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TMI Blog2016 (1) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... has been issued for the purpose of initiating reassessment proceedings in relation to Assessment Year 2000-2001. This Writ Petition was admitted and rule was issued by this Court on 22nd January, 2008 and interim relief was granted in favour of the Petitioner. It has now come up for hearing and final disposal before us. 3. Exception is taken to the impugned notice as well as the impugned order on the ground that the impugned notice dated 30th March, 2007 is admittedly issued after the expiry of four years from the end of the A. Y. 2000-2001 and therefore, bad-in-law for want of satisfaction of the following pre-requisite conditions :- (a) There must be reason to believe that income chargeable to tax has escaped assessment; (b) There must be a failure on the part of the Assessee to disclose full and truly all material facts as a result of which income has escaped assessment; (c) The allegation of failure of the Assessee to disclose fully and truly all material facts should be in the reasons as recorded for reopening the assessment; (d) The allegation regarding failure to disclose all material facts should be precise and unambiguous and cannot be supplemented by giving reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided to make investments in equity mutual funds of Prudential ICICI, Cholamandalam Cazenove Mutual Fund as well as Reliance Capital Mutual Fund and thereafter decided to exit the said funds at the available NAV price. The Petitioner pointed out that the transaction was a normal business transaction and also disclosed the dividend earned from the aforesaid three mutual funds. 7. After the queries raised by Respondent No.1 were answered by the Petitioner, Respondent No.1 passed an assessment order under section 143(3) of the Act dated 31st March, 2003 by which the total income of the Petitioner was assessed at Rs. 6,81,54,960/-. In determining the above income, Respondent No.1 noted that the Petitioner had borrowed money to invest in mutual funds and earned dividend therefrom. He took the view that interest on the said borrowings computed at Rs. 3.49 lakhs had to be disallowed under section 14A of the Act. However, he specifically noted that the Petitioner had earned dividend income of Rs. 3,38,45,293/- which was exempt from tax. In this view of the matter, in the Assessment Order dated 31st March, 2003 passed under section 143(3) of the Act, Respondent No.1 specifically exempte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in large scale during the block period in the act of buying dividends from mutual funds. On perusal of record, it is noted that the assessee had received dividend to the tune of Rs. 8 crores during the F.Y. 2000-01 and Rs. 3 crores during the F.Y. 1999-2000 through various Mutual Funds." "The assessee had traded in shares / securities during the year, which included the units of mutual fund. As the assessee has mitigated the loss incurred on account of sale of mutual fund units against the gains derived on sale of shares and since the purchase and sale of such units were made with the intention to procure dividend income which is exempt from tax, the assessee's representative was asked to explain as to why the said loss claim of Rs. 3,70,36,638/- for the assessment year 2000-01 and Rs. 7,50,57,205/- for the A.Y. 2001-02 on sale of mutual fund units should not be disallowed in computing the total income of the assessee." The details of the dividend received from mutual funds were also set out in the said order. 10. As can be seen from a perusal of the block assessment order, after considering the objections of the Petitioner, Respondent No.1 took the view that the Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember, 2000 may be treated as having been filed in response to the said notice. 14. Instead of replying to the aforesaid letters of the Petitioner, Respondent No.1 issued a notice dated 24th October, 2007 under section 142(1) of the Act by which the Petitioner was directed to produce details of dividend received which had been claimed as exempt from tax under section 10(33) of the Act and also its books of accounts alongwith vouchers. In reply thereto and in view of the fact that no reasons had been forwarded to the Petitioner for issuance of the impugned notice, the Petitioner by its letter dated 5th November, 2007 once again requested Respondent No.1 to furnish it a copy of the reasons recorded for issuance of the impugned notice under section 148 of the Act. Accordingly, Respondent No.1 by its letter dated 7th November, 2007 communicated the reasons to the Petitioner. This letter can be found at page 421 of the paper-book and reads as under :- "No.ACIT/CC-41/Reasons/2007-08 Date: 07.11.2007 To: M/s Nirmal Bang Securities Pvt.Ltd., 38 B Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai 400 023 Sir, Sub : Reasons recorded for re-opening the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Petitioner to make a true and full disclosure and therefore reassessment proceedings were without jurisdiction. It was also pointed out that reassessment proceedings were based on a mere change of opinion which was impermissible under the Act. There were also other objections that were set out in the said letter. 16. Be that as it may, Respondent No.1 passed the impugned order dated 5th December, 2007 by which he rejected the objections of the Petitioner and held that he had reason to believe that the income of Rs. 3,31,15,313.49 had escaped assessment for the A.Y. 2000-01. 17. In this factual backdrop, Mr Murlidharan, learned counsel appearing on behalf of the Petitioner, submitted that admittedly in the facts of the present case, the impugned notice issued under section 148 of the Act to initiate reassessment proceedings for A. Y. 2000-2001 was beyond the period of four years. He therefore submitted that:- (i) the condition precedent to initiate reassessment proceedings under section 148 of the Act after a period of four years from the end of the relevant assessment year was only if there was a failure on the part of the assessee to make a return under sections 139 or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aran relied upon the following two judgments :- (1) Hindustan Lever Ltd. v/s R.B. Wadkar, Assistant Commissioner of Income-Tax and others; (2004) 268 ITR 332 and (2) CIT - 17, Mumbai v/s M/s K. Mohan and Co. (Exports) (Reg.). (ITXA (L) No.2347 of 2010) decided on 1st July 2011 For all the aforesaid reasons, Mr Murlidharan submitted that the impugned notice dated 30th March, 2007 issued under section 148 could not be sustained and the entire initiation of re-assessment proceedings was without jurisdiction. 19. On the other hand, Mr Malhotra, learned counsel appearing on behalf of the Revenue, in support of the impugned notice, submitted as under:- (a) the reasons recorded for initiation of reassessment proceedings under section 148 of the Act do indicate a failure to disclose fully and truly all material facts necessary for assessment. Thus the notice is within jurisdiction. It is not necessary to specifically mention the words "there was a failure to disclose truly and fully all material facts necessary for assessment" in the reasons recorded. This is particularly so as on a holistic reading of the reasons recorded for reopening the assessment for A. Y. 2000-2001, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless 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 necessary for his assessment, for that assessment year." (emphasis supplied) 21. In the present case, admittedly, the assessment had been made under section 143(3) of the Act for A.Y. 2000-2001. It is also admitted that the reassessment proceedings initiated for A.Y. 2000-2001 was after the expiry of four years from the end of the said Assessment Year. In such a scenario, as per the first proviso to section 147 of the Act, no action for initiation of reassessment proceedings for A.Y. 2000-2001 could have been taken unless the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment by reason of a failure on the part of the Petitioner to disclose fully and truly all material facts necessary for assessment. As rightly submitted by Mr Murlidharan, learned counsel appearing on behalf of the Petitioner, there is not even an allegation in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice for re-opening an assessment can be sustained. The reasons cannot be allowed to grow with age and ingenuity by devising and/or supplementing additional reasons in replies and affidavits not envisaged in the reasons recorded for re-opening the assessment. To put it simply, the validity of a notice under section 148 of the Act has to be tested on the basis of the reasons recorded for initiating the re-assessment proceedings. The reasons recorded cannot be supplemented by affidavits and other material. In this regard, Mr Murlidharan's reliance upon the judgment of this Court in the case of Hindustan Lever Ltd. (2004) 268 ITR 332 is well founded. At pages 337 and 338, this Court held as under :- "The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts 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 reasons alone that the validity of the order 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. The principle of law, therefore, is well settled that the question as to whether there was reason to believe, within the meaning of section 147 that income has escaped assessment, must be determined with reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After taking these disclosures into account, the Assessing Officer passed his assessment order under section 143(3) of the Act on 31st March, 2003 and which can be found at page 147 of the paper-book. In this assessment order, the Assessing Officer specifically refers to the names of the aforesaid three mutual funds, the number of units purchased by the Petitioner and the dividend received therefrom. In the computation of income, the Assessing Officer has specifically recorded that the dividend income of Rs. 3,38,45,293/- is exempt from tax. It is on this basis that the total income computed by the Assessing Officer came to Rs. 6,81,54,960/-. All this material would clearly show that the Assessing Officer, during the regular assessment proceedings under section 143(3) of the Act, had specifically applied his mind to the dividend income earned by the Petitioner during the A.Y. 2000-2001 and on due consideration of these facts, he passed his assessment order under section 143(3) of the Act forming an opinion that the dividend income earned by the Petitioner was exempt from tax. This would clearly establish that there was due application of mind to all relevant facts and thereafter a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Chapter III and stipulates that in computing the total income of a previous year of any person, any income falling within any of the clauses mentioned therein shall not be included. Section 10(33) provides that any income by way of (i) dividends referred to in section 115-O; or (ii) income received in respect of the units from the Unit Trust of India established under the Unit Trust of India Act, 1963; or (iii) income received in respect of units of a mutual fund specified under section 10(23D), shall be exempt from tax. The proviso to section 10(33) of the Act stipulates that this clause shall not apply to any income arising from transfer of units of the Unit Trust of India or of a mutual fund, as the case may be. On an ex-facie reading of the said provision, it is clear in the facts of the present case that the proviso to section 10(33) could never apply to the dividend income earned by the Petitioner. In the facts of the present case, dividend received by the Petitioner does not arise from the transfer of units of the mutual fund but arises by virtue of the fact that those units were held by the Petitioner. In fact, on the transfer of the units of the mutual fund, the Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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