appeals) even otherwise erred in holding that the appellant had failed or omitted to disclose fully and truly all the material facts necessary for assessment when all the primary facts relating to the deduction of gratuity liability were duly placed before the Income-tax Officer. 5. The CIT(Appeals) has erred in observing that there was no specific scheme for gratuity and only an estimated amount was claimed by the appellant when the gratuity scheme was explained to the Income-tax Officer and a statement showing each employee-wise calculation of gratuity liability was produced before him which was critically examined by him before accepting the same. 6. The CIT(Appeals) has erred in observing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation, which is incorporated inUSA. It is assessed in the status of "Non-Resident Company", being a company declared by the Central Board of Direct Taxes, as a company as per section 2(17)(iv) of Income-tax Act, 1961 since assessment year 1958-59. The appellant company filed a return declaring total income of Rs. 2,24,36,049 on30th June, 1970. 2.1 Thereafter the assessee submitted a revised return of income for the said year on 27-2-1971 declaring an income of Rs. 2,23,45,299 after deducting the estimated liability of Rs. 90,760 for gratuity for the said year. The relevant extracts from letter dated 27th February, 1971 explaining the reasons for submitting the revised return are reproduced hereunder:--- "We are sending herewith a revised Income Tax Return of our above clients for the assessment year 1970-71. The only difference between the Return filed earlier and the present one is on account of claim for gratuity to staff members. This being an ascertained liability is admissible according to the recent decision of the Supreme Court in the case of Metal Box Company of India Ltd. and as per Circular of the Central Board of Direct Taxes." 2.2 It appears that during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment. From the records it appears that deduction on account of provision for gratuity payable amounting to Rs. 90,760 has been allowed as deduction. Having regard to the accepted commercial principles the provision for gratuity is not an ascertained liability; as the amount has neither been paid to employees nor it became payable during the previous year. The assessee has accepted this principle in subsequent year also. I have, therefore, reasons to believe that income chargeable to tax has escaped assessment. Start proceedings under section 147(a) and issue notice under section 148. 23-3-1974 Sd/- A.K. Chakravorty Income-tax Officer Company Circle-I, New Delhi." 2.7 The appellant company filed a return of income declaring total income of Rs. 2,25,61,646 on26-4-1974. The income originally assessed by the Assessing Officer at Rs. 2,26,01,039 was reduced as a result of the order passed by the ITAT on25th April, 1975and the income finally assessed in the original assessment proceedings was Rs. 2,25,61,646. The return of income filed by the assessee pursuant to notice under section 148 was at the same figure of income as had been originally assessed after giving effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the remedy of appeal under the Act. Mr. Salve, learned counsel of the appellant, submitted that the appeals were pending before the Income-tax Appellate Tribunal for the assessment year 1970-71 and that he would not press the present appeals, i.e. Civil Appeal Nos. 1090 of 1985 and 1091 of 1985, pertaining to the assessment year 1970-71 and he would like to withdraw the same having all the questions open for the Appellate Tribunal to decide. We need not, therefore, go into the merits of the dispute in these two appeals and, as prayed, would dismiss the same as withdrawn." 3. Shri S. Ganesh, the ld. Advocate appearing on behalf of the assessee submitted his arguments mainly in relation to invalidity of the proceedings initiated under section 147/148 of Income-tax Act, 1961. He submitted that for assuming jurisdiction under section 147(a) of the Act and to issue notice under section 148, it is necessary on the part of the Assessing Officer to record his satisfaction about the fulfilment of twin conditions prescribed in section 147(a), namely, (i) that he should have reasons to believe that the income liable to tax has escaped assessment; and (ii) that such income has escaped ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 147(a) should be quashed. 3.1 On merits of the claim for deduction in respect of gratuity liability, the ld. counsel relied upon the explanation submitted during the course of original assessment proceedings and also the facts and decision stated in letter dated 27th February, 1971 and dated 11th August, 1971 submitted before the Assessing Officer alongwith details of such gratuity claim furnished at pages 47 to 53 of the Paper Book. 3.2 The ld. counsel submitted that all the aforesaid submissions have been made by him in respect of Ground No. 1 to Ground No. 10 of the summarised grounds of appeals submitted alongwith letter dated27th September, 1998. 3.3 As regards ground Nos. 11 to 14 relating to disallowance out of pro-rated home Expenses and disallowances out of Service Charges, the ld. counsel submitted that these grounds are squarely covered by the judgment of Hon'ble Supreme Court in assessee's own case in Coca-Cola Export Corpn. 4. The ld. Sr. D.R. strongly supported the order of the CIT(A). He submitted that this case has a chequed history. The assessee had challenged the validity of proceedings initiated under section 147(a) and issue of notice under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the course of hearing. 7. We will first like to examine the issue relating to validity of initiation of reassessment proceedings under section 147(a) of Income-tax Act, 1961. 7.1 The copy of reasons recorded by the Assessing Officer on 23rd March, 1974 prior to issue of notice under section 148 for assessment year 1970-71 have been reproduced in the earlier part of this order. It is clear from the reasons so recorded by the Assessing Officer under section 147(a) of the Act that the proceedings for re-assessment had been started on account of the fact that the Assessing Officer, in the original assessment, had allowed deduction on account of the provision of gratuity payable amounting to Rs. 90,760. It has been observed in the reasons that the provisions for gratuity is not ascertained liability as the amount has neither been paid to employees nor it became payable during the previous year. The assessee has accepted this principle in subsequent year also. It is however pertinent to note that the Assessing Officer has nowhere recorded under section 147(a) that such income chargeable to tax had escaped assessment due to failure on the part of the assessee to disclose fully a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that deduction of Rs. 90,760 on account of provision for gratuity payable has been allowed as deduction. He has nowhere recorded his satisfaction that such income has escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly material facts relating to gratuity claim in the course of original assessment proceedings. The reasons so recorded by the Assessing Officer on the other hand show, that the proceedings under section 147(a) have been initiated in view of the fact that the Assessing Officer while passing the original assessment order, had allowed such deduction which according to the successor ITO [who initiated such reassessment proceedings under section 147(a)], has resulted in escapement of income chargeable to tax from being assessed in the original assessment. It indicates that the successor ITO was of the view that his predecessor had wrongly allowed the said deductions in the original assessment. 7.3 The validity of the reasons so recorded by the Assessing Officer have to be examined in the light of various judgments of theHon'ble Apex Court. We will, therefore, like to reproduce herein the gist of some of the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the Income-tax Officer with regard to the inference which he should draw from the primary facts. If an Income-tax Officer draws an inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment." 7.6 The Hon'ble Supreme Court in the case of Ganga Saran Sons (P.) Ltd. at page 11 has held as under:--- "It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to beli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial had any rational connection with or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer, at the time of making the original assessment, could or could not have found by further enquiry or investigation whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at conclusion, after satisfying the twin conditions prescribed in section 147(a) that the assessee had not made a fun and true disclosure of the material facts at the time of original assessment and therefore income chargeable to tax had escaped assessment. By the Court: One of the purposes of section 147 is to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of the original assessment and when that falsity comes to notice, to turn around and say: "You accepted my lie, now your hands are tied and you can do nothing." It would be a travesty of justice to allow the assessee that latitude." 7.8 It is clear from the aforesaid judgment that the Assessing Officer should record his satisfaction about the fulfilment of the twin conditions prescribed in section 147( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income chargeable to tax has escaped assessment as deduction in respect of gratuity payable had been allowed as deduction in the original assessment. The recording of such reasons without a specific satisfaction that such escapement of income had resulted on account of failure on the part of the assessee to make a full and true disclosure of the material facts cannot confer jurisdiction to the Assessing Officer to issue a notice under section 147(a) of the Act. 7.9 In view of the aforesaid facts and decisions, we are of the considered opinion that the proceedings for reassessment initiated by the ITO under section 147(a) of the Act and issue of notice under section 148 of the Act are patently invalid and without any jurisdiction. The Assessing Officer is, therefore, directed to cancel the reassessment order. 8. Since we have quashed the reassessment proceedings initiated under section 147(a) of the Act, we do not consider it necessary to deal with the various other grounds raised in the present appeal. In case the decision on the question relating to invalidity of proceedings initiated under section 147(a) is reversed by the Hon'ble High Court or the Hon'ble Supreme Court, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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