TMI Blog2011 (2) TMI 738X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the assessee had asserted that it is a developer in the returns filed by him, it cannot be said that there is any failure on the part of the petitioner to disclose fully and truly all material facts - In the circumstances, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the assessment year under consideration, the assumption of jurisdiction under section 147 of the Act after the expiry of four years from the end of the relevant assessment year is illegal and invalid - Decided in favor of the assessee - 15992 of 2010 - - - Dated:- 2-2-2011 - HARSHA DEVANI MS., ANTANI H. B., JJ. JUDGMENT Ms. Harsha Devani J.- 1. The petition under article 226 of the Constitution of India challenges the notice dated March 12, 2010, issued by the respondent under section 148 of the Income-tax Act, 1961 ("the Act"), reopening the assessment of the petitioner for the assessment year 2003-04. 2. The petitioner, a firm, filed a return of income on November 29, 2003, declaring total income at nil. Along with the return, the petitioner submitted a statement of income in which deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in a case where section 147 of the Act has been invoked beyond the period of four years from the end of the relevant assessment year, for the purpose of valid assumption of jurisdiction, two conditions are required to be satisfied ; firstly, that there is escapement of income, and, secondly, that such income has escaped assessment on account of failure on the part of the assessee (i) to make a return under section 139(1) of the Act ; or (ii) to file a return in response to a notice under section 142(1) of the Act or section 148 of the Act ; or (iii) failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. 6. Referring to the reasons recorded : it was submitted that all that is recorded in the reasons is that, "On verification of the details, it is noticed that the assessee is merely a works contractor and has not undertaken any developing and building housing project approved by the local authority and hence, the claim of the assessee for deduction under section 80-IB(10) of the Act is not in accordance with law." It was submitted that in the entire reasons, there is not even a whisper to the effect that income has escap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year under consideration. According to the learned advocate from the reasons recorded, it is apparent that the assessment is sought to be reopened on a mere change of opinion and that the successor Assessing Officer, based on the same material to which the Assessing Officer had applied his mind and granted deduction, is now of the view that the asses-see is not entitled to deduction under section 80-IB(10) of the Act. The reopening of assessment is, therefore, without any valid basis. 7. It was submitted that in any case, the assessment is sought to be reopened after the expiry of a period of four years and, the reasons recorded do not indicate any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the assessment year in question and as such, the assumption of jurisdiction under section 147 of the Act after the expiry of a period of four years from the end of the relevant assessment year is not valid. 8. Referring to the affidavits filed by the respondent in response to the petition, it was submitted that in the first affidavit, the respondent has stated that the petitioner had made incorrect claim and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y affidavits. 12. It was, accordingly, urged that when the reasons recorded do not indicate any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment, the respondent Assessing Officer cannot be permitted to supplement the reasons recorded by affidavit by devising new grounds not envisaged when the reasons for reopening were recorded. It was submitted that, according to the respondent, the petitioner had made a wrong claim stating that it was a developer, whereas the petitioner claimed to be a developer and had, accordingly, filed the return of income along with relevant documents. It was submitted that it is not the case of the respondent that the formation of belief that income has escaped assessment is based on any material subsequently collected. The very same material which was filed by the petitioner during the course of assessment has been considered by the Assessing Officer for the purpose of reopening the assessment. According to the learned advocate the petitioner is required to disclose all primary facts but not inferential facts. The petitioner had claimed that it was a developer. As to whether the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out that in the facts of the said case, the court had observed that if one looks at the report submitted by the Assessing Officer, it would not be possible to say that the Income-tax Officer had any non- disclosure of material facts by the assessee in mind when he assumed jurisdiction. However, the court had observed that it has to be remembered that in sending a report to the Commissioner, the Income-tax Officer might not fully set out what he thought amounted to a non-disclosure, because it is conceivable that the report may not be drawn up carefully and may not contain a reference to all the non-disclosure that operated on his mind. The court, thereafter, looked into the affidavit sworn by the same Income-tax Officer who had started the section 34 proceedings and observed that it was reasonable to accept that in the said affidavit which was his opportunity to tell the court what non-disclosure he took into consideration, he would state as clearly as possible the material facts in respect of which there had not been in his view a full and true disclosure. It was, accordingly, submitted that the decision in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner was only a works contractor and not a developer, was to the exclusive knowledge of the petitioner and that the petitioner claimed deduction giving wrong particulars about his status, by claiming to be a developer, though he was only a works contractor. It was submitted that in the circumstances, the petitioner having failed to disclose fully and truly all material facts necessary for its assessment, the assumption of jurisdiction under section 147 of the Act is valid. 17. Reliance was also placed upon the decision of the Supreme Court in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC), wherein the court has held that one of the purposes of section 147 appears to be to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say "you accepted my lie, now your hands are tied and you can do nothing". It would be a travesty of justice to allow the assessee that latitude. It was submitted that the petitioner having willfully made a false or untrue statement asserting that it is a developer, cannot now be permitted to turn around and say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that an affidavit bringing out new grounds cannot be considered for the purpose of examining the validity of assumption of jurisdiction under section 147 of the Act, even in the affidavit except for stating that the petitioner had made an assertion that it is a developer which according to the Assessing Officer is a wrong assertion, nothing has been stated as to what is the nature of the non-disclosure made by the petitioner. 20. Various other decisions of the Supreme Court as well as High Courts have been cited by the learned advocates for the respective parties, how-ever, with a view to avoid prolix, the same are not referred to hereinabove. Reference has been made to the relevant decisions in the body of the judgment. 21. In the background of the aforesaid facts and contentions, the principal issue that arises for consideration is as to whether the Assessing Officer has assumed valid jurisdiction under section 147 of the Act by issuing the impugned notice under section 148 of the Act. Another issue that arises for consideration is as to whether it is permissible for the court to look beyond the reasons recorded by the Assessing Officer and consider the new groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 80-IB(10) of the Income-tax Act, is not in accordance with law. Finance (No. 2) Act, 2009, has amended the section 80-IB(10) by way of inserting the Explanation with retrospective effect from April 1, 2001. After the introduction of Explanation in the section there is a change in legal matrix, and the deduction under section 80-IB(10) is not available to an enterprise which execute the housing project as a works contractor. In view of the above, I have every reason to believe that due to illegitimate claim of the deduction of Rs. 13,45,211 made and allowed to the assessee under section 80-IB(10) of the Income-tax Act, the income chargeable to tax has escaped assessment within the meaning of section 147 of the Income-tax Act." 24. On a plain reading of the aforesaid reasons, it appears to be the case of the Assessing Officer that upon verification of the details he has noticed that the assessee is merely a works contractor and has not undertaken any developing and building housing project approved by the local authority and as such the claim made by the assessee for deduction under section 80-IB(10) of the Act is not in accordance with law. The basis for format ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the petitioner that the averments made in the affidavits cannot be considered for the purpose of deciding the validity of initiation of proceedings under section 147 of the Act and that it is the only the reasons recorded, which can be looked into requires to be examined. 26. In this regard it may be germane to refer to various decisions of the Supreme Court, wherein while examining the validity of reopening of assessment, the court has taken into consideration affidavits filed by the Assessing Officer. 27.In Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) the Supreme Court had made the following observations (pages 203, 205) : ". . . It has to be remembered, however, that in sending a report to the Commissioner, the Income-tax Officer might not fully set out what he thought amounted to a non-disclosure, because it is conceivable that the report may not be drawn up carefully and may not contain a reference to all the non-disclosures that operated on his mind. We have, however, on the record an affidavit sworn by the same Income-tax Officer who started the section 34 proceedings. It is reasonable to expect that in this affidavit which was his opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the prerequisite to issue of notice under section 34(1)(a) being not fulfilled, the Income-tax Officer had no jurisdiction to issue the notice. The Supreme Court after considering the counter-affidavit filed in the High Court by the Income-tax Officer controverting the allegations of the assessee that all material facts were fully and truly disclosed at the original assessment stage and ascertaining that the assessee had failed to disclose the existence of the bank account in the name of his father-in-law, benami for the benefit of the assessee and to disclose fully and truly the basic facts in respect of the sources of the alleged cash credits, was of the opinion that there was some material before the Income-tax Officer on which he formed the prima facie belief that the assessee had omitted to disclose fully and truly all material facts and in consequence of such non-disclosure, income had escaped assessment. 30. In Madhya Pradesh Industries Ltd. v. ITO [1970] 77 ITR 268 (SC), which again was a case of reopening of assessment under section 34(1)(a) of the Indian Income-tax Act, 1922, the court had observed as follows (page 276) : "In those cases, the company in its wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such affidavit were not in conformity with or were contrary to the reasons recorded by him for reopening the assessment, and it further appears that although in those cases where the recorded reasons were not produced before the court below or before the Supreme Court, yet neither the court nor the assessee asked for production of the recorded reasons. The court held that it is true that section 148(2) of the Income-tax Act does not say that the Income-tax Officer shall record all the reasons which he has in mind for reopening the assessment or for formation of his belief that income of the assessee had escaped assessment or has been under-assessed on account of the assessee not having made full and true disclosure of his income, but the section does not also say that the Income-tax Officer would record only some of the reasons and keep others up his sleeve to be disclosed before the court if his action is ever challenged in a court of law. The recording of reasons is not an idle formality, but it is a mandatory requirement of the statute casting a duty and obligation on the Income-tax Officer to record his reasons for issuing a notice for reopening an assessment and the Central B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes to his notice subsequently in the course of the proceedings under the section. The first proviso to section 147 has no application in the facts of this case. The basic postulate which underlies section 147 is the formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. The Assessing Officer must have reason to believe that such is the case before he proceeds to issue a notice under section 147. The reasons which are recorded by the Assessing Officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned. The recording of reasons distinguishes an objective from a subjective exercise of power. The requirement of recording reasons is a check against arbitrary exercise of power. For it is on the basis of the reasons recorded and on those rea-sons alone that the validity of the order reopening the assessment is to be decided. The reasons recorded while reopening the assessment cannot be allowed to grow with age and ingenuity, by devising new grounds in replies and affidavits not envisaged when the reasons for reopening an assessment were recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to refer to certain statutory provisions. Section 147 of the Act lays down that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 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 the section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. The proviso to section 147 of the Act lays down that where an assessment under sub-section (3) of section 143 or section 147 has been made for the relevant assessment year, no action shall be taken under section 147 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imself. 39. Thus, the scheme of the Act as emerging on a plain reading of the aforesaid provisions indicates that for the purpose of assuming jurisdiction under section 148 of the Act, the Assessing Officer is required to record his reasons for doing so as laid down under sub-section (2) of section 148 of the Act. In respect of a case which has been subject-matter of scrutiny under section 143(3) or section 147 of the Act, notice under section 148 of the Act cannot be issued after the expiry of a period of four years from the end of the relevant assessment year, unless the Chief Commissioner or the Commissioner, as the case may be, is satisfied on the reasons recorded by the Assessing Officer that it is a fit case for issue of such notice. Thus, reasons recorded form the foundation for assumption of jurisdiction under section 147 of the Act. In a case which falls under the proviso to sub-section (1) of section 151, the Chief Commissioner or the Commissioner, as the case may be, is required to be satisfied on the reasons recorded as to whether it is a fit case for issuing of such notice. The reasons would form the basis of such satisfaction. If the reasons do not fulfil the pre- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the reasons, though the same may be elaborated by filing an affidavit. But in the absence of formation of any such belief being recorded in the reasons, it is not open for the Assessing Officer to express formation of such belief for the first time by way of affidavit-in-reply filed in the court. This court is in agreement with the view taken by the Calcutta High Court in the case of East Coast Commercial Co. Ltd. v. ITO [1981] 128 ITR 326 (Cal) that the Assessing Officer in his affidavit filed in the court can explain or elaborate or clarify the reasons recorded by him, but cannot thereby introduce new grounds or new reasons or new materials which were not to be found in the recorded reasons either expressly or by implication. 41. On behalf of the Revenue, strong reliance has been placed upon the decision in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), to submit that in the said case, the Constitution Bench of the apex court has considered the affidavit filed by the Assessing Officer and as such, it is always permissible for the court to look into the affidavit filed by the Assessing Officer in support of the reasons recorded by him. However, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material, and necessary for assessment will differ from case to case. In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts ; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and, taking all these together, to decide what the legal inference should be. There can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? It may be pointed out that the Explanation to the sub-section has nothing to do with 'inferences' and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose 'inferences'-to draw the proper inferences being the duty imposed on the Income-tax Officer. We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this." 44. Examini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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