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Sri N. Govindaraju Versus Income Tax Officer Commissioner of Income Tax

[2015] 377 ITR 243 (Kar) - Validity of reopening of assessment - when the reason recorded for reopening the assessment under section 147 itself does not survive, can tax be levied by the Assessing Officer for a totally different reason or issue, which was not the subject matter of reopening the assessment - assessment was reopened for the purpose of assessing the income from the sale of property under section 45(2) of the Act and denying the benefit of indexation. The reassessment was completed .....

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al income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to 'such income' and the other to 'any other income') are to be read independently. The phrase 'such income' used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase 'any other income' used in the second part of the section is with regard to where no reasons have been recorded before issuing notice and has .....

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n be checked at the initial stage by challenging the notice. If the notice is challenged and found to be valid, or where the notice is not at all challenged, then in either case it cannot be said that notice is invalid. As such, if the notice is valid, then the foundation remains and the proceedings on the basis of such notice can go on. We may only reiterate here that once the proceedings have been initiated on a valid notice, it becomes the duty of the Assessing Officer to levy tax on the enti .....

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uently passed a perverse order on the facts and circumstance of the case? - Held that:- In the present case, the assessee had provided the reasons for determining ₹ 225/- per sq. ft. as the fair market value of the property by producing the relevant material, including valuation report of a registered valuer, which all have been ignored while arriving at the price of ₹ 84/- per sq. ft. The Assessing Officer assessed the value of the property as on 1.4.1981 on the basis of sale deeds .....

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by the assessee. The matter thus requires to be remanded to the Assessing Officer for determination of the fair market value of the property in question in accordance with law and in the light of the observations made hereinabove. - Decided in favour of the assessee

Disallowance of 50% of the expenditure towards brokerage incurred by the assessee - Whether tribunal was justified not allowing expenditure incurred wholly and exclusively in connection with the transfer more so when the .....

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d to be paid because of the property being under litigation and that it being occupied by unauthorized persons for which payment had to be made to get it vacated. In our view, when the said brokerage was paid by cheque and there was sufficient reason for paying higher brokerage, the entire amount ought to have been allowed and deduction of 50% amount i.e., ₹ 3,75,000/- cannot be justified in law. It is noteworthy that the Assessing Officer, after observing that what is normally allowed as .....

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see - Income Tax Appeal No. 504 / 2013 - Dated:- 1-7-2015 - Vineet Saran And S. Sujatha, JJ. For the Appellant : Sri A Shankar, Adv. for Sri V S Yogesh Kumar, Adv. For the Respondent : Sri E Sanmathi Indrakumar, Adv JUDGMENT The primary question that requires determination in this appeal is that when the reason recorded for reopening the assessment under section 147 of the Income Tax Act (for short 'Act') itself does not survive, can tax be levied by the Assessing Officer for a totally d .....

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/merits also certain questions have been raised which would require consideration of this Court. Brief facts of this case are that the appellant, who is assessed as an individual, has income from house property, transport business, capital gains and other sources. For the assessment year 2004-05, he filed his Income Tax return on 16.12.2004 declaring an income of ₹ 4,82,330/- and agriculture income of ₹ 1,62,470/-. Such return was first processed under section 143(1) of the Act and a .....

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ome in the year in which the stock is sold. It was also stated that the assessee had claimed indexation till the assessment year 2003-04 and arrived at the capital gains without considering the provisions of section 45(2) and the assessee has thus understated the income and claimed excessive indexation. Thus, it was stated that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment for the year 2004-05. The assessment was reopened for the purpose of asse .....

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of long term capital asset, for which a fair market value was adopted at ₹ 225/- per sq.ft. and offered the capital gains for taxation after availing the benefit of indexation. After reopening of the case, the Assessing Officer adopted fair market value at ₹ 84/- per sq.ft. and computed the capital gains, and also disallowed 50% of expenses on transfer claimed by the assessee. Besides this, certain other disallowances were also made by the Assessing Officer. Challenging the same, th .....

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n law on the ground, that besides the fact that Assessing Officer had formed his opinion purely on suspicion and surmises on the same facts amounting to change of opinion, the assessment was also for different reasons than which were recorded by the Assessing Officer in the notice for reassessment. On merits, the assessee also challenged the adopting of fair market value at ₹ 84/- per sq.ft., as well as disallowance of 50% of the expenditure. Relying on the decision of the Apex Court in th .....

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ding reassessment proceedings, when the reason recorded for re-opening of assessment under S.147 of Act itself does not survive. (2) Whether the Tribunal was correct in upholding levy of tax on a different issue, which was not a subject matter for re-opening the assessment and moreover the reason recorded for the re-opening of the assessment itself does not survive. (3) Whether the Tribunal was justified in law in passing an order without application of mind as to the determination of the fair m .....

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circumstance of the case. We have heard Sri A.Shanker, learned counsel for the appellant and Sri E.I.Sanmathi learned counsel for the respondent-department, as well as Sri K.V.Aravind, learned counsel for the department appearing in the connected appeals, and have also perused the record. The first two questions relate to the primary issue and are interconnected. They are thus being first considered together. Sri A.Shanker has submitted that the order under section 147 of the Act has to be in c .....

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urvive, and it is only thereafter that 'any other income' which is found to have escaped assessment can be assessed or reassessed in such proceedings. He thus submitted that the reopening of assessment should first be valid (which could be only when reason for reopening survives) and once the reopening is valid, then under section 147 of the Act, the entire case can be reassessed on all grounds or issues. That is to say, if reopening is valid and reassessment can be made for such reason .....

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ting decisions of the High Courts, the provisions of the said section have now been clarified to include or cover any other income chargeable to tax which may have escaped assessment and for which reasons may not have been recorded before giving the notice. In support of this, Sri Sanmathi has referred to certain circulars of the Central Board of Direct Taxes (CBDT). Sri K V Aravind has submitted that the said section 147 is in two parts, which have to be read independently, and the phrase " .....

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ason had been recorded, and all that is necessary is that during the course of the proceedings under section 147, income chargeable to tax must be found to have escaped assessment. In support of his submission, he has relied on Explanation 3 to Section 147 which was inserted by Finance Act, 2009 with effect from 1.4.1989. Learned counsel for the parties have relied on certain circulars of the CBDT and also several decisions of the Courts, which all shall be referred to while considering their su .....

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n, or recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that ……. Provided further that…….. Provided also that ….. Explanation (1) …… Explanation (2)……. Explanation 3 : For the purpose of assessment or reassessment under this section, the Assessing Of .....

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ason of the omission or failure on the part of an assessee to make a return under S.139 for any assessment year to the Income Tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income Tax Officer has in consequence of information in his possession reason t .....

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ing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed,; and the provisions of this Act shall, so far as may be, apply acc .....

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rom 1.4.1989, requires the Assessing Officer to record his reasons before issuance of any such notice under sub-section (1) of section 148. The question which first arises is with regard to the validity of the reopening proceedings, which is by issuance of notice under section 148, reasons for which are to be recorded under sub-section (2). The assessee has an opportunity to challenge the reasons given for issuance of notice and if the same are found to be vague or illegal or without any basis, .....

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91 ITR 500, while considering the issuance of notice under section 147 of the Act prior to the amendment of 2009, has held that the final outcome of the proceedings is not relevant and at the initial stage, what is required is 'reason to believe' but not established fact of escapement of income. It further held that "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 .....

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er income' in the case of a validly issued notice cannot be said to be a case of fishing and roving enquiry. The assessee has the opportunity to challenge the notice, and if it is held to be invalid for not giving adequate reasons for reopening the assessment, the entire reopening proceedings would lapse. In such a case there would be no question of assessment of either 'such income' of the first part of section 147 or 'any other income' of its second part. But if the notice .....

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the proceedings have been initiated on the basis of a valid notice, it becomes the duty of the Assessing Officer to levy tax on the entire income which may have escaped assessment during the assessment year. The said section 147 of the Act, as it now stands after 1.4.1989, may be read in a simple manner, in parts, as follows: If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he may assess or reassess 'such income' "and also" .....

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first part of the section and up to this extent, there is no dispute. It is the latter part of the section that is to be interpreted by this Court, which is as to whether the second part relating to 'any other income' is to be read in conjunction with the first part (relating to 'such income') or not. If it is to be read in conjunction, then without there being any addition made with regard to 'such income' (for which reason had been given in the notice for reopening the .....

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ts of the section having been joined by the words 'and also', what we have to now consider is whether 'and also' would be conjunctive, or the second part has to be treated as independent of the first part. If we treat it as conjunctive, then certainly if the reason to believe is there for a particular ground or issue with regard to escaped income which has to be assessed or reassessed, and such ground is not found or does not survive, then the assessment or reassessment of 'a .....

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elieve that some income chargeable to tax has escaped assessment, he may assess or reassess such income. Since the purpose is to tax all such income which has escaped assessment, in our view, besides 'such income' for which he has reason to believe to have escaped assessment, it would be open to the Assessing Officer to also independently assess or reassess any other income which does not form the subject matter of notice. Although in a different context, which was whether in the course .....

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Courts have held differently, i.e., some have held that the second part of section 147 is to be read in conjunction with the first part, and some have held that the second part is to be read independently. To clarify the same, in the year 1989, the legislature brought in suitable amendments in sections 147 and 148 of the Act, which was with the object to enhance the power of the Assessing Officer, and not to help the assessee. Explanation 3 was inserted in section 147 by Finance (No.2) Act, 2009 .....

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the benefit of the Revenue, and not the assessee. In this background, if we read Section 147 it would be clear that in the phrase 'and also' which joins the first and second parts of the section, 'and' is conjunctive which is to join the first part with the second part, but 'also' is for the second part and would be disjunctive. It segregates the first part from the second. Thus, when we read the full section, the phrase 'and also' cannot be said to be conjunctive .....

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ing Officer has power to make additions even on the ground that reassessment notice might not have been issued in the case during the reassessment proceedings, if he arrives at a conclusion that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment under S.148 of the Act. The provision no where postulates or contemplates that it is only when there is some addition on the ground on which reassessment had been initiated, that the Asses .....

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amendment of 2009, provided for the "Explanatory Notes to the Provisions of Finance (No.2) Act, 2009" by which Explanation 3 to section 147 of the Act had been inserted with effect from 1.4.1989. The relevant paragraph 47 of this Circular is reproduced below: "47: Clarificatory amendment in respect of reassessment proceeding under S.147. 47.1: The existing provisions of S.147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped .....

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8 with a view to reassess the income of assessee. 47.2: Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to the reasons recorded for reopening of the assessment and he is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent. 47.3: Therefore, to articulate the legislative intention clearly Explanation 3 has been inserted in S.147 to provide that the Asse .....

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s clear that once satisfaction of reasons for the notice is found sufficient, i.e., if the notice under section 148(2) is found to be valid, then addition can be made on all grounds or issues (with regard to 'any other income' also) which may come to the notice of the Assessing Officer subsequently during the course of proceedings under section 147, even though reason for notice for 'such income' which may have escaped assessment, may not survive. In the case of CIT Vs Jet Airway .....

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sment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independentl .....

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ay High Court, same view has been taken by the Delhi High Court in the cases of Ranbaxy Laboratories Ltd. Vs CIT (2011) CIT 336 ITR 136 and CIT Vs Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 and also the Gujarat High Court in the case of CIT Vs Mohmed Juned Dadani (2013) 214 Taxman 38. With due respect to the view taken in the aforesaid cases, we are unable to persuade ourselves to follow the same. Insertion of 'Explanation' in a section of an Act is for a different purpose than insertio .....

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fies the enactment as it explains and is useful for settling a matter or controversy. Orthodox function of an 'Explanation' is to explain the meaning and effect of the main provision. It is different in nature from a 'Proviso', as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. It is true that an 'Explanation' may not enlarge the scope of the section but it also does not restrict .....

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n. Rules cannot go beyond or against the provision of the Act as it is framed under the Act and if there is any contradiction, the Act will prevail over the Rules. Same is not the position vis-à-vis the Section and its Explanation. The latter, by its very name, is intended to explain the provision of the Section, hence there can be no contradiction. Section has to be understood and read hand-inhand with the Explanation, which is only to support the main provision, like an example does to .....

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BDT (already reproduced above) also makes this position clear. In our view, there is no conflict between the main section 147 and its Explanation 3. This Explanation has been inserted only to clarify the main section and not curtail its scope. Insertion of Explanation 3 is thus clarificatory and is for the benefit of the Revenue and not the assessee. If there is ambiguity in the main provision of the enactment, it can be clarified by insertion of an Explanation to the said section of the Act. Sa .....

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g the course of the proceedings under the section. After the insertion of Explanation 3 to section 147 it is clear that the use of the phrase "and also" between the first and the second parts of the section is not conjunctive and assessment of 'any other income' (of the second part) can be made independent of the first part (relating to 'such income' for which reasons are given in notice under section 148), notwithstanding that the reasons for such issue ('any other .....

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d also keeping in view that it is the constitutional obligation of every assessee to disclose his total income on which it is to pay tax, we are of the clear opinion that the two parts of section 147 (one relating to 'such income' and the other to 'any other income') are to be read independently. The phrase 'such income' used in the first part of section 147 is with regard to which reasons have been recorded under section 148(2) of the Act, and the phrase 'any other i .....

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for the appellant that the reason to be given under sub-section (2) of section 148 would be the very foundation of the issuance of notice and if it is false or baseless, then everything goes and the structure erected on such foundation would crumble. It is true that if the foundation goes, then the structure cannot remain. Meaning thereby, if notice has no sufficient reason or is invalid, no proceedings can be initiated. But the same can be checked at the initial stage by challenging the notice. .....

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ave escaped assessment and comes to his notice during the course of the proceedings initiated under section 147 of the Act. In view of the aforesaid, we answer the first two substantial questions of law in favour of the Revenue and against the assessee. After having answered the first two questions relating to the primary issue, we may now deal with questions 3 and 4, which relate to the merits of the case at hand. Question 3 relates to the evaluation of the 'fair market value' of the pr .....

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;Capital gains' and in that context 'full value of the consideration' would mean the consideration or price received as a result of the transfer of a capital asset. It is different from 'fair market value' of the property, which phrase is used in section 45(2) [relating to capital gains] and section 55(2)(b) [relating to cost of acquisition]. Section 45 of the Act provides for how profit or gain arising from transfer of capital asset is to be charged to income tax as 'Cap .....

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ee. 'Fair Market Value' has been defined under subsection (22-B) of section 2 of the Act to be the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date. 'Full value of the consideration' has not been defined. The legislature has expressly drawn a distinction between the two phrases: 'full value of the consideration' and 'fair market value'. The former would be the price received on transfer of a capital asset and the .....

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alue of the property as on 1.4.1981 on the basis of sale deeds of some nearby properties registered for such price in the year 1981 and thus, arrived at that figure. In our opinion, the same cannot be the proper mode of arriving at the 'fair market value' of the property in question as on 1.4.1981, for the purpose of determining 'Capital gains' under the Act. In a recent case of Smt Krishna Bajaj Vs ACIT - 2014 (41) Taxman.com 445 (Kar) the question for consideration before this .....

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ct and the Indian Registration Act nor the net wealth value arrived at under the provisions of the Wealth Tax Act, cannot be the guiding factor. The market value of the property is certainly far more than the guideline value." In the said case of Smt Krishna Bajaj (supra) the assessee had not provided the valuation report to substantiate the valuation of the property, and in such context it was held that "merely because it was not produced, no adverse inference could be drawn. Even in .....

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istered valuer, valuing the property in question as on 1.4.1981, was filed which, in our opinion, has wrongly been ignored by the Assessing Officer. In such view of the matter, we are of the opinion that the Tribunal was not justified in arriving at the fair market value of the property in question as on 1.4.1981 without taking into consideration the material on record, including the valuation report filed by the assessee. The matter thus requires to be remanded to the Assessing Officer for dete .....

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er and brokerage charges, even when the same had been paid by cheque and the receipt of which was obtained from the broker. Merely saying that generally 1-2% of the sale consideration is the brokerage, would not suffice when the specific case of the assessee was that heavy brokerage had to be paid because of the property being under litigation and that it being occupied by unauthorized persons for which payment had to be made to get it vacated. In our view, when the said brokerage was paid by ch .....

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