TMI Blog2004 (6) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income of Rs. 4,22,400 was filed on 27th Oct., 1997. It is seen that the assessee's only source of income is interest on deposit with M/s Herbertsons Ltd. amounting to Rs. 7,76,712. This interest is against the deposit of Rs. 25,00,000 made by the assessee with this company. Interest income is assessable under the head income from other sources and only such expenses are allowable under s. 57 which have been incurred for earning of interest income. It is seen that assessee incurred an expenditure of Rs. 42,000 under the head salary, Rs. 30,000 under the head rent and various other expenses. These expenses are not allowable under s. 57 as the same have not been incurred for earning of interest income on deposit with M/s Herbertsons Ltd. It is further seen from the examination of balance sheet that the assessee has obtained loan of Rs. 48,00,534.32 which has been invested in deposit with M/s Herbertsons Ltd. and M/s Kripa Traders. The deposit with M/s Kripa Traders is Rs. 2,00,000. The assessee is partner in M/s Kripa Traders and in subsequent years share of profit in M/s Kripa Traders has been claimed as exempt being tax paid profit. Accordingly, payment of interest on unsec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O vide intimation under s. 143(1)(a) of the Act. He stated that before initiating the proceedings under s. 147, the AO has to satisfy the two conditions, namely, that he has "reason to believe" and that the income chargeable to tax has "escaped assessment". In the notice under s. 148, the AO has mentioned the words "to reassess" the income. It postulates that it was the income of the 'AOP' which has escaped the assessment. But the AO has passed the assessment order treating the assessee as 'registered firm'. The learned counsel stated that the firm was never in existence and, therefore, the question of any escapement of income of the firm did not arise. He argued that once the AO has treated the interest income from M/s Herbertsons Ltd. as business income, he was not justified in restricting the expenses which were allowable under s. 57 of the Act and not under s. 37. He also argued that the AO has not invoked the provisions of s. 14A of the Act and, therefore, the apportionment of the expenses was also not permissible. The reliance was placed on the decisions CIT vs. Cotton Fabrics Ltd. (1981) 23 CTR (Guj) 247 : (1981) 131 ITR 99 (Guj), CIT vs. Madan Lal Jain (1982) 136 ITR 409 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of ss. 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 ss. 148 to 153 referred to as the relevant assessment year). In the newly substituted s. 147, w.e.f. 1st April, 1989, the AO, 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 ss. 148 to 153 of the Act, to assess or reassess the income and any other income chargeable to tax which has escaped the assessment. The section, therefore, envisages two important concepts for initiation of reassessment proceedings- (1) Reason to believe; and (2) Escapement of income. The concepts "reason to believe" and "escapement of income" have been considered and interpreted by various Courts including the Hon'ble Calcutta High Court in the case of Bibhuti Bhushan Ghosh vs. ITO Ors. (1993) 203 ITR 536 (C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court is required to examine is whether some material exists on record for the AO to form the requisite belief and the reasons for the belief have a rational nexus or a relevant bearing to the formation of such belief and are not extraneous or irrelevant for the purpose of the said section. But the sufficiency is not justiciable." 9. Keeping in view the above judicial pronouncements, we have examined the facts of the case. We find that the AO has issued notice under s. 148 but without mentioning the status of the assessee. But as the AO wanted to reassess the income of the assessee who had filed the return of income in the status of AOP, the AO has to hold that the income of the AOP has escaped assessment. As the assessment order has been passed in the status of registered firm, the initiation of proceedings under s. 148 has no co-relation with the assessment order passed in the status of registered firm. On this very ground itself, the assessment order passed by the AO suffers from infirmity. Even assuming that it was the income of the firm which has escaped assessment, then the AO has to "assess" the income under s. 147 and not "reassess" the income of the registered firm as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , while changing the status of the assessee, clearly omitted to consider this vital fact. We, therefore, hold that as the reassessment order passed in the status of 'registered firm' has been passed without issuing a notice under s. 148 to the registered firm, the assessment order itself was illegal and the same is cancelled. 11. In the result, the appeal directed by the assessee is allowed. 12. Now, we will take up the appeals for asst. yrs. 1998-99 and 1999-2000. In both the years also, the assessee had challenged the assumption of jurisdiction under s. 147 of the Act. The learned counsel has reiterated the arguments challenging the assumption of jurisdiction under s. 147 of the Act. From the assessment order, we find that while passing the reassessment order, the AO had disallowed the part of expenses on account of being relatable to the exempted income and also disallowed the part of interest paid on borrowed funds. 13. We have examined the issue of initiation of proceedings under s. 147 and the assessment order made thereunder in the asst. yr. 1997-98. As the facts during the year are the same, keeping in view our finding in the asst. yr. 1997-98, we hold that the reasse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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