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2016 (5) TMI 804 - DELHI HIGH COURT

2016 (5) TMI 804 - DELHI HIGH COURT - [2016] 384 ITR 337 - Reopening of assessment - share of loss from the firm wrongly claimed - Held that:- When the case at hand is examined, it is seen that the return filed having been processed under Section 143 (1) of the Act, there was no occasion for the AO to form an opinion on whether that was any escapement of income to begin with. A perusal of reasons to believe reveals that the AO on going through the return subsequently found that the Assessee had .....

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sessee had 'artificially and with an ulterior motive' reduced the income from the property by setting off loss accruing to the firm. Apart from this the P&L account of the Assessee showed that she has claimed a loss on account of the bad debt of the firm.

The central submission of Assessee that the above reason to believe had to be based on some new tangible material cannot be accepted in light of the legal position explained hereinbefore. At the same time, the Court does not consider .....

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e said interim order and directs that the AO will now pass a final order within eight weeks from today, after affording the Petitioner one opportunity of being heard. - W.P.(C) 1393/2002 - Dated:- 18-5-2016 - S. MURALIDHAR & VIBHU BAKHRU JJ. For the Appellant: Mr. Prem Nath Monga with Mr. Manu Monga, Advocates For the Respondent: Mr. Dileep Shivpuri, Senior standing counsel with Mr. Sanjay Kumar with and Mr. Rahul Chaudhary, Advocates. Dr. S. Muralidhar, J.: 1. The challenge in this writ pet .....

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6(2), New Delhi under Section 143(2)/142(1) of the Act requiring the Petitioner to furnish the requested details therein. 2. By an order dated 26th November 2002, the Court directed that the proceedings in terms of the abovesaid notice under Section 148 of the Act may continue before the Assessing Officer ( AO ) but no final order shall be passed during the pendency of the writ petition. 3. The Petitioner was earlier a partner of M/s. Rangwala Enterprises. The other partner was Ms. Ritu Rangwala .....

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st December 1998 the Petitioner wrote to the AO regarding retirement of the other partner, Ms. Ritu Rangwala, from the partnership firm. It is stated that from that date the firm was converted into a proprietorship with the Petitioner as sole proprietor. A copy of the retirement deed dated 30th November 1998 evidencing the retirement of Ms. Ritu Rangwala from the partnership firm was enclosed with this letter. 5. For the AY 1999-2000 the Petitioner filed her return on 21st December 1999 indicati .....

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d return was filed along with the statement of accounts, audit report etc. 7. The Petitioner s return was processed under Section 143 (1) of the Act by an order dated 29th May 2001 by the AO, Circle 16 (2), New Delhi. In the said order/intimation, the loss declared by the Petitioner in the return along with its statement of accounts, computation sheet, audit report etc. was accepted and the amount as claimed by the Petitioner was refunded to the Petitioner. A copy of the said order under Section .....

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had a half share in the profits and losses of the said firm, the Petitioner s share of loss worked out to ₹ 3,12,885. 9. On 26th June 2001, the DCIT, Circle 16 (2) issued the impugned notice to the Petitioner under Section 148 of the Act stating that he had reasons to believe that the Petitioner s income chargeable to tax for the AY in question has escaped assessment and that he proposed to reassess the income. The Petitioner stated that she received the said notice on 10th July 2001 and f .....

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isited the office of the AO, i.e., DCIT on several dates beginning with 11th October 2001 up to 20th December 2001 for procuring copy of the reasons recorded by the AO for issuance of the notice under Section 148 of the Act. However, the request was not acceded to. The Petitioner states that she had also sent reminders on 19th November 2001 and 10th December 2001 for supply of reasons recorded but the reasons were not supplied. 11. On 26th November 2001 the Respondent issued notice to the Petiti .....

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asons for reopening the assessment which read as under: The Assessee has filed return of income on 21st December 1999 declaring loss of ₹ 2,17,100 claiming refund ₹ 1,82,705. This return was revised on 17th April 2000 declaring loss of ₹ 2,17,230 and claiming refund ₹ 1,80,066. While going through the return, it was found that the Assessee has declared properly income of ₹ 9,62,957 as rental income from property situated at GF-4, Arunachal, 19, Barakhamba Road, New .....

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ing the profit and loss account of the two periods, the following situation emerges:- Period Sales (Rs.) G.P. (Rs.) G.P. Rate Net Profit/ loss 1.4.97 to 31.3.98 1,34,43,289 18,75,770 13.95% 31.574 (Profit) 1.4.97 to 31.11.98 38,12,440 5,33,440 13.99% 5,42,970 (loss) 1.12.97 to 31.3.99 7,86,195 32,962 4.19% 12,94,055 (loss) From the above data it would be seen that for the period 1st April 1998, the Assessee has wrongly claimed share of loss of ₹ 3,12,885 from the firm M/s. Rangwala Enterpr .....

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his bad debt belong to the registered firm and not to the Assessee and again the income from property has been reduced by the amount of loss with an ulterior motive and with the intention to defraud the revenue. Further for the period of 4 months the expenses claimed are on the higher side and has to be examined. This case therefore, needs scrutiny and in the facts and circumstances, I have reason to believe that the Assessee has deliberately resorted to and adopted ways and means to avoid to de .....

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he letter further stated that from the details furnished by the Assessee in the final account for the two periods, it was seen that for the period 1st April 1998 to 30th November 1998 there was a loss of ₹ 3,12,885 which was wrongly claimed as a deduction from the property income in view of Section 10 (2A) of the Act. The ITO therefore noted that the AO was accordingly of the view that the Assessee has thus artificially and with an ulterior motive reduced the income from the property by se .....

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. 14. It was further pointed out by the ITO that there were revenue receipts or sale of ₹ 7,86,195 in the relevant period. The bad debt of ₹ 9,63,598 was much more than the revenue receipts. It was accordingly concluded that the Petitioner had resorted to and adopted ways and means to avoid declaring the correct income thereby resulting in the escapement of taxable income. Submissions of counsel for the Petitioner 15. It is submitted by Mr. Prem Nath Monga, learned counsel appearing .....

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is a mandatory requirement of Section 148 (2) of the Act and failure to do so rendered the entire proceedings invalid and void ab initio. 16. Mr. Monga submitted that the intimation under Section 143 (1) of the Act was as much an assessment as regular assessment of a return that has been picked up for scrutiny under Section 143 (3) of the Act. It is further submitted by Mr Monga that there was no tangible material that the AO came across to justify forming 'reasons to believe' that incom .....

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t cannot be issued for the purpose of verification of the material already available with the authorities. Mr. Monga placed reliance on the decision in Commissioner of Income Tax v. Kelvinator of India Limited (2010) 187 Taxman 312 (SC), and decisions of this Court in Commissioner of Income Tax v. Orient Craft Limited (2013)354 ITR 536 (Del), Mohan Gupta (HUF) v. Commissioner of Income Tax (2014) 366 ITR 115 (Del) , Pr. Commissioner of Income Tax v. Tupperware India (P) Ltd. (2016) 236 Taxman 49 .....

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eep Shivpuri, learned counsel for the Revenue that the recent decision of the Supreme Court in Deputy Commissioner of Income-tax v. Zuari Estate Development & Investment Co. Ltd. (2015) 373 ITR 661 (SC) settled the legal position that where the return had been processed under Section 143 (1) of the Act, there was no assessment‟ as such and therefore, the question of change of opinion did not arise. He referred to the order dated 10th February 2016 passed by the High Court of Judicature .....

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n assessment which was originally made under Section 143 (3) of the Act would not apply to reopening of the assessment where initially it was only an intimation under Section 143 (1) of the Act. Legislative background of Section 143 20. At the outset it requires to be noticed that Section 143 of the Act has frequently undergone changes. Though the said provision has been amended several times, what is relevant as far as the present case is concerned, is Section 143 (1) (a) as it stood immediatel .....

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e sent to the Assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under Section 156 and all the provisions of this Act shall apply accordingly; and (ii) if any refund is due on the basis of such return, it shall be granted to the Assessee: Provided that in computing the tax or interest payable by, or refundable to, the Assessee, the following adjustments shall be made in the income or loss declared in the return, namely- (i) any arithmetica .....

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facie in admissible, shall be disallowed: Provided further that an intimation shall be sent to the Assessee whether or not any adjustment has been made under the first proviso and notwithstanding that no tax or interest is due from him: Provided also that an intimation under this clause shall not be sent after the expiry of two years from the end of the assessment year in which the income was first assessable. 21. What is evident is the requirement of the AO having to send an intimation to the A .....

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n, he had no authority to make adjustments or adjudicate upon any issue arising from the return. The second point to be noted is that, notwithstanding the fact that an intimation to the Assessee which was deemed to be a notice of demand under Section 156 of the Act, the AO could proceed to issue notice under Section 143 of the Act. Thirdly, the sending of an intimation under Section 143 (1) (a) of the Act was mandatory. The legislature was careful not to use the word assessment' in the provi .....

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n response to a notice under sub-Section (1) of Section 142 - (i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid, any tax paid on self-assessment and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-Section (2), an intimation shall be sent to the Assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under .....

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nder this sub-section shall be sent after the expiry of two years from the end of the assessment year in which the income was first assessable. 23. Here again the word used is intimation‟. The first proviso states that the acknowledgment of the return shall be deemed to be an intimation‟ where either no sum is payable by the Assessee or no refund is due to him. The provision underwent changes as far as the outer limit of two years from the end of the assessment year in which the inti .....

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he revenue audit raised an objection relating to showing of a debt of ₹ 1,285.72 lakhs as bad debts, the AO reopened the assessment on the ground that he had reason to believe that income assessable to tax had escaped assessment within the meaning of Section 147 of the Act. 24.2 In response to the notice, the Assessee filed its return of income on 31st May 2004 declaring the loss in the original income. The Assessee raised a protest on various grounds relating to jurisdiction and the merit .....

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se before the Supreme Court the return had been accepted by processing it under Section 143 (1) of the Act. It is above in the background that the Supreme Court discussed the entire legislative history of Section 143 (1) of the Act. The Supreme Court explained the difference in the two expressions intimation‟ and assessment order‟ as under: It is to be noted that the expressions intimation‟ and assessment order‟ have been used at different places. The contextual differenc .....

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t out by the statutory provisions as they stood at different points of time. Under Section 143 (1) (a) as it stood prior to 1st April 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with the instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to min .....

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tion 143 (1) where (a) either no sum is payable by the Assessee, or (b) no refund is due to him. It is significant that the acknowledgement is not done by any Assessing Officer, but mostly by ministerial staff. Can it be said that any assessment‟ is done by them? The reply is an emphatic no‟. The intimation under Section 143 (1) (a) was deemed to be a notice of demand under Section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable by .....

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April 1989 empowered the AO to assess or reassess income chargeable to tax if the AO has reason to believe that income for any AY has escaped assessment. To confer the jurisdiction under Section 147 (a), the two conditions have to be fully satisfied: (i) the AO must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment and (ii) if the reopening of assessment was after four years from the end of the relevant assessment year, the AO must also have r .....

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intimation under Section 143 (1) of the Act had been issued. The Supreme Court concluded that the High Court had wrongly applied Adani s case (supra) which had no application in view of the conceptual difference between Section 143 (1) and Section 143 (3) of the Act. 24.6 The ratio of the decision in Rajesh Jhaveri Stock Brokers P. Ltd. (supra) is that the sending of an intimation by the AO to an Assessee in terms of Section 143 (1) of the Act is not treated to be an assessment made by the AO. A .....

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en the object of provision of Section 143 (1) and Section 143 (3) of the Act was overlooked in some of the decisions of the High Courts, including this Court. Decision in Orient Craft Ltd. 26.1 In Commissioner of Income Tax v. Orient Craft Limited (supra), the question that arose for consideration was whether the reopening of the assessment made by the AO under Section 147 of the Act of an assessment for the AY 2002-03 was valid and whether the intimation under Section 143 (1) sent to the Assess .....

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ion to that effect is sent to the Assessee. However, it has been recognized by the Supreme Court itself in Assistant CIT v. Rajesh Jhaveri Stock Brokers (P) Limited (supra), a decision that was relied upon by the Revenue, that even where proceedings under Section 147 are sought to be taken with reference to an intimation framed under Section 143 (1), the ingredients of Section 147 have to be fulfilled, the ingredient is that there should exist reason to believe‟ that income chargeable to t .....

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earlier decisions of the Supreme Court in A.N. Lakshman Shenoy v. ITO (1958) 34 ITR 275 (SC), S. Narayanappa v. CIT (1967) 63 ITR 219 (SC), Sheo Nath Singh v. Appellate Assistant CIT (1971) 82 ITR 147 (SC), ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC). The Court has also discussed the decision of the Supreme Court in CIT v. Kelvinator of India Limited (supra). It must be noted at this stage that the Kelvinator of India Limited (supra) was a case one where the initial return was picked up fo .....

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sible to adopt different standards while interpreting the word reason to believe vis-a-vis Section 143 (1) and Section 143 (3)." 26.5 The Court in Orient Craft Ltd. (supra) proceeded to hold as under: We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made under Section 143 (3) cannot apply where only an intimation was .....

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rigorous procedure involved in reopening an assessment and the burden of providing valid reasons to believe could be circumvented by first accepted the return under Section 143 (1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression reason to believe in cases where assessments were framed earlier under Section 143 (3) and cases where mere intimations were issued earlier under Section 143 (1) may wel .....

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Brokers (P) Ltd. (supra) the Court reiterated that so long as the ingredients of Section 147 are fulfilled an intimation issued under Section 143 (1) can be subjected to proceedings for reopening. The Court in Orient Craft Ltd. (supra) then reiterated that: It is nobody s case that an intimation cannot be subjected to Section 147 proceedings; all that is contended by the Assessee, and quite rightly, is that if the Revenue ants to invoke Section 147 it should play by the rules of that Section an .....

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hat there was either no reason to believe or that the alleged reason to believe is not relevant for the formation of the belief that income chargeable to tax has escaped assessment. In doing so, it is further open to the Assessee to challenge the reasons recorded under Section 148 (2) on the ground that they do not meet the standards set in the various judicial pronouncements. 26.7 The above lengthy discussion of the decision in Orient Craft Limited (supra) becomes necessary since it was a case .....

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Section 143 (1) of the Act, the AO would, for the purposes of reopening the assessment under Section 147/148 of the Act still have to record reasons to believe that the income chargeable to tax has escaped assessment. Thirdly, the Court in Orient Craft Ltd. (supra) also discussed the entire case law as per the reason to believe including the decision in Kelvinator of India Limited (supra). Other decisions of this Court 27. In Mohan Gupta (HUF) v. Commissioner of Income Tax-XI (supra) the return .....

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143 (1) did not involve the application of mind by the AO and the new information had resulted from the scrutiny assessment for AY 2007-08. The Court relied on its decision in Orient Craft Limited (supra) and held that the record does not show any tangible material that created the reason to believe that income had escaped assessment. Rather, the reassessment proceedings amount to a review or change of opinion carried out in the earlier AY 2005-06, which amounts to an abuse of power and is imper .....

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tice was issued by the AO to the Assessee under Section 148 of the Act. The Court relied on the decision in Orient Craft Limited (supra) and held that while the AO had in the reasons for reopening the assessment set out the information received from the ED, he had failed to examine if that information provided the vital link to form the "reason to believe" that income of the Assessee had escaped assessment for the AY in question. The AO had not stated that he examined the returns filed .....

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essee an intimation under Section 143 (1) of the Act. This was for the AY 1999-2000. On 9th January 2002 the return was sought to be reopened under Section 147 of the Act but the reasons for so doing did not refer to any tangible material which the AO had come across subsequent to the filing of the return. The Court this time relied on the decision in Commissioner of Income Tax v. Kelvinator of India (supra) and held that a valid reopening of the assessment has to be based only on tangible mater .....

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amount had escaped assessment after having examined the audit report and consequently notice was issued on 21st October 2005. The Court came to the conclusion that since the report of the statutory Auditor had already been enclosed with the return filed, there was no material that the AO came across so as to have reasons to believe that the income had escaped assessment." The Court relied on the decision in Orient Craft Limited (supra) and answered the question on the validity of the reope .....

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sioner of Income tax v. Zuari Estate Development & Investment Co. Ltd. (supra). The decision in Zuari Estate Development 32.1 The Supreme Court in Zuari Estate Development & Investment Co. Ltd. (supra) was dealing with an appeal by the Revenue against the decision of the Bombay High Court in Zuari Estate Development & Investment Co. (P) Limited v. J.R. Kankar, Dy. CIT (2004) 139 Taxman 209 (Bom). 32.2 The facts in brief were that the Assessee filed its return for the AY 1991-92 which .....

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he Assessee's accounts for the AY 1991 had disclosed the amount of ₹ 84,47,112 received from the Bank by the Assessee way back on 20th June 1984 as a "current liability" under the heading "Advance against deferred sale of building". During the course of the assessment for AY 1994-95, the AO posed a query as to why the capital gains arising out of the sale of the premises should not be taxed in the AY 1991-92. On this basis notice was issued on 4th December 1996 unde .....

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the Supreme Court reversed the decision of the Bombay High Court by relying on the decision in ACIT v. Rajesh Jhaveri Stock Brokers (P) Limited (supra). The Supreme Court found that the contention of the Revenue to the effect that there was no question of change of opinion‟ since the original return was accepted under Section 143 (1) of the Act, was not even addressed by the High Court. 32.6 To be fair to the Bombay High Court, the decision in Rajesh Jhaveri Stock Brokers (P) Limited (supr .....

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Court was being set aside, the Supreme Court also set aside the subsequent order dated 29th January 2004 of the ITAT and remitted the matter to the ITAT to decide the appeal on merits. Decisions post Zuari Estate Development 33. The true purport of the decision in Supreme Court in Zuari Estate Development and Investment Co. Ltd. (supra) came for consideration before the Bombay High Court in Writ Petition No. 3027 of 2015 (Khubchandani Healthparks Pvt. Ltd. v. Income tax office 6(3)(4), Mumbai). .....

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in Zuari Estate Development and Investment Co. Ltd. (supra) has held that the condition precedent for the issue of reopening notice namely, reason to believe that income chargeable to tax has escaped assessment, has no application where the assessment has been completed by intimation under Section 143 (1) of the Act. The law on this point has been expressly laid down by the Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra) and the same would continue to apply and be binding .....

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ation under Section 143 (1) of the Act. 34. Recently in Olwin Tiles (India) (P.) Ltd. v. Deputy Commissioner of Income Tax (2016) 66 taxman.com 8 (Guj), the Gujarat High Court dealt with the case where the initial return was processed under Section 143 (1) of the Act, and later notice was issued under Section 148 of the Act seeking to reopen the assessment of the Assessee for the said AY 2011-12. The Court took note of the decision Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and negatived the .....

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t have reason to believe that income chargeable to tax had escaped assessment. The Court however did not refer to the decision of the Supreme Court in Zuari Estate Development and Investment Co. Ltd. (supra). Summary of the legal position 35.1 The upshot of the above discussion is that where the return initially filed is processed under Section 143 (1) of the Act, and an intimation is sent to an Assessee, it is not an 'assessment' in the strict sense of the term for the purposes of Secti .....

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r words, the requirement in the first proviso to Section 147 of there having to be a failure on the part of the Assessee "to disclose fully and truly all material facts" does not at all apply where the initial return has been processed under Section 143 (1) of the Act. 35.3 As explained in Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) "an intimation issued under Section 143 (1) can be subjected to proceedings for reopening", so long as the ingredients of Section 147 are fulfi .....

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Jhaveri Stock Brokers P. Ltd. (supra) and reiterated by it in Zuari Estate Development and Investment Co. Ltd. (supra) an intimation under Section 143 (1) (a) cannot be treated to be an order of assessment. There being no assessment under Section 143 (1) (a), the question of change of opinion does not arise. 35.6 Whereas in a case where the initial assessment order is under Section 143 (3), and it is sought to be reopened within four years from the expiry of the relevant assessment year, the AO .....

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rds, where reopening is sought of an assessment in a situation where the initial return is processed under Section 143 (1) of the Act, the AO can form reasons to believe that income has escaped assessment by examining the very return and/or the documents accompanying the return. It is not necessary in such a case for the AO to come across some fresh tangible material to form 'reasons to believe' that income has escaped assessment. 35.8 In the assessment proceedings pursuant to such reope .....

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sition, when the case at hand is examined, it is seen that the return filed having been processed under Section 143 (1) of the Act, there was no occasion for the AO to form an opinion on whether that was any escapement of income to begin with. A perusal of reasons to believe reveals that the AO on going through the return subsequently found that the Assessee had showed a loss of the firm, M/s. Rangwala Enterprises at ₹ 3,12,885. A loss of ₹ 12,94,055 of the firm was converted into a .....

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