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TMI Blog2015 (12) TMI 305X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Whether the finding of the Income Tax Appellate Tribunal accepting the genuineness of the loss in respect of shares held as stock-in-trade is perverse and accordingly cannot be sustained?" 3. As far as ITA No. 1109/2010 is concerned, by an order of the same date, the following question was framed: "Whether the Income Tax Appellate Tribunal was correct in deleting the penalty under Section 271(1)(c) of the Income Tax Act, 1961?" 4. It must be noted at the outset that the impugned order dated 30th June 2009 of the ITAT is common to the other appeals of the Revenue before the ITAT pertaining to AYs 1997-98, 1998-99 and 1999-2000. However as regards the Revenue's appeals against the same impugned order of the ITAT for those AYs being ITA Nos. 1105, 1106 and 1107 of 2010, a separate judgment has already been passed by this Court on 30th April 2015 allowing the said appeals. What distinguishes those appeals from the present one is that in none of those appeals a question concerning the validity of the assumption of jurisdiction under Section 147 of the Act arose. As far as those appeals were concerned, the sole question that was framed by the Court on 3rd September 2014 concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the dismissal of the Assessee's appeal by CIT (A) for AY 1997-98 it was recorded as under: "In this manner the assessee understated its income for the asstt year 1995-96 by an amount of Rs. 1,28,80,000/- and this income has escaped asstt. Obviously there was failure on the part of the assessee to disclose the complete facts to the Assessing Officer at the time of completion of assessment for the asstt year 1995-96. Therefore it is proposed to reopen the case U/s 147. The conditions provided in the proviso to section 147 are also satisfied." (emphasis supplied) 9. A notice under Section 148 of the Act was issued to the Assessee on 26th March 2002 for AY 1995-96 recording inter alia that the income which had escaped assessment was Rs. 1,28,80,000. 10. It must be noted at this stage that for AY 1996-97 also, jurisdiction under Section 147 of the Act was assumed and a notice for reopening of the reassessment was issued to the Assessee on 26th March 2000 under Section 148 of the Act. A reference was made in the said notice not to the losses as regards the valuation of the shares but regarding unexplained liabilities comprising credit received from M/s. Toko Fin and Associates and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolling PPL. The assessment order noted that several adjournments were granted to the Assessee to enable it to furnish: (i) details of the name and address of the share broker through whom the purchase/sale of the shares of PPL was made, (ii) the number of shares purchased/sold, (iii) the contract note, (iv) the rate/distinctive numbers of the shares amount and (v) the date of payment made/received to/by stock exchange. However, no one from the side of the Assessee attended the hearing on the dates fixed after adjournment and the details were also not supplied. Consequently, the sum as proposed in the notice under Section 148 of the Act, i.e., Rs. 1,28,80,000 was added to the income of the Assessee. 15. The appeal of the Assessee was dismissed by the CIT (A), by the order dated 8th December 2003, confirming the additions. The CIT (A) referred to the earlier order in the appeals for AYs 1996-97, 1998-99 and 1999-2000 where the issue regarding loss as a result of share valuation had been discussed at length. According to the CIT (A), the facts for AY 1995-96 were no different. 16. The further appeal by the Assessee before the ITAT was allowed by it on 25th August 2006 on the sole g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings is void. 20. The ITAT concurred with the CIT (A) even as regards the merits by holding that the value of the closing stock of shares had been computed on the basis of the quotation in the Gauhati Stock Exchange which was at Rs. 2 per share. The Assessee had consistently followed the method of valuation of shares at cost or at market price whichever is lower. This method had been accepted by the department for the earlier AYs. Consequently, the ITAT held that it was not open to the Revenue to challenge the said method for the AY in question at that stage. The ITAT referred to the decision in Radha Soami Satsang v. CIT 193 ITR 321 (SC) and the decision of this Court in CIT v. Lagan Kala Upvan 259 ITR 489 (Del). 21. It is submitted by Mr. Rohit Madan, learned Senior Standing counsel for the Revenue, that the crucial fact that Mr. R.R. Modi, the Director of the Assessee, also controls PPL, whose shares he had purchased and sold, was not disclosed during the assessment proceedings for this year i.e. AY 1995-96 and that this was a material fact which came to light only during the assessment proceedings for AY 1997-98. He pointed out that the entire assessment record f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the above submissions, the legal position regarding Section 147 of the Act, prior to and subsequent to the amendment with effect from 1st April 1989, needs to be briefly recapitulated. In Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, the Supreme Court was dealing with a case where the AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment pursuant to communications from the Commissioner of Income Tax showing that the alleged creditors of the Assessee were "name-lenders and the transactions are bogus." The Supreme Court disagreed and observed that the AO "had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be '"bogus transactions'." It was further explained by the Supreme Court that: "Before issuing a notice under S. 148, the ITO must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under S. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential." 28. In Calcutta Discount Company v. Income Tax Officer 41 ITR 191 the Supreme Court, while considering the import of the words "omission or failure to disclose fully and truly all material facts necessary for his assessment", observed as under: "The words used are "omission or failure to disclose fully and truly all material facts necessary for his assessment for that year". It postulates a duty on ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ambit of section 147. 19. Examining the proviso [set out above], we find that no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year if the following conditions are satisfied : (a) an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year; and (b) unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee : (i) to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148; or (ii) to disclose fully and truly all material facts necessary for his assessment for that assessment year. Condition (a) is admittedly satisfied inasmuch as the original assessment was completed under Section 143(3) of the said Act. Condition (b) deals with a special kind of escapement of income chargeable to tax. The escapement must arise out 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. This is clearly not the case he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eve that income had escaped assessment is a necessary precondition for the AO to assume jurisdiction. Clearly, it would be difficult to sustain that this precondition is met if such reasons to believe that income of an Assessee has escaped assessment are based on palpably erroneous assumptions. The reason to believe must be predicated on tangible material or information. A reason to suspect cannot be a reason to believe; the belief must be rational and bear a direct nexus to the material on which such a belief is based." 34. In CIT v. Multiplex Trading (decision dated 22nd September 2015 in ITA 356/2013), this Court surveyed the above case law and held: "12. ... [I]t would be impermissible for the AO to reopen the assessment unless the AO, on the basis of credible and tangible material, which was not in his possession during the initial assessment, believes that income of the Assessee has escaped assessment." "29. It is at once seen that the Amendment in Section 147 of the Act brought about a material change in law w.e.f. 1st April, 1989. Section 147(a) as it stood prior to 1st April 1989 required the AO to have a reason to believe that (a) the income of the Assessee has escap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason for forming the 'reasons to believe' that income had escaped assessment was the dismissal of the Assessee's appeal by CIT (A) for AY 1997-98 when the share loss was disallowed for the first time. There was no material as such for coming to the conclusion that "the assessee understated its income" for AY 1995-96 by an amount of Rs. 1,28,80,000. The following sentence in the 'reasons' shows that the conclusion was based on surmises: "Obviously there was failure on the part of the assessee to disclose the complete facts to the Assessing Officer at the time of completion of assessment for the asstt year 1995-96." 37. Interestingly nearly two years prior to the issuance of the above notice, the AO had issued a notice on 26th March 2000 under Section 148 of the Act for re-opening of the assessment for AY 1996-97 on account of unexplained credits from two firms but that ended in an order of re-assessment dated 27th March 2002 referring to the unexplained share loss. Therefore, when the AO issued the notice on 26th March 2002 under Section 148 proposing to reopen the assessment for 1995-96, there was no fresh material to enable him to form reasons to believe that inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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