TMI Blog2008 (10) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... he brief background is that the assessee is a partnership firm which is engaged in the business of manufacturing emergency lights. It filed its return of income for the assessment year 1998-99 on 29-9-1998 declaring nil income. The gross total income declared was Rs. 51,73,798 and deduction under section 80-IA of the Income-tax Act, 1961 (in short the Act ) was claimed at Rs. 51,73,798 thus resulting in nil taxable income. This return was accepted as such under section 143(1) on 3-3-2000. Subsequently after recording reasons on 8-3-2006 the Assessing Officer formed a belief that certain income chargeable to tax had escaped assessment inasmuch as the claim of deduction under section 80-IA was wrongly made and allowed. The Assessing Officer also observed that profit declared by the assessee were normally high and the expenses were low. He also observed that the conditions prescribed under section 80-IA relating to the employment of number of workers was also not fulfilled and hence wrong claim of deduction under section 80-IA. For all the above reasons the Assessing Officer initiated reassessment proceedings by making a recourse to section 147/148 of the Act. Subsequently in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d purely as per the whim of the Assessing Officer. In nutshell it is submitted that the belief of the Assessing Officer was not based on any material or information and, therefore, the assumption of jurisdiction to make reassessment under section 147 was arbitrary. The ld. counsel vehemently argued that the decision of the Apex Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500 relied upon by the CIT(A) to negate the stand of the assessee, in fact supports the case of the appellant. According to the counsel the Supreme Court has itself observed that the ingredients of section 147 are required to be fulfilled even in a case of intimation under section 143(1) of the Act. In the present case there was no cause or justification for the Assessing Officer to form a belief that certain income chargeable to tax had escaped assessment. On the other hand the ld. D.R. has defended the action of the Assessing Officer to assume jurisdiction under section 147/148 of the Act by placing reliance on the reasoning advanced by the CIT(A). 4. We have considered the rival submissions, perused the case laws cited at bar and also the material relevant on record. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n invocation of section 147 of the Act. It was, however, not been held that in each and every case where return of income is accepted in an intimation under section 143(1) of the Act proceeding under section 147 of the Act can be initiated. On the contrary what has been held is that Assessing Officer has jurisdiction to issue notice under section 148 of the Act if there was cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment . Their Lordships held as under : "The scope and effect of section 147 of the Act, as substituted with effect from 1-4-1989 as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147 separate clauses ( a ) and ( b ) laid down the circumstances under which reassessed. To confer jurisdiction under section 147( a ) two conditions were required to be satisfied: firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment and secondly he must also have reason to believe that such esca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has, therefore, been held that "reason to believe" is a mandatory precondition for assumption of jurisdiction under section 147 of the Act. It has been further held that such "reason to believe" must necessarily to be based on relevant material and that relevant material must be such that a reasonable person on information of such material would have formed a requisite belief that income of the assessee has escaped assessment. In this context it would be appropriate to refer to the judgment of Apex Court in the case of Ganga Saran Sons (P.) Ltd. v. ITO [1981] 130 ITR 1 wherein the Supreme Court inter alia observed that the expression "reason to believe" is stronger than the expression "is satisfied". It was held that belief entertained by the Assessing Officer should not be irrational or arbitrary. Alternatively put it must be reasonable and must be based on reasons which are material. Following the above judgment, the Delhi High Court in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 has held as under : " Thus the existence of tangible material, for the formation of opinion in a pre-requisite for initiation of action under section 147 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial or tangible information for the formation of the belief then in such a case, action taken under section 132 would be regarded as bad in law. It is thus, trite, that when a challenge is made to the action under section 147 of the Act what the court is required to examine is whether some material exists on record for the Assessing Officer to form the requisite belief and the reasons for the belief have a rational nexus or a relevant bearing to the information of such belief and are not extraneous or irrelevant for the purpose of the said action . But sufficiency of the grounds, which induced the Assessing Officer to act under the said section is not a justiciable issue." [Emphasis supplied] 7. In the aforestated background now we may advert to the factual position in the instant case. In this case, after the processing of return under section 143(1) the Assessing Officer recorded reasons on 8-2-2006 to initiate proceedings under section 147/148 as under : "The assessee filed return of income for the above-noted assessment year declaring total income at Rs. Nil after claiming deduction under section 80-IA amounting to Rs. 51,73,798. The assessee-firm derives income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y any material. The Assessing Officer has led no evidence whatsoever to either allege or establish that the expenses incurred were insufficient to carry out the manufacturing process. He has also led no material to assume that net profit declared by the assessee was exceptionally high rate of profit. There is also no material to allege that plant and machinery was insufficient to carry out the manufacturing process. The Assessing Officer has thus not relied upon any material or evidence, which could enable him to assume that income of the assessee has escaped assessment either by understatement of expenses or overstatement of profits. He has merely proceeded on surmises, conjectures and suspicion to observe that income of the assessee has escaped assessment which in law cannot constitute a reason to believe for invoking section 147 of the Act. Reliance is placed on the judgment of the Hon ble Supreme Court in the case of Indian Oil Corpn. v. ITO [1986] 159 ITR 956 1 wherein it was held "that the reasons to believe is not the same thing as reasons to suspect". It is a case where the Assessing Officer s belief is unsupported by any evidence and all the factors stated in the reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or distant remote and far-fetched which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment . The fact that the words "definite information" which were there in section 34 of the Act, 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 ." [Emphasis supplied] 10. In view of the above in our considered opinion the mandatory pre-condition for taking action under section 147 of the Act that the Assessing Officer should have reason to believe that income of the assessee has escaped assessment and such reason to believe must be based on some valid material has not been satisfied in the case of the appellant. 11. In light of the above in our considered opinion all of the above three factors stated in the reasons in absence of any material either individually or cumulatively can be considered a basis so as to enabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of manufacturing but was engaged in trading of finished goods. In support of his conclusion he has given the following basis : ( a )Electricity expenses incurred of Rs. 3,894 were minimal, which were just sufficient for the purpose of office use and factory use. Therefore, no electricity was used in the manufacturing process, if carried out by the assessee and the little bit manufacturing if carried out must have been with minimal labour of the workers and the major part of its turnover was of trading of finished goods; ( b )That State Excise and Taxation Department carried out the inspection of the factory at its barrier at Parwanoo to check whether the sales tax is paid on the goods sold or purchased and, it has not their concern whether finished goods or items of raw material were purchased or sold; ( c )That Central Excise Department is concerned on collecting Excise Duty payment and it does not question whether the goods were manufactured by the assessee or whether these were purchased as semi-finished or finished goods. The Assessing Officer has held that, if the assessee carried out the trading in finished goods and voluntarily pays Excise Duty than too, Central Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tools. In view of above it cannot be accepted that the assessee carried out the process of manufacturing with the aid of power which would have done more work that would have reduced the requirement of workers. Thus I am of the view that the assessee was required to employ twenty or more workers in the process of manufacturing if any carried out. It had employed only 10 to 17 workers during the year. The meagre expenses on wages also show that the workers employed were not that much as were required. This fact has been confirmed by the State Industrial Department in its certificate of registration filed by the assessee with the return for the assessment year 1996-97. As the assessee had failed to employ twenty or more workers in the process of manufacturing, therefore, the deduction claimed under section 80-IA is disallowed." ( h )The evidence of bills and vouchers cannot be regarded as sufficient evidence or conclusive evidence as in the opinion of the Assessing Officer, it is very easy to procure bills of raw material and finished goods. It has been held that it is not too difficult to get under billing in terms of price of items of raw material and over billing in terms of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n manufactured and sale rates on which sold to verify the actual profit earned on each model of emergency lights. The assessee had not furnished the same; ( e )The partner of the firm Shri Sudhir Gulati had admitted to have travelled abroad i.e. Hongkong several times before and during the financial year 1997-98. This also proved that the assessee had been suppressing the expenses to claim higher deduction under section 80-IA of the Act; ( f )The partners of the assessee sit in the head office shown at 4299/4300, Ansari Road No. 3, Darya Ganj, New Delhi. I estimate such expenses incurred at Delhi, Head Office at Rs. 50,000 per month. The above expenses are being taken in account while estimating the actual profits of the assessee because by suppressing such expenses the assessee has managed to inflate the income for claiming maximum deduction to convert its concealed taxable income into explained capital; ( g )The assessee had supplied the details of bill-wise purchases of raw material which revealed that the same item was purchased on different rates during the year. For instance many of the PCB kits of emergency lights were purchased for price ranging from Rs. 12.48 to 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies below have failed to appreciate the claim of the assessee. It was submitted that subjective considerations have been made a basis do deny the valid and legitimate claim of the assessee. It was his contention that books of account of the assessee are correct and complete and the Assessing Officer has not stated any valid reason for holding, the same to be unreliable. The ld. D.R. supported the order of the Assessing Officer and placed reliance on the findings contained in the order of assessment and submitted that on the facts of the case both the denial of deduction and computation of income by the Assessing Officer was justified. 18. We have carefully considered the rival submissions perused the order, of assessment and material placed on record. The first and foremost issue that arises for our consideration in this appeal is in respect of disallowance of claim of deduction under section 80-IA of the Act. The factual position which remains undisputed is that assessee has been manufacturing emergency light since inception i.e. 28-10-1995 i.e. from financial year 1995-96 relevant to assessment year 1996-97. The assessee has claimed deduction under section 80-IA of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only profits derived from the industrial undertaking but also derived from manufacture of article or thing in the industrial undertaking. In the instant case, the Assessing Officer has held that industrial undertaking of the assessee was not engaged in the manufacturing of emergency lights but was engaged in the trading of finished goods. The Assessing Officer has supported his conclusion by various reasons, as have been set out in para 7 above. Taking up each of them it will be seen that Assessing Officer has held that no authority including the Excise and Tax Department, Sales Tax Registration, State Industries Department verified the alleged activity of manufacturing carried out by the assessee in the industrial undertaking. The purchases made by the appellant are duly supported by purchases invoices which are duly stamped at Himachal Pradesh Barrier. The Assessing Officer has not disputed that in respect of each of the purchases the assessee has been issued Form ST XXXVI, which establish the import of raw material into Himachal Pradesh. In fact assessee has claimed sales tax exemption for such purchases as per the Himachal Sales Tax Act and Rules which has been allowed. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consumption of electricity. In the letter dated 17-3-2006, the assessee before the Assessing Officer has explained as under: "1. Reference is invited to our earlier correspondence wherein we have explained the manufacturing process. We were using soldering iron for manufacturing which consumed power 10W to 25W each. Thus if 10W soldering iron was used for 100 hours or 25W soldering iron was used 40 hours, the electric consumption was of 1 unit only. The process of soldering required moderate heating (in the absence of fans etc.) to mount chips/transistors on PCB. Automatic screw drivers consumed power of about 15W each. There were two such screw drivers. Testing equipments were three to finally test the lights manufactured. They also consumed very low power, like 10W to 25W. All these equipments were used only when their requirement arose. Thus power consumption on these was quite low. But we manufactured our goods with the aid of power. Without soldering iron, automatic screw drivers and testing equipments, we could not manufacture emergency lights. This is clear and there is no ambiguity in this. The power consumption was low but there was use of power in our manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material the assessee had duly stated before the Assessing Officer as under: "3. Your allegation that finished packed goods were purchased is baseless as we have already explained how many times our products was checked by Barrier authorities and Excise authorities. Barrier authorities were interested in checking the sale tax incentive was available on manufacturing only. The Excise authorities used to visit our factory and verify the raw material and finished goods from time to time. There was thus no question of bringing finished goods to Parwanoo in the garb of raw material. We are also enclosing bills of purchases which clearly show that we imported raw material only. All packing material like printed boxes (inner box), thermocol, polythene, packing tape etc. were received from the suppliers along with raw material. Their cost was included in the cost of raw material. We are enclosing copy of some bills to prove this point. There was no need to purchase packing material from outside. The printed (inner) boxes were packed in outer cartons in which the raw material was received. The expenditure on packing material shown in the profit and loss account shows petty items like ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial and, thus, the same cannot be made any basis. In view of above we find that each of the basis given by the Assessing Officer to hold that the assessee was not engaged in the business of manufacturing of industrial undertaking is untenable and unsubstantiated and, therefore, unsustainable. We, therefore, hold that the assessee was engaged in the business of manufacturing of emergency lights and the profits derived from the industrial undertaking, were from manufacturing of emergency lights and not derived from trading of emergency lights. 25. The next issue which has also been raised by the Assessing Officer to disallow claim of deduction under section 80-IA of the Act is that the assessee had not employed adequate number of workers to carry on the business of manufacturing as have been stipulated in section 80-IA(2) clause ( iv ) of the Act. According to the Assessing Officer the assessee ought to have employed twenty employees as the business of the assessee had been carried out without the aid of the power. This finding of the Assessing Officer is factually incorrect and legally misplaced. No evidence has been placed on record to establish that the business of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs including vouchers. The Assessing Officer has not recorded any finding or has not found any defect much less any specific defect in the books of account. He has not established in any manner that either sales were suppressed or any of the expenditure incurred were bogus. The Assessing Officer s conclusion that the profits declared were exorbitant is based on general hypothesis and presumptive assumptions. The Assessing Officer has applied the rate of 7 per cent of the turnover to compute the profit of the industrial undertaking whereas the assessee has declared 19 per cent of the turnover. Firstly no basis has been given by the Assessing Officer to adopt 7 per cent and, therefore, the same is otherwise unsustainable, in light of the judgment of the Apex Court in the case of State of Orissa v. Maharaja B.P. Singh Deo [1970] 76 ITR 690 wherein it has been held as under: "Apart from coming to the conclusion that the material placed before him by the assessee were not reliable, the Assistant Collector has given no reasons for enhancing the assessment. His order does not disclose the basis on which hehas enhanced the assessment. The mere fact that the material placed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ari Road and on Trademark. It has been established that travelling to Hongkong was undertaken by the partner in connection with his independent and separate business and the premises at Ansari Road, Delhi belonged to one of the partners and as such no rent was paid as is evident from the evidence placed in Paper-Book. So far as trademark expenses, it has not been shown that any expenditure was incurred, which remained to be account for in the books of the assessee. In view of above Assessing Officer was not justified in holding that books of account are not reliable or restricting the profits from 18.53 per cent to 7 per cent. We, therefore, conclude that the entire profits declared by the assessee were correct and same were eligible for deduction under section 80-IA of the Act. 30. Taking up the appeal for assessment year 1999-2000. The foremost issue raised hereto is in respect of initiation of proceedings under section 147 of the Act. The reasons recorded by the Assessing Officer are identical to the reasons recorded for assessment year 1999-2000 other than two additional reasons i.e. provisions contained in sections 80-IA(9) and (10) of the Act are attracted and the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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