TMI Blog2009 (11) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - - - Dated:- 10-11-2009 - CORAM THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN For Petitioner : Mr.S.Sridhar For Respondents : Mr.K.Subramaniam, Standing Counsel. ORDER The petitioner has come up with this writ petition challenging a notice issued under section 148 of the Income Tax Act, 1961 and an order overruling the objections filed by the petitioner to the said notice. 2. I have heard Mr.S.Sridhar, learned Counsel for the petitioner and Mr.K.Subramaniam, learned Standing Counsel for the department. 3. The petitioner is a company, whose main objects, as per the Articles and Memorandum of association, include the manufacturing and marketing of paper and the business of financing. The company was incorporated in 1974. For the assessment year 2004-05 relating to the previous year ending 31-3-2004, the petitioner filed a return of income on 1-11-2004 disclosing a total income of Rs. 3,02,626/-. This income was arrived at by the petitioner by showing an income of Rs.12,80,258/- as interest earned in the activity of money lending, under the head 'business' and after claiming admissible expenses and set off as against brought forward losses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had occurred by reason of either the omission or failure on the part of the assessee to file a return or omission or failure on the part of an assessee to disclose fully and truly, all material facts necessary for the assessment. In paragraph-8 of the said decision, the Supreme Court held that the section postulates a duty on every assessee to disclose fully and truly all material facts and that the question as to what are material facts, would differ from case to case. The court further pointed out in paragraph -9 that the Explanation to section 34 (of the old Act) was inserted "to meet a possible contention that when some account books or other evidence has been produced, there was no duty on the assessee to disclose further facts, which on due diligence, the ITO might have discovered". The court held that in view of the Explanation to section 34, no asssessee would be heard to contend that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority by pursuing an investigation on the basis of what had been disclosed. However the Apex court also made it clear that once all primary facts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making a true and full disclosure of primary facts and that it was for the ITO to draw a correct inference from those primary facts. If an ITO had drawn an inference which was found subsequently to be erroneous, the mere change of opinion with regard to that inference would not justify the initiation of action for reopening the assessment. After holding so, the Apex court also added a note of caution that once there exist reasonable grounds for the ITO to form the belief, it would be sufficient to clothe him with jurisdiction and that the sufficiency of grounds which induced the ITO to act, is not a justiciable issue. While the existence of the belief can be challenged by the assessee, the sufficiency of reasons for the belief cannot be challenged. 12. In S. Ganga Saran and Sons (P) Ltd vs. I.T.O. {(1981) 3 SCC 143}, it was again reiterated that before the ITO can assume jurisdiction to issue notice under section 147 (a), 2 distinct conditions are to be fulfilled namely (i) that he must have reason to believe that the income of the assessee had escaped assessment and (ii) that he must have reason to believe that such escapement was by reason of omission or failure on the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that sections 148 (2) and 151 impose further checks by respectively prescribing (i) the requirement to record reasons and (ii) the requirement for the Commissioner to satisfy himself that it was a fit case for the issue of a notice. Therefore the power conferred upon the ITO was held by the Apex court to have been hedged with several safeguards conceived in the interest of eliminating room for abuse of this power by the assessing officers. 17. In Raymond Woollen Mills Ltd vs. Income Tax Officer {(1999) 236 ITR 34 (SC)}, assessment was reopened on the ground that the assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc., and that however, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. The reason for reopening was that such non-inclusion resulted in undervaluation of inventories and understatement of profits. When a challenge was made, the Supreme Court rejected it on the ground that the Court could only see whether there was prima facie some material on the basis of which the assessment could be reopened and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year: Provided further that the Assessing Officer may assess or reassess such income other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1:- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2:- For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; (b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year). Explanation 1:- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where income chargeable to tax has been underassessed; or (b) where such income has been assessed at too loo a rate; or (c) where such income has been made the subject of excessive relief under this Act or under the Indian Income Tax Act, 1922 (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2:- Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of this section." 22. After the aforesaid amendment under Act 4 of 1988, yet another amendment was made by Direct Tax Laws (Amendment) Act, 1989 and the words "for reasons to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding under this section, can also be included in the assessment. A proviso to the new sub-section provides that if an assessment has been made for the relevant assessment year under sub-section (3) of section 143 or this section, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless the income has escaped assessment due to the failure on the part of the assessee to file a return under section 139 or 142(1) or 148 or to disclose fully and truly all material facts necessary for his assessment. Explanation 1 to the new section, which clarifies the meaning of the term 'disclosure', is the same as Explanation 2 in the existing section. Explanation 2 to the new section clarifies that the following shall also be deemed to be cases of income escaping assessment:- (i) Where no return of income has been furnished by an assessee, although his total income is above the taxable limit; (ii) Where a return of income has been furnished but no assessment has been made, and the assessee is found to have understand his income or claimed excessive loss, deduction, etc., in the return; and (iii) Where an assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment, in cases where an assessment has been made. 27. In the light of the above deeming fiction, if we now look at the order dated 31.8.2009, passed by the second respondent, overruling the objections of the petitioner to the initiation of proceedings, it is seen that the petitioner admittedly earned income solely from interest on fixed deposits and inter corporate deposits and debited significant amount of expenditure. The Assessing Officer has taken a stand, prima facie, that the expenditure debited to the profit and loss account under various heads are not incidental to the earning of interest income. Therefore the stand taken by the second respondent that he has reason to believe that certain income chargeable to tax escaped assessment, cannot be said to be vague, irrational or devoid of any basis. 28. The learned counsel for the petitioner relied upon two decisions, one, of the Division Bench of the Delhi High Court and another, of the Division Bench of this Court. In KLM Royal Dutch Airlines vs. Assistant Director of Income Tax {2007 (292) ITR 49}, relied upon by the learned counsel, a notice under Section 148 was issued on the ground that the income earned by renderin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer failed to record (i) that he had reasons to believe that there was underassessment and (ii) that such underassessment had occurred by reason of the omission or failure on the part of the assessee. 30. But in the case on hand, the reason recorded by the second respondent cannot be said to be vague or a mere doubt. From the return of income filed by the petitioner, the Assessing Officer had found that the petitioner had earned interest on deposits to the tune of Rs.12,80,258/- and that they sought deduction of a sum of Rs.9,26,830.84 towards admissible expenses that included the general administrative expenses, vehicle maintenance, salaries etc. The losses brought forward from the previous assessment years were also set off and the petitioner claimed a total income of only Rs.3,02,626.16. It is this that prompted the second respondent to issue a notice under Section 148 and hence on facts, the case of the petitioner is patently distinguishable from the one in Sterlite Industries case. Moreover, Explanation 2 was not in issue in Sterlite Industries case. Therefore, that case is of no assistance to the petitioner. 31. In any event, the petitioner is only at the thresho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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