TMI Blog2007 (5) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that the assessee is eligible for deduction under s. 80HHC of such sales." The Revenue has raised the following grounds of appeal: "On the facts and in the circumstances of the case, the learned CIT(A)-I, Jaipur, has erred: 1. In deleting following additions made by the AO under reassessment proceeding under s. 147 of IT Act: (i) Trading addition of Rs. 25,48,728 by invoking provisions under s. 145(3) of IT Act and holding that the assessee has suppressed the profits and sales shown in the audited accounts, and manipulated the accounts according to his suitability. (ii) Disallowance out of manufacturing expenses paid to Mr. Leela Dhar Bhati amounting to Rs. 1,79,250. (iii) Disallowance out of foreign travel expenses amounting to Rs. 65,407. (iv) Disallowance out of telephone and telex expenses amounting to Rs. 23,090. (v) Disallowance out of travelling expenses amounting to Rs. 65,000. (vi) Additions under s. 68 of the Act of the total unexplained deposits in partner's capital account amounting to Rs. 22,12,679. 2. In not holding that language of s. 147 itself makes it clear that AO may assess or reassess not only income escaping assessment in respect of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent on a total turnover of Rs. 6,04,97,127 in the immediate preceding year. As per audit report the assessee was not maintaining stock register. The assessee was required vide letter No. 352, dt. 14th Nov., 2002 to explain the fall in GP rate and to file the inventories of opening and closing stock. The assessee did not file the details of inventories and did not file the details for work-in-progress and raw material issued to workers and when they were received after manufacturing of jewellery and whether the same has been included in the finished product or not. The assessee submitted an explanation that it was not possible to keep a record for each item-wise purchase, expenses, sales and profit. As regards the fall in GP rate, it was submitted by the assessee vide letter dt. 8th Jan., 2003 that due to such competition, margins are decreasing year after year and due to increasing competition buyers were in a better bargaining position, which was attributable to the declining profitability additionally affecting the assessee's profits margin and the cost of material has increased whereas the rates of sales likewise did not increase. Further, it was contended that export sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has claimed that the payment has been made and the same has been reflected in the cash book. The AO observed that the penalty was for an illegal activity i.e. the assessee was caught evading customs duty claiming that a parcel contained duty-free goods and therefore the penalty of Rs. 40,000 was levied which is not an allowable deduction and therefore the AO disallowed Rs. 40,000 and added the same to the income of the assessee. 8. Before the learned CIT(A), the assessee assailed the initiation of reassessment proceedings, invoking provisions of s. 145(3) of the Act and various additions made vide ground Nos. 1 to 11 before the learned CIT(A). The learned CIT(A) vide pp. 8 to 11 of his order, after hearing the learned Authorised Representative observed as under: "I have considered the submissions of the Authorised Representative and find that the Hon'ble Punjab Haryana High Court in the case of Vipin Khanna vs. CIT (2002) 175 CTR (P H) 335 have clearly discussed the case of the CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 and have come to the conclusion that looking to the law laid down by the Supreme Court, when proceedings under s. 147 of the Act are init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of business. I have considered the submissions of the Authorised Representative and find that the levy of penalty is on account of infringement of law which is not allowable and, therefore, looking to the facts and circumstances of the case, the addition made by the AO at Rs. 40,000 is sustained. Perusal of ground Nos. 10(i) and (ii) reproduced above shows that the AO has not allowed deduction under s. 80HHC of the counter sales made to foreign tourists. Before deciding this ground of appeal here it is mentioned that although the AO has not mentioned that this escaped income came to his knowledge during the course of reassessment proceedings but it is clear that this was on account of investigation regarding levy of penalty by the Customs Department and, therefore, this is clearly related to the reasons recorded by the AO. This is clearly an escaped income detected during the course of, reassessment proceedings on the point of levy of penalty. So far as the allowability under s. 80HHC is concerned, it has been mentioned by the Authorised Representative that the appellant's case is covered by the judgment of the Hon'ble Supreme Court based in the case of the appellant itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . and Vipin Khanna vs. CIT. Therefore, this does not require any separate discussion. These additions have already been deleted in the above discussed paras and therefore, this ground of appeal is dismissed. Ground No. 11 relates to initiation of penalty proceedings under s. 271(1)(c) of the Act. Since penalty proceedings are independent and separate proceedings, it is premature to make any comment on this point. Therefore, this ground of appeal is dismissed." 9. We have perused the facts of the case. The assessee has mainly challenged the validity of issuance of notice under s. 148 of the Act and consequently the assessment framed by the AO under s. 147 of the Act. The learned Authorised Representative argued that the payments of customs duty and penalty are very normal event in the business of the assessee and therefore the AO does not have any specific material to enable him to have a bona fide belief that some taxable income has escaped assessment and therefore the issuance of notice under s. 148 of the Act is bad in law. The goods were the samples sent by the foreign buyers which were claimed by the assessee as without duty. The customs authorities did not agree to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequently in the course of reassessment proceedings under s. 147 of the Act. 12. The learned counsel for the assessee, Dr. S.L. Jain having pleaded at length that the AO could call upon the assessee within 12 months, as provided under s. 143(2) of the Act, to produce any evidence on which the assessee may rely in support of the return filed by him. Since the AO as per proviso to s. 143(2) of the Act, failed to issue notice within 12 months from the end of the month in which the return is furnished, the returned income would be deemed to be accepted. The incomes sought to be reassessed as per the reasons disclosed are in respect of the penalty imposed by the Customs Department in respect of samples received from the foreign country. Therefore, the Department can seek information only in respect of the claim of the assessee with respect to the penalty amounting to Rs. 40,000 paid to the Customs Department and not in respect of other claims since the assessment proceedings in respect of other items of income have become final on account of non-issue of notice under s. 143(2) of the Act within stipulated period. The letter No. 352, dt. 14th Nov., 2002 issued by the AO asking for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the 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 ss. 148 to 153 referred to as the relevant assessment year)." On the bare reading of the provision, the AO is empowered to assess or reassess any income chargeable to tax which has escaped assessment. The AO is not empowered to make the assessment of the total income of the assessee but any income which has escaped assessment and also any other income chargeable to tax which has escaped assessment which comes to his notice subsequently in the course of the proceedings under this section. The scope of reassessment proceedings under s. 147 of the Act is qua the reasons recorded being germane to the commencement of proceedings whereby during the continuation of proceedings, the income coming to the knowledge of the AO, being not disclosed and/or underassessed can be a part of reassessment proceedings but not the total income as provided in the statute under s. 4 of the Act for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. Of course, in the reassessment proceedings, it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jaganmohan Rao's case, as laying down the reassessment wipes out the original assessment and the reassessment is not only confined to 'escaped assessment' or 'underassessment' but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of s. 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reassessment proceedings are initiated. The ITO cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject-matter of proceedings under s. 147. An assessee cannot resist validily initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under s. 153(2). The words 'such income' in s. 147 clearly refer to the income which is chargeable to tax but has 'escaped assessment' and the ITO's jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment claims which have been disallowed in the original assessment proceeding cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain items which had escaped assessment because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, we may now examine the validity of the letter dt. 30th July, 1998 (Annex. P-5), issued by the Asstt. CIT which has been upheld by the Dy. CIT vide his order dt. 26th Oct., 1998 (Annex P-7). There can be no dispute about the argument advanced on behalf of the Revenue that in view of the amendment made in s. 147 of the Act w.e.f. 1st April, 1989, the AO could not only assess or reassess the escaped income in respect of which proceedings under s. 147 have been initiated but also any other income chargeable to tax which may have escaped assessment and which comes to his knowledge subsequently in the course of such proceedings. This proposition is not even disputed by learned counsel for the petitioner. However, what is disputed is the action of the AO in embarking upon fresh inquiries on issues which are unconnected with the issue which forms the basis of proceedings under s. 147 of the Act. From the letter dt. 30th July, 1998, it is evident that the AO was seeking general information on other issues merely to verify the return. However, the provisions and the propositions of law with regard to the issue on and after the amendment shall apply as such as held in the case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, it has to be held that the AO had not found it necessary to require the petitioner to produce any evidence in support of the returns. Thus, the returns filed by the petitioner had become final. This finality could not be disturbed even in proceedings under s. 147 of the Act in respect of issues on which there is no material on record suggesting any escapement of income. In the present case, except for the excessive claim of depreciation there is no material to suggest any underassessment or escapement of income under any other item. There is no gainsaying the fact that in proceedings under s. 147 of the Act it is only the escaped income which has to be assessed or reassessed. Thus, we are of the considered view that as per the law laid down by the apex Court in the case of Sun Engineering Works (P) Ltd., when proceedings under s. 147 of the Act are initiated, the proceedings are open only qua items of underassessment. The finality of the assessment proceedings on other issues remains undisturbed. According to us, it makes no difference whether the assessment proceedings have become final on account of non-issue of a notice under s. 143(2) of the Act within the stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire income or the total income wherein the proceedings were held to be invalid since there was no external or internal source and/or material or information for coming at a general probe, thus the proceedings were held to be invalid. Asstt. CIT vs. Mali Chand Baid, wherein the Departmental appeal for the asst. yr. 1998-99 in which the assessment was completed under s. 143(1)(a) and the reopening was restricted qua the items for the initiation of the reassessment proceedings and not the items having no ratbl1al nexus with the reason recorded. 19. In view of the various decisions on the controversy settled, we are of the view that the AO had the option to issue a notice under s. 143(2) of the Act requiring to the assessee to produce evidence in support of the return, if he considered it necessary and ensures that the assessee had not understated the income or had not computed excessive loss or had not underpaid the tax in any manner. Such a notice could be issued only within 12 months from the end of the month in which the respective returns had been filed originally. Admittedly, no such notice had been served on the assessee within the stipulated period and it has to be held t ..... 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