TMI Blog2006 (8) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... e as per the provisions of law. The Assessing Officer is within his right to deny credit for the TDS but he cannot bring to the charge of tax the income, which is not assessable in the hands of the assessee. Thus, we hold that the relevant interest income is not chargeable in the hands of the assessee and we direct the Assessing Officer to exclude such income from the assessee s total income for all the assessment years under appeal. The Assessing Officer is also directed to withdraw the credit in respect of TDS allowed to the assessee for all the assessment years. Expenditure in respect of use of motor car, telephone, printing and stationery - Nature of expenditure - HELD THAT:- No material was produced before us to controvert the finding of the ld CIT(A) or to show that no part of the expenditure is in the nature of personal expenditure of the assessee. The ld CIT(A) has sustained disallowance merely at 10 per cent. of the telephone expenses, motor car and depreciation on motor car. In the facts of the case, this cannot be said to be unreasonable or excessive. The disallowance of printing and stationery expenses have been deleted by the ld CIT(A) except for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax (Appeals) has not annulled the assessment but has given partial relief. The appellant is entitled to refund on the taxes paid under self-assessment for the return filed in response to notice under section 148 of the Income-tax Act, 1961. 3. Under the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in holding no refund of self assessment paid on revised return of income filed in response to notice under section 148 of the Income-tax Act, 1961, having not annulled the assessment proceedings and having given past relief only. 4. Under the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in holding that no refund of self-assessment tax paid as per return of income filed in response to notice under section 148 of Income-tax Act, 1961, having held that the interest accrued on the bank accounts disclosed in the return of income Rs. 12,74,733/- does not belong to the appellant. 5. The interest income accrued on client accounts does not belong to the appellant in view of the various courts decisions. Even if such interest income is offered for taxation under protest/under wrong advice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in the nature of deposits held by the assessee on behalf of the clients and to be utilized only for discharging the obligations of the clients. The assessee maintained a separate bank account in respect of such deposits. On these deposits, which are kept in a separate bank account, interest was credited by the bank on accrual basis. However, such interest was not declared by the assessee in the original returns of income filed by him. Thus, such income was not offered to tax. Admittedly, tax at source was deducted by the bank on such interest income credited to this bank account and the bank also issued TDS certificate in the name of the assessee. Even though, the assessee had not disclosed the interest income in the returns of income, he claimed credit for the TDS. The returns of income were processed under section 143(1) resulting into issue of intimations to the assessee allowing credit for the TDS. The relevant income for which the assessee claimed credit for TDS, was not disclosed in the returns of the income filed by the assessee and therefore, the Assessing Officer initiated proceedings under section 147 and notices under section 148 were issued for the relevant assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant as per the High Court Rules. The appellant relied on following decisions : Tanubai D. Desai [1972] 84 ITR 713 (Bom) Manilal Kher Ambalal and Co. [1989] 176 ITR 253 (Bom) The interest on clients account referred to above was declared in the return of income in response to notice under section 148 under duress and with the condition that no penalty proceedings/prosecution under the Income-tax Act, 1961, shall be initiated. The appellant had wrongly fully declared the interest on clients account as income in the return of income filed in response to notice under section 148 of the Income-tax Act, 1961, under a mistaken belief that it was not to be taxed by the Assessing Officer. The action of the Assessing Officer taxing the interest of Rs. 12,74,773/- tant amounts to contempt of court. If the claim of the appellant for TDS on such interest was not found to be admissible only the claim for TDS should have been disregarded. The appellant has produced before me copies of the books of account to substantiate the claim that interest accrued on the bank account wherein amounts received from clients are deposited, is apportioned to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in response to notices issued under section 148 to buy peace of mind and to avoid litigation on the condition that penalty proceedings under section 271(1)(c) will not be initiated and the interest chargeable under sections 234B and 234C shall be waived. However, the Assessing Officer initiated penalty proceedings and also levied interest. It is true that subsequently, the penalty proceedings under section 271(1)(c) were dropped by the Assessing Officer but substantial interest has been charged under sections 234B and 234C. Learned counsel submitted that in the letters, which were filed along with the returns of income, it was clearly stated that the interest income belongs to the clients and not taxable in the hands of the assessee but still a conditional offer was made. Learned counsel argued that in these circumstances, the assessee is entitled to dispute in appeal the inclusion of such interest income in his total income as the assessee is saddled with substantial liability on account of charging of interest. It is further submitted that even though, the assessee has offered any income in the return of income, he is not precluded from raising this issue in appeal and that this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the then existing income-tax laws in the State of Sikkim and could not be charged to tax under the Income-tax Act, 1961. 11. Drawing support from the aforesaid judgment of the hon ble Bombay High Court, learned counsel for the assessee forcefully contended that the assessee is free to raise the issue regarding taxability of interest income even though, the assessee disclosed such income in the return. 12. Coming to observations of the learned Commissioner of Income-tax (Appeals) that section 240 read with proviso (b) is against the assessee, learned counsel invited our attention to the relevant provisions, which are reproduced below : Refund on appeal, etc. 240. Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf : Provided that where, by the order aforesaid, (a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Coming to the merits of chargeability to tax of the relevant interest income, learned counsel for the assessee submitted that the issue is squarely covered in the assessee s favour by the decision of the hon ble Bombay High Court in the case of Tanubai D. Desai [1972] 84 ITR 713. In that case also the assessee was a practicing solicitor of the hon ble Bombay High Court and in the course of carrying on his profession, the assessee used to receive moneys from or on behalf of his clients and the same were deposited by him in a separate bank account. From this account, the assessee withdrew a sum of Rs. 3,25,000/- and placed it in fixed deposit with the bank. The fixed deposit was renewed from time to time. The assessee earned interest income on the fixed deposit, which was also appropriated by him. Thus, the assessee never adjusted the interest earned by apportioning to different clients whose amounts were held in the said current account. This interest income was not shown in the returns of income filed by the assessee for four assessment years and the assessments were completed on the basis of the returns. Subsequently, the reassessment proceedings were taken under section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Learned counsel contended that this decision of the hon ble Bombay High Court is fully applicable to the facts of the assessee s case. It is submitted that at the most the credit allowed by the Assessing Officer for TDS can be withdrawn. 17. The learned Departmental representative forcefully supported the orders of the Revenue authorities and reiterated that the amount voluntarily shown by the assessee in his returns of income cannot and should be excluded from the total income of the assessee. 18. We have given a careful consideration to the rival submissions made before us. We have also carefully gone through the relevant facts and the judicial pronouncements cited before us. In our view, the grounds raised by the assessee in the appellate proceedings to the effect that the interest income disclosed by him in the returns of income filed in response to notices issued under section 148 must be excluded from his total income, has to be entertained and dealt with on merits. The hon ble jurisdictional High Court s decision in the case of Nirmala L. Mehta [2004] 269 ITR 1 (Bom) squarely applies to the facts of this case. In that case also the hon ble Bombay High Court observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the assessee had even appropriated the interest income for his own benefit. Nevertheless, the High Court held that the income cannot be brought to the tax in the hands of the solicitor. Any other action can be taken against the assessee for unauthorisedly converting the clients money for his own benefit but such income cannot be brought to the charge of tax. The case of the assessee is on a better footing. The assessee has maintained separate account and has also apportioned the interest income to the respective accounts of the clients. It is notable that even the learned Commissioner of Income-tax (Appeals) held on merits that the interest income was not taxable legally in the hands of the assessee. At paragraph 4.2 of his order, the learned Commissioner of Income-tax (Appeals) held as under : From the facts of the case, the rules of the hon ble Bombay High Court and the judgments relied upon by the appellant, it is clear that interest accrued on bank account referred to above, would not belong to the appellant as long as the appellant apportioned the interest accrued to the respective clients account. 20. Thus, while accepting the claim of the assessee on merits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Commissioner of Income-tax (Appeals), but he forcefully contended that in an assessment made by the Assessing Officer under section 147 of the Act, he cannot make such disallowances in respect of matters which have reached finality in the original assessment and which are not in the nature of any escapement of income within the meaning of section 147. Learned counsel for the assessee pointed out that the original assessment was made under section 143(1) and thereafter no notice under section 143(2) was issued. Notices for the relevant assessment years were issued under section 148 for the limited purpose of bringing to the charge of tax the interest income. However, during the course of reassessment proceedings, the Assessing Officer made enquiries regarding various expenses and thereafter he made disallowances. It is argued that this is not permissible under law. Learned counsel strongly relied on the decision of the hon ble Punjab and Haryana High Court in the case of Vipan Khanna v. CIT [2002] 255 ITR 220. The relevant part of the ratio of this case is reproduced from the headnotes as under : According to the law laid down by the hon ble Supreme Court in CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 subsection (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 1. Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. 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 furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not approved by the hon ble High Court. 27. This issue arose before the hon ble Supreme Court in the case of V. Jaganmohan Rao v. CIT and CEPT [1970] 75 ITR 373 and the ratio of this case may be reproduced from the headnotes : Once proceedings under section 34 are validly initiated the jurisdiction of the Income-tax Officer is not restricted to the portion of the income that escapes assessment. Section 34 in terms says that once the Income-tax Officer decides to reopen the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice under section 22(2) and may proceed to assess or reassess such income, profits or gains. Therefore, once assessment is reopened by issuing a notice under sub-section (2) of section 22, the previous underassessment is set aside and the whole assessment proceedings start afresh. Once valid proceedings are started under section 34(1)(b) the Income-tax Officer not only had the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. 28. The hon ble Supreme Court was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment 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 [1970] 75 ITR 373 (SC), as laying down that reassessment wipes out the original assessment and that 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 section 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 context of the question under consideration and treat it to be the complete law declared by this 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 this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of assessment in respect of matters, which are not the subject-matter of proceedings under section 147. An assessee cannot resist validly 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 section 152(2). The words such income in section 147 clearly refer to the income, which is chargeable to tax but has escaped assessment and the Income-tax Officer 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 proceedings cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain income, 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 proceedings also cannot be permitted to be agitated in the reassessment proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting and stationery. These expenses stood allowed as the returns were accepted under section 143(1). The relevant assessments were reopened for the purpose of bringing to the charge of tax, the relevant interest income. During the course of the reassessment proceedings, the Assessing Officer noticed that the assessee had claimed the entire expenditure under section 37(1) and no part of the expenditure was disallowed by the assessee for personal use. He, therefore, asked the assessee to furnish the details. However, the assessee neither furnished any details nor any satisfactory explanation. In these circumstances, the Assessing Officer estimated the expenditure for personal use at around 20 per cent. In these facts, it would be too far fetched to hold that the Assessing Officer made any roving, fishing or general enquiries so as to make the assessment de novo. The Assessing Officer only observed that personal use cannot be ruled out and therefore, he asked the assessee to furnish the details. In our view, under section 147 and in the light of the legal position as discussed above, the Assessing Officer is within his jurisdiction to disallow part of the expenses which are not wholl ..... 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