TMI Blog2008 (8) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001-02, instead of provisions applicable for the assessment year in question, i.e., assessment year 2000-01, as such the assessment opened and completed on a wrong reasoning be squashed; 2.That the ld. Assessing Officer has erred in law and on facts in assessing the interest earned Rs. 7,86,844 under the head "Income from other sources without appreciating the provisions of law applicable for the assessment year 2001-02 and more so ignoring the facts, that the interest has been earned by an 100 per cent export oriented unit; 3.That, without prejudice to the above Ground No. 02, the ld. Assessing Officer has erred in law and on facts in not setting off the Bank interest paid [Rs. 6,37,797] against the interest earned [Rs. 7,86,844] while computing the Income from other sources ." 4. The first issue for consideration relates to the re-opening of assessment under section 147 of the Income-tax Act, 1961 [hereinafter referred to as the Act ]. The facts of the case stated in brief are that the assessee is a hundred per cent export oriented unit engaged in export of halogen lamps and filed return of income of its income for assessment year 2000-01 on 22-11-2000 declaring N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 for the proposition that the Tribunal had jurisdiction to examine a question of law, which arose from the facts as found by the Income-tax authorities and having a bearing on the tax liability of the assessee. He also placed reliance on the decision of Hon ble Supreme Court in the case of CIT v. Varas International (P.) Ltd. [2006] 284 ITR 80 1 . Relying on the decision of Hon ble Delhi High Court ld. Sr. counsel for the assessee submitted that the question of fact can also be placed before the ITAT for the purpose of adjudication. 7. We have heard both the parties. The additional ground of appeal raised as above being purely in legal nature stands admitted in view of the decision of Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. ( supra ). 8.1 Now we will take up first the additional ground of appeal raised by the assessee. It has been submitted by the ld. Sr. counsel for the assessee that notice under section 148 of the Act was issued on the basis of return of income filed by the assessee. The return of income was filed on 22-11-2000. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. He placed reliance on the decision of ITAT Delhi Bench (TM) in the case of Asstt. CIT v. O.P. Chawla [2006] 8 SOT 242 for the proposition that notice under section 148 cannot be issued to circumvent the provisions of section 143(2) of the Act. 8.3 The ld. AR of the assessee further submitted that the assessee is hundred per cent export oriented unit. Therefore, the entire income earned from whatever source it may be, is derived from export unit. In the return of income the assessee has shown the income as other income but the same could not be treated as income from other sources. 9.1 On the other hand, the ld. CIT - DR Shri K. C. Jain, submitted that the decision in the case of M. Challapam ( supra ) rendered by Hon ble Madras High Court was in different context. In that case during the course of reassessment proceedings, notice under section 143(2) was issued beyond the period of 12 months. Likewise, in the case of C. Planiappam ( supra ) it was held that in case of reassessment issue of notice under section 143(2) of the Act within the period of 12 months was statutory. Therefore, it was held that completion of assessment without issue of notice under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income. His powers are limited to prima facie adjustments permitted in law. The instructions issued by the CBDT also do not permit him to verify the information. Placing reliance on the decision of Hon ble Kerala High Court in the case of CIT v. Abad Fisheries [2002] 258 ITR 641 the ld. CIT - DR submitted that so long as the ingredients of section 147 of the Act are fulfilled, the Assessing Officer is free to initiate proceedings under section 147 and failure to take steps under section 143(3) of the Act will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) of the Act had been issued. He also submitted that in the case of Metal Products of India v. CIT [2007] 293 ITR 618, Hon ble Punjab Haryana High Court has held that if the ingredients of section 148 are satisfied, there is no bar to initiate proceedings under section 148 of the Act. Thus this being later decision has to be considered as compared to earlier decision in the case of Vipin Khanna ( supra ). He further referred to the decision of Hon ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring to the decision of the ITAT in the case of O. P. Chawla ( supra ) submitted that the decision of Third Member is binding on Division Bench wherein it has been held that the Assessing Officer is not permitted to circumvent the provisions of section 143(2) by resorting to re-open the assessment under section 147 of the Act. 11. We have heard both the parties. In this case the return of income was filed on 22-11-2000 at NIL income. Thereafter notice under section 148 was issued on 31-1-2002 after recording the reasons in writing. From the arguments made by the ld. Sr. Counsel for the assessee with reference to the original ground of appeal as also to the additional ground relating to assumption of jurisdiction, three issues are to be decided ( i ) whether fresh material is necessary or assumption of jurisdiction under section 147; and ( ii ) whether issue of notice under section 148 amounts to circumventing of provisions of section 143(2); and ( iii ) whether reasons recorded are sufficient to assume jurisdiction under section 147 of the Act. 12.1 The issues in ( i ) and ( ii ), relates assessment procedure. Up to 31-3-1989, after the assessee filed a return of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief. 12.3 From 1-4-1989 to 31-3-1998, the second proviso to section 143(1)( a ), required that where adjustments were made under first proviso to section 143(1)( a ), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. Such intimation under section 143(1)( a ) was to be drawn and issued to the assessee, without prejudice to the provisions of section 143(2). Technically speaking the intimation issued was deemed to be a demand notice issued under section 156 that did not per se preclude the right of the Assessing Officer to proceed under section 143(2). That right was preserved and was not taken away. With effect from 1-4-1998, second proviso to section 143(1)( a ) was substituted by the Finance Act, 1997, which was operative till 1-6-1999. The requirement was that intimation was to be sent to the assessee whether or not any adjustment had been made under the first proviso to section 143(1)( a ) and notwithstanding that no tax or interest was found due f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause the newly substituted section 143(1) with effect from 1-6-1999 has done away with the making of the prima facie adjustments. 13.1 From above discussion it is clear that prior to 1-4-1989 the Assessing Officer could make assessment either under section 143(1)( a ) or section 143(3). Where an assessment was made under section 143(1)( a ), assessment order in prescribed form was issued to the assessee. After 1-4-1989 when new assessment procedure as explained as above came into existence intimation in prescribed form was issued whether any adjustment was made or not. With effect from 1-6-1999 under section 143(1) intimation is issued in cases where tax or refund was due after allowing credit for pre-paid taxes. In cases where no tax or refund is due, the acknowledgement of return of income will be deemed to be intimation under section 143(1). Thus, the legislative intent is very clear for the use of word "intimation" in place of word "assessment" under section 143(1) under new assessment scheme and consequently two different concepts i.e., ( i ) intimation and ( ii ) assessment have emerged. While making an assessment, the Assessing Officer is free to make any addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a notice of demand under section 156 for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. Nothing more could be inferred from the deeming provisions. From above discussion it is clear that issue of intimation on processing of return of income under section 143(1)( a ) with effect from 1-4-1989 till 31-5-1999 or issue of intimation/deemed intimation under section 143(1) with effect from 1-6-1999 cannot be treated as assessment. 13.2 For the purpose of making assessment under section 143(3) the Assessing Officer can issue notice under section 143(2) within the period of twelve months from the end of the month in which the return of income is furnished. Thereafter the Assessing Officer is not empowered to issue notice under section 143(2) of the Act. He has to proceed under section 147 in order to assess any income that has escaped assessment. The law relating to the reassessment has undergone a change from 1-4-1989. The change was brought in by the Direct Tax Laws (Amendment) Act, 1987. Prior to amendment two sets of provisions were avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 147, no action under section 147 will be taken after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year. Explanation 2 to section 147 gives the types cases escaping assessment. It reads as under : "Explanation 2 . For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: ( a )where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ; ( b )where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been with due diligence discerned by the Assessing Officer for the purpose of assessing a particular item of income chargeable to tax, it cannot be inferred that the Assessing Officer must necessarily have deliberated over it and taken it out while ascertaining the taxable income or that he had formed any opinion in respect thereof. If looking back within four years of the end of the relevant assessment year it appears to the Assessing Officer, that a particular item even though reflected on the record was not subjected to assessment and was left out while working out the taxable income and the tax payable thereon, i.e., while making the final assessment order, that would enable him to initiate the proceedings irrespective of the question of non-disclosure of material facts by the assessee. 17. From above one will find that within the period of four years the Assessing Officer, has power to initiate assessment or reassessment proceedings in the cases specified in clauses ( a ), ( b ) and ( c ) of Explanation 2 of section 147 of the Act. This brings us to the question whether the Assessing Officer had any reason to believe that income exigible to tax had escaped assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was the duty of the assessee to bring to the notice of the ITO particular items in the books of account or portions of documents, which were relevant. Even if it was to be assumed that from the books produced, the ITO, if he had been circumspect, could have found out the truth, the ITO might not on that account be precluded from exercising the power to assess income, which had escaped assessment. 18.3 In ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC), Hon ble Court has held that the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra ) has held that the expression "reason to believe" in section 147 would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. What is required is "reason to believe" but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer. 19. Now we will examine the facts of the case before us in the light of judicial pronouncements referred to above. In this case, the assessee filed return of income at nil after claiming deduction under section 10B on interest income earned on fixed deposits. The interest income on FDRs was shown under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest income under the head Other sources . 20. The next contention of the ld. AR of the assessee is that there should be fresh material on record in order to enable the Assessing Officer to initiate proceedings under section 147 of the Act. It is also contended that the material available in the return of income cannot form basis for re-opening of assessment. We are unable to agree with this proposition. As held above the accepting of returned income under section 143(1) is not an assessment the question of change of opinion does not arise as no opinion was formed by the Assessing Officer while accepting the return of income under section 143(1). Hon ble Kerala High Court in the case of Abad Fisheries ( supra ) has held that so long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceedings under section 147 of the Act and failure to take steps, under section 143(3) will not render the Assessing Officer powerless to re-initiate reassessment proceedings even when intimation under section 143(1) have been issued. The view of Hon ble Kerala High Court in the case of Abad Fisheries ( supra ) finds support from the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 147 immediately after expiry of period of twelve months will not in any way circumvent the provisions of section 143(2). The assessment under section 143(3) relates to verification of entire information contained in the return of income. Entire assessment is open before him. On the other hand the assessment or reassessment under section 147 relates to income that has escaped assessment. The Assessing Officer can only assess or reassess income that has escaped after recording of reasons including any other income escaped assessment that comes to his notice during the course of proceedings under section 147. Thus, the scope of section 143(2) is wider than section 147 in the sense that the income escaping assessment has to fall within the ambit of provisions of Explanation 2 of section 147. Hence it will be incorrect to say that the provisions of section 147 cannot be substituted for verification of correctness of entire information contained in the return of income. The contention of the assessee that the decision of Third Member in the case of O.P. Chawla ( supra ) is binding on the Division Bench of the ITAT wherein it has been held that provisions of section 147 canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer to re-open the assessment under section 147 of the Act. 23. The next issue for consideration in the assessee s appeal for assessment year 2000-01 relates to assessing the interest income of Rs. 6,86,844 under the head Income from other sources . The facts stated in brief are that the assessee earned interest income of Rs. 7,86,844 on FDRs and claimed the same as exempt under section 10B of the Act. The Assessing Officer assessed the income under section 147/143(3) under the head Income from other sources . On appeal, the ld. CIT confirmed the stand taken by the Assessing Officer relying on the decision of Hon ble Kerala High Court in the case of CIT v. Wandoor Jupitor Chittry (P.) Ltd. [2003] 130 Taxman 479. 24. Before us the ld. AR of the assessee submitted that the ld. CIT has not discussed the nature of interest and has upheld the stand taken by the Assessing Officer without going into the nature of the interest. Placing reliance on the decision of Hon ble Delhi High Court in the case of CIT v. Koshika Telecom Ltd. [2006] 287 ITR 479 he has submitted that the deposit of margin money to obtain license was linked to the assessee s busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and gains derived by the assessee and export oriented undertaking. The contention of the ld. Sr. Counsel for the assessee has contended that entire profits in case of hundred per cent export oriented undertaking will be from export-oriented undertaking and hence form part of exempted income in view of decision of Hon ble Bombay High Court in the case of CIT v. Puneet Commercial Ltd. [2000] 245 ITR 550 3 . We are unable to subscribe this view in the light of decision of Hon ble Delhi High Court in the case of Shri Ram Honda Power Equip. ( supra ) wherein it has been observed that in that case the Hon ble Bombay High Court noticed that according to the Tribunal, the Assessing Officer had proceeded on the footing that the interest income was business income; but that it was not income from exports. In those circumstances, the High Court held that since the entire business activities of the assessee was of exports, the entire business income was deemed to be profit derived from export of goods. It has also been observed by Hon ble Delhi High Court that from the narration of facts in the case of Puneet Commercial Ltd. ( supra ), it was not clear whether the interest earned was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a direct nexus between the interest earned and interest paid, the netting of interest is allowable. Since the Assessing Officer has not examined this issue, we set aside the matter to the file of the Assessing Officer with a direction to examine the interest paid and if it has direct nexus with the earning of interest on FDRs, the netting of interest can be allowed under section 57(3) of the Act, which provides that the income chargeable under the head Income from other sources shall be computed after making the deductions on account of any other expenditure laid out or expanded wholly and exclusively for the purpose of making or earning such income. The Assessing Officer is directed accordingly. ITA No. 4399 (Delhi) of 2005 ITA No. 2181 (Delhi) of 2004 : 29. The common issue in both the appeals relates to deduction under section 10B of the Act in respect of interest income earned on FDRs. Though this issue has been discussed at length in assessment year 2000-01 above, but since the Finance Act, 2000, has substituted the present section 10B with effect from 1-4-2001. The language employed in section 10B(1) is different from the language employed prior to its substituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Electricity Board though deposited for obtaining electricity connection was not income derived from industrial undertaking for the purposes of deduction under section 80HH of the Act. The principle laid down in the case of Cambay Electric Supply Industrial Co. Ltd. ( supra ) was followed wherein the Hon ble Supreme Court drew a distinction between the expression "derived from" and "attributable to", the latter being wider in import than the expression "derived from". It was observed that the expression "attributable to" was used when the Legislature intended to cover receipts from sources other than the actual conduct of the business. Similarly in Sterling Foods ( supra ), the Hon ble Supreme Court has held that on the language of section 80HH of the Act, the expression "derived from" is a narrower expression and so the industrial undertaking had to be the source of the profit or gain. Therefore, prior to amendment of section 10B, the income claimed exempted under this section should have direct and proximate connection with industrial undertaking. 31. With effect from 1-4-2001 the profits and gains as are derived by a 100 per cent export oriented undertaking from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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