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Pr. Commissioner of Income Tax-Vadodara-1 Versus Laxmiraj Distributors Pvt. Ltd.

2017 (9) TMI 743 - GUJARAT HIGH COURT

Reopening assessment - validity of notice - Tribunal held that the formation of the belief by the Assessing Officer that income chargeable to tax had escaped assessment was not correct - Held that:- The Tribunal went into minutest details of the reasons recorded by the Assessing Officer and relied on the material which had come on record during the assessment and the appellate proceedings to hold that such reasons were not valid. In other words, without so saying, the Tribunal held that the form .....

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ty of such formation of belief is of course open to challenge. Nevertheless, in our opinion, it is not permissible to criticize the formation of belief and to declare it as invalid from the inception by carrying out threadbare examination of documents, materials and the evidences which have come on record during the assessment proceedings. It is one thing to hold that a certain addition or disallowance made by the Assessing Officer was impermissible on the basis of materials on record. It is ent .....

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mpermissible. - order of ITAT set aside. - Decided in favour of revenue - Tax Appeal No. 472 of 2017 - Dated:- 6-9-2017 - MR. AKIL KURESHI AND MR. BIREN VAISHNAV, JJ. For The Appellant : MR KM PARIKH, ADVOCATE For The Opponent : MR B S SOPARKAR, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This tax appeal is filed by the Revenue challenging judgement of the Income Tax Appellate Tribunal dated 13.10.2016. By the impugned judgement, the Tribunal had declared that the notice .....

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nvalid? 2. Facts are as under: The respondent-assessee is a company registered under the Companies Act. For the assessment year 2009-10, the assessee had filed the return of income on 13.09.2009 declaring total income of ₹ 78.46 lacs (rounded off). The return was accepted under section 143(1) of the Act. No scrutiny assessment under section 143(3) of the Act was framed. Subsequently, a survey was carried out at the premises of the assessee-company. A statement of the Director of the compan .....

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To avoid litigation and penalty and to buy peace, the company would voluntarily disclose an amount of ₹ 9 crores as its undisclosed income which would comprise of ₹ 7.52 crores for the assessment year 2009-10 towards share capital reserves and ₹ 1.48 crores for the assessment year 2013-14 towards estimated profit for the year. In such letter, details of the companies, to which, 7.52 lacs shares were allotted with premium of ₹ 676.80 lacs were given. 3. It appears that de .....

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were found, which are inventoried and impounded as annexure BF-1 to BF- 15. On scrutinizing the annexure BF-1, it was noticed that the assessee had introduced unaccounted capital through share capital and share premium. The assessee company raised an amount of ₹ 7,52,00,000/- by allotting its shares to 10 different companies, located at Surat, Ahmedabad and Kolkata. The assessee company had allotted total 7,52,000 shares with face value of ₹ 10/-at a premium of ₹ 90/- in F.Y. .....

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Pvt. Ltd. 48000 4800000 48000 480000 3 Flacsel Contech Pvt Ltd 49000 4900000 49000 490000 4 Chirag Call Shops Pvt. Ltd. 25000 2500000 25000 250000 5 Angelica Commotrade Pvt Ltd 80000 8000000 80000 800000 6 Anticlock Vyapaar Pvt Ltd. 95000 9500000 95000 950000 7 Veronica Commerce Pvt Ltd 100000 10000000 100000 1000000 8 Muse Dealers Pvt Ltd 155000 15500000 155000 1550000 9 Medler Dealcom Pvt Ltd 125000 12500000 125000 1250000 10 Winter fresh food Pvt Ltd 45000 4500000 45000 450000 Total 752000 75 .....

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the company was asked vide Q. No. 57 to 70 of the statement recorded u/s 131 of the Act on 03.09.2012 about details of investors of the company and the investments made by them. But the director Shri Parasmal Jain who is the only beneficiary to enjoy the profits of the company and who take care all the matters of the company, was unable to give any detail in respect of investors. Even he was not able to name any one of investors who made such huge investments in the company. Later, on the same .....

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rves 7,52,00,000 2013-14 Estimated profit for the year 1,48,00,000 Regarding unaccounted income an account of bogus share capital the assessee vide above mentioned letter, submitted the following names of companies through which unaccounted money was introduced: 1. Shnkant Broking Pvt Ltd 2. Bhandari Glasses Pvt Ltd 3. Flacsel Contech Pvt Ltd 4. Chirag Call Shops Pvt Ltd 5. Angelica Commotrade Pvt Ltd 6. Anticlock VyapaaertLtd 7. Veronica Commerce Pvt Ltd 8. Muse Dealers Pvt Ltd 9.Medler Dealcom .....

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sclosed as a result of survey at ₹ 7.52 crores over and above ₹ 78,46,643/- returned in the original return filed on 13.09.2009. In view of the above facts, I have reason to believe that income of ₹ 7.52 crores have been escaped from assessment. Therefore notice u/s. 148 is being issued for A.Y. 2009-10. 4. The Assessing Officer passed the order of assessment under section 143 (3) read with section 147 of the Act on 31.03.2014. He made the addition of ₹ 7.52 crores as bog .....

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dity of the notice of reopening which the Tribunal permitted since it touched upon the very jurisdiction of the Assessing Officer to reassess. The asssessee also canvassed detailed arguments on the merits of the additions made by the Assessing Officer and confirmed by the CIT(Appeals). With respect to the legality of the notice for reopening, the assessee had raised following five contentions: i. The Assessing Officer has not established a live link between the material relied upon to reopen the .....

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e has to be adjudged on the basis of the reasons recorded which cannot be supplemented by additional reasons. 6. The detailed arguments were made by both sides before the Tribunal on the question of validity of the reopening of the assessment as well as on the merits of the additions. The Tribunal, by the impugned judgement, held that reopening of assessment was bad in law. Consequently, the Tribunal did not enter into the question of correctness of the additions. The Tribunal was aware that the .....

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Rajesh Jhaveri Stock Brokers P. Ltd. reported in 291 ITR 500 in which, the distinction between the reopening of an assessment which was previously framed after scrutiny and one which was accepted without scrutiny was highlighted. The Tribunal also noticed the decision of this Court in case of Inductotherm (India)(P) Ltd vs. M.Gopalan, Deputy Commissioner of Income Tax reported in 36 taxmann.com 401 [356ITR 481] and proceeded to annul the reassessment on the ground that the formation of belief b .....

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per reasonable prudence that any taxable income has escaped assessment and that the same is not in the nature of a fishing or roving inquiry; respectively and proceed to examine the validly of the impugned reopening before us. 31. The assessee's plea is that the impounded document annexure BF-Ol is its annual statement] report at page 01 to 620 of the paper book already tiled with the return. The Assessing Officer's first reason is that a scrutiny thereof indicates the assessee to have i .....

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n question. He fails to refer to any such material. We accordingly observe that the impugned reopening reasons nowhere indicate any live nexus between the income sought to be reassessed. Our View therefore is that the Assessing Officer has proceeded on a mere apprehension leading to the impugned long drawn process of roving inquiry which has held to be not permissible by the hon ble apex court. This met reason accordingly fails the test of cause-effect relationship as discussed in preceding para .....

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in question. We put up a specific query to Shri Patel to point out that the above four share capital purchasers are in any way related to assessee's directors. His case is that the assessee is a closely held company and it is not possible for the department to prove this relationship. This plea does not impress upon us. We notice from Shri Jain's survey statement that he was put up a very specific query about his family members and assesses's other directors. The same were sufficien .....

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made any effort to find about finding of the assessment in cases of investor companies as well as the four individual assessee who have repurchased the share capital despite that the fact it itself is the assessing authority of all of them. We rely on the case law in preceding paragraphs that the basic tenet of cause-effect relation between the reopening reasons and taxable income having escaped assessment is accordingly not made out. The assessee succeeds in the instant argument as well. 33. We .....

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financial year 2008-09 and this survey statement is dated 03-09-20 12 i.e. after a time gap of four years. There is further no issue that the department had already impounded BF-Ol on 31-08-2012 stating all details of assessee's companies contained in its annual statement and other documents. The same was furnished back only after issuance of reopening notice (supra). There is thus nothing in Shri Jain's statement which could be held to be treated as an admission or that it is pointing t .....

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o be made merely on the basis of assessee's admission. We accordingly reject Revenue's contentions supporting this third limb of the impugned reopening as well. 34. This leaves us with the last reason of reopening stated to be based assessee's written correspondence dated 03.09.2012 and 04.09.2012 disclosing names of ten investor companies through whom it had allegedly introduced the impugned unaccounted money. We revert back to page 648 of the paper book. Shri Jain submitted a hand .....

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ng at his disposal all the impounded material coupled with details of the ten investor companies. The Revenue at this stage seeks to involve estople principle. Its case is that the above correspondence binds the assessee since filed during survey or under section 131 of the act; as the case may be. We do not agree with this plea either way. We quote Board's circular hereinabove to hold that the same hardly carries any significance in absence of corroborative evidence. The Revenue's latte .....

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R. Thakkar (1996) 56 TTJ Ahd 460 rejecting a similar argument that a statement made during survey cannot be accepted in piecemeal. We adopt the very reasoning to observe that the Revenue's approach in seeking to assess assessee's amount declared of ₹ 9 crores and at the same time questioning genuineness thereof by adopting pick and choose method is accordingly rejected. The assessee thereofre succeeds in its fourth argument as well. 35. We have already discussed in preceding parag .....

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ince the re-openings therein fulfilled all relevant parameters as per facts involved therein. The same are accordingly distinguished. 36. We rely upon our detailed discussion hereinabove to finally conclude that all four reasons of the impugned reopening recorded by the Assessing Officer have to be held as not sustainable as per the settled law. We accordingly quash the impugned re-opening. The assessee's additional ground is accepted. All other arguments advanced at both parties behest qua .....

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52 crores for the assessment year 2009- 10 under the head of share capital reserves. The letter of course suggested that this was being done to by peace and to avoid protected litigation as also since it was not possible to reconcile the company's accounts after long gap of time. We may also recall that neither before the Assessing Officer nor before the CIT (Appeals) the assessee had raised any ground of invalidity of the notice of reopening of assessment. This is not to suggest that before .....

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as so done? 8. In case of Rajesh Jhaveri Stock Brokers P. Ltd (supra), the Supreme Court highlighted a clear distinction between the assessment under section 143(1) of the Act and one in which, the assessment is made by the Assessing Officer after scrutiny under section 143(3) of the Act. This distinction was noticed in the background of the notice of reassessment where the return of the assessee was accepted under section 143(1) of the Act. In this context, it was held and observed that in the .....

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sessing 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 Delhi Hig .....

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s whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ; Raymond Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)]. 9. The ratio of decision in case of Rajesh Jh .....

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assessee was accepted under section 143(1) of the Act. One of the contentions raised on behalf of the assessee was that the time limit for issuing notice under sub section (2) of section 143 of the Act to scrutinize the return of the assessee having expired, it was not open for the Assessing Officer to resort to reopening of the assessment. Such a contention was rejected by the Court. However, it was observed that even in case of reopening of an assessment where the return was accepted without .....

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ion 156, that did not per se preclude the right of the Assessing Officer to proceed under section 143(2). That right is preserved and is not taken away. Between the period from April 1, 1989 to March 31, 1998, the second proviso to section 143(1)(a), required that where adjustments were made under the first proviso to section 143(1)(a), an intimation had to be sent to the assessee notwithstanding that no tax or refund was due from him after making such adjustments. With effect from April 1, 1998 .....

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s very clear from the use of the word intimation as substituted for assessment that two different concepts emerged. While making an assessment, the Assessing Officer is free to make any addition after grant of opportunity to the assessee. By making adjustments under the first proviso to section 143(1)(a), no addition which is impermissible by the information given in the return could be made by the Assessing Officer. The reason is that under section 143(1)(a) no opportunity is granted to the ass .....

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, 1994, and ultimately omitted with effect from June 1, 1999, by the Explanation as introduced by the Finance (No. 2) Act of 1991 an intimation sent to the assessee under section 143(1)(a) was deemed to be an order for the purposes of section 246 between June 1, 1994, to May 31, 1999, and under section 264 between October 1, 1991, and May 31, 1999. It is to be noted that the expressions intimation and assessment order have been used at different places. The contextual difference between the two .....

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stood at different points of time. Under section 143(l)(a) as it stood prior to April 1, 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 and 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 minimize the departmental work to scrutinize ea .....

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he assessee, or (b) no refund is due to him. It is significant that the acknowledgment 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 such application only recovery indicated to be payable in the intima .....

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efore making the assessment, reassessment or re-computation under section 147, the Assessing Officer shall serve on the assessee a notice containing all or any of the requirements which may be included in a notice under subsection (2) of section 139; and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that subsection. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so. 17 .....

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the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue n .....

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roviso. 10. In case of Lakhmani Mewal Das (supra), the Supreme Court observed that the reasons for the formation of the belief contemplated by section 147 of the Act for the reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there had been escapement of the .....

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and where the scrutiny assessment has been previously framed. In the former case, the Assessing Officer cannot be stated to have formed any opinion and therefore, unlike in the latter case, the concept of change of opinion would have no applicability. Despite this clear distinction, the common thread that would run through both sets of exercises of reopening of assessment is that the Assessing Officer must have reason to believe that income chargeable to tax had escaped assessment. Such reason .....

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assessment) the question is whether there was relevant material on which a reasonable person could have formed the requisite belief and the final outcome of the proceedings is not relevant. 12. We may test the decision of the Tribunal on the basis of these legal principles. We may recall, the Assessing Officer had recorded detailed reasons. These reasons referred to survey action carried out in case of the respondent-assessee company on 30.08.2012 during which, incriminating documents were foun .....

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ares. During the course of survey, statement of Shri Parasmal Jain, Director of the company was recorded on 31.08.2012. His further statement was recorded under section 131 of the Act on 31.09.2012. He was asked to give details of investors of the company and the investments made by them. He was unable to give any such details. He had also admitted in his letter of the same day, ₹ 9 crores as unaccounted income. Company had subsequently under letter dated 04.09.2012 reiterated such admissi .....

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is relevant to this aspect. The Tribunal went into minutest details of the reasons recorded by the Assessing Officer and relied on the material which had come on record during the assessment and the appellate proceedings to hold that such reasons were not valid. In other words, without so saying, the Tribunal held that the formation of the belief by the Assessing Officer that income chargeable to tax had escaped assessment was not correct. As noted, as the judicial trend suggests that in a case .....

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material. It is equally well established that the notice for reassessment cannot be issued for a mere roving or a fishing inquiry. Nevertheless, the formation of belief is a subjective satisfaction of the Assessing Officer to be arrived at on the basis of objective consideration of materials on record. The validity of such formation of belief is of course open to challenge. Nevertheless, in our opinion, it is not permissible to criticize the formation of belief and to declare it as invalid from .....

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The conclusion, that a certain addition or disallowance was not permissible in face of the evidence on record, rests in the realm of testing the Assessing Officer's findings on the issue and must necessarily take within its sweep the evidence and materials brought on record during the assessment proceedings and sometimes, even additional material which may have been allowed to be brought on record at the appellate stage. Such exercise would necessarily rests on evaluation of evidence and pre .....

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while examining a finding by the Assessing Officer as to the addition or disallowance in an order of assessment and his formation of belief that income chargeable to tax had escaped assessment. The former would be in the realm of appreciation of evidence which would be on the basis of preponderance of probabilities and application of mind on the facts so deduced. The later would be in the realm of reasonableness of the belief of the Assessing Officer that income chargeable to tax had escaped ass .....

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ome chargeable to tax has escaped assessment. If such material ex facie demonstrates either in fact or in law that the Assessing Officer could not have formed a belief that income chargeable to tax had escaped assessment, the notice could as well be quashed. 14. In the present case, the Tribunal has evaluated the evidence on record in minutest detail as if each limb of the Assessing Officer's reasons recorded for issuing notice of reopening was in the nature of an addition made in the order .....

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16. Decision in case of TANMAC India vs. Deputy Commissioner of Income Tax, Circle-I, Pondicherry reported in 78 taxmann.com 155 of the Madras High Court seems to be suggesting that if after issuing intimation under section 143(1) of the Act, the Assessing Officer does not issue notice of scrutiny assessment under section 143(2) of the Act, it would not be open for the Assessing Officer thereafter to resort to reopening of the assessment. The High Court placed heavy reliance on the decision of D .....

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143(1) of the Act, notice for reopening cannot be issued, was not accepted by this Court in case of Inductotherm (India)(P) Ltd (supra). Relevant portion of which we have already reproduced earlier. The decision of Delhi High Court in case of Orient Craft Ltd.(supra) came up for consideration before this Court in case of Olwin Tiles India Pvt. Ltd vs. Deputy Commissioner of Income Tax reported in 382 ITR 291. The Court observed as under: 9. In case of Orient Craft Ltd. (supra), heavily relied up .....

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upra). However, in later portion of the judgment in para-18, which is reproduced hereinabove, the Court went further and observed that there was no whisper in the reasons recorded, of any tangible material which came to the possession of the assessing officer subsequent to the issue of the intimation. The Court was, therefore, of the opinion that it reflects an arbitrary exercise of the power conferred under section 147 of the Act. Heavy reliance was placed on the decision of the Supreme Court i .....

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h facts. We are afraid, the Supreme Court never meant to convey that to reopen an assessment, which was accepted under Section 143(1) of the Act, there must be some tangible material, which is alien to the record . 18. The Court thereafter referred to the Division Bench judgement in case of Gujarat Power Corporation Ltd vs. Assistant Commissioner of Income Tax reported in 350 ITR 266 and it was held that in case of reopening of assessment within 4 years from the end of relevant assessment year, .....

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culled out legal proposition. Relevant portion of which reads as under: 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 Section 147 of the Act. In other words, in such event, there is no occasion for the AO to form an opinion after examining the documents enclosed with the return whether in .....

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facts" does not at all apply where the initial return has been processed under Section 143 (1) of the Act. 35.5 As explained by the Supreme Court in Rajesh 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. 35.7 In other words, where r .....

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l be open to the Assessee to contest the reopening on the ground that 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. 20. In case of EL Forge Ltd. vs. Deputy Commissioner of Income Tax, Special Range-I, Chennai reported in 45 taxmann.com 402, the Division Bench of Madras High Court considered the validity of notice of reopening in case of an assessee whose return was .....

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e income computed and all these details were very much there before the Assessing Officer; that there is no denial of the fact that there was no failure on the part of the assessee in disclosing the facts necessary for assessment and that there is no such allegation that the escapement of income was on account of the failure of the assessee in not disclosing fully and truly all material facts. In the circumstances, applying the Supreme Court decision referred to above, we have no hesitation in a .....

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the order of the Tribunal, thereby allowing the appeal. In the light of the above, the appeal is decided in favour of the assessee and the Tax Case Appeal stands allowed. No costs. 21. We are unable to concur with this view. In plain terms, the proviso to section 147 of the Act would apply only in a case where previously assessment has been framed after scrutiny. In a case where the return is accepted under section 143(1) of the Act, the additional requirement that income chargeable to tax had e .....

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in view of the amended section 147 after 01.04.1989 the concept of change of opinion would still apply? The reference and reliance by the High Court on the decision of Supreme Court of case of Kelvinator of India Ltd.(supra) in the context of requirement of true and full disclosures where a notice has been issued for reopening of the assessment which was originally not framed after scrutiny was simply not useful. 22. The decisions of Delhi High Court in cases of Commissioner of Income Tax-Centr .....

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