TMI Blog2009 (12) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... lable for issuing notice u/s 143(2) has not expired. HELD THAT:- Section 147 and the related provisions are basically machinery provisions. Section 147 has been explained in detail by the Special Bench of the Tribunal in the case of Smt. Mahesh Kumari Batra [ 2005 (5) TMI 240 - ITAT AMRITSAR] . The gist of the observations in the said decision is that section 147 deals with income escaping assessment. The process entails the reopening of a completed assessment. This infringes on the sanctity of a completed assessment. Therefore, it is incumbent upon the AO to act in a fair manner and not in a partisan manner. There is no jurisdictional fact in existence which straightaway empowers the AO to enter jurisdiction. He can assume jurisdiction to reopen a completed assessment only on the basis of his own honest belief. Therefore, though section 147, in essence, is a machinery section, it also affects the substantive right of the assessee which had accrued to him on completion of original assessment. This is an example of what Chief Justice Venkatachaliah said in the case of CWT v. Sharvan Kumar Swarup and Sons [ 1994 (9) TMI 2 - SUPREME COURT] that a substantive right can be found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confers jurisdiction to reopen the assessment. So long as the ingredients of section 147 are fulfilled, the AO, is free to initiate proceedings u/s 147 and failure to take steps u/s 143(3) will not render the AO powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued.'' In the case of Qatalys Software Technologies Ltd.[ 2008 (7) TMI 240 - MADRAS HIGH COURT] , the AO s action of initiating proceeding u/s 147 was not upheld, on the ground that the time for issuing notice u/s 143(2) had not expired. Coming to the three decisions of the jurisdictional High Court, there is indeed a divergence of opinion in the two judgments, viz., one in the case of ITO v. K. M. Pachiappan [ 2007 (8) TMI 329 - MADRAS HIGH COURT] and Qatalys Software Technologies Ltd. in which the decision in the case of K. M. Pachayappan [ 2007 (7) TMI 229 - MADRAS HIGH COURT] has been followed. I am of the view that in such a situation, the decision which appeals to one s conscience more should be followed. The decision in the case of Qatalys Software Technologies Ltd. is in consonance with all the Supreme Court judgments on the issue including the one in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts from the profits while computing deduction under section 80HHC. (VI) The learned Commissioner of Income-tax (Appeals) has erred in sustaining the exclusion of 90 percent of miscellaneous income (scrap sales, etc.) from the profits while computing deduction under section 80HHC. (VII) The learned Commissioner of Income-tax (Appeals) has erred in sustaining the exclusion of 90 percent of interest income from the profits while computing the deduction under section 80HHC, without first netting off the interest expenditure against the interest income. (VIII) The learned Commissioner of Income-tax (Appeals) in his order has erred in not considering the following ground raised before him : The learned Assessing Officer has erred in assessing the interest receipts amounting to Rs. 59,27,318 under the head Income from other sources without considering the facts and circumstances of the receipts. (IX) The learned Commissioner of Income-tax (Appeals) has erred in sustaining the disallowance of the claim under section 80-IA. Ground No. 1 : Regarding validity of reopening of assessment : The assessee filed its return of income for the assessment year 2002-03 on October 30, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 148, if the conditions for initiating proceedings under section 147 are satisfied and material was available for taking up assessment proceedings. The hon ble court noted that the acknowledgement is not done by any Assessing Officer but mostly by ministerial staff. Can it be said to be assessment done by them ? The answer is an emphatic no . The intimation under section 143(1) was deemed to be a notice of demand under section 156, for the apparent purpose of making the machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation become permissible and nothing more can be inferred from the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion as contended before us does not arise. Moreover, after the amendment in section 147, the decision of the Supreme Court in the case of CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297 will not apply and the Assessing Officer does not have any embargo on his power to consider items that were not the reasons for issuing notice under section 148. Section 147 provides that the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and that any proceeding should be made on the basis of the revised return filed and not on the original return. Hence, in the instant case, there was time to issue notice under section 143(2) and complete the assessment till March 31, 2005, however he had not done the same but had proceeded, with issuing notice under section 148 on July 9, 2004, thus to extend the time limit for completing the assessment. Hence, following the above said decisions, it is submitted that the assessment is invalid in the eyes of law and hence liable to be quashed. (d) Explanation 2 to section 147 lists the cases where it shall be deemed that income chargeable to tax has escaped assessment. In the appellant s case valid return was filed and it was processed under section 143(1). There was no assessment prior to the impugned assessment under section 147. Hence, clauses (a) and (c) of the Explanation do not apply to the appellant s case. Clause (b) of the Explanation reads as follows : 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 understated the income or has claimed excessive loss, deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e orders of the lower authorities as well as the following decisions : (1) In the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in [2007] 291 ITR 500 (SC). (2) In the case of K. M. Pachayappan reported in [2008] 304 ITR 264 (Mad). After considering the rival contentions and the materials on record and the decisions cited and relied upon by both the parties, the question arises regarding the validity of the notice issued under section 148 of the Incometax Act, 1961, prior to the expiry of the period for issuing notice under section 143(2) of the Income-tax Act, 1961. This issue is purely legal in nature and there is no dispute regarding the facts relating to this issue. As per the provisions of sections 147 and 148 of the Income-tax Act, 1961, there is no bar for issuing notice under section 148 before the expiry of time available for issuing notice under section 143(2) of the Income-tax Act, 1961, if the other conditions for reopening of the assessment and initiation of proceedings under section 147 are satisfied. After amendment to section 147 with effect from April 1, 1989, the Assessing Officer is free to initiate the proceedings under section 147 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, 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 a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)). The scope and effect of section 147 as substituted with effect from April 1, 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 income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f KLM Royal Dutch Airlines [2007] 292 ITR 49 (Delhi), the decision is dated January 12, 2007 which means the said decision is prior to the decision of the hon ble apex court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500, which is dated May 23, 2007 and thus the hon ble Delhi High Court had no occasion to consider the said decision of the hon ble Supreme Court. Similarly, the decision of the hon ble jurisdictional High Court in the case of K. M. Pachayappan reported in [2008] 304 ITR 264 (Mad) has been passed without considering the decision of the hon ble Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500. We note that in the subsequent decision of ITO v. K. M. Pachiappan reported in [2009] 311 ITR 31 (Mad), the hon ble jurisdictional High Court after considering the decision of the hon ble Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 has decided the issue in paragraph 5 to 10 as under (page 35 of 311 ITR) : Section 147 authorises or empowers the Assessing Officer to assess or reassess any income chargeable to tax, if he has reason to believ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2000] 246 ITR 173, wherein the Delhi High Court held that the intimation under section 143(1)(a) of the Act could not be treated to be an order of assessment and that a distinction was well brought out by the statutory provisions as they stood at different points of time, that the intimation under section 143(1)(a) was deemed to 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 of the amount indicated to be payable in the intimation became permissible. And nothing more could be inferred from the deeming provision, the Kerala High Court held that so long as the ingredients of section 147 are fulfilled, the Assessing Officer was free to initiate proceedings under section 147 and failure to take steps under section 143(3) would not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued. The Punjab and Haryana High Court in the case of Punjab Tractors Ltd. v. Joint CIT [2002] 254 ITR 242 held that if the Assessing Officer had reason to believe that any income chargeable to tax had esca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment . . . So long as the ingredients of section 147 are fulfilled, the Assessing Officer, is free to initiate proceedings under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued. For the reasons stated above and in the light of the pronouncement of the Supreme Court and the judgments of the High Courts referred to supra, we are of the considered view that the order of the Tribunal impugned in this appeal has to be set aside and the same is set aside by allowing the appeal. The subsequent decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as to warrant interference. Following the said decision, these appeals are dismissed. Consequently, connected miscellaneous petition is also dismissed. It is clear from the decision in the case of Qatalys Software Technologies Ltd. [2009] 308 ITR 249 that the hon ble jurisdictional High Court has followed the decision in the case of K. M. Pachayappan reported in [2008] 304 ITR 264 (Mad) and the decision in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 was also not considered. The subsequent decision in the case of ITO v. K. M. Pachiappan reported in [2009] 311 ITR 31 (Mad), is the latest decision of the hon ble jurisdictional High Court on the point. When the effect of the subsequent decision is reversal/overruling of the earlier decision, then the decision in the case of Qatalys Software Technologies Ltd. [2009] 308 ITR 249 would not help the assessee. When there is diversion of views of the hon ble High Court on the same issue, then the decision which laid down the principle of law and based on the latest decision of the hon ble Supreme Court shall be followed by the lower authorities. Though, this Tribunal is no authority to distingui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(2). Accordingly, we hold that the action of the Assessing Officer in reopening of the assessment is justified and the order of the Commissioner of Income-tax (Appeals), qua this issue is upheld. Ground Nos. II and III : Regarding disallowance of bad debts : During the assessment, the Assessing Officer noted that the assessee has debited a sum of Rs. 79,39,662 to the profit and loss account being written off unrealisable receivables and advances. The Assessing Officer found from the details that the assessee had advanced a sum of Rs. 25 lakhs to the Mercantile Credit Corporation Ltd. (MCC) during the period 1996-97 and Rs. 27 lakhs to M/s. Alsa Constructions. The assessee claimed that by its memorandum and articles of association, it was authorised to invest any of the funds of the company as per clause 15 thereof. The Assessing Officer denied the claim of the assessee and held that since the regular business of the assessee was manufacturing of yarn and not money lending activity, these advances of the assessee were investment made by utilising its surplus funds and the same were capital in nature. The Assessing Officer thus disallowed the claim in respect of Rs. 25 lakhs to Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of loan interest to any public company or bank. The assessee is not doing the business of money lending as no such permission has been taken by the assessee. We further note that these advances by the assessee is also not in the course of ordinary business of the assessee or in relation to its ordinary business. Even, these advances are not for any business or commercial expediency of the assessee. Therefore, these advances are purely in the nature of investment of surplus funds by the assessee. As per clause (i) of sub-section (2) of section 36 of the Income-tax Act, 1961, the deduction of bad debts shall not be allowed unless such debts or part thereof has been taken into account in computing the income of the assessee of the previous year in which such debts or part thereof is written off or of an earlier previous year. In the case of business of banking or money lending, the money lent in the ordinary course of business is also permitted as deduction for bad debts. In the present case, the assessee is not doing banking or a money lending business. Therefore, by the provisions of section 36(2), the claim of the assessee is not allowable. The case referred to by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perly examined by the lower authorities. Accordingly, we set aside the orders of the lower authorities, qua this issue and remit the same to the record of the Assessing Officer to reconsider and decide afresh after verifying the claim of the assessee that the entire amount was offered by the assessee as income in the earlier years. Ground Nos. V, VI and VII : Regarding exclusion of 90 percent of insurance receipts, scrap sales, interest income while computing deduction under section 80HHC : We have heard the learned authorised representative as well as the learned Departmental representative and considered the relevant records. From the facts of the case, prima facie these issues are covered by the decision of the hon ble apex court in the case of CIT v. K. Ravindranathan Nair reported in [2007] 295 ITR 228. However, there is no discussion either by the Assessing Officer or by the Commissioner of Income-tax (Appeals) in respect of these issues item-wise. Accordingly, we set aside these issues to the record of the Assessing Officer to decide after discussing each and every item, whether the same are directly relating to the export activity of the assessee or not. As far as the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the relevant records. The Assessing Officer has not discussed anything on this issue ; whereas the Commissioner of Income-tax (Appeals) has disallowed the claim of the assessee by following the order of this Tribunal. The learned authorised representative for the assessee has pointed out that there is a decision of this Tribunal in favour of the assessee also on this point. He has also contended that the assessee is having an agreement with the Tamil Nadu Electricity Board regarding the electricity generated by the assessee. In view of these facts, we set aside the order of the lower authorities and remand the issue to the record of the Assessing Officer for passing a fresh order after considering the decisions of this Tribunal as well as the agreement between the assessee and the Tamil Nadu Electricity Board. Needless to say that the assessee be given an appropriate opportunity of hearing. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Ahmad Fareed (Accountant Member).-I have gone through the order proposed by learned brother in this appeal and have also discussed the issues with him. I am unable to persuade myself to sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 143(2) expired on October 31, 2002. The notice under section 148 was issued on May 12, 2004, much after the time for issuing notice under section 143(2) had expired on October 31, 2002. These facts are presented below : Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC) (Date of judgment : May 23, 2007) S. No. Particulars Date 1. Return filed (AY : 2001-02) 30.10.2001 2. Processed under section 143(1) Yes (26.11.2001) 3. Time available for issuing notice under section 143(2) 31.10.2002 4. Notice under section 148 12.05.2004 The Assessing Officer s action of initiating proceeding under section 147 was upheld by the Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500. In the case of K. M. Pachayappan reported in [2008] 304 ITR 264 (Mad), the return for the assessment year 1997-98 was filed on March 30, 1999, and the time for issuing under section 143(2) was available up to March 31, 2000. The notice under section 148 was issued on March 15, 2000, when the time for issuing notice under section 143(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts are presented below. Qatalys Software Technologies Ltd. [2009] 308 ITR 249 (Date of judgment : July 29, 2008) S. No. Particulars Date 1. Return filed (AY : 2003-04) 13.11.2003 2. Processed under section 143(1) Yes (20.12.2003) 3. Time available for issuing notice under section 143(2) 30.11.2004 4. Notice under section 148 05.10.2004 In the case of Qatalys Software Technologies Ltd. [2009] 308 ITR 249, the Assessing Officer s action of initiating proceeding under section 147 was not upheld, on the ground that the time for issuing notice under section 143(2) had not expired. It is seen that in the present case the notice under section 148 was issued before the expiry of the time available for issuing notice under section 143(2), whereas in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 the notice under section 148 was issued after the expiry of the time available for issuing notice under section 143(2). This is the crucial difference in facts, because of which the decision of the Supreme Court in the case of Asst. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147 of the Act when the time for issuance of notice under section 143(2) had not expired. Order of Third Member Pradeep Parikh (Vice-President).-There being a difference between the two Members who originally heard the appeal, the hon ble President was pleased to nominate the zonal Vice-President as the Third Member by his order dated October 13, 2009. Accordingly, I proceed to resolve the points of difference referred to the Third Member which are as follows : 1. Whether, on the facts and circumstances of the case, the proceedings initiated by the Assessing Officer under section 147 of the Act for the assessment year 2002-03, vide notice issued under section 148 on July 9, 2004, was valid. 2. Whether, on the facts and circumstances of the case, the Assessing Officer could initiate proceedings under section 147 of the Act when the time for issuance of notice under section 143(2) had not expired. The facts as narrated in the orders of both Members are not in dispute and hence, they are not repeated here. The short question for consideration is whether proceedings under section 147 can be initiated or not when the time for issuance of notice under section 143(2) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced Law Lexicon, Third Edition meant the entire process of assessment starting from the stage of filing of return under section 139 or issuance of notice under section 142(1) till the making of the assessment order. For this proposition, reliance was placed on the judgment of the Supreme Court in the case of Auto and Metal Engineers v. UOI [1998] 229 ITR 399 ; [1997] 7 SCC 734. Learned counsel after referring to several other judgments contended that it is a settled proposition that the proceedings under section 148 can be initiated when no assessment under section 143(3) can be made. The contention of the learned Departmental representative was that the assessee should not have any grievance as to whether the assessment is made under section 143 or 147 or whether it is rectified under section 154 or revised under section 263 of the Act as ultimately the assessee is going to pay the tax at the same rate. Hence, in the present case if the assessment is made under section 147 instead of section 143, there is no damage to the assessee. It was contended that when the notice under section 148 was issued in the present case, no proceedings were pending and hence, the notice was vali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of Smt. Mahesh Kumari Batra [2006] 280 ITR (AT) 34 (Amritsar) ; [2005] 95 ITD 152. The gist of the observations in the said decision is that section 147 deals with income escaping assessment. The process entails the reopening of a completed assessment. This infringes on the sanctity of a completed assessment. Therefore, it is incumbent upon the Assessing Officer to act in a fair manner and not in a partisan manner. There is no jurisdictional fact in existence which straightaway empowers the Assessing Officer to enter jurisdiction. He can assume jurisdiction to reopen a completed assessment only on the basis of his own honest belief. Therefore, though section 147, in essence, is a machinery section, it also affects the substantive right of the assessee which had accrued to him on completion of original assessment. This is an example of what Chief Justice Venkatachaliah said in the case of CWT v. Sharvan Kumar Swarup and Sons [1994] 210 ITR 886 that a substantive right can be found secreted in the interstices of procedure. This is one principle which we shall keep in mind while adjudicating the matter on hand. As mentioned earlier, in section 147 we are concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n passed thereon, it would be premature to suggest that any income of the assessee has escaped assessment. At this juncture, it is very emphatically reiterated that as per the judgment in the case of Ranchhoddas Karsondas [1959] 36 ITR 569 (SC), once a return is filed, the assessment proceedings become pending. In the light of the above principles let us examine clause (b) of Explanation 2 to section 147 which is relevant in this appeal. The same is reproduced below : 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 .. (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 understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; The Department wants to interpret the expression no assessment has been made in the above clause to mean that it also includes situation where assessment under section 143(3) is still possible but not yet made. If this interpretation is to be accepted, it will set at naught the fundamenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992] 198 ITR 297 that it is neither desirable nor permissible to pick out a word or sentence from the judgment of the Supreme Court, divorced from the context of the question under consideration and treat it to be a complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. In this context, we proceed to examine the judgment in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in [2007] 291 ITR 500. The facts in the said case have been noted by the learned Accountant Member in paragraph 25 of his order which clearly show that the notice under section 148 was issued much after the time for issuing notice under section 143(2) had expired. In other words, action under section 147 was initiated only on the termination of the proceedings under section 143(3) of the Act. Therefore, the said action was upheld by the Supreme Court which is in consonance with the earlier judgments of the same court referred to in paragraph 7 above. The observation in placitum 18 of the Supreme Court judgment has to be understood in the right perspectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose situations where the return has or has not been processed under section 143(1) but the time limit to issue notice under section 143(2) has expired. When the Legislature has logically arranged the relevant provisions, there is no need to put a specific bar in section 147/148 to the effect that the Assessing Officer cannot initiate proceedings under section 147 when the time available for issuing notice under section 143(2) has not expired. In my view, it would be quite absurd to put such a provision and it is well known that the Legislature does not waste words. The next observation of the learned Judicial Member is also in paragraph 6 which says that failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate proceedings under section 147 of the Act even when the return was processed under section 143(1) only. This observation is borrowed from the judgment in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. reported in [2007] 291 ITR 500 with which we have already dealt in paragraph 10 above. The third observation is in paragraph 10 of the order. It reads as follows : The hon ble Supreme Court has emphatically made it ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
