TMI Blog2019 (5) TMI 1800X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any addition in respect to the item shown to have been escaped assessment in the reasons recorded by ibid letter dated 19.03.2015. During reassessment when the AO finds that the item on the basis of which he reopened does not survive, then the reasons recorded to reopen loses its significance and the fall out is that the AO's jurisdiction to reassess is without jurisdiction and therefore is illegal and fragile in the eyes of law Thereafter he should have dropped the reassessment proceeding there only as discussed supra. Therefore, after having no jurisdiction to reassess his further action of a new fact finding in the absence of any item specified in the reasons recorded which is the foundation on which he reopens when no longer subsists, the AO's action is hit being 'Quarum non-judice' and, therefore, the impugned addition is non-est in the eyes of law and so it has to necessarily go. Therefore, the appeal of the Revenue is devoid of any merits - Decided in favour of assessee. - I.T(SS).A. Nos. 122 & 123/Kol/2017 - - - Dated:- 22-5-2019 - Shri A. T. Varkey, JM Dr. A. L. Saini, AM For the Appellant: Shri A. K. Singh, CIT, DR For the Respondent: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual production gathered from the Report of Justice M. B. Shah Commission on illegal mining and Statutory Audited Account of the assessee company, it was observed that the assessee company has suppressed its actual quantity of production of iron ore to the tune of 8,78,079 MT valued at ₹ 1,79,41,61,259/- (taking the rate of gross sale/turnover of assessee company as reflected in their Annual Account which comes to ₹ 2043.28 per MT). The assessee company has shown production of Iron Ore of 10,98,385 MT in its statutory audited account for the FY 2008-09 relevant to AY 2009-10 whereas from the M. B. Shah Commission Report at Page No. 291, Annexure-7, Vol. II A of 1st report on Odisha, it reveals that actual production of Iron Ore of the assessee company in the same period was 19,76,464 MT. Hence, the production of iron ore remains undisclosed in the books of account of the assessee company, worked out to 8,78,089 MT valued at ₹ 1,79,41,61,259/- for the AY 2009-10. Considering the above, I have reason to believe that income to the tune of ₹ 1,79,41,61,259/- chargeable to tax has escaped assessment in AY 2009-10. A bare perusal of the reasons recorded reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Majinder Singh Kang Vs. CIT (2012) 25 taxmann.com 124 (P H) and also the decision of the Hon'ble High Court of Punjab Haryana in the case of CIT Vs. Mehak Finvest (P.) Ltd. (2014) 52 taxmann.com 51 (P H) wherein the Hon'ble High Court held after considering scope of Explanation (3) to sec. 147 of the Act that the AO is empowered to make addition even on the ground on which reassessment notice might not have been issued where during reassessment proceedings, he finds that some other income has escaped assessment which comes to his notice during the course of proceedings for reassessment u/s. 148 of the Act. According to the Hon'ble High Court, the provision nowhere postulates or contemplates that the AO cannot make any addition or any other ground unless some addition is made on the ground on which reassessment had been initiated. It was pointed out to us by the Ld. DR that the decision in Majinder Singh Kang (supra) was challenged by the assessee by Special Leave Petition no. 13028 of 2011 which was dismissed and has been followed by the subsequent order of the Hon'ble P H High court in the CIT Vs. Mehak Finvest (P.) Ltd., supra. So, it was conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section . The proviso deals with reopening of an assessment upon the expiry of a period of four years from the end of the relevant assessment year and does not fall for interpretation in this appeal. Explanation 3 to section 147 was inserted by the Finance (No. 2) Act of 2009, with effect from 1-4-1989. Explanation 3 provides as follows : Explanation 3.--For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148. 4. Prior to its amendment with effect from 1-4-1989, section 147 provided as follows :-- 147. Income escaping as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amendment to be clarificatory and contains the following Explanation : Some courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent. With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in section 147 to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of section 148. 7. In order to appreciate the reasons for the amendment inserting Explanation 3, it would be necessary to advert to some of the judgments of the High Courts, prior to the amendment. The Punjab and Haryana High Court, in its decision, in Vipan Khanna v. Asstt. CIT [2002] 255 ITR 2201 dealt with the question as to whether, after initiating p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y alien then the assessing authority has to follow sub-section (2) of section 148 with regard to the escaped income which comes to his knowledge during the course of the proceedings. Hence, the view of the Punjab and Haryana High Court and the Kerala High Court was that, once the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment and proceeds to issue a notice under section 148, it is not open to him to assess or, as the case may be, reassess the income under an independent or unconnected issue, which was not the basis of the notice for reopening the assessment. 8. Parliament stepped in to correct what it regarded as an incorrect interpretation of the provisions of section 147. The Memorandum explain-ing the provisions of Finance (No. 2) Bill of 2009 states in this background that some courts had held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which reasons have been recorded for reopening the assessment and that it was not open to him to touch upon any other issue for which no reasons have been recorded. This interpretation was regarded by Parliament as being contrary to legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the income which he has reason to believe has escaped assessment and which formed the subject-matter of a notice under section 148(2), it is nonetheless open to him to assess any other income which, during the course of the proceedings is brought to his notice as having escaped assessment. 11. The rival submissions which have been urged on behalf of the revenue and the assessee can be dealt with, both as a matter of first principle, interpreting the section as it stands and on the basis of precedents on the subject. Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to believe under section 147 and following the issuance of a notice under section 148, the Assessing Officer has the power to assess or reassess the income, which he has reason to believe had escaped assessment and also any other income chargeable to tax. The words and also cannot be ignored. The interpretation which the Court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament having used the words assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly stipulated that the Assessing Officer has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter. 12. In CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 , the Supreme Court dealt with the following question of law in the course of its judgment:-- Where an item unconnected with the escapement of income has been concluded finally against the assessee, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item for the purpose of computation of the escaped income? The issue which arose before the Supreme Court was whether, in the course of a reassessment on an escaped item of income could an assessee seek a review in respect of an item which stood concluded in the original order of assessment. The Supreme Court dealt with the provisions of section 147, as they stood prior to the amendment on 1-4-1989. The Supreme Court held that the expression escaped assessment includes both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in Travancore Cements Ltd.'s case (supra). This line of authority, would now cease to reflect the correct position in law, by virtue of the amendment which has been brought in by the insertion of Explanation 3 to section 147 by Finance (No. 2) Act of 2009. The effect of the Explanation is that once an Assessing Officer has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice under section 148, it is open to him to assess or reassess income in respect of any other issue though the reasons for such issue had not been included in the reasons recorded under section 148(2). 14. The second line of precedent is reflected in a judgment of the Rajasthan High Court in CIT v. Shri Ram Singh [2008] 306 ITR 343 . The Rajasthan High Court construed the words used by Parliament in section 147 particularly the words that the Assessing Officer 'may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings' under section 147. The Rajasthan High Court held as follows : . . . if is only wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Rajasthan High Court in Shri Ram Singh's case (supra), Explanation 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab Haryana High Court in CIT v. Atlas Cycle Industries [1989] 180 ITR 3191. The decision in Atlas Cycle Industries' case (supra) held that the Assessing Officer did not have jurisdiction to proceed with the reassessment, once he found that the two grounds mentioned in the notice under section 148 were incorrect or non-existent. The decisions of the Punjab Haryana High Court in Atlas Cycle Industries' case (supra) and of the Rajasthan High Court in Shri Ram Singh's case (supra) would not be affected by the amendment brought in by the insertion of Explanation 3 to section 147. 16. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words and also by the Rajasthan High Court in Shri Ram Singh's case (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147(1) as they stood after the amendment of 1-4-1989 continue to hold the field. 18. In that view of the matter and for the reasons that we have indicated, we do not regard the decision of the Tribunal in the present case as being in error. The question of law shall, accordingly, stand answered against the revenue and in favour of the assessee. The appeal is, accordingly, dismissed. There shall be no order as to costs. It should be kept in mind that the concept of assessment is governed by the time- barring rule and the assessee acquires a right as to the finality of proceedings. Queitus of the completed assessment is the Fundamental Rule and exception to this rule is Re-opening of assessment by AO under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income chargeable to tax for that assessment year has escaped assessment. If this condition is not satisfied at the first place, then it cannot be said the AO has validly assumed jurisdiction u/s. 147 of the Act. Therefore, the question for consideration is whether on the basis of the reasons recorded by the AO, he could have validly usurped the jurisdiction to reopen and reassess the assessee on a different issue which has not found place in the reason recorded, when the fact is that the precise basis (issue) recorded in reasons to believe escapement of income has disappeared or dropped. For that it has to be seen as to whether the AO on the basis of whatever material before him, [which he had indicated in his reasons recorded ] the AO had reasons warrant holding a belief that income chargeable to tax has escaped assessment. It is important to remember that the reasons recorded by AO to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed, while adjudicating the legal issue of AO's usurpation of jurisdiction u/s. 147 of the Act. Moreover, the Parliament has given power to AO to reopen the assessment, if the condition precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he eyes of law. At the cost of repetition we say that AO without satisfying the condition precedent as stipulated under section 147 of the Act cannot have successfully usurped the reopening jurisdiction, so as discussed above the precise fact for which the AO re-opened in this case disappeared after AO dropped the same, thereafter ideally the AO should have dropped the reassessment proceedings and ought not to have proceeded to reassess the assessee on an issue which he did not refer at all in the reasons recorded to justify re-opening. The Explanation (3) to Sec. 147 of the Act, will come to the aid of the AO/department only when the AO has successfully usurped/assumed the reopening jurisdiction on the strength of the reasons recorded by him to re-open the assessment. So without successfully satisfying the condition precedent to reopen i.e. reason to believe escapement of income, which can be discerned from reading of the reasons recorded by the AO that too on a stand alone basis, the AO cannot proceed to make any other additions without making any additions on the facts specifically stated in the reasons recorded for which he decided to reopen. We would like to make it clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foundation for recording of reasons to believe, is not assessed or reassessed in the order under section 147, then it is not mere open to the AO to independently assess any other income, which comes to his notice subsequently. (Emphasis given by us) 11. Since we have taken note that there is no whisper about the escapement of income i.e. loss created by misusing client's code modification has been mentioned in the reasons for reopening conveyed to the assessee vide letter dated 19.03.2015 no addition in respect of this can be made without making any addition in respect to the item shown to have been escaped assessment in the reasons recorded by ibid letter dated 19.03.2015. During reassessment when the AO finds that the item on the basis of which he reopened does not survive, then the reasons recorded to reopen loses its significance and the fall out is that the AO's jurisdiction to reassess is without jurisdiction and therefore is illegal and fragile in the eyes of law; and thereafter he should have dropped the reassessment proceeding there only as discussed supra. Therefore, after having no jurisdiction to reassess his further action of a new fact finding in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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