Allahabad H.C : The issue of commission paid having not been covered by the reasons recorded within the meaning of section 148(2) as such the reopening under section 147/148 of the Act is not valid under the law

High Court Of Allahabad

CIT vs. Barnala Steel Industries Ltd.

Section : 37(1), 147

Assessment Year : 1999-2000

Tarun Agarwala And Dr. Satish Chandra, JJ.

IT Appeal No. 270 Of 2006

February 18, 2015

JUDGMENT

Tarun Agarwala, J. – This is an appeal filed by the Department for the assessment year 1999-2000, which was admitted at the following substantial questions of law:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the order of the Commissioner of Income-tax (Appeals) in holding that the issue of commission paid having not been covered by the reasons recorded within the meaning of section 148(2) as such the reopening under section 147/148 of the Act is not valid under the law ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in upholding the order of the Commissioner of Income-tax (Appeals) in holding that the reopening of assessment under section 147/148 is bad in law ?”

2. The facts leading to the filing of the appeal is that the assessee had filed his return on January 31, 1999, showing a loss of Rs. 15,54,275. The said return was processed on March 31, 2000. Proceedings were initiated on October 18, 2001, under section 147 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) and the notice under section 148 of the Act was served on the appellant on January 19, 2001. The reasons recorded by the Assessing Officer for reopening the assessment is as under:

“Reasons : 18-10-2001.

On going through the case records, it is seen that as per annexures 2 and 3 of the tax audit report, the assessee has made valuation of closing stock of raw material at cost. The raw material of the assessee is iron ingots and billets on which excise duty and trade tax was paid at the time of purchase. The purchases made by the assessee have been reduced by the value of excise duty and trade tax, only net amount has been debited to the purchase account. The valuation of the closing stock of raw material has been made by the assessee on purchase price without including excise duty and trade tax. The assessee has shown the closing stock at Rs. 45,52,265 on which excise duty at 15 per cent. comes to Rs. 6,84,340 and the assessee has also paid trade tax at Rs. 55,554 as per annexure 3 of the audit report. Thus, the assessee has not included the amount of Rs. 7,38,994 (6,84340 = 5,5554) on account of excise duty and trade tax while valuing the closing stock of raw material as the provisions of section 145A of the Income-tax Act, 1961, have been introduced with effect from April 1, 1999.

Therefore, I have reason to believe that the assessee’s income of Rs. 7,38,994 has escaped from assessment. Hence, action under section 147 Explanation 2 of the Income-tax Act, 1961, is taken.

Issue notice under section 148 of the Income tax Act, 1961.

(Sd. . . . . . . . . . . .)

ACIT, Circle 1, M. Nagar.”

3. Based on the aforesaid reasons to believe, the case was reopened under section 148 of the Act as the appellant had shown the less value of the raw material amounting to Rs. 7,38,994 in the closing stock. After due investigation the Assessing Officer made the addition of Rs. 49,278 on the valuation of the closing stock due to less value of the raw material and also added Rs. 54,07,792 on the commission paid by the petitioner to Pashupati Casting Pvt. Ltd., Aligarh. The Assessing Officer also disallowed certain telephone expenditure, advertisement and payment made to catering service.

4. The assessee, being aggrieved, filed an appeal before the Commissioner of Income-tax, who partly allowed the appeal holding that the reassessment proceedings were validly reopened. The appellate authority found that the assessee had claimed 50 per cent. of depreciation against the admissible rate of 40 per cent. and, therefore, the Assessing Officer had valid reason to believe that income had escaped assessment and, therefore, reassessment proceedings were validly reopened under section 148 of the Act in respect of the amount of Rs. 7,38,994. The appellate authority, however, held that the Assessing Officer was not justified in making the addition in respect of the commission paid to Pashupati Casting Pvt. Ltd. amounting to Rs. 54,07,792. The appellate authority found that the assessee had claimed as expenditure on the commission of Rs. 58,51,913 in his trading and profit and loss account and the same was available on the record and, therefore, in the absence of any reason being recorded on this issue coupled with the fact that the said information was already available on record, the appellate authority held that the Assessing Officer was not justified in reopening the assessment in respect of commission paid to Pashupati Casting Pvt. Ltd. and, consequently, deleted the said addition. The Department, being aggrieved, filed an appeal, which was dismissed and, consequently, the present appeal has been filed.

5. We have heard Sri R.K. Upadhyay, the learned counsel for the appellant and Sri Rakesh Ranjan Agarwal, the learned senior counsel along with Sri Suyash Agarwal for the assessee.

6. The learned counsel for the Department submitted that once assessment proceedings are reopened under section 147 of the Act, the Assessing Officer was justified in making a fresh assessment of the entire income and, therefore, could also reconsider the question of claiming deduction on the commission paid by the petitioner.

7. In support of the submission, the learned counsel placed reliance upon a decision of the Supreme Court in V. Jaganmohan Rao v. CIT & EPT [1970] 75 ITR 373 and ITO v. K.L. Srihari (HUF) [2001] 250 ITR 193/118 Taxman 890.

8. The decision of the Supreme Court in V. Jaganmohan Rao (supra) is not applicable in the instant case as it is a case of reassessment under section 34 of the Indian Income-tax Act, 1922, which provision underwent a substantial change under sections 147 and 148 of the Income-tax Act, 1961. After the amendment of the Income-tax Act, 1989, the provisions for reassessment further underwent a change.

9. The Supreme Court in the aforesaid decision held that once proceedings under section 34 of the Act are validly initiated, the jurisdiction of the Income-tax Officer is not restricted to the portion of the income that escapes assessment. The Supreme Court held that once a valid notice is served and assessment is reopened, the previous underassessment is set aside and the whole proceedings starts afresh. The same view was reiterated following the aforesaid decisions in the case of K.L. Srihari (HUF) (supra).

10. The aforesaid situation has changed in reassessment proceedings under the Income-tax Act, 1961.

11. The Supreme Court in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 held that when proceedings under section 147 of the Act are initiated the proceedings are opened only qua the items of under-assessment. The finality of assessment proceedings on other issues remains undisturbed and it makes no difference whether the assessment proceedings have become final on account of framing of an assessment under section 143(3) of the Act or on account of non-issue of a notice under section 143(2) of the Act within the stipulated period. The Supreme Court held that the Assessing Officer could only assess or reassess the escaped income in respect of which proceedings under section 147 of the Act have been initiated but also any other income chargeable to tax, which may have escaped assessment and which comes to his knowledge, subsequently, in the course of such proceedings.

12. Admittedly, in the instant case, it is not the case of the assessing authority that during the course of proceedings under section 147 of the Act it came across any material relating to the payment of commission suggesting escapement of income under any of the heads. On the other hand, the first appellate authority has given a categorical finding that the assessee had claimed as expenditure the commission of Rs. 58,59,913 in his trading and profit and loss account and the same was available on the record. Consequently, in the absence of any information having been received by the Assessing Officer regarding escapement of commission income during the course of proceedings under section 147 of the Act he could not have formed an opinion on this issue that it has escaped assessment. Further, the reasons to believe does not record the factum of escapement of commission. The aforesaid decision of the Supreme Court in Sun Engg. Works (P.) Ltd. (supra) was followed in Vipan Khanna v. CIT [2002] 255 ITR 220/122 Taxman 1 (Punj. & Har.) which is fully applicable in the instant case.

13. In the light of the aforesaid, we are of the opinion, that the first appellate authority was justified in deleting the addition of commission, on the ground, that it was not covered by the reasons recorded under section 148(2) of the Act. The Tribunal was justified in upholding the order of the first appellate authority.

14. In the light of the aforesaid, the appeal filed by the Department fails and is dismissed. The question of law is answered in favour of the assessee and against the Department.

[Citation : 375 ITR 281]

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