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2017 (1) TMI 122 - MADRAS HIGH COURT

2017 (1) TMI 122 - MADRAS HIGH COURT - TMI - Validity of reopening of assessment - Held that:- Merely by virtue of the non-action on the part of the assessing officer in the case of the present assessee, i.e. by his failure to issue a notice under section 143 (2) of the Act, the Department gets the advantage of another four years from 31.3.2002 to initiate proceedings for re-assessment. This obviously can neither be the proper interpretation of section 147 nor the intention of Legislature. - .....

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: Mr. Muralidharan For the Respondent : Mr. J. Narayanasamy JUDGMENT ( Order of the Court was pronounced by Dr. Anita Sumanth, J. ) This Tax Case (Appeal) filed by the assessee raises the following two substantial questions of law admitted for consideration of this Court. 1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law on holding that the appellant is not entitled to claim the expenditure of ₹ 5,50,000/- paid to the retiring partner und .....

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deed of retirement provided for a sum of ₹ 5,50,000/-(Rupees five lakhs and fifty thousand ) to be paid by the firm to the retiring partner 'as compensation for his agreeing to retire from the firm'. The aforesaid sum of ₹ 5.5 lakhs was claimed as a deduction for the purposes of computation of tax under the provisions of the Income Tax Act (hereinafter referred to as 'Act') by the firm. 3. The return of income filed in respect of A Y 1998-99 was processed and an inti .....

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d as 'lump sum payment made as a compensation for future profits forgone by the retiring partner' in the Profit and Loss account and was, at best, contingent. 4. The appeal before the Commissioner of Income Tax (Appeals) was rejected vide order dated 30.9.2004, which order was confirmed by the Income tax Appellate Tribunal on 18.8.2006. It had been contended by the assessee before both appellate authorities that the re-assessment lacked requisite jurisdiction under section 147 of the Act .....

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e Income Tax Department. 6. We first address the question of jurisdiction. The present re-assessment is pursuant to a prima facie intimation in terms of section 143 (1) (a) of the Act. Tribunal concludes the issue adverse to the appellant based on the judgment of the Supreme Court in the case of DCIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (295 ITR 499) that has been rather mechanically applied. The question that now arises for our consideration is whether the assessing officer could, having .....

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sufficiency of reasons on the basis of which re-assessment is initiated, the existence or otherwise such reason to believe is certainly open to verification and would be evident from the reasons recorded prior to issue of notice under section148 as required in terms of section 148(2) of the Act. In order to examine this aspect of the matter, the records were called for and have been duly produced for our perusal by Mr..Narayanaswamy. The reasons recorded are as follows: The debit claimed toward .....

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y on the basis of the return of income and the enclosures thereto, being the financials and the deed of partnership, to initiate proceedings for re-assessment. The aforesaid documents however are part of record and the basis on which the intimation under section 143(1)(a) has been issued on 1.12.98. Let us bear in mind that the intimation dated 1.2.1998 has been manually issued, being prior to the electronic era which came into force on and with effect from 2003. The assessing officer has thus e .....

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n him to attend his office and require him on a date to be specified therein, to produce or cause to be produced any evidence on which the assessee may rely in support of such claim. Having done so, an assessment is to be completed in terms of section 153(1) of the Act within a period of two years from the end of the assessment year in which the income was first assessable, in this case, on or before 31.3.2001. 10. Let us now see the sequence of events that have transpired in this case. The asse .....

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01. This was not done in the present case. Subsequently, a notice under section 148 has been issued on 9.12.2002 under section 148 of the Income Tax Act taking advantage of the now extended limitation of four years to re-assess income on the basis of the same materials that were available with the authority as part of the record. 11. The phrase reason to believe in section 147 relates to such other new or tangible material as may have come to the knowledge of the assessing officer pursuant to th .....

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nded on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of change of opinion as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief. 12. If the assessing officer, .....

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ental requirement of section 147, it would be apparent that the exercise undertaken by the Revenue in this case is not one of re-assessment, but of review. The reasons make it abundantly clear that the re-assessment is sought to be initiated on the basis of the return of income and the enclosures which were available with the assessing officer since 2.11.1998 and which ought to have prompted him to issue a notice under section 143(2) of the Act to conduct the proceedings under scrutiny. What is .....

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n Bench of the Delhi High Court in the case of Commissioner of Income Tax Vs. Orient Craft Ltd (354 ITR 546) deals specifically with this aspect of the matter. The substantial question of law that was dealt with by the High Court is as follows; Was the Tribunal right in law in holding that in the absence of any tangible material available with the Assessing Officer to form the requisite belief regarding escapement of income, the reopening of the assessment made under section 143(10 is bad in law .....

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turb the finality of the intimation under section 143(1) at his whims and caprice; he must have reason to believe within the meaning of the section. 15. There is yet another relevant aspect. Mr.Kapur, to whom the payment was made in the present case, also retired from two other firms simultaneously, M/s.Jarvis International (hereinafter referred to as Jarvis ) and M/s Aryavartha Impex (hereinafter referred to as Aryavartha ). The facts in the case of Jarvis, Aryavartha and TANMAC, the appellant .....

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on of jurisdiction under section 148 was bad in law. 16. The facts as well as the law remain identical in all three cases. Thus merely by virtue of the non-action on the part of the assessing officer in the case of the present assessee, i.e. by his failure to issue a notice under section 143 (2) of the Act, the Department gets the advantage of another four years from 31.3.2002 to initiate proceedings for re-assessment. This obviously can neither be the proper interpretation of section 147 nor th .....

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Assessing Officer had taken a conscious decision to allow the same as a revenue expenditure. On the other-hand, in the present case, the Appellant s assessment was not completed after scrutiny u/s.143(3). That means, the Assessing Officer did not have the opportunity to examine the allowability of ₹ 5,50,000/- paid to Sri P.C.Kapur. Since there was no application of mind and consequently no conscious decision on the part of the Assessing Officer to allow this amount, it cannot be said tha .....

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536) had occasion to consider a similar question and the Division Bench, at Page 546, holds as follows; Having regard to the judicial interpretation placed upon the expression reason to believe , and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words reason to believe have to be understood in a liberal man .....

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). 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 issued earlier under section 143(1). It would in effect place an assessee in whose case the return was processed under section 143(1) in a more vulnerable position than an assessee in whose case there wa .....

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