TMI Blog2004 (5) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... chanically signed the reasons recorded for issue of notice under section 148 as there is nothing on record to indicate that there was lack of application of mind." 3. All the three grounds of appeal relate to the validity of initiation of proceedings under section 147 of the Act. This is the main issue. It has been observed by the Assessing Officer that the income-tax returns for assessment year 1989-90 was filed on 15-12-1989 by declaring income at Rs. 15,09,530. The case was processed under section 143(1)(a) on22-1-1990. Thereafter proceedings were initiated under section 147/148 and the assessee was issued notice under section 148 on15-12-1992which was served on18-1-1993. In response to this notice, the assessee sent a reply vide letter dated16-2-1993and submitted that the return already filed on15-12-1989be considered as a return filed in pursuance of notice under section 148. In compliance with notice issued under section 143(2), Shri Mukesh Jain, CA attended the office and the case was discussed with him. The assessee has claimed deduction under section 80-O on the gross amount of foreign exchange brought into India minus 5 per cent disallowance of total fees towards servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO and he will have no jurisdiction to issue a notice under section 148 without completing the assessment. He has also relied on the judicial pronouncement of the Hon'ble Allahabad High Court in the case of S.P. Kochhar v. ITO [1984] 145 ITR 255 wherein it was held that so long as assessment is pending, the assessing authority cannot have reason to believe that income for the relevant assessment year has escaped assessment. He has further held that from these judgments it is clear that after picking up the case for scrutiny by issuing a notice under section 143(2) of the Act, the only course open to the Assessing Officer was to complete the assessment within the limitation time prescribed in section 153(1)(a) of the Act. If assessment is not completed by this date, the same cannot be allowed to be reviewed under a different provision of the Act because this will render the provisions of section 153 of the Act as ineffective and meaningless. He has also considered the amendment to section 147 of the Act by the Direct Tax Laws (Amendment) Act, 1987 w.e.f.1-4-1989. Under clause (b) of Explanation (2) of the amended section 147, income shall be deemed to have escaped assessment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Jorawar Singh Baidv. Asstt. CIT [1992] 198 ITR 47. The learned DR has further argued that proceedings under section 147 are also within time. According to her 18th January, 1993 was the date of service of notice under section 148 and the limitation runs from end of the financial year 1993 i.e. 31-3-1993 upto two years i.e. 31-3-1995. Hence limitation for completing the assessment under section 147 should be upto31-3-1995whereas the present assessment has been completed on 24-1-995. Hence assessment under section 143(3)/147 is quite within limitation of time. The learned DR has further argued that deduction under section 80-O was allowable on net income where the assessee has claimed on gross income and it was sufficient and reasonable cause to believe by the Assessing Officer that the income has escaped assessment. She has referred to the provisions of section 80-O of the Act and she has argued that Explanation 2(b) to section 147 is completely and reasonably applicable in the present facts and circumstances of the case. She has contended that initiation of proceedings under section 147 of the Act was also within time as per section 149(a) of the Act. She has furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------- 1. Return of Income of Rs. 15,09,530 filed u/s 139(1) of the Act 15-12-89 31-12-89 Return filed in time u/s 139(1) of the Act. 2. Issued intimation u/s 143(1)(a) accepting the Return. 22-1-90 31-3-91 3. Issued notice u/s 143(2)- hearing fixed for 18-6-90 . 23-5-90 30-6-90 Notice issued in time in terms of proviso to section 143(2)i.e., end of the Financial Year in which the return is filed or expiry of six months from the end of the month in which the return is furnished,which- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e limit for issue of notice under first proviso to section 143(2) is one year from the end of the month in which Return of Income filed, since return was filed in response to Notice under section 147/148 as on 16-2-93, the one year time limit expires on 28-2-94. Even then there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that the Hon'ble Delhi High Court's judicial pronouncement is clearly distinguishable from the facts and circumstances of the present case because in the present case the original assessment under section 143(3) had not been completed. While in the case of judicial pronouncement relied upon it was a case of completed assessment under section 143(3). In the present case intimation issued by Assessing Officer under section 143(1)(a) was not assessment order under section 143(3). The question of change of opinion by Assessing Officer did not arise. The Assessing Officer in the present case had not only not changed his opinion but found new facts regarding excessive deduction claimed under section 80-O of the Act. Hence, she has argued that in the present case the judicial pronouncement is not applicable. 8. We have considered rival submissions and materials on the file. First question to be considered in this matter is that whether the assessment made under section 147 is time barred. It is admitted by both the parties that the amended provisions of section 147 which were applicable from1-4-1989could be applicable in the present case. It is also admitted by both the parties t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to tax had escaped assessment and action under section 147 was warranted in the case. Clearly the assessee had claimed excessive deduction under section 80-O by claiming it wrongly on gross amount instead of the net income. The assessee had also wrongly claimed deduction of entertainment expenses. The action under section 147 on account of claim of excessive deduction was fully covered by Explanation 2(b) of section 147. 11. Hence after having heard both the parties, perusing the material on record and considering provisions of law and the judicial pronouncements of the different High Courts we are of the view that the proceedings under section 147 had been validly initiated and the assessment framed under section 147 was proper and valid. Explanation 2(b) to section 147 of the Act is applicable and the ruling of the judicial pronouncements relied upon by the CIT(A) were before1-4-1989which were not applicable on the facts and in the circumstances of the present case. Ld. CIT did not correctly appreciate the facts of the case and provisions of law. Therefore, the order of the Assessing Officer deserves to be upheld and that of the CIT(A) is to be reversed. We order acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under: - (i) It is admitted fact that when the original return of income was filed through notice under section 143(2) was issued, no assessment order under section 143(3) was made up to 31-3-1992, i.e. the limitation period provided under section 153(1)(a) of the Act. (ii) On receipt of notice under section 148, the assessee intimated the Assessing Officer vide his letter dated 16-2-1993 that the return filed by it originally may be treated as a return filed in response to notice under section 148 of the Act. Section 148(1) provides that a return is filed in response to notice under section 148, then the provisions of this Act shall so far as may be apply accordingly as if such return were required to be furnished under section 139 of the Act. Thus, the notice under section 143(2) should have been issued within the time prescribed in proviso to section 143(2) of the Act. The assessee's letter is received by the Assessing Officer in February 1993. As per proviso to section 143(2) of the Act, the limitation period for issue of notice under section 143(2), therefore, expired on28-2-1994. The notice under section 143(2) has been issued on25-7-1994which was beyond the period o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave therefore address ourselves to the findings of the CIT(A) and the challenge of the revenue to those findings. 9. Section 147 of the Act reads as under:- "147. If the Assessing Officer has reasons 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 (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." 10. Under the newly substituted section 147 w.e.f. 1-4-1989, the Assessing Officer if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, has been empowered subject to the provisions of sections 148 to 153 to assess or re-assess such income and any other income chargeable to tax, which has escaped assessment and which comes to his notice subsequently in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Sub-section (2) of section 148 provides that before issuing any notice under this section, the Assessing Officer shall record his reason for doing so. The combined reading of sections 147 and 148 makes it clear that firstly the Assessing Officer must have "reason to believe" that any income chargeable to tax "has escaped assessment" and before issuing notice under section 148, the Assessing Officer shall have to record the reasons. Both these conditions were prescribed in the pre-amended section 147 as well as in the section after the amendment w.e.f.1-4-1989. Under the section, the Assessing Officer can clothe himself with the jurisdiction only after recording the reasons for reopening the assessment. In fact, even under the Act of 1922, this was a pre-condition for assumption of jurisdiction. Since recording of reasons is a pre-condition for assumption of jurisdiction, there cannot be any controversy or debate about the necessity thereof. But the nature and quality of the reasons recorded have been the subject matter of judicial consideration. The reasons recorded for the sake of formalities to do will not satisfy the requirement of law. The reasons should be exhaustive and sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese views also find support from the decision of Hon'ble Rajasthan High Court in the case of Sardar Kehar Singh v. CIT [1992] 195 ITR 769. 17. Hon'ble Delhi High Court in the case of Bawa Abhai Singh v. Dy. CIT [2002] 253 ITR 833 and in the case of United Electricals Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 has held as under: - "Crucial expression (reason to believe) 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." 18. Keeping in view the settled legal position, if we see the reasons recorded by the Assessing Officer, it is abundantly clear that the initiation of proceedings under section 147 of the Act has been for the purposes of examination only. Hon'ble Allahabad High Court in the case of C.S.T. v. Modi Industries Ltd. [1987] 67 STC 341 and in other cases in General Electric Company of India Ltd. v. Sales Tax. Officer [1974] 33 STC 108/[1981] UPTC 396 has held that no reassessment proceedings under section 147 can be initiated for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also settled law that it is the Assessing Officer's reason to believe which was relevant. The reading of the reasons itself makes it clear that the reasons were not recorded by the Assessing Officer. The words "hence if approved, notice under sect ion 148 may be issued" itself was indicative of the fact that some staff member had put the note which was mechanically approved by the Assessing Officer without application of his mind. Needless to say, it is not the appraisal of the Assessing Officer but the subjective satisfaction of the Assessing Officer which is important for formation of belief. The CIT(A) has, therefore, rightly held that the Assessing Officer has initiated reassessment proceedings under section 147 without application of his mind. The initiation of reassessment proceedings on this count itself is illegal. We are, therefore, of the view that the CIT(A) has rightly held that the initiation of reassessment proceedings under section 147 of the Act was invalid. 23. The CIT(A) has also held that the reassessment was invalid as the same was made in consequence to a notice under section 143(2) of the Act which was issued beyond the period of limitation. Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were a return required to be furnished under section 139" is of great importance. The use of above words are not by way of clarification. These are the substantive provisions of law. This section makes it clear that when a return is filed in response to notice under section 148, such return will be deemed to be a return under section 139 and the provisions of the Act so far as may apply to such return will also be applicable. As the notice under section 143(2) is issued on a return filed under section 139, the natural conclusion will be that the Assessing Officer if he considers it necessary and expedient, shall issue a notice under section 143(2) of the Act requiring the assessee to produce any evidence on which he may rely in support of the claim. Thus, the proviso to section 143(2) which provided for limitation period for issue of notice under section 143(2) of the Act comes to play. But for the above provisions in section 148(1) of the Act perhaps the issue could have been doubtful as to whether the time limit prescribed in proviso to sub-section (2) of section 143 will apply or not to the returns filed in response to notice under section 148 of the Act. It is admitted positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 147 are different, but in making assessments and reassessments under section 147 the procedure laid down in sections subsequent to section 139, including that laid down by section 144-B, has to be followed." 26. Hon'ble Punjab Haryana High Court in the case of Mrs. Rama Sinha v. CIT [2002] 256 ITR 481 had considered similar issue. In this case, the return was filed in response to notice under section 148 of the Act. The question arose as to whether the procedure laid down for an assessment under section 143(3) on a return filed under section 139 of the Act will be applicable to the returns filed in response to notice under section 148 of the Act. TheHon'ble Courtafter considering the issue held as under: - "Once a return in pursuance of notice under section 148 of the Income-tax Act, 1961 is filed, the "provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139". The position was the same even prior to the amendment of section 148 with effect fromApril 1, 1989. The unamended provision also provided that on issue of a notice under section 148 "the provisions of this Act shall, so far as may be, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) is not merely procedural in nature but is a mandatory provision. Once the valid return under section 148 is filed by the assessee, the provision on the assessment of return filed under section 139 shall apply due to the mandatory provision of section 148 itself." 30. In view of the above, we are, therefore of the view that the CIT(A) has rightly held the assessment order to be invalid as the same was made on the notice under section 143(2) of the Act issued beyond the period of limitation prescribed under proviso to section 143(2) of the Act. 31. We find that ld. DR's arguments were centered mainly on two counts firstly that the notice under section 148 of the Act has been issued within the limitation period and secondly the reassessment has also been completed within the limitation period. There is no dispute about it. Even the CIT(A) has not said anything against it. The CIT(A) has held the initiation of reassessment proceedings as well as the assessment order to be invalid on different counts. These findings of the CIT(A) have not been rebutted by the ld. DR. We also find that the Id. DR has argued about deduction under section 80-O of the Act. In our opinion, the argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of belief that there was escapement of income for initiating the action under section 147 were proper and valid; (2) There was no change of opinion of Assessing Officer because assessment under section 143(3) had not been completed in the case and processing of return under section 143(1)(a) was not tantamount to assessment under section 143(3). (3) Since there was no assessment the provisions of explanation 2(b) of section 147 was applicable in the case. (4) Since the assessee had claimed excessive deductions including the deduction under section 80-O on gross amount instead of net amount, there was understatement of income by the assessee and hence provision of Explanation 2(b) of section 147 was applicable in the case. (5) The initiation of proceeding and completion of assessment under section 147 was within the limitation period as prescribed in sections 149 and 153. Action under section 147 is not barred if proceeding under section 143(3) was time barred." REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 1. As there was difference of opinion between the Judicial Member and the Accountant Member my brother learned Judicial Member has opined five po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Judicial Member was justified in holding that the initiation of proceedings under section 147 was valid or the Accountant Member was justified in holding that the initiation of reassessment proceeding was invalid inasmuch, as nowhere the Assessing Officer has recorded his satisfaction to the effect that 'he had reason to believe' that 'any income chargeable to tax has escaped assessment? (ii) Whether the Accountant Member was justified in holding that the so called reasons recorded by the Assessing Officer had any live link with the material available with the Assessing Officer? (iii) Whether the Accountant Member was justified in holding that the reasons recorded, if any, was without application of mind of the Assessing Officer as the same was put to Assessing Officer or his approval only? (iv) Whether it is only Assessing Officer's reason to believe which was necessary before issue of notice under section 148 of the Act?" THIRD MEMBER ORDER Per Shri K.C. Singhai, J.M. - The Hon'ble President, vide order dated 5-1-04, has nominated me as Third Member under section 255(4) of Income-tax Act, 1961 (in short as Act) to express my opinion on the question referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y before issue of notice under section 148 of the Act?" 2. At the initial stage of hearing it was seen that in fact there is no difference of opinion on question Nos. 3 to 5 as framed by the learned JM. The learned AM, in para 32 of his order, has clearly observed that there is no dispute to the contention of the DR that if no order has been passed on a valid return, then in view of Explanation to section 147; it will be a case of deemed escapement of income. In the same para he has also observed that there is no dispute that proceedings under section 147 were initiated within the period of limitation and the assessment has also been completed within the limitation period. Further, learned AM has not expressed any opinion regarding Question Nos. 2 4. The only dispute between the learned members centers round the validity of initiation of re-assessment proceedings. When this position was confronted to both the parties, it was rightly agreed by them that basic difference of opinion between the learned Members was on the question whether the Assessing Officer had reasons to believe that there was escapement of income. Hence, it was agreed that question to be answered may be re-fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecorded by the Assessing Officer revealed that initiation of proceedings under section 147 was for the purpose of examination only; (ii) that there was no material with the Assessing Officer for formation of belief that there was escapement of income; (iii) that reasons were not recorded by Assessing Officer himself which resulted in non application of mind by Assessing Officer. Hence, it was held that proceedings under section 147 were not validly initiated. 6. The learned counsel for the assessee has reiterated the reasons given by the learned AM while the learned DR has relied on the reasonings given by the learned JM. Hence, the same need not be repeated. 7. After considering the submissions of both the parties and going through the orders of both the learned Members, I am inclined to agree that the reasonings given by the learned AM. To appropriate the controversy, it would be appropriate here to reproduce the reasons recorded by the Assessing Officer as under: "The assessee-company has filed his return on15-12-1989. The assessment was made under section 143(1)(a) on22-1-1990. The company has claimed entertainment expenses higher side and there is no receipt of donation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague indefinite far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence." Another decision which I would like to quote is the decision of the apex court in the case of Ganga Saran Sons (P.) Ltd. wherein their Lordships observed as under: "The important words in section 147(a) are "has reason to believe" and there words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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