Gauhati H.C : Whether initiation of a proceeding under s. 147 of the IT Act, 1961, is permissible under the law for reversal of the assessment order already passed on consideration of the materials on record ?

High Court Of Gauhati

CIT vs. Shiv Shakti Flour Mills (P) Ltd.

Section 147

Asst. Year 1997-98, 1998-99, 1999-2000, 2000-01

Ranjan Gogoi, C.J. & B.P. Katakey, J.

IT Appeal Nos. 8 of 2006, 6-8 of 2007

15th September, 2009

Counsel Appeared :

U. Bhuyan, for the Appellant : R.P. Agarwalla, R. Goenka, R.K. Agarwala & M. Talukdar, for the Respondent

JUDGMENT

B.P. Katakey, J. :

These appeals under s. 260A of the IT Act, 1961 (in short, the Act) are directed against the common order dt.16th Sept., 2005, passed by the Tribunal, Gauhati Bench, Guwahati in ITA Nos. 96, 97, 98 and 99/Gau/2003 relating to the asst. yrs. 1997-98, 1998-99, 1999-2000 and 2000-01, dismissing the appeals preferred by the Revenue against the common order dt. 14th Aug., 2003, passed by the CIT(A), Dibrugarh in Appeals Nos. 2 (TSK), 3 (TSK), 4 (TSK) and 5 (TSK) of 200304.

2. This Court, while admitting IT Appeal No. 8 of 2006, vide order dt. 19th May, 2006, had formulated the following substantial question of law :

“(i) Whether initiation of a proceeding under s. 147 of the IT Act, 1961, is permissible under the law for reversal of the assessment order already passed on consideration of the materials on record ?”

3. IT Appeal Nos. 6, 7 and 8 of 2007 have been admitted for hearing, vide order dt. 29th Aug., 2007 on the following substantial question of law :

“(i) Whether on the facts and circumstances of the case, the AO was justified in initiating proceedings under s. 147 of the IT Act, 1961 ?”

4. The facts leading to the filing of the present appeals are that the respondent, a private limited company, carrying on the business of flour mills had filed returns of income on 7th Nov., 1997 for the asst. yr. 1997-98 on 27th Nov.,

1998 for the asst. yr. 1998-99 on 29th Nov., 1999 for the asst. yr. 1999-2000 and on 28th Nov., 2000 for the asst. yr. 2000-01, declaring the income as nil for all those assessment years. Consequent upon filing of such returns, those were processed under s. 143(1)(a) of the Act. The AO (in short, AO), thereafter, on verification of the balance-sheets furnished by the assessee along with the returns of income dt. 7th Nov., 1997, 27th Nov., 1998, 29th Nov., 1999 and 28th Jan., 2000 for the aforesaid assessment years had found that the assessee omitted to credit a sum of Rs. 65,10,563 and Rs. 14,44,670 to its P&L a/c and instead, had credited the same in the reserve and surplus account, as on 31st March, 1997 for the asst. yr. 1997-98 and as on 31st March, 2000 for the asst. yr. 2000-01, respectively. The AO, therefore, had passed the orders dt. 28th May, 2002, 7th June, 2002 and 6th Feb., 2002 in respect of the aforesaid assessment years and directed issuance of notice under s. 148 of the Act, having concluded that the same has resulted in the escapement of income within the meaning of s. 147 of the Act. Accordingly, with the approval of the higher authority, notices under s. 148 of the Act had been issued, in response to which the assessee filed the returns of income on 9th July, 2002, 7thJune, 2002, 7th June, 2002 and 6th June, 2002 for the aforesaid assessment years respectively, enclosing therewith all the details and documents filed earlier with the original returns. In response to the statutory notices, the assessee also filed its written submission on 13th March, 2003. The AO, thereafter, passed the orders dt. 17th March, 2003 for the asst. yrs. 1997-98 and 1998-99, and dt. 27th March, 2003 for the asst. yrs. 1999-2000 and 2000-01 rejecting the contention of the assessee and assessing the total income for the said assessment years by inclusion of transport subsidy, under s. 147 of the Act.

5. Being aggrieved, the assessee preferred four separate appeals before the Commissioner of Income-tax (Appeal) [in short, CIT(A)], which were taken up for disposal together, the same having involved the same question of law. The CIT(A), vide order dt. 4th Aug., 2003 has allowed the appeals by setting aside the orders passed by the AO, on the ground that the assessment for the said years having been completed under s. 143(1) of the Act, no assessment under s. 147 of the Act can be made on reappraisal of pre-existing materials on record, which tantamounts to change of opinion. The Revenue, thereafter, filed IT Appeal Nos. 96, 97, 98 and 99/Gau/2003 before the learned Tribunal, Gauhati Bench, Guwahati, which have been dismissed, vide the common order dt. 16th Sept., 2005, concurring with the view taken by the CIT(A) and by holding that since there was no fresh information or material before the AO, he had no jurisdiction to reopen the assessment under s. 147 of the Act, as all materials were already on record, those having been filed along with the original returns, on the basis of which the assessments were completed under s. 143(1) of the Act. It has further been held that the action under s. 147 of the Act is based on nothing but a change of opinion of the AO in the intervening period, i.e., after disposal of the cases under s. 143(1) and till the issuance of notices under s. 148, which is not permissible in law. Hence, the present appeals.

6. We have heard Mr. U. Bhuyan, learned standing counsel for the Revenue and Mr. R.P. Agarwal, learned senior counsel for the assessee.

7. Mr. U. Bhuyan, learned counsel for the Revenue, has submitted that the grounds on which the learned Tribunal has dismissed the appeals preferred by the Revenue are not tenable in law, in view of the provisions contained in s. 147 of the Act, which empowers the AO to assess or reassess any income chargeable to tax which has escaped assessment for any assessment year. According to Mr. Bhuyan, Expln. 2 to s. 147 of the Act provides that where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it amounts to escaped assessment. In the instant cases, according to Mr. Bhuyan, the AO had passed the orders reflecting his reason to believe that income chargeable to tax has escaped assessment in respect of the aforesaid assessment years in view of the fact that the transport subsidies received by the assessee have been credited in the reserve and surplus account instead of P&L a/c and such transport subsidy being revenue receipt taxable as income, within the meaning of the Act, the AO had decided to issue notice under s. 148 of the Act. Referring to the provisions contained in s. 143(1) (a) of the Act and also the apex Court decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC), it has been submitted by the learned counsel that after the amendment of s. 143(1)(a) by the Direct Tax Laws (Amendment), 1987, w.e.f. 1st April, 1989, the requirement of passing an order under the said provision has been dispensed with and instead, an intimation only is required to be sent. There is, therefore, no assessment and formation of opinion by the AO while issuing the intimation under s. 143(1)(a) of the Act and the same being not an assessment within the meaning of the Act, the AO is authorized to take action under s. 147 of the Act, in case of escaped assessment. According to the learned counsel, for the same reason there is no question of change of opinion by the AO while taking action under s. 147 of the Act. Mr. Bhuyan has submitted that the expression “reason to believe” has to be understood in the context in which it is used in s. 147 of the Act and hence the decisions of the various Courts including of the apex Court relating to such expression, rendered prior to the Amendment Act of 1987, w.e.f. 1st April, 1989, cannot be applied in the present cases, the same being in respect of the assessment years after 1st April, 1989. It has further been submitted that since the intimation issued under s. 143(1)(a) of the Act is not an assessment within the meaning of the Act and s. 147 of the Act empowers the AO to take action under the said provision of law, when he has “reason to believe” that there is escaped assessment, the AO can take into consideration the materials already submitted along with the original returns filed, for the purpose of s. 147 of the Act. Mr. Bhuyan submits that the order of the learned Tribunal, therefore, needs to be set aside and the matter remitted to the learned Tribunal for deciding the appeals on the merits. Mr. Bhuyan, in support of his contention has also placed reliance on the decisions of the Delhi High Court in Consolidated Photo & Finvest Ltd. vs. Asstt. CIT (2006) 200 CTR (Del) 433 : (2006) 281 ITR 394 (Del) and of the Gujarat High Court in Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62 : (1999) 236 ITR 832 (Guj) in Inductotherm (India) (P) Ltd. vs. James Kurian, Asstt. CIT (2007) 212 CTR (Guj) 195 : (2007) 294 ITR 341 (Guj).

Mr. R.P. Agarwal, learned senior counsel for the assessee, while concurring with the submission the learned counsel for the Revenue that the intimation under s. 143(1) (a) of the Act does not amount to an assessment, has, however, submitted that the AO can take action under s. 147 of the Act only if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment years and the same must be reflected in the orders passed and the Revenue cannot by way of affidavit improve upon the reasons initially disclosed in the orders reopening an assessment. Referring to the orders passed by the AO, it has been submitted by Mr. Agarwal, that when such orders contain the statement of facts and the conclusion, it does not indicate any reason as to why the AO came to the conclusion that there is escaped assessment. According to Mr. Agarwal, the expression “reason to believe” does not signify a purely subjective satisfaction and it must have a rational connection with or a relevant bearing on the formation of the belief and must not be extraneous or irrelevant. There must be a live link between the materials on which the conclusions are based and the actual conclusion. In the instant cases, according to Mr. Agarwal, there being no reason recorded in the orders reopening the assessment under s. 147 of the Act, the appeals, in any case, filed by the Revenue deserved to be dismissed and accordingly, those have rightly been dismissed by the learned Tribunal.

Mr. Agarwal has further submitted that the materials on the basis of which the notices under s. 148 of the Act were directed to be issued, were already available before the AO, as those were placed along with the original returns of income filed by the assessee and there being absolutely no new material placed or coming to the knowledge of the AO to record his belief that there is an escaped assessment, the same materials cannot be the basis for the AO to take action under s. 147 of the Act. Mr. Agarwal, has submitted that, in any case, the transport subsidy is not taxable as income under the provisions of the Act.

Mr. Agarwal, in support of his contentions has placed reliance on the decisions of the apex Court in Sheo Nath Singh vs. AAC 1973 CTR (SC) 484 : (1971) 82 ITR 147 (SC); ITO & Ors. vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437 (SC) of this Court in Assam Co. Ltd. vs. Union of India (2005) 197 CTR (Gau) 659 : (2005) 275 ITR 609 (Gau) of the Bombay High Court in Hindustan Lever Ltd. vs. R.B. Wadkar (2004) 190 CTR (Bom) 166 : (2004) 268 ITR 332 (Bom) and of the Calcutta High Court in Anil Kumar Bhandari vs. Jt. CIT (2007) 212 CTR (Cal) 439 : (2007) 294 ITR 222 (Cal).

We have considered the submissions of the learned counsel for the parties and also perused the records. Sec. 147 of the Act, as it stood prior to 1st April, 1989, authorized the AO to take action under the said provision of law, if,—(a) the AO has reason to believe that by reason of omission or failure on the part of an assessee to make a return under s. 139 for any assessment years or to disclose fully or truly all material facts for his assessment for that assessment year, any income chargeable to tax has escaped assessment for that assessment years; or (b) notwithstanding that there has been no omission or failure, on the part of the assessee, the AO has in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment for any assessment year, subject to the provisions of ss. 148 to 153 of the Act. In either of the situations the AO can proceed to assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned. Sec. 147 of the Act has undergone a change made by the Direct Tax Laws (Amendment) Act, 1987 which came into force 1st April, 1989, by which the original s. 147 has been substituted by the new s. 147. Under the new provision, the AO is authorized to take action if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year and proceed to assess or reassess such income subject to the provisions of ss. 148 to 153 of the Act. The AO is also authorized to assess or reassess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in course of such proceedings or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. The proviso to s. 147, however, puts an embargo on the AO to take action under the said provision of law after expiry of 4 years from the end of the relevant assessment year, where an assessment under sub-s. (3) of s. 143 or under s. 147 has been made for the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts, necessary for his assessment, for that assessment year. By the Finance Act, 2008, w.e.f. 1st April, 2008, a second proviso to s. 147 has been inserted authorizing the AO to 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. Expln. 2 to s. 147 of the Act stipulates the cases, which shall constitute escaped assessment.

13. It, therefore, appears that the AO must record his “reason to believe” to take action under s. 147 of the Act, whether it pertains to the assessment year prior to 1st April, 1989 or thereafter, i.e., under the unamended as well as the amended provision of law. The expression “reason to believe” has naturally to be understood in the context of the provisions contained in s. 147 of the Act. It is also the requirement of s. 147 of the Act that the AO before proceeding to take action under the said provision of law and issuing notice under s. 148 of the Act, has to record his reasons, which is open to scrutiny by the higher Courts.

The expression “reason to believe” came to be discussed in various decisions of various High Courts as well as of the apex Court. The apex Court in Sheo Nath Singh (supra), has observed that the words “reason to believe” suggest that the belief must be that of an honest and reasonable person, based upon reasonable grounds and though the AO may act on direct or substantial evidence but he cannot act on mere suspicion, gossip or rumour. It has further been observed that the AO would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The apex Court has further opined that the Court can always examine this aspect, though the declaration or sufficiency of the “reason to believe” cannot be investigated by the Court. The apex Court in Lakhmani Mewal Das (supra) has observed that the grounds or reasons which lead to the formation of belief contemplated by s. 147of the Act must have a material bearing on the question of escapement of income of the assessee from assessment. Once there exist reasonable grounds for the AO to form the belief, that would be sufficient to clothe him with the jurisdiction to issue notice. It has further been observed that the expression “reason to believe” does not mean a purely subjective satisfaction on the part of the AO and the “reason to believe” must be held in good faith and it cannot be merely a pretence and should not be based on extraneous or irrelevant consideration. There must be a live link between the material and the belief. In Ganga Saran & Sons (P) Ltd. vs. ITO (1981) 22 CTR (SC) 112 : (1981) 130 ITR 1 (SC), the apex Court has observed that if there is no rational and intelligible nexus between the reasons and the belief, so that on such reasons no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the AO could not have reason to believe that any part of the income of the assessee had escaped assessment. A single Bench of this Court in Assam Co. Ltd. vs. Union of India & Ors. (2005) 197 CTR (Gau) 659 : (2005) 275 ITR 609 (Gau), has also observed that for exercising the jurisdiction under s. 147 of the Act, there must be relevant and rational reason on which the AO proceeds to act, which must have a bearing on the process of formation of the belief by the AO that the income has escaped assessment, it has further been observed that if either of these two essentials is absent, the action under s. 147 would be unauthorized. A Division Bench of the Gujarat High Court in Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (supra), while dealing with the expression “reason to believe”, has opined that the word “reason” would mean cause or justification and, therefore, if the AO has a cause or justification to think or suppose that income had escaped assessment, he can be said to have a reason to believe that such income had escaped assessment. It has further been observed that the expression “reason to believe” cannot mean that the AO should have finally ascertained the facts by legal evidence. What requires is the formation of a belief from the examination he makes and if he likes from any information that he receives. It has also been observed 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 not actually taxed, though ought to have been under the law, due to an error committed at the first assessment. The same view has also been taken by another Division Bench of the Gujarat High Court in Inductotherm (India) (P) Ltd. vs. James Kurian, Asstt. CIT (supra). A Division Bench of the Delhi High Court in Consolidated Photo & Finvest Ltd. vs. Asstt. CIT (supra) has also opined that an action under s. 147 of the Act is permissible even if the AO gathers his “reasons to believe” from the very same record which was not the subject-matter of the completed assessment proceeding.

16. The expressions “reason to believe”, “assessment” and “intimation” occurring in ss. 143(1) and 147 of the Act came to be discussed by the apex Court in a recent judgment in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra). The apex Court, after noticing the various provisions of the Act, more particularly the provisions contained in the pre-amended and post-amended ss. 143 and 147 of the Act, has held that the amended provisions of s. 143(1)(a) do not contemplate making of any assessment by the AO. It has been held that under the scheme of the Act, an intimation under s. 143(1)(a) cannot be treated to be an order of assessment, though under s. 143 (1)(a) as stood prior to 1st April, 1989, the AO had to pass the assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of assessment order has been dispensed with and instead, an intimation is required to be sent. Under the first proviso to the substituted s. 143(1), which came into force w.e.f. 1st April, 1989, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under s. 143(1), where (a) either no sum is payable by the assessee; or (b) no refund is due to him. It has further been held that action under s. 147 of the Act, after the Direct Tax Laws (Amendment) Act, 1987, came into force w.e.f. 1st April, 1989, can be taken against an assessee if the AO, for whatever reason, has reason to believe that the income has escaped assessment. The requirement of fulfilling the two conditions as stipulated in the unamended provision of s. 147(a) of the Act no longer exists after the new s. 147 has been substituted by the said Amendment Act. Under s. 143(1), as it stands w.e.f. 1st April, 1989, as held by the apex Court in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), no assessment is made and there is no formation of opinion by the AO. Therefore, there being no formation of opinion at the stage of issuance of intimation under s. 143(1)(a), there is no question of change of opinion by the AO while taking action under s. 147 of the Act. In the present cases, the principal ground on which the learned Tribunal has dismissed the appeals preferred by the Revenue is that the action on the part of the AO is merely on a change of opinion in the context of the earlier assessment made under s. 143(1) of the Act and hence is not sustainable in law. What transpires from the judicial pronouncements, as discussed above, is that there must be a live link between the materials on which conclusions are based and the actual conclusion of the AO in formation of his belief that any income chargeable to tax has escaped assessment. Such reason must be held in good faith and cannot be a pretence and also cannot be based on extraneous or irrelevant consideration. Unless the AO has “reason to believe” and such reason is material and relevant to form a belief that there is an escaped assessment, no action under s. 147 of the Act can be taken. Unless there is a rational or intelligible nexus between the reasons and the belief, so that, on such reason any one properly instructed on facts and on law could reasonably entertain the belief, the AO cannot initiate any action under s. 147 of the Act. There is always a necessity of live link between the materials and the belief. The Court, however, though, can examine whether there were relevant materials before the AO to form the “reason to believe”, the sufficiency of reasons for the belief, however, cannot be investigated by the Court. The relevant materials must appear from the order by which the AO has decided to proceed with the assessment or reassessment under s. 147 of the Act. The satisfaction of the AO cannot be supplemented by the Revenue by filing an affidavit subsequently inasmuch as the AO only on formation of reason to believe on the basis of materials available before him that there is escapement of assessment can proceed to take action under s. 147 of the Act. Such an order must be construed objectively with reference to the reasons given in the order itself and cannot be construed in the light of the explanation subsequently given by the AO. A Division Bench of the Bombay High Court in Hindustan Lever Ltd. vs. R.B. Wadkar (supra) as well as a single Bench of the Calcutta High Court in Anil Kumar Bhandari vs. Jt. CIT (supra) have also held so. Unlike the unamended provisions of s. 147 of the Act which require fulfilment of the two conditions for initiation of the action under the said provision of law, namely, (i) the AO must have reason to believe that income, profit or gain chargeable to income-tax have escaped assessment; and (ii) he must have also reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that assessment year, the new provision of s. 147 requires the fulfilment of only one condition, namely, the AO has “reason to believe” that the income has escaped assessment. Once the said condition is fulfilled, it confers jurisdiction upon the AO to take action under s. 147 of the Act. As held by the apex Court in Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), such formation of belief may be for whatever reason. There being no finality to the assessment at the stage of issuance of intimation under s. 143(1) (a), it will be justified for an AO to take into consideration the materials placed before him by an assessee along with his original return of income, if such materials had escaped the notice of the AO, for whatever may be the reason. It is open to the AO to take into consideration such materials already available before him for the purpose of forming the belief within the meaning of s. 147 that there is escapement of assessment. The initiation of such proceeding under s. 147 is, however, subject to the first proviso thereto. Expln. 2 to s. 147 stipulates the cases, which shall be deemed to be escaped assessment within the meaning of s. 147. Explanation 2(b) provides that where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it would deemed to be escaped assessment within the meaning of s. 147.

In the instant cases, it is not in dispute that the transport subsidies received by the assessee relating to the asst. yrs. 1997-98 and 2000-01 were not shown in the profit and loss accounts but in the reserve and surplus account in the relevant returns of income. It is no doubt true that the assessee has submitted the audited accounts and also the materials relating to receipt of such transport subsidy along with the original returns filed by them, but such materials can form the basis of the belief that there is escapement of assessment, for the reasons given above. The various orders passed by the AO for taking action under s. 147 and issuance of notice under s. 148 of the Act reveal the reason as to why he has come to the conclusion that the income chargeable to tax had escaped assessment in the relevant assessment years. It is not that there is no reason and what the orders consist of is the statement of facts and the conclusion only. Reading of the orders reveal the reason, i.e., the assessee has reflected the transport subsidies received by him in the reserve and surplus account and not in the P&L a/c in the relevant assessment years, which had resulted in escapement of assessment. The AO took into consideration the relevant materials and did not take the decision on irrelevant or irrational materials. The AO, at this stage, is not required to finally ascertain the facts by legal evidence, which stage shall come thereafter and not at the stage of formation of belief, within the meaning of s. 147 of the Act. In the instant cases, it is not in dispute that the action under s. 147 of the Act has been taken within the time allowed. The first proviso to s. 147, therefore, is not applicable in the cases in hand.

As noticed above, the learned Tribunal has dismissed the appeals preferred by the Revenue by holding that the action of the AO in making assessment under s. 147 of the Act is illegal on two grounds, namely, (i) it is based merely on a change of opinion; and (ii) the same is based on materials on record already available before him. The said grounds, on which the appeals have been dismissed, in view of the aforesaid discussion, cannot be sustained in law and hence the common order dt. 16th Sept., 2005 passed by the learned Tribunal is set aside. Since the learned Tribunal has decided the appeals only on the aforesaid two grounds without going into the merits of the case, i.e., as to whether the transport subsidy is an income chargeable to tax under the Act, the matter is remitted to the learned Tribunal for its decision on the said issue.

In the result, the appeals are allowed. No costs.

[Citation : 327 ITR 430]

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