High Court Of Andhra Pradesh
Andhra Bank vs. DCIT
Section INT 10
Asst. Year 1992-93, 1993-94, 1994-95
S.R. Nayak & S. Ananda Reddy, JJ.
Writ Petn. No. 8336 of 1998
5th February, 2002
Counsel Appeared
Dr. N.R. Sivaswamy & S. Dwaraknath, for the Petitioner : S.R. Ashok, for the Respondent
JUDGMENT
S. ANANDA REDDY, J. :
In this writ petition, the petitioner-bank is assailing the notices issued under s. 10 and subsequent notices issued under ss. 8(1) and 8(2) of the Interest-tax Act, 1974, for the asst. yrs. 1992-93, 1993-94 and 1994-95 and prayed for the issue of a writ of certiorari or any other appropriate writ calling for the records relating to the issue of the above notices and quash the said notices, holding that the issue of the said notices is illegal, without jurisdiction and contrary to the provisions of the Interest-tax Act.
2. The petitioner is a nationalised bank. Its entire capital is owned by the Central Government. Under the provisions of the Interest-tax Act, 1974 (hereinafter referred to as “the Act”), the petitioner is obliged to file a return disclosing its chargeable interest to tax. Accordingly, the petitioner-bank filed its returns disclosing chargeable interest under the Act for the above three assessment years enclosing copies of its audited P&L a/c and balance-sheet. According to the petitioner, it had declared the full interest, which is chargeable to interest-tax in terms of charging s. 5, r/w s. 2(7) of the Act. In the above three returns, the petitioner-bank returned the interest income accrued on the loans and advances but without including the interest on securities. The said income as declared by the assessee and as accepted by the AO while framing the assessment is as follows :
Interest-tax levied (Rs.in crores) 3.80
6.76 6.75 Date of completion 18-1-1995 18-1-1995Â 26-3-1997
According to the petitioner-bank, in pursuance of the returns filed for the above assessment years, the assessments were framed determining the tax liability under the said Act. However, subsequently, the AO issued notices on 21st Aug., 1997, purported to be under s. 10 of the Act, reopening the assessments for all the three years in question and the petitioner was directed to file return on the premise that the chargeable interest for the assessment years in question has escaped assessment and the petitioner-bank was called upon to file the returns. The petitioner, however, did not comply with the said notices but wrote a letter seeking withdrawal of the said notices. But the respondent without giving any reply to the letter of the petitioner dt. 24th Feb., 1998, issued notices under ss. 8(1) and 8(2) of the Act. Aggrieved by the said action of the respondent, the petitioner has approached this Court. According to learned counsel for the petitioner, s. 4 of the Act is the charging section, while s. 5 explains the scope of the chargeable interest; and s. 2(7) of the Act defines the term “interest”, which means only interest on loans and advances made in India and also includes commitment charges on utilised portion of any credit sanctioned as well as discount charges on promissory notes and bills of exchange drawn or made in India. Relying upon the above terms, learned counsel contended that the term “chargeable interest” does not include the interest on securities or investments, such as debentures, etc. Learned counsel also contended that the provision of s. 10 has two clauses, i.e., 10(a) and 10(b). Both the clauses operate under different circumstances. As the AO did not specify whether the notices issued were under cl. (a) or (b) of s. 10, the notices are vitiated even on that ground. It is contended that, however, the respondent has come up in the counter that the notices were issued under s. 10(a) of the Act. In order to attract the provisions of s. 10(a), the AO must have reason to believe that chargeable interest for the assessment years in question has escaped assessment or has been under-assessed and the same was as a result of the failure to disclose fully and truly all material facts necessary for the assessment. It is contended that there was no failure or omission on the part of the assessee to disclose any particulars. According to learned counsel, in fact, the AO issued notices under ss. 8(1) and 8(2) while framing the assessments and after being satisfied with the particulars furnished by the assessee, the assessments were framed. Learned counsel contended that as the petitioner has disclosed fully and truly all material facts necessary for the assessment, the provisions of s. 10(a) of the Act have no application. In support of his contention, learned counsel relied upon the decisions of the Supreme Court in the case of Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC 51R.779 and CIT vs. Hemchandra Kar (1970) 77 ITR 1 (SC) : TC 51R.896. Learned counsel also contended that as the respondent has not obtained any fresh information in respect of the assessment years in question, the proposed action of the respondent is merely a change of his opinion and thus reopening of the assessments on such change of opinion is without jurisdiction. In support of this contention, learned counsel relied upon decisions of the apex Court in the case of CIT vs. Dinesh Chandra H. Shah (1971) 82 ITR 367 (SC) : TC 51R.1434 and Bhimraj Pannalal vs. CIT (1961) 41 ITR 221 (SC) : TC 51R.230.
According to learned counsel, s. 2(7) of the Act defines “interest”, to mean interest on loans and advances. Though the terms “loans” and. “advances” are not defined in the Act, but as per s. 2(10) of the Act, the definitions contained in the IT Act are applicable but even under the IT Act these terms are not defined. Therefore, the popular meaning of these terms as understood by the persons engaged in the trade, commerce and business had to be applied. Learned counsel contended that even on the merits the issue of taxability of interest on securities has been decided by the Madras High Court in the case of CIT vs. Lakshmi Vilas Bank Ltd. (1997) 138 CTR (Mad) 230 : (1997) 228 ITR 697 (Mad) : TC 71R.483, in favour of the bank. Therefore, the interest on debentures, which are treated as securities cannot be considered as interest on loans and advances and therefore not liable to tax under the provisions of the Act. Learned counsel also referred to the provisions of the Banking Regulation Act, 1949, and contended that according to s. 29 of the said Act and the Third Schedule to the Act, debentures should be shown under the head “Investments” but not under the head “Loans and advances”. When once the debentures form part of investments, the interest earned on such debentures would not form part of the chargeable interest under the Act. Therefore, it is contended that the impugned notices are liable to be quashed.
Learned counsel also relied upon the following decisions in support of his contention : (i) Gemini Leather Stores vs. ITO 1975 CTR (SC) 127 : (1975) 100 ITR 1 (SC) : TC 51R.894, (ii) Y. Rajan vs. ITO (1970) 77 ITR 839 (AP) : TC 51R.1391, (iii) Chhugamal Rajpal vs. S.P. Chaliha (1971) 79 ITR 603 (SC) : TC 51R.611, (iv) ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) : TC 51R.598, (v) Indian & Eastern Newspaper Society vs. CIT (1979) 12 CTR (SC) 190 : (1979) 119 ITR 996 (SC) : TC 51R. 1371, (vi) Jindal Photo Films Ltd. vs. Dy. CIT (1999) 154 CTR (Del) 355 : (1998) 234 ITR 170 (Del) : TC S51.4065, (vii) S. Sreeramachandra Murthy vs. Dy. CIT (2000) 159 CTR (AP) 436 : (2000) 243 ITR 427 (AP) and (viii) Unit Trust of India vs. P.K. Unny (2001) 168 CTR (Bom) 99 : (2001) 249 ITR 612 (Bom).
3. Learned standing counsel, on the other hand, referred to and relied upon the provisions of ss. 5, 6 and 7 as well as definitions contained under ss. 2(5) and 2(7) of the Act. Learned counsel also referred to the return form and specifically contended that Part III of the return provides for disclosure of the investments, interest on which is exempted. Though the petitioner filed an enclosure to the return but the debentures were not disclosed. Learned counsel also contended that this omission clearly amounts to failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Such omission on the part of the assessee clearly gives
cause of action for the AO to invoke the reassessment proceedings. Accordingly, he issued notice under s. 10(a) of the Act. Learned counsel also contended that the omission committed by the assessee clearly amounts to non- disclosure of primary facts required for the assessment under the provisions of the Act and such failure would certainly provide jurisdiction to the AO to reopen the assessment so as to tax the interest income that had escaped the assessment. Learned counsel also relied upon the following decisions in support of his contention : (i) Calcutta Discount Co. Ltd. vs. ITO (supra), (ii) Kantamani Venkata Narayana & Sons vs. Addl. ITO (1967) 63 ITR 638 (SC) : TC 51R.65, (iii) ITO vs. Lakhmani Mewal Das (supra), (iv) Raymond Woollen Mills Ltd. vs. ITO (1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC) and (v) Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62 : (1999) 236 ITR 832 (Guj). With reference to the merits of the matter, learned counsel contended that if the interest on debentures is not liable to tax, it is always open to the assessee to contest before the AO. Therefore, on that ground the notices issued by the AO for reassessment would not become illegal or without jurisdiction.
4. Before considering the rival contentions on the merits, it would be proper to refer to the relevant provisions of the Act. “2. (5) ‘chargeable interest’ means the total amount of interest referred to in s. 5, computed in the manner laid down in s. 6. 2. (7) ‘interest’ means interest on loans and advances made in India and includes— (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include— (i) interest referred to in sub-s. (1B) of s. 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills;
5. Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year : Provided that any interest in relation to categories of bad or doubtful debts referred to in s. 43D of the IT Act shall be deemed to accrue or arise to the credit institution in the previous year in which it is credited by the credit institution to its P&L a/c for that year or, as the case may be, in which it is actually received by the credit institution, whichever is earlier. 10. If— (a) the AO has reason to believe that by reason of the omission or failure on the part of the assessee to make a return under s. 7 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for any assessment year, chargeable interest for that year has escaped assessment or has been underassessed or has been made the subject of excessive relief under this Act, or (b) notwithstanding that there has been no omission or failure as mentioned in cl. (a) on the part of the assessee, the AO has, in consequence of information in his possession, reason to believe that chargeable interest assessable for any assessment year has escaped assessment or has been underassessed or has been the subject of excessive relief under this Act, he may, in cases falling under cl. (a), at any time, and in cases falling under cl. (b), at any time within four years of the end of that assessment year, serve on the assessee a notice containing all or any of the requirements which may be included in a notice under s. 7, and may proceed to assess or reassess, the amount chargeable to interest-tax, and the provisions of this Act shall, so far as may be, apply, as if the notice were a notice issued under that section.” A perusal of the above provisions shows that “interest” means interest earned on loans and advances made in India, commitment charges and discount charges on promissory notes and bills of exchange drawn in India. “Chargeable interest” means the total amount of interest other than the interest on loans and advances made to other credit institutions and co-operative societies carrying on the business of banking. While computing the chargeable interest for any previous year, deduction is permissible only in respect of the amount of interest, which is established to have become a bad debt during the previous year. Sec. 10(a) provides that if the AO has reason to believe that by reason of the failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment, chargeable interest for that year has escaped assessment or has been underassessed or granted excessive relief, he may, at any time, serve a notice and proceed to assess or reassess the assessee. Now the AO issued notices under s. 10(a) calling upon the assessee to file the returns for the three assessment years in question. The notices issued to the assessee do not contain any reasons, as they are only pro forma notices. In fact, the notices were issued using pro forma notice, under s. 148 of the IT Act, 1961. But, however, in the counter, it was stated that the assessee has not disclosed fully and truly all the material facts. In particular, it was stated that the assessee had not disclosed the interest income on securities distinctly. This allegation of the Department is contested by the assessee. According to the assessee, it had disclosed fully and truly all material facts necessary for the assessments and in fact, the AO had completed the assessment after issuing notices to the assessee under ss. 8(1) and 8(2) and after verification of the records produced by the assessee. Here, we are concerned with the validity of the initiation of the reassessment proceedings by the AO. A perusal of s. 10(a) shows that the AO must form an opinion that chargeable interest had escaped assessment and the same was by reason of the omission or failure to make a return or to disclose fully or truly all material facts necessary for the assessment by the assessee. In the present case, the AO before issue of the notices recorded the following common grounds in the proceedings sheet for all the three years. For convenience the reasons recorded for the year 1992-93 are extracted here: “On a perusal of the record, it is seen that the interest received by the assessee on the debenture loans has not been assessed in the interest-tax assessment. Similarly, some other items of chargeable interest on investments have also been omitted to be charged to interest-tax. Therefore, since the income chargeable to tax has escaped assessment, the assessment is reopened under s. 10 of the Interest-tax Act. Issue notices under s. 10 of the Interest-tax Act, 1974, for the asst. yr. 1992-93.” A perusal of the above reasons recorded by the AO shows that the interest received by the assessee on debenture loans had not been assessed to tax. No doubt the reasons recorded do not disclose that there was any omission or failure on the part of the assessee, but, however, in the counter filed before this Court the stand of the respondent/Department is that there was omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Hence, the reassessment proceedings. The said contention, of course, is being contested by the assessee.
7. According to the assessee, the returns filed by it are full and complete. The returns are accompanied by copies of the audited P&L a/c and balance-sheet. The balance sheets are prepared in conformity with the requirements of the provisions of the Banking Regulation Act. Therefore, there was no omission or failure on the part of the assessee to disclose fully and truly all material facts, as the copies of the statements filed contains all the particulars including the interest earned on the debentures. But the contest of the Department is that the assessee failed to disclose the interest on debentures separately. According to the Department, in the return there is a specific provision under Part III where the assessee has to disclose other sums not included in the chargeable interest and claimed to be not taxable. The assessee has to disclose under this head and can claim exemption if any interest earned by it is not taxable. Here, the assessee failed to disclose the interest earned on debentures even though it was claiming that such interest is not taxable. Hence, there was a failure on the part of the assessee to disclose fully and truly all material facts. The explanation of the assessee is that the statement of P&L a/c and balance sheet, which were filed and prepared in accordance with the provisions of the Banking Regulation Act amount to full disclosure by the assessee. It was also contended by learned counsel for the petitioner that there are innumerable items, which are exempt under the provisions of the Interest-tax Act and it would not be possible to enlist them in the returns.
From the above, it is clear that as far as the interest on debentures is concerned, it was not specifically declared in the returns even as an item of exempted interest earned by it under Part III of the return, though in fact a statement was enclosed disclosing the advances in respect of which the interest earned was claimed as not taxable. Though it was claimed that the interest earned on debentures is disclosed in the statements such as P&L a/c filed along with the returns in the form of annual returns, it could not be inferred that there was full disclosure of all material facts by the assessee on the premise that the AO with a little effort or investigation into the papers filed by the assessee could find such information from the statements.
8. Coming to the decisions relied upon by the parties, learned counsel for the petitioner relied upon a decision of the apex Court in the case of Calcutta Discount Co. Ltd. (supra). The said decision was rendered under s. 34(1)(a) of the Indian IT Act, 1922. The said provision is in pari materia with the provisions under consideration and in fact, it was the predecessor provision to ss. 147 and 148 of the 1961 Act. In that case, in the original assessments of the company for the asst. yrs. 1942-43, 1943-44 and 1944-45, profits realised by the company by the sales of shares were not assessed to tax. The ITO proposed to initiate reassessment proceedings against the company under s. 34 of the IT Act and in his reports to the CIT for the purpose of obtaining his sanction, (as it was provided therein) he stated that at the time of the original assessments, the representation made on behalf of the company was that the sales of shares were casual transactions and in the nature of mere change of investments, which were accepted, but the result of the company’s trading from year to year, however, showed that it had really been systematically carrying on the trade in the sale of investments, and that as such the company had failed to disclose the true intention behind the sale of shares. The ITO, therefore, issued notices under s. 34 of the IT Act calling upon the company to submit fresh returns. The company submitted the returns, but applied to the High Court under Art. 226 of the Constitution of India seeking for the issue of appropriate writs, directing the officer not to proceed to assess on the basis of these notices, on the ground, inter alia, that the ITO did not have reason to believe that underassessment had occurred by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. The ITO filed an affidavit in the Court asserting the fact of the representation made in the course of the assessment proceeding for the year 1994-95. As the assessee was not successful before the High Court, he went in appeal to the apex Court. The apex Court while negativing the contention of the Department held as under : “In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts ; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences . . . Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else—far less the assessee—to tell the assessing authority what inferences, whether of facts or law, should be drawn.”
9. In the case of CIT vs. Hemchandra Kar (supra) the assessee, an HUF consisting of six members had been assessed for the asst. yr. 1946-47. Following the demonetisation of high denomination notes in January, 1946, the assessee encashed notes of the value of Rs. 19,000 and five members of the family encashed notes of the aggregate value of Rs. 1,10,000. The ITO reopened the assessments of the assessee and of the five members and by his reassessment orders made on 31st Jan., 1955, included the sum of Rs. 19,000 in the reassessment of the family and the sum of Rs. 1,10,000 separately in the assessments of the five members in respect of the respective notes encashed by them. Two days later, i.e., on 2nd Feb., 1955, the ITO issued a notice under s. 34(1) (a) of the Indian IT Act, 1922, seeking to include the sum of Rs. 1,10,000 in the hands of the family. The Tribunal, being satisfied that the notes encashed by the five members belonged to the HUF, held that the notice issued was valid. On a reference, the High Court held that the notice issued under s. 34(1)(a) was not valid since it was found that when the first reassessment was made the primary facts necessary for reassessment of the family were in the possession of the ITO, that these facts came into his possession not by virtue of any disclosure made by the family but were discovered by him otherwise; that at the time of the first reopening of the assessment of the HUF and of the individual members the question of assessment of the entire amount represented by the high denomination notes was under direct consideration; that it was open to the ITO to assess the whole amount of Rs. 19,000 and Rs.
1,10,000 in the hands of the HUF at that stage and that the escapement, if any, therefore, took place by reason of the failure of the ITO to assess the family with respect of the sum of Rs. 1,10,000 when he was in full possession of all the material facts. When the matter was carried on in appeal, the apex Court while confirming the decision of the High Court held that, because the primary facts were within the knowledge of the ITO when he completed the first reassessment, the escapement of income took place by reason of the failure of the ITO to include the sum of Rs. 1,10,000 in the assessment of the HUF when he was in full possession of all the necessary and material facts. In such a situation, the requirements of s. 34(1)(a) were not satisfied.
10. In the case of Chhugamal Rajpal vs. S.P. Chaliha (supra), in proceedings for assessment for the asst. yr. 1960- 61, the appellant-firm had produced its books of account and also a statement giving full names and addresses of the various creditors from whom it had borrowed on hundis during the accounting year in question. Assessment was completed after enquiry. Thereafter on 3rd June, 1966, the ITO issued a notice under s. 148 of the IT Act, 1961, initiating reassessment proceedings for that year. The appellant-firm filed a writ petition in the High Court challenging the validity of that notice, inter alia, on the ground that the requirements of s. 151(2) were not complied with. But the writ petition was dismissed by the High Court. On appeal, the Supreme Court directed the Department to produce the records to show that the ITO had complied with ss. 148 and 151(2). After considering the said records, it was held that the ITO had not even come to a prima facie conclusion that the loan transactions to which he referred were not genuine transactions; he appeared to have only a vague feeling that they might be bogus transactions. Such a conclusion did not fulfil the requirements of s. 151(2). Under that section, he had to give reasons for issuing a notice under s. 148. He should have some prima facie grounds before him for taking action under s. 148. His conclusion that there was a case for investigating the truth of alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The ITO could not have had reason to believe that income had escaped assessment by reason of the appellant-firm’s failure to disclose material facts and if the CIT had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under s. 148. The notice issued under s. 148 was therefore held invalid.
11. In the case of Dinesh Chandra H. Shah (supra), the assessee, who was assessed at Calcutta, had disclosed in his return for the asst. yr. 1955-56, his share in the income of a firm. Such information was received by the ITO at Calcutta in September, 1955, and this was recorded in the order sheet. In completing the assessment in November, 1958, the ITO failed to include the assessee’s share of profits from that firm. Thereafter, a successor to the ITO issued a notice under s. 34(1)(b) of the Indian IT Act 1922, to include the share of profits from that firm which had escaped assessment, the only reason given for such action being that he had changed his opinion. The apex Court held that the fact that the successor of the ITO who had made the original assessment had changed his opinion did not furnish a justifiable reason for taking action under s. 34(1)(b). The apex Court, however, did not find it necessary to go into the question whether an inadvertent omission in the original assessment can justify the reopening of the assessment under s. 34(1)(b) on its subsequent discovery by the ITO.
In the case of Gemini Leather Stores (supra) in proceedings for the original assessment of the appellant-firm, though the appellant did not disclose certain transactions evidenced by certain drafts, the officer himself discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the ITO issued a notice under s. 147(a) of the IT Act, 1961, with a view to assess the amounts as the appellant’s income from undisclosed sources. On a writ petition filed by the appellant, the High Court held that the ITO did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant did not disclose the source of those amounts which were not recorded in the account books, all the conditions for invoking the jurisdiction under s. 147(a) were present. On appeal, the apex Court held reversing the decision of the High Court, that after discovery of the primary facts relating to the transactions evidenced by the drafts it was for the officer to make the necessary enquiries and draw proper inference as to whether the amounts represented by the drafts could be treated as part of the total income of the appellant. This the officer did not do. It was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the appellant to disclose fully and truly all material facts. He could not, thereafter, take recourse to s. 147(a) to remedy the error resulting from his own oversight.
In the case of ITO vs. Lakhmani Mewal Das (supra), the respondent was assessed for the year 1958-59 under s. 23(3) of the Indian IT Act, 1922, on 14th June, 1960. His total income was assessed at Rs. 37,872. While making the assessment the ITO allowed deduction of a sum of Rs. 15,991 by way of expenses claimed by the respondent. The expenses included Rs. 10,494 4as. 3 ps. by way of interest. According to the assessee, he produced through his authorised representative, all books of account, bank statements, and other necessary documents in connection with the return. On 14th March, 1967, the respondent received notice issued by the appellant under s. 148 of the Act, stating that the appellant had reason to believe that the respondent’s income which was chargeable to tax for the asst. yr. 1958-59 had escaped assessment within the meaning of s. 147 of the Act. The respondent was called upon to submit a return for that year. The respondent through his lawyer stated that there was no material on which the appellant had reason to believe that his income had escaped assessment and, therefore, the condition precedent for the assumption of jurisdiction by the appellant had not been satisfied. The appellant was also called upon to furnish all the materials on which he had reason to believe that income had escaped assessment. As there was no response, a petition under Art. 226 of the Constitution of India was filed for quashing the impugned notice. In the affidavit filed before the High Court, the ITO has stated that it was discovered that some of the loans shown to have taken and interest alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The report furnished by the ITO to the CIT was also directed to be produced before the High Court. A Full Bench of the Calcutta High Court by majority held that the notice under s. 148 was not valid and accordingly allowed the writ petition. On further appeal the apex Court held that for a valid reassessment before issuance of notice under s. 148, two conditions have to be satisfied, viz., (i) that the ITO must have reason to believe that income chargeable to tax has escaped assessment, and (ii) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under s. 139, or (b) to disclose fully and truly material facts necessary for the assessment. The apex Court further observed that the duty, which is cast upon the assessee, is to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the ITO of the account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure contemplated by law. The duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that his duty ends. It is for the ITO to draw the correct inference from the primary facts. It is no responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts. If an ITO draws an inference, which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment.
The grounds or reasons which lead to the formation of the belief contemplated by s. 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the ITO to form the above belief that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the Court to investigate. The sufficiency of the grounds, which induce the ITO, is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the ITO in starting proceedings in respect of income escaping assessment is open to challenge in a Court of law. Holding so, the apex Court upheld the majority view expressed by the High Court quashing the notice issued for initiating reassessment proceedings.
14. In the case of Indian & Eastern Newspaper Society (supra), the apex Court considered the opinion of an internal audit party of the IT Department on a point of law cannot be regarded as opinion within the meaning of s. 147(b) of the IT Act, 1961, for the purpose of reopening the assessment. The apex Court negatived the contention of the Department, after considering the contentions elaborately. But the issue considered and decided in the above decision is not relevant for the purpose of the present case as the issue in question is analogous to the issue falling under s. 147(a).
15. In the case of Jindal Photo Films Ltd. (supra), the Delhi High Court considered the issue of reassessment. The assessee-company was engaged in the business of manufacturing of photosensitive films. Prior to the asst. yr.
1991-92, the assessee’s claim for investment allowance under s. 32A of the IT Act, 1961, was disallowed on the ground that the manufacture of colour film rolls was not entitled to investment allowance, as it was included in the prohibited list mentioned in the Eleventh Schedule to the IT Act. But, subsequently, the item listed at Sl. No. 9 was deleted, though item No. 10 refers to “photographic apparatus and goods” continued in the said list of the Eleventh Schedule. When the matter was in appeal for the asst. yr. 1990-91, the CIT(A) made an observation that after exclusion of the term “cinematographic films” from entry No. 9 there was no justification for holding that the colour film rolls were included in the Eleventh Schedule to the Act and thereafter the petitioner’s claim for deduction under s. 80-I of the Act was allowed for the asst. yrs. 1991-92, 1992-93 and 1993-94. Thereafter the AO issued notice under s. 147/148 of the Act for all the years and reopened the assessments, as according to the officer he had reason to believe that income of the assessee had escaped assessment since the manufacture of the photo films was an article placed under the Eleventh Schedule to the Act which was not entitled to deduction under s. 80-I of the Act. When such notices were assailed in writ petitions, the High Court quashed the notices holding that the said action of the AO is a mere change of opinion, as according to him the opinion formed earlier by him was in his opinion incorrect holding that the reopening on such ground is not permissible.
16. In the case of S. Sreeramachandra Murthy (supra) a Division Bench of this Court considered the scope of s. 147 of the Act. In this case, reassessment proceedings were initiated on the ground that the petitioner underestimated the cost of construction of a commercial complex constructed during the year 1992-93 and the differential cost was attributable to unexplained income. When the said notice was questioned, this Court held that
: “The construction of the building complex was admittedly disclosed by the petitioner in the return and in the assessment, the cost of construction and sources of investment were specifically gone into by the AO. Nearly four years later, the Dy. CIT obtained a report from the valuation cell which revealed that the cost of construction would have been much more than what was disclosed by the assessee and noticed by the ITO in the course of the assessment proceedings. It was on the basis of the valuation report that the notice in question was issued. The formation of reasonable belief could not obviously be based on such valuation done after the assessment was completed when there was no other material to suggest that the petitioner failed to disclose the true and relevant primary facts which had bearing on the construction of the building. It was submitted that the petitioner had shown the differential cost proportionately in the declarations relating to assessment years filed under the Kar Vivad Samadhan Scheme. But the reasons recorded for reopening of the assessment did not include this information and it could not be considered by the Court. The petitioner had not failed to discharge the duty of disclosing the primary facts to the AO before the assessment was made. Accordingly, the notices under s. 148 were invalid and liable to be quashed.”
17. In the case of Saradbhai M. Lakhani vs. ITO (1998) 145 CTR (Guj) 110 : (1998) 231 ITR 779 (Guj) : TC 51R.1391, the Gujarat High Court considered the scope and validity of the notice issued under s. 148 of the IT Act, 1961. The assessees were partners of a firm—Bharat Vijay Construction Company. They were assessed during the asst. yr. 1988-89 under s. 143(1) of the Act. They were served with notice dt. 13th March, 1997, issued under s. 148 of the IT Act, stating that income for the asst. yr. 1988-89 has escaped assessment within the meaning of s. 147 of the IT Act. The petitioners filed a return for the asst. yr. 1988-89 enclosing therewith the income and expenditure account, which showed an amount of Rs. 47,82,922.50 by way of receipt from the Daman Ganga Dam arbitration. How this amount was arrived at was also shown in an annexure to the return. An amount of Rs. 1,91,31,690 received on account of the above project was shown as distributed to four partners in equal shares, and also claimed that the said receipt is on capital account and the same is not liable to tax. However, subsequently an assessment was framed on the firm in respect of the said entire amount received on account of the arbitration award. Thereafter the petitioners have been issued notice under s. 148. When the said notice was assailed on the ground that there was no failure on the part of the assessee to disclose fully and truly all the relevant material, the Gujarat High Court held that the entire reasons recorded by the ITO, to support his belief that income had escaped assessment, did not make any reference to the decision in Banyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj) : TC 44R.1257. In the absence of mention of that case in the order, it was not open to the officer to justify the order by reference to the said decision. The documents and assessment orders made it clear that the assessees had placed the entire facts before the assessing authority. The authority took note of all the income which accrued during the year 1988-89 and passed the orders of assessments. Since the entire facts relating to the income were made known to the assessing authority and no objective reason had been given for issuing a notice under s. 148, the notices issued under s. 148 were liable to be quashed.
18. In the case of Unit Trust of India vs. P.K. Unny (supra), a Division Bench of the Bombay High Court considered whether the interest received by the UTI is exempt from tax under the provisions of the Interest-tax Act, 1974. The said issue was considered when the Department issued reassessment notices under s. 10(a) of the Act. The case of the UTI was that basing on the interpretation given by the Central Board of Direct Taxes (the CBDT), the UTI did not file its returns under the provisions of the Interest-tax Act. In fact the communication given by the CBDT was based on a circular issued by it, which was subsequently withdrawn. The Bombay High Court held against the Department holding that the burden is on the Department to show on what basis the said communication of the CBDT, dt. 11th Oct., 1991, came to be implemented by the Department for nine years and the said burden was not discharged. Therefore, the Department was estopped from raising an argument contrary to the said circular. Holding so the reassessment notices were set aside. Though the issue considered in this case relates to the Interest-tax Act, but the issue is not in anyway connected with the issue in question in the present writ petition.
19. The assessee also relied upon a decision of the Madras High Court in the case of Lakshmi Vilas Bank Ltd. (supra) where a Division Bench of the Madras High Court had considered the issue as to the assessability of the interest on debentures under the provisions of the Interest-tax Act and held that a co-operative society is not a statutory body, because it is not created by a statute. It is a body created by an act of a group of individuals in accordance with the provisions of a statute. A co-operative society, therefore, is not a corporation established by or under an Act of the Central or State legislature. A co-operative land mortgage bank is not a corporate body established by the Co-operative Societies Act. Interest on debentures issued by such a bank would, therefore, not
be interest on securities falling within the meaning of ss. 18 and 193 of the IT Act, 1961, so as to go out of the purview of the Interest-tax Act, 1974. Here also the issue relates to the merits of the matter as to the chargeability of the interest under the provisions of the Interest-tax Act. It is premature to go into the merits of the matter as we are now concerned only with the validity of the notice.
20. The apex Court in the case of Mohinder Singh Gill vs. Chief Election Commissioner AIR 1978 SC 851, held that when a statutory functionary makes an order based on certain grounds, its validity or propriety must be judged by the reasons so mentioned and cannot, on challenge, be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to Court on account of a challenge get validated by Additional grounds later brought out. It is trite that a quasi-judicial order has to stand on its own legs ; it has to sustain itself on its own reasons recorded therein. Its validity has to be judged by the reasons so mentioned and fresh reasons in the shape of subsequent affidavits cannot be allowed to supplement and buttress the same.
21. Learned senior standing counsel, on the other hand relied upon a decision of the apex Court in the case of S. Narayanappa vs. CIT (1967) 63 ITR 219 (SC) : TC 51R.651 wherein the apex Court held that if there are some reasonable grounds for the ITO to believe that there had been any nondisclosure as regards any fact, which could have a material bearing on the question of underassessment, that would be sufficient to give jurisdiction to the ITO to issue notice under s. 34 of the Indian IT Act, 1922. Whether these grounds are adequate or not is not a matter for the Court to investigate. It is of course open for the assessee to contend that the ITO did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. In this case the appellant was carrying on business in jewellery, copper wire and money-lending. For the asst. yr. 1951-52, the appellant did not comply with the notices issued under s. 22(2) or s. 22(4) of the IT Act. No return was filed by the appellant. The assessment was completed by the ITO on such material as was available on 23rd Feb., 1955, and the income was assessed at Rs. 36,068. Subsequently, while making assessment for the asst. yr. 1955-56, the appellant was asked to furnish a wealth statement, which was actually filed on 30th June, 1954. From the wealth statement it was found that the appellant had made investments for Rs. 39,000 during the previous year which ended on 30th June, 1950, though in respect of that previous year, the appellant’s income was assessed only at Rs. 36,068. Therefore, a notice was issued under s. 34(1) and after examining the return made the appellant was assessed on an income of Rs. 89,002. In an appeal before the Tribunal the assessee assailed the jurisdiction of the ITO to initiate proceedings under s. 34(1) unsuccessfully and then carried the matter on a reference to the High Court. The High Court answered the question against the appellant holding that the ITO had jurisdiction to initiate proceedings under s. 34(1) of the Act. On further appeal, the apex Court also confirmed the order of the High Court.
22. In the case of Raymond Woollen Mills Ltd. (supra) the issue relates to the reopening of the assessment under s. 147(a). The case of the Revenue was that the assessee was charging to its P&L a/c, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals, etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of inventories and understatement of profits. This information was obtained by the Revenue in a subsequent year’s assessment proceeding. Hence, notice was issued under s. 147. Under the above facts, the apex Court upheld the reassessment proceedings.
23. In the case of Praful Chunilal Patel (supra), a Division Bench of the Gujarat High Court considered the issue of reassessment proceedings. In this case the AO while making the assessment for the asst. yr. 1993-94 found that the assessee and his three brothers had decided to form a partnership firm with two other partners; that the assessee and his other co-owners had a bungalow and that the said property was converted by the said assessee and other co-owners on 15th Aug.,1990, from a capital asset to stock-in-trade. The fair market value of the bungalow was valued at Rs. 56,00,000 by the registered valuer and the converted property was sold on 19th Sept.,
1990, to the firm. It was found that the capital account of the assessee, which was credited by Rs. 14 lakhs after the said transfer on 19th Sept., 1990, by which the stock-in-trade was sold to the firm, remained to be taxed as capital gains in the case of the assessee in the asst. yr. 1991-92. The assessment for that year was completed on 31st Jan., 1994, but the capital gain arising from the transfer of his share in the immovable property to the partnership firm was not subjected to tax although the assessee had informed the ITO by his letter about the conversion of the capital asset being his share in the immovable property into stock-in-trade and its consequential effect, in view of the query raised by the AO. The AO, therefore, clearly had a reason to believe that the income chargeable to tax in the form of capital gains in respect of the transfer that took place on 19th Sept., 1990, had escaped assessment in the relevant asst. yr. 1991-92. The initiation of the proceedings under s. 147 by notice was upheld confirming the jurisdiction of the AO. It was further held that in cases where the AO had overlooked something at the first assessment, there can be no question of any change of opinion, when the income which was chargeable to tax is actually taxed as it ought to have been under the law, but was not, due to an error committed at the first assessment. Though the above judgment was rendered in favour of the Department, but the ratio laid down in the said decision is clearly contrary to various decisions that are rendered by the apex Court, the earliest being the decision rendered by it in the case of Calcutta Discount Co. Ltd. (supra).
24. In the case of ITO vs. Biju Patnaik (1991) 91 CTR (SC) 95 : (1991) 188 ITR 247 (SC) : TC 51R.1191 the apex Court considered the issue as to the validity of the reopening of the assessment under s. 147 of the Act and the apex Court sustained the validity of the notice, though the satisfaction recorded by the ITO does not contain the required two conditions, but, however, as the record shows the ITO has applied his mind to the facts and the record discloses the existence of the required grounds. The relevant portion of the judgment of the apex Court is as under : “Thus, though ex facie the notice does not disclose the satisfaction of the requirement of s. 147(a), from the record and the averments in the counter affidavit, it is clear that the ITO had applied his mind to the facts, and after prima facie satisfying himself of the existence of those two conditions precedent, reached the conclusion for reopening the assessment. It is settled law that, in an administrative action, though the order does not ex facie disclose the satisfaction by the officer of the necessary facts if the record discloses the same, the notice or the order does not per se become illegal.”
25. In the case of Associated Stone Industries (Kotah) Ltd. vs. CIT (1997) 138 ITR (SC) 260 : (1997) 224 ITR 560 (SC) : TC S51.4051 the apex Court considered a notice issued under s. 34(1) (a) on the ground of failure by the assessee to disclose material facts. Though the Court found that there was no such failure on the part of the assessee, but, however, such notice can be sustained under s. 34(1)(b), if the pre-requisite conditions for the application of cl. (b) are satisfied. From a conspectus of the above case law it is clear that in order to initiate valid reassessment proceedings, two conditions are required to be satisfied, viz., (i) that the AO must have reason to believe that income chargeable to tax had escaped assessment, and (ii) he must have reason to believe that such income had escaped assessment by reason of omission or failure to make a return or to make a true and full disclosure of all material facts. Once there existed some grounds, the sufficiency or otherwise is not open to question in a Court of law. But, however, the existence of the belief by the AO can be challenged. It was also held that production before the AO of the account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to true disclosure contemplated by law.
Apart from the above legal position, unlike in s. 148(2), there is no specific provision in s. 10 or in any other provisions of the Act, obliging the AO to record reasons before issuing a notice for initiating reassessment proceedings. In the absence of such mandatory provision as was contained in the IT Act, requiring the AO to record his reasons for initiating reassessment proceedings, it could not be inferred that the AO was obliged to record such reasons. But, however, the existence of such grounds is mandatory and it is for the AO to satisfy the Court as to the existence of those grounds when such proceedings are assailed in a Court of law. If the facts of the present case are examined in the light of the above legal position, the reasons recorded by the AO show that the interest received on debenture loans had not been assessed in the interest-tax assessment. Therefore, the AO reopened the assessments by issuing notice under s. 10 of the Act. Though the AO recorded the reason in the docket sheet that the interest received by the assessee in respect of debenture loans had escaped assessment, but, however, the AO did not record that there was failure on the part of the assessee to disclose all relevant material facts. But, however, in the counter-affidavit filed by the AO, it was stated that the assessee failed to disclose the interest received on debentures, which was disputed by the assessee. According to the assessee, the interest earned on debentures is exempt and, therefore, it was not included in the chargeable interest. Further, as there are innumberable items of investments, the interest on which is not taxable, it would not be possible to disclose all those items of investments and interest received thereon. Further, according to the assessee, the interest received on debentures was shown in the annual reports, which are filed along with the returns. According to the assessee, the annual reports were prepared in conformity with the provisions of the Banking Regulation Act. Therefore, the same would amount to full disclosure. But, according to the Department, even if such interest is not chargeable, the same is required to be disclosed under Part III of the return and interest earned on debentures was not disclosed under Part III of the return, though some other items are disclosed, the same amount to omission or failure to disclose truly and fully all material facts. This Court finds merit in the above contention of the Department.
When it is required specifically to disclose even the exempted interest received by the assessee under Part III of the return, the failure to disclose the same would amount to omission or failure to disclose truly and fully all material facts. Further, as held by the apex Court, production of the annual report along with the return would not be sufficient to contend that there was full disclosure of all the material facts. As the assessee failed to disclose specifically the interest received on debentures in Part III of the return, as according to it is not liable to tax, the same would attract the provisions of s. 10 of the Act, and therefore, the notices issued by the AO are legal and valid and there are no grounds warranting interference with the reassessment proceedings initiated by the AO.
In the result, the writ petition is dismissed. No costs.
[Citation : 255 ITR 1]
