Gujarat H.C : Assessing Officer had allowed interest expenditure from dividend income under section 57 on basis of disclosures made by assessee, he could not reopen assessment on ground that in original assessment, assessee did not submit information as to how interest expenditure was incurred to earn dividend income

High Court Of Gujarat

Ketan B. Mehta vs. ACIT

Assessment Years : 1995-96 And 1996-97

Section : 147

Ms. Harsha Devani And Ms. Bela Trivedi, JJ.

Special Civil Application Nos. 4549 & 4551 Of 2002

March 16, 2012

JUDGMENT

Ms. Harsha Devani, J. – Both these petitions challenge the notices dated March 11, 2002, issued by the respondent under section 148 of the Income-tax Act, 1961 (“the Act”), reopening the petitioner’s assessment for the assessment years 1996-97 and 1995-96 respectively.

2. Since common questions of fact and law are involved in both these petitions and the parties are also common, the same were taken up for hearing together and are decided by this common judgment. The facts relating to Special Civil Application No. 4549 of 2002 are that the petitioner, an individual, filed his return of income on November 29, 1996, for the assessment year 1996-97, inter alia, claiming deduction of interest expenditure of Rs. 51,33,658 from income from other sources under section 57(iii) of the Act, which came to be allowed by the Assessing Officer while framing assessment under section 143(3) of the Act, vide assessment order dated December 23, 1998.

3. The facts in relation to Special Civil Application No. 4551 of 2002 are that the petitioner filed his return of income for the assessment year 1995-96 on March 29, 1996, declaring total loss of Rs. 7,45,759 wherein, he had, inter alia, claimed interest expenses of Rs. 39,01,689 from income from other sources under section 57(iii) of the Act. The assessment came to be framed at a loss of Rs. 3,53,622 under section 143(3) of the Act by an assessment order dated March 31, 1998.

4. Subsequently, by the impugned notices, the assessments of the petitioner for the assessment years 1996-97 and 1995-96 are sought to be reopened by the Assessing Officer. In response thereto, the petitioner addressed a letter dated March 22, 2002, to the respondent asking for the reasons for issuance of notice under section 148 of the Act. However, as the respondent neither provided the reasons nor dropped the reassessment proceedings, the petitioner has approached this court by way of the present petitions challenging the aforesaid notices.

5. In response to the petitions, the respondent has filed affidavits-in-reply stating that there are sufficient reasons to believe about the escapement of income chargeable to tax as is evident from the reasons so recorded before the issue of notice under section 148. That as per the requirement of the statute, proper reasons were recorded before issue of notice under section 148 of the Income-tax Act. It is also averred that the petition is filed at a premature stage and that the petitioner also has an alternative efficacious remedy under the Act. Copies of the reasons recorded for reopening the assessment under section 147 of the Act in relation to assessment years in question have been annexed with the affidavits-in-reply.

6. The Assessing Officer has recorded extensive reasons in relation to both the assessment years which are more or less similar except for the difference in figures and dates, inter alia, in the following terms :

“(1) Facts of the case :

The assessee is an individual was having his residence at C/13, Avani Flats, Nr. H. L. Commerce College, Navrangpura, Ahmedabad. For the assessment year 1996-97, the assessee submitted his return of income on November 29, 1996, disclosing nil income. The scrutiny assessment under section 143(3) of the Income-tax Act, 1961, was completed on December 23, 1998. In the return of income filed, the assessee has claimed interest expenses of Rs. 51,33,658 from ‘Income from other sources’ under section 57(iii) of the Income-tax Act, 1961. The assessee did not submit any information as to how the interest expenditure claim under section 57(iii) is laid out or expended wholly and exclusively for the purpose of making or earning dividend and interest income taxable in other sources head. During the course of the assessment proceedings also, the assessee only submitted that the borrowing were made for either repaying the earlier loan or for making investments in shares of Mastek Ltd. The assessee claimed that since investments were made in shares, which are generating dividend income and, therefore, interest expenditure is allowable under section 57(iii) of the Income-tax Act. The assessee did not submit the details relating to his controlling interest or his total holding in Mastek Ltd. The assessee is a director in Mastek Ltd. and increase in the shareholding in Mastek Ltd. is not for the purpose of earning dividend but for acquiring controlling stake in the company (Mastek Ltd.). To determine the clear purpose for making investments in these shares, relevant facts such as percentage holding of the assessee and his group, increase in holding, purpose of such increase, etc., are necessary. The deduction under section 57(iii) is allowable only when the expenditure was incurred wholly and exclusively for the purpose of earning the said income, i.e., dividend.

(2) How income has escaped assessment :

The assessee has claimed interest expenditure on fund borrowed for the purpose of making investments in shares of Mastek Ltd. The claim of such interest was Rs. 51,33,658. The provisions of section 57(iii) under which the said claim was made is quoted below :

(iii) Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

7. The Assessing Officer has thereafter referred to various decisions of this High Court, viz., (1) Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj), (2) Sarabhai Sons (P.) Ltd. v. CIT [1993] 201 ITR 464 (Guj), (3) (Smt.) Padmavati Jaykrishna v. CIT [1975] 101 ITR 153 (Guj), affirmed by the Supreme Court in Smt. Padmarati Jaikrishna v. Addl. CIT [1987] 166 ITR 176/32 Taxman 321 (SC) the decision of the Bombay High Court in the case of CIT v. Sir Homi M. Mehta [1943] 11 ITR 142 (Bom), (5) CIT v. Jagmohandas J. Kapadia [1966] 61 ITR 663 (Bom) and (6) the decision of this High Court in CIT v. Kasturbhai Lalbhai [1968] 70 ITR 267 (Guj). The decision of the Supreme Court in the case of T. S. Krishna v. CIT [1973] 87 ITR 429 (SC), was cited for the proposition that if the sum laid out is in a capacity different from that in making or earning the income, the expenditure is outside the scope of section 57(iii) of the Act.

8. Thereafter, the Assessing Officer has recorded as follows :

“In view of the above, it is quite clear that if the interest expenditure is not solely for the purpose of earning dividend income, the same is not allowable as an expenses under section 57(iii) of the Income-tax Act, 1961. Prima facie the assessee has invested in shares to acquire the controlling stake in the company, namely, Mastek Ltd., and his investment was not apparently for the purpose of earning dividend income. Considering this the assessee was allowed excess claim of interest to the extent of Rs. 51,33,658. As per Explanation 2(c)(i) and (iv) of section 147, such excess allowance of interest is deemed to be the income which has escaped assessment.

The assessee has not submitted the following information/details relevant to decide the purpose of making investments in the shares of Mastek Ltd. The balance-sheet and capital account of the assessee was not filed along with the return or during the assessment proceedings. In the absence of the balance-sheet, the details of investment, source of investment, application of fund for the purpose of making investments in shares, etc., have not been disclosed by the assessee. How much percentage of shares, the assessee and his group was holding in Mastek Ltd. was not submitted by the assessee. This is very relevant in the light of the Gujarat High Court’s judgment discussed above.

Details of total borrowings and their use for making investments in shares have not been submitted by the assessee. The details of loans taken with date and amount and investments made with copy of accounts of the persons and also to linking up of the loans taken for investments, etc., and interest paid during the year, has been furnished. The assessee has not submitted the details of loans taken nor the copies of accounts from all the parties were furnished. Thus, the assessee has not discharged the primary onus of giving details of loans taken, interest paid and linking the same with the investments made in shares.

The assessee nowhere submitted the investments in the shares of Mastek Ltd., is”

In relation to the assessment year 1995-96, in place of the immediately preceding paragraph, the reasons recorded read thus :

“Details of total borrowings and their use for making investments in shares have not been submitted by the assessee. Despite specifically being asked the details of loans taken with date and amount and investments made with copy of accounts of the persons and also to link loans taken for house construction and investments and interest paid during the year, the same were not furnished. The assessee has submitted details of loans taken of Rs. 37,50,000 + Rs. 42,90,000 + Rs. 84,00,000 = Rs. 1,64,45,000. Copy of accounts from the parties were not furnished. Even interest taken on these loans at the normal rate of 21 per cent. cannot be Rs. 39.01 lakhs. The assessee nowhere submitted that investments in the shares of Mastek Ltd. is to keep the control over the company.”

Thereafter, the reasons recorded in respect of both the assessment years, except for figures, read thus :

The approximate shareholding pattern for the assessment year from the details of the return are as follows :

Assessment year 1995-96 1996-97

Total number of shares held in the MASTEK 8,83,350 9,16,150

Authorized capital 50,00,000 50,00,000

Issued subscribed and paid up capital 30,00,000 30,56,200

The above data has been culled from and the comparison has been derived from the details of the income-tax returns of the company Mastek Ltd. in which the abovenamed assessee is a director and it can be safely deduced that the shares were purchased with clear purpose of object of getting controlling interest over the company and the only purpose or even the dominant purpose was not the earning dividend income.

In the absence of balance-sheet and other relevant information, the real nature of investments could not be decided and as such, income has escaped assessment by way of excessive deduction. In view of the non-allowable interest of Rs.51.33 lakhs claimed by the assessee from dividend income taxable income to that extent has escaped assessment within the meaning of Explanation 2(c)(i) and (iv) of section 147 of the Income-tax Act, 1961.

(3) Legal aspects of reopening the assessment :

For reopening an assessment completed under section 143(3) of the Income-tax Act, 1961, beyond four years, the following conditions need to be satisfied :

(i) The Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.

(ii) The escapement of income should be by reasons of failure on the part of the assessee who disclosed fully and truly all material facts necessary for that assessment year.

(iii) More than six years have not lapsed from the end of the relevant assessment year.

(iv) The income escaped is likely to amount to Rs. 1 lakh or more. In the assessee’s case, all the above four conditions, required for issue of notice under section 148 are satisfied as under :

(i) In view of the foregoing paras, the assessee has claimed deduction of interest on funds borrowings for the purpose of making investments in the shares of Mastek Ltd., which is not allowable under section 57(iii) of the Income-tax Act, 1961, considering the factual and legal position discussed above. As per Explanation 2(c)(i) and (iii) of section 147, such excessive allowance is deemed to be the case where income has escaped assessment. In view of this, there is sufficient reason to believe that substantial income chargeable to tax has escaped assessment.

(ii) In this case, as discussed earlier, the assessee has not submitted the balance-sheet, capital account, his holding in Mastek Ltd., linking of investments with the borrowings, copy of accounts of lenders, etc. These information’s are very relevant to decide whether the expenses was solely incurred for the purpose of earning dividend or not. If the assessee would have disclosed the facts relating to the nature of investments in the shares of Mastek Ltd., the deduction under section 57(iii) would not have been allowed to the assessee. It is, therefore, clear that the substantial income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In view of this, the second condition is also satisfied in the assessee’s case.

(iii) Assessment can be reopened up to six years from the end of the relevant assessment year. For the assessment year 1996-97, six years period will end on March 31, 2003, therefore, this assessment can be legally reopened by March 31, 2003.

(iv) The income likely to have escaped assessment should be Rs. 1 lakh or more in this case more than Rs. 51.33 lakhs have escaped assessment from the above, it is clear that all the conditions required for reopening the assessment are satisfied in the assessee’s case.”

9. Thereafter, the Assessing Officer has discussed various judicial decisions and has found that wherever material facts have not been disclosed fully and truly by the assessee suo motu, the reopening of the assessment is justified. That, in the present case, as discussed in the preceding paragraphs, the assessee had not disclosed the basic fact relating to his investments in Mastek Ltd., he has also not disclosed the details of total assets and liabilities to link the borrowings with investment and also to determine the purpose of such borrowings. This has resulted in excess allowance of interest. The Assessing Officer has thereafter recorded the following conclusion :

“5. Conclusion

It can be seen from the return of the income that the assessee has claimed interest payments of Rs. 51,33,658 on the borrowed (capital) fund for acquiring the shares of the company Mastek Ltd., in which the assessee is a managing director (for the assessment year 1995-96 the words used are promoter/director). The assessee has no intention to earn income by investing the borrowed capital for the purchase of shares of the company in which the assessee is a promoter director. Thus, the assessee has borrowed the money for the investment purpose and, hence, the interest paid is not allowable as expense under section 57(iii) of the Income-tax Act, 1961.

In view of the above, I am of the firm belief that substantial income has escaped assessment within the meaning of section 147, for which assessments need to be reopened.”

10. In reply to the affidavits-in-reply, the petitioner has filed affidavits-inrejoinder in both the petitions placing on record various documents produced by the petitioner during the course of the assessment proceedings before the Assessing Officer. The respondent has not filed any reply to the rejoinder rebutting the averments made therein. Thus, it is an accepted position that the documents annexed with the rejoinder affidavit have been submitted by the petitioner during the course of the assessment proceedings for the respective assessment years.

11. Mr. S. N. Soparkar, senior advocate, learned counsel for the petitioner submitted that, in the present case, the original assessment order was framed under section 143(3) of the Act. The impugned notices have been issued on March 11, 2002, in relation to the assessment years 1996-97 and 1995-96, which is clearly beyond a period of four years from the end of the relevant assessment years and as such, in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is without authority of law. Inviting attention to the reasons recorded, it was submitted that the Assessing Officer seeks to reopen the assessment on the ground that the petitioner had claimed interest expenses in relation to loans taken by him for the purpose of purchasing shares. According to the Assessing Officer, the petitioner did not submit details relating to his controlling interest or his total holding in Mastek Ltd. wherein the petitioner is a director and that he has assumed that the increase in the share holdings in Mastek Ltd. is for the purpose of gaining controlling stake in the company (Mastek Ltd.) and that by not disclosing the percentage of his holding in Mastek Ltd., the petitioner has failed to disclose fully and truly all material facts. It was submitted that the Assessing Officer has recorded that the petitioner has not submitted the balance-sheet and capital account along with the return or during the assessment proceedings and that, in the absence of the balance-sheet, the details of investment, source of investment, application of fund for the purpose of making investments in shares, etc., had not been disclosed by the petitioner. Referring to the documents annexed along with the affidavits-in-rejoinder, the learned counsel submitted that during the course of assessment proceedings, the petitioner has produced all documents which were called for by the Assessing Officer in support of his claim. That the petitioner had submitted copies of dividend warrants as well as confirmations from the various parties in respect of loans availed of by the petitioner and had also submitted the statement of account for the relevant period. Referring to the statements of total income submitted along with the return of income, it was pointed out that for the assessment year 1996-97 the petitioner had clearly stated that the petitioner had dividend income of Rs. 15,81,906 and that the petitioner had claimed deduction of interest expenditure of Rs. 51,33,658 and that for the assessment year 1995-96, it had been stated that the petitioner had dividend income of Rs. 16,75,157 and had claimed interest expenditure of Rs. 39,01,689. It was submitted that the petitioner had, in the statements of income also, categorically stated the dividend income derived from his shareholdings in Mastek Ltd. and as such, all primary facts necessary for the purpose of assessment of the petitioner had been produced before the Assessing Officer.

12. In relation to the claim for deduction under section 57(iii) of the Act, Mr. Soparkar for the petitioner submitted that the question in the present case is whether the interest can be allowed against the dividend income. Referring to the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), it was submitted that the interest can be allowed against dividend income ; hence, the petitioner had rightly made such a claim. According to the learned counsel, controlling interest is not statutorily defined and is a matter of perception. In relation to his claim of deduction under section 57(iii) of the Act, the petitioner had filed dividend warrants, and all other information called for by the Assessing Officer during the course of assessment proceedings, like confirmations from depositors, etc., and that the Assessing Officer after being satisfied as regards the admissibility of the petitioner’s claim had allowed the deduction. It was contended that the Assessing Officer cannot commence the reassessment proceedings merely because he entertains a view different from his predecessor. It was further submitted that the petitioner had disclosed fully and truly all primary facts necessary for the purpose of assessment and on that account also, the Assessing Officer had no jurisdiction to initiate reassessment proceedings.

13. The learned counsel further submitted that the petitioner had made a claim for expenditure along with supporting documents and the Assessing Officer after due application of mind, had allowed the said claim. The petitioner had placed all primary facts on record before the Assessing Officer and as such, there was no failure on the part of the petitioner to disclose fully and truly all material facts. It was submitted that the case of the Assessing Officer in the reasons recorded is that the petitioner has not submitted the balance-sheet and capital account along with the return of income or during the assessment proceedings and that the petitioner had failed to disclose his percentage holding in Mastek Ltd. It was submitted that in so far as the submission of the balance-sheet and capital account of the petitioner is concerned, the petitioner is an individual and is not required by law to maintain the balance-sheet and as such, does not maintain balance-sheets. Inviting attention to the rejoinder affidavits, it was pointed out that, vide letters dated December 14, 1998, and December 21, 1998, all the information and details called for were placed before the then Assessing Officer, who framed the original assessment. It was urged that it is not the case of the respondent that any information was called for and was not submitted by the petitioner. That at best, this is a case of perception of the Assessing Officer vis-a-vis perception of the petitioner. It was submitted that in so far as the petitioner’s holding in the company, viz., M/s. Mastek Ltd. is concerned ; there is no requirement under law that the petitioner should disclose his holding in the said company. Reliance was placed upon the decision of this High Court in the case of CIT v. Akbarali Jummabhai [1992] 198 ITR 69 (Guj), for the proposition that the duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge or of which he cannot be attributed with any knowledge, there would be no duty to disclose such material. It was, accordingly, submitted that when the petitioner was not maintaining balance-sheets or capital accounts, such material not being in existence, there was no obligation cast upon the petitioner to produce such documents. According to the learned counsel, in case the Assessing Officer, during the course of assessment, found it difficult to make the assessment in the absence of such documents, he could have called upon the petitioner to prepare the balance-sheet and to produce the same. It was submitted that in relation to the assessment year 1995-96, it appears that the Assessing Officer had called for the balance-sheet ; hence, the petitioner had prepared the same and produced them during the course of assessment proceedings. In respect of the assessment year 1996-97, no such information was called for by the Assessing Officer, who proceeded to assess the petitioner on the material before him. In the circumstances, it is clear that the Assessing Officer did not find the material necessary for assessment. In the circumstances no failure to disclose fully and truly all material facts can be attributed to the petitioner. Reliance was also placed upon a decision of the Supreme Court in the case of CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC), wherein the court had held that when all primary facts have been disclosed by the assessee, action under section 34(1)(a) of the Indian Income-tax Act, 1922, is not valid.

14. Inviting attention to the reasons recorded, it was submitted that there is a basic inconsistency therein inasmuch as on the one hand that the Assessing Officer has recorded that the assessee had claimed interest expenditure on funds borrowed for the purpose of making investment in shares in Mastek Ltd. and that the petitioner had invested in shares to acquire controlling stake in company, hence, the investment was not for the purpose of earning dividend income, whereas on the other hand, he says that the petitioner had not discharged the primary onus of giving details of loans taken, interest paid and linking the same with the investment in shares.

15. The next submission advanced by the learned counsel for the petitioner was that the reopening of assessment by the Assessing Officer seems to be based upon an incorrect reading of the decision of this court in the case of Sarabhai Sons (P.) Ltd. (supra), inasmuch as in the facts of the said case, the assessee therein had purchased the shares with the clear purpose or object of getting 100 per cent. control over a company, viz., Swastik Oil Mills Ltd. (SOML). However, when the assessee could not purchase the entire 100 per cent. shares, the assessee sold the shares to another company, viz., Kasturbhai group and Patel group (KPPL). During the financial year which ended on March 31, 1969, the assessee paid by way of interest Rs. 6,05,291 to the shareholders from whom it had purchased shares. It received Rs. 3,18,195 as interest from KPPL for the unpaid price of the shares which it had sold to KPPL. Thus, despite the fact that by that time it had already acquired more than 90 per cent. shares, which would have satisfied its object of earning more income by possessing more shares, the assessee sold the shares for the reason that it was not able to get 100 per cent. control by purchasing all the remaining shares. The assessee claimed net deficiency in the interest account calculated on the basis of interest paid by the assessee to the shareholders of SOML on the unpaid purchase price and interest received on unpaid sale price by KPPL as a deduction in computing its income from other sources. It was in the background of the aforesaid facts that the court held that the dominant purpose for which the expenditure was incurred was not for earning income and at the highest, it was a mixed purpose. It was submitted that the said decision was rendered in a totally different set of facts and would not be applicable to the facts of the present case.

16. The learned counsel further submitted that the main reason for reopening, according to the Assessing Officer, is that the purchase of shares of Mastek Ltd. by the petitioner was made with the motive of gaining controlling stake in the said company and not for the purpose of earning dividend. It was submitted that assuming without admitting that the petitioner has purchased the shares with a motive to gain controlling interest, the petitioner would still be entitled to deduction under section 57(iii) of the Act, if he has purchased the shares for the purpose of earning dividend income. Reliance was placed upon the binding pre-bifurcation decision of the Bombay High Court in the case of Ormerods (India) P. Ltd. v. CIT [1959] 36 ITR 329 (Bom), wherein the court held that the word “purpose” in the expression “expenditure incurred solely for the purpose of making or earning such income, profits or gains” in section 12(2) of the Income-tax Act, did not mean motive for the transaction ; much less could it mean the ulterior motive or the ultimate object of the purchase of the shares by the assessee. The court, accordingly, held that the finding of the Tribunal that the purchase was made to serve the convenience of two others was no more than a finding as to the ulterior motive in purchasing the shares, whereas the purpose of the purchase was an entirely different matter. The learned counsel, accordingly, submitted that the purpose of purchasing the shares in the present case is for the purpose of earning dividend income, as is evident from the statement of income submitted by the petitioner which clearly shows that a major portion of the income of the petitioner is comprised dividend income. Hence, assuming that there is a motive to gain controlling interest, the same would not detract from the fact that the amount has been expended wholly for purchasing shares for the purpose of earning dividend income.

17. In the background of the aforesaid contentions, the learned counsel, submitted that in the absence of any failure on the part of the petitioner to disclose fully and truly all material facts, the respondent has no jurisdiction to invoke the provisions of section 147 of the Act by issuance of the impugned notice under section 148 of the Act.

18. Vehemently opposing the petition, Mr. M. R. Bhatt, senior advocate, learned counsel for the respondent, emphatically argued that the petitioner had invested amounts taken by way of loans in shares of Mastek Ltd. in which he had considerable holding. For the purpose of claiming deduction on interest expenditure under section 57(iii) of the Act, the petitioner should have expended the amount wholly and exclusively for the purpose of earning such income. In the facts of the present case, the Assessing Officer while making assessment in the case of Mastek Ltd. had noticed the percentage of shares held by the petitioner which led him to deduce that the petitioner had acquired shares for the purpose of gaining a controlling stake in the company and not solely for the purpose of earning dividend income. In the circumstances, when the petitioner had purchased shares for the purpose of gaining controlling stake in Mastek Ltd., he was bound to inform the Assessing Officer about the Mastek Ltd.’s total share holding as well as the percentage of shares held by him as that would be necessary to determine as to whether the petitioner was entitled to deduction under section 57(iii) of the Act. It was submitted that a fact which was necessary for arriving at a decision as regards admissibility of a claim is a material fact and as such, the petitioner has failed to disclose fully and truly all material facts.

19. Mr. Bhatt further submitted that the petitioner has failed to disclose fully and truly all material facts necessary for his assessment and as such, the Assessing Officer is justified in reopening the assessment beyond a period of four years from the end of the relevant assessment years. Inviting attention to the reasons recorded, it was submitted that in the facts of the present case, since the petitioner has purchased the shares with a view to gain controlling stake in the company, viz., Mastek Ltd., of which the petitioner was the promoter/director, the petitioner was not entitled to deduction under section 57(iii) of the Act and as such, he had made a false claim which amounts to non-disclosure of correct facts. According to the learned counsel the petitioner having purchased a considerable number of shares of Mastek Ltd., he was duty bound to bring the same to the notice of the Assessing Officer during the course of scrutiny as the same was a material fact necessary for his assessment.

20. Replying to the contention that the petitioner was not required to disclose the percentage of his holding in Mastek Ltd. as there was no such statutory requirement under the Act or the Rules, the learned counsel placed reliance upon a decision of the Andhra Pradesh High Court in the case of K. C. P. Ltd. v. ITO [1984] 146 ITR 284/[1983] 13 Taxman 104 (AP) wherein the court held thus (page 295) :

“The form which was prescribed for the relevant assessment year, undoubtedly, did not contain any column requiring the assessee to state whether it had availed of the initial depreciation in respect of the machinery for which it is claiming normal depreciation in that year. But, we are not prepared to hold that the non-disclosure must be confined only to failure to fill up the columns contained in the form of return prescribed by the Rules. We find no reason to give such restricted meaning. Section 147 speaks of omission or failure to disclose fully and truly all material facts necessary for the assessment for that year. Which fact, or facts, are material for assessment for that year is a question of fact to be decided in each case, and it is not possible to lay down any hard and fast rule.”

21. The learned counsel, accordingly, submitted that the percentage holding of the petitioner in Mastek Ltd. was a material fact, which had a bearing on the assessment of the petitioner inasmuch as, if the said fact had been disclosed to the Assessing Officer while framing the original assessment, the petitioner would not have been allowed deduction under section 57(iii) of the Act in respect of the shares purchased by it to gain controlling stake in Mastek Ltd. It was submitted that in the circumstances, non-disclosure of the petitioner’s holding in Mastek Ltd. amounts to failure on the part of the petitioner to disclose fully and truly all material facts and as such, the Assessing Officer was justified in reopening the assessment after a period of four years from the end of the relevant assessment year.

22. Reliance was also placed on the decision of the Bombay High Court in the case of Dr. Amin’s Pathology Laboratory v. P. N. Prasad, Jt. CIT (No. 1) [2001] 252 ITR 673 (Bom), for the proposition that mere production of balance-sheet, profit and loss account or account books will not necessarily amount to disclosure within the meaning of the proviso to section 147 of the Act. It was submitted that the case of the Department is that though interest expenditure was not allowable under section 57(iii) of the Act, in the light of the fact that the petitioner had purchased the same to gain a controlling interest in Mastek Ltd., the petitioner had failed to disclose fully and truly all material facts by not disclosing his shares in Mastek Ltd. Reliance was also placed on the decision of the Madras High Court in the case of Tamil Nadu Petroproducts Ltd. v. CIT [2011] 330 ITR 342/202 Txman 104/11 taxmann.com 311 (Mad) for the proposition that even a wrong claim would amount to incorrect disclosure.

23. Strong reliance was placed on the decision of this High Court in the case of Sarabhai Sons (P.) Ltd. (supra), for the purpose of contending that where the shares have been purchased for the dominant purpose of gaining controlling interest and not for the purpose of earning income, the expenditure was inadmissible under section 57(iii) of the Act. The learned counsel also placed reliance upon the decision of the Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), for the proposition that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of “underassessment”, that would be sufficient to give jurisdiction to the Income-tax Officer to issue notice under section 34 (now 148) of the Act. It was submitted that primary facts which have a material bearing would be such facts which, if taken into account, would have an adverse effect on the assessee resulting in a larger assessment than the one actually made. That in the facts of the present case, if the petitioner had disclosed his percentage shareholding in Mastek Ltd., the same would have had an adverse effect on him and would have resulted in a larger assessment than the one actually made, and as such, the said fact was a material fact.

24. Reliance was also placed on an unreported decision of a Division Bench of this High Court in the case of Dishman Pharmaceuticals and Chemicals Ltd. v. Dy. CIT (OSD) (No. 1) rendered on March 1, 2011, in Special Civil Application No. 15304 of 2010 (since reported in [2012] 346 ITR 228 (Guj)), wherein the court, in the facts of the said case in the context of clause (e) of section 2(22) of the Act, held that the holding of the petitioner in SDBL wherein the petitioner had the holding of shares of not less than 10 per cent. of the voting power, which could either bring the payment within the mischief of clause 2(22) of the Act, by treating the same as deemed dividend, or could keep such payment out of the said provision, was never disclosed by the assessee in the return of income and that by simply stating that the petitioner company holds certain shares in SDBL, the duty to truly and fully disclose all material facts necessary for assessment of the income, was not discharged. It was submitted that the facts of the present case are similar to the facts of the said case inasmuch as, the petitioner had not disclosed his controlling stake in Mastek Ltd., and as such, the petitioner had failed to disclose fully and truly all material facts necessary for the assessment of his income.

25. In conclusion it was submitted by the learned counsel that the Assessing Officer was fully justified in reopening the assessment under section 147 of the Act by issuing the impugned notices and that the petitioner having failed to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration, the assumption of jurisdiction by the Assessing Officer under section 147 of the Act is valid.

26. In the present case, the original assessments for both the assessment years in question came to be framed under section 143(3) of the Act. Evidently, both the impugned notices, which have been issued on March 11, 2002, in relation to the assessment years 1996-97 and 1995-96, respectively, have been issued after the expiry of a period of four years from the end of the relevant assessment years, the proviso to section 147 of the Act would, therefore, be clearly attracted.

27. It is by now well settled that in case where by the proviso to section 147 of the Act is attracted, two conditions have to be satisfied before the Assessing Officer acquires the jurisdiction to issue notice under section 148 in respect of an assessment beyond a period of four years from the end of the relevant assessment year, viz., that the Assessing Officer must have reason to believe that (i) income chargeable to tax has escaped assessment ; and (ii) such escapement is by reason of omission or failure on the part of the assessee, (a) to make a return under section 139 for the assessment year or to file a return in response to a notice issued under section 143(2) or section 148 of the Act, or (b) to disclose fully and truly all material facts necessary for his assessment for that year. Both these conditions must co-exist to confer jurisdiction on the Assessing Officer. It is also imperative for the Assessing Officer to record his reasons before initiating the proceedings as required under section 148(2) of the Act. Therefore, the only question which requires consideration is as to whether both the conditions set out above are satisfied so that it can be said that the respondent validly acquired jurisdiction to initiate proceedings for reassessment.

28. In the present case, the reassessment is not resorted to on the ground that there was omission or failure on the part of the petitioner to make a return under section 139 of the Act for the assessment years in question or in response to the notice under section 143(2) or section 148 of the Act. The only ground on which the proceeding was initiated was that there was failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration. Even on this aspect of law, the position is well settled. 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. Once he has done that, his duty ends. It is for the Assessing Officer to draw correct inference from those primary facts. It is not the responsibility of the assessee to advise the Assessing Officer with regard to the inference which he should draw from the primary facts. If the Assessing Officer 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 reassessment. The words “omission or failure to disclose fully and truly all material facts necessary for his assessment for that year” postulate a duty to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. But once those primary facts are disclosed, and all the facts which would help the Assessing Officer in coming to the correct conclusion are brought to his notice, the assessee’s duty ends. From these primary facts and the further facts inferred from them, the taxing authority has to draw the proper legal inferences and ascertain on a correct interpretation of the taxing enactment the proper tax leviable (See Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC).

29. Bearing in mind this settled legal position, the question that arises for consideration is as to whether in this case there was any material on the basis of which the respondent could have entertained a reasonable belief that there was escapement of income from assessment on account of failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the year under consideration.

30. For this purpose it would be necessary to refer to the reasons recorded for reopening the assessments. In the reasons it has been recorded by the Assessing Officer that the assessee had not submitted any information as to how the interest expenditure claimed under section 57(iii) of the Act is laid down or expended wholly and exclusively for the purpose of making or earning dividend and interest income taxable under the head of other sources. That during the course of assessment the petitioner had only submitted that the borrowings were made for either repaying the earlier loan or for making investments in shares of Mastek Ltd. The petitioner had claimed that since the investments were made in shares, which were generating dividend income, therefore, interest expenditure was allowable under section 57(iii) of the Act. However, the petitioner did not submit details regarding his controlling interest or his total holding in Mastek Ltd. According to the Assessing Officer, the assessee being a director in Mastek Ltd. and considering his shareholding pattern in Mastek Ltd. the increase in his shareholding in Mastek Ltd. was not for the purpose of earning dividend income but for acquiring controlling stake in the company. In the opinion of the Assessing Officer, to determine the clear purpose for making investments in these shares, relevant facts such as percentage holding of the assessee and his group, increase in the share holding, purpose of such increase, etc., were necessary as deduction under section 57(iii) of the Act was allowable only when expenditure was incurred wholly and exclusively for the purpose of earning such income, that is dividend.

31. As to how the income chargeable to tax has escaped assessment, the Assessing Officer has recorded that the assessee had claimed interest expenditure on funds borrowed for the purpose of making investments in shares of Mastek Ltd. to the tune of Rs. 51,33.658 and Rs. 39,01,689 respectively. Relying upon the decisions of this High Court in the case of Smt. Virmati Ramkrishna (supra), Sarabhai Sons (P.) Ltd. (supra), as well as the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna (supra), etc., the Assessing Officer has recorded that if interest expenditure is not solely for the purpose of dividend income the same is not allowable as an expense under section 57(iii) of the Act. According to the Assessing Officer, prima facie, the assessee had invested in shares to acquire the controlling stake in the company and his investment was not apparently for the purpose of earning dividend income. Therefore, the assessee had been allowed excess claim of interest to the extent noted hereinabove.

32. As to what was the nature of non-disclosure on the part of the petitioner, the Assessing Officer has recorded that the petitioner had not submitted the balance-sheet and the capital account along with the return or during the assessment proceedings ; that in the absence of balance-sheet, the details of investment, source of investment, application of fund for the purpose of making investments in shares, etc., have not been disclosed by the petition. The main non-disclosure alleged is that the petitioner had not submitted at to what percentage of shares he and his group were holding in Mastek Ltd. which, according to the Assessing Officer, was very relevant in the light of the Gujarat High Court’s judgment in the case of Sarabhai Sons (P.) Ltd. (supra).

33. In the facts of the present case, what is now required to be examined is as to whether the action of the petitioner in not filing the balance-sheet for the assessment year 1996-97 can be said to be a non-disclosure of primary facts which has resulted into escapement of income from being assessed.

34. In relation to the assessment year 1995-96, a perusal of the documents annexed with the affidavit-in-rejoinder filed by the petitioner, clearly indicates that the petitioner had in fact furnished a copy of the balance-sheet as on March 31, 1995, to the Assessing Officer during the course of assessment proceedings setting out the details of the loans obtained by him, the expenses incurred by him as well as the details of shares purchased by him. Along with the affidavit-in-rejoinder, the petitioner has annexed a note submitted by him to the Assessing Officer stating that he had invested in shares of some companies as per statement (A) (which shows date of investment, amount invested, number of shares acquired, etc.). A statement showing details of parties from whom loans were taken, purpose of such loan, amount, interest, closing balance, has also been submitted. The petitioner has explained as regards loans taken by him and has stated that the loans were taken to invest in shares of the company or to repay the loans taken for the said purpose. Hence, it must be allowed against the dividend income. The petitioner also enclosed proof of interest payment. The petitioner has also annexed copies of the return filed by him, along with the statement of income, balance-sheet as on March 31, 1995, expenses/income statement of 1994-95, details of shares 1994-95, expenses/income statement and balance-sheet of his wife, Rupa Mehta, as on March 31, 1995, March 31, 1993, and March 31, 1994, bank statement of the petitioner, details of other advances/deposits, dividend warrants, Form No. 16 under rule 31(1)(a) of the Rules, proof of payment of interest on loan taken by the petitioner, certificates of interest charged on the loans, certificates evidencing repayment, proof regarding purchase of shares, etc. In the circumstances, in so far as the assessment year 1995-96 is concerned, the reasons recorded to the extent the same state that the petitioner had not submitted the balance-sheet along with the return of income or during the course of assessment proceedings and that the petitioner had not produced details of total borrowings and their use for making investments in shares do not appear to be factually correct.

35. From the reasons recorded, it appears that failure to disclose fully and truly all material facts on the part of the petitioner has been attributed on the ground of non-furnishing of balance-sheet, capital account, details of loans with date and amount of investments made with a copy of the accounts as well as the extent of the petitioner’s holding in the company, Mastek Ltd. In so far as the failure to furnish the balance-sheet and capital account, etc., is concerned, the learned counsel for the petitioner has submitted that the petitioner being an individual, is not required to maintain balance-sheet and as such, it cannot be said that there is any failure on the part of the petitioner to disclose fully and truly all material facts by not submitting the balance-sheet and capital accounts, etc. Moreover, in so far as the assessment year 1995-96 is concerned the said documents had in fact been submitted by the petitioner during the course of the assessment proceedings.

36. In this regard, it may be pertinent to refer to the decision of this court in the case of CIT v. Akbarali Jummabhai (supra), wherein the court held that the duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge or cannot be attributed with any knowledge, there would be no duty to disclose such material. If absence of such material handicaps the Income-tax Officer in assessing the income or passing the order on the return, he has ample power to call upon the assessee, under section 142(1)(ii) to supply such material or to prepare the balance-sheet and to produce the same. If he does not exercise that power or fails to exercise that power and proceeds to assess the assessee on the material which is before him, it can be said that the Assessing Officer did not find the material necessary for assessment and, therefore, he cannot resort to the power under section 147(a) subsequently when he has failed to exercise the power under section 142(1)(ii) of the Act. Adverting to the facts of the present case, in so far as the assessment year 1995-96 is concerned, a perusal of the annexures annexed with the rejoinder affidavits indicates that the petitioner had in fact submitted along with the return of income and during the course of assessment proceedings, statements of income, balance-sheet as on March 31, 1995, setting out the details of loans obtained by him as well as the other details, expenses incurred by him, including interest expenses and details of shares purchased during the previous year 1994-95, including total number of shares purchased in Mastek Ltd. The petitioner had also submitted copies of dividend warrants and confirmation letters of the persons from whom the petitioner had obtained loans. For the assessment year 1995-96, the assessment order framed under section 143(3) of the Act indicates that the Assessing Officer after duly applying his mind to the facts of the case and the documents furnished during the course of assessment proceedings, had allowed the interest expenditure except to the extent of Rs. 2,02,149 in respect of Nirma Detergent as confirmation had not been received in respect of the said party. The Assessing Officer, during the course of assessment proceedings for the assessment year 1995-96, had before him all relevant details of the loans obtained by the petitioner and the investments made by the petitioner from the amounts obtained by way of loans as well as interest expenditure claimed in respect thereof. It was after examining all the said documents, that the Assessing Officer had assessed the petitioner under section 143(3) of the Act. At no point of time, does it appear that the Assessing Officer had called upon the petitioner to furnish the percentage of his holding in Mastek Ltd.

37. In relation to the assessment year 1996-97, the record of the case indicates that the petitioner had furnished along with his return of income and during the course of assessment proceedings, statement of his income as well as the confirmation letters of the depositors and dividend warrants to indicate earnings by way of dividend income. In relation to the assessment year 1995-96, the petitioner had submitted the statement of income along with the balance-sheet as well as other documents evidencing proof of obtainment of the loans as well as investment of the same by purchasing shares and the income derived by way of dividend. Since, in the assessment year 1996-97, no fresh loans had been availed of, it appears that the Assessing Officer did not call for the aforesaid details and placed reliance upon the earlier assessment made for the assessment year 1995-96. On the basis of the assessment for the assessment year 1995-96, the Assessing Officer has framed assessment under section 143(3) of the Act, vide order dated December 23, 1998, determining the total income of the petitioner at rupees nil.

38. Thus, from the facts noted hereinabove, it is apparent that the petitioner had disclosed all primary facts necessary for his assessment for the assessment years under consideration. On behalf of the respondent, it is, however, strongly contended that the petitioner had failed to disclose his percentage holding in Mastek Ltd., which was a material fact for the purpose of making the assessment of the petitioner and that, had the petitioner disclosed the said fact, the petitioner would have been assessed at a higher income.

39. In this regard, it may be germane to refer to the binding pre-bifurcation period decision of the Bombay High Court in the case of Ormerods (India) (P.) Ltd. v. CIT [1959] 36 ITR 329 (Bom), wherein the court has held thus (page 335) :

“It has been strenuously urged that the Tribunal has recorded an express and explicit finding that the purpose of these borrowings was not earning of any income or profits or gains by the assessee-company but something fraudulent, viz., the convenience of the interested parties whose names are mentioned as Gupta and Morarka. The short argument of Mr. Joshi is that there is a clearly recorded finding of fact as to what the purpose of this borrowing was and it is said that the only answer that can be given on the question before us must, therefore, be against the assessee. We are unable to acquiesce in this argument. It is indubitably true that the Tribunal has stated that the purchase of these shares by the company has served the purpose of giving facility or convenience to two interested parties. It is equally true that the Tribunal has used the word ‘purpose’ in recording this finding. Evidently there is here the use of an expression which has more than one meaning. ‘Purpose’ may, in some context, suggest object ; and purpose may sometimes suggest motive for a transaction. But, under section 12, we have to read the word ‘purpose’ in its legal sense to be gathered from the context in which it appears. We have to find out the meaning as far as possible from the language of the section itself and without attributing to the Legislature a precise appreciation of the technical appropriateness of its own. But whatever way we read the word ‘purpose’ it cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ultimate object of purchasing the shares by the company. The only possible way to read what Mr. Joshi has described as the express and explicit finding of the Tribunal is, in our opinion, no more than a finding by the Tribunal as to the ulterior motive or ultimate object in purchasing the shares. But the purpose of the purchase is a different matter. All that the Tribunal has recorded is that the shares were not purchased with a view to trading in them. Incidentally, we may mention that the Income-tax Officer had observed that the investments were not for a proper business consideration nor for any ‘sound investment consideration’. But we are concerned with the finding of the Tribunal and not what the Income-tax Officer may have said. There is, therefore, in our view, no finding by the Tribunal that these shares were not purchased solely for the purpose of making or earning income, profits or gains. Now, the Tribunal has found that these purchases were investments of the assessee-company. On the facts of the case and the finding recorded by the Tribunal the only possible conclusion that we can reach is that these investments were made for the purpose of earning income or dividends or for making profits or gains. In our opinion, the Tribunal has mixed up the concept of the purpose of the purchase of these shares by the company and what in its judgment was the motive for the purchase of the shares. It follows from the order of the Tribunal, part of which we have already set out, that the Tribunal took the view that the assessee was entitled in respect of the three subsequent years to set off the payment of interest on the loans against the dividend income. That the purchase of the shares was to earn income would seem to be the very basis of that part of the order made by the Tribunal. In our judgment, where the Tribunal has gone wrong is that it has, while appreciating the nature of the purchase of the shares by the assessee-company, given overriding effect to what it concluded was the motive for the purchase of the shares. The motive for the purchase of the shares and the purpose for purchase of the same should not have been allowed to be mixed up in that manner.

The only inference that is possible is that, according to the Department, the effect of section 24 read with section 12(2) is that though income from dividend in a case of the nature before us would be taxed under the head of other sources, if interest was paid on any loan incurred for the purpose of making the investment such interest would not be taken into computation. Of course, we are not concerned with any equitable consideration or any consideration of fairness while interpreting the provisions of the Act and if the language of section 12(2) compelled us to take the view urged on behalf of the Department, we would certainly take that view though not without some reluctance.

It would appear from the foregoing discussion that there was no material before the respondent on the basis of which he could have reasonably come to the conclusion that there was omission or failure on the part of the petitioner to disclose fully and truly all material facts in the course of the original assessment. This is a case in which all the primary facts were disclosed by the petitioner in the course of its original assessment proceedings. On the basis of those facts, the Income-tax Officer who completed those proceedings arrived at certain decisions. The respondent appears to have initiated reassessment proceedings principally because he thinks that certain items of expenditure were ‘wrongly allowed’. This, therefore, is a case in which reassessment has been undertaken merely on a change of opinion. Besides, the affidavit-in-reply filed by the respondent discloses complete non-application of mind in relation to an item upon which he has relied. The respondent, therefore, does not appear to have carefully looked into the record of the original assessment proceedings before he satisfied himself that there was escapement of income on account of failure on the part of the petitioner to fully and truly disclose material facts during the course of the original assessment proceedings. Under these circumstances, in our opinion, no conclusion is possible other than that the reassessment proceedings have been initiated without the very conditions precedent for the exercise of power having been in existence. In the result, the writ petition succeeds and is allowed. The impugned notice, exhibit D, issued by the respondent is quashed and set aside and the respondent is restrained from initiating proceedings for reassessment against the petitioner in pursuance of the said notice. Rule made absolute accordingly. The respondent shall pay the costs of the petition to the petitioner.”

40. Examining the facts of the present case, in the light of the aforesaid decision, the respondent-Assessing Officer has reopened the assessment on the ground that the petitioner had purchased the shares in question not with the intent to earn dividend income but to gain controlling stake in the company. For that reason, according to the respondent, the petitioner was not entitled to deduction under section 57(iii) of the Act which was allowed by the Assessing Officer in the course of the original assessment. Now, the fact that the petitioner was a director of Mastek Ltd. and had purchased considerable number of shares of Mastek Ltd. was very much before the Assessing Officer who completed the original assessment. The number of shares and the extent of investment made by the petitioner was also before the Assessing Officer. The return of income indicates that for the assessment year 1995-96, the petitioner had a salary income of Rs. 2,67,360, whereas the dividend income was Rs. 16,75,157. Evidently, a major portion of the petitioner’s income consists of dividend income. Thus, the primary facts having been placed before the Assessing Officer, it was for him to draw the correct inference and arrive at the right decision as to whether the petitioner was entitled to deduction under section 57(iii) of the Act in relation to the interest on loans taken to purchase the shares or to discharge the earlier loans. If at all he had harboured any doubt as regards the intention to purchase the shares not being exclusively for the purpose of earning dividend income but for gaining controlling stake, the Assessing Officer could have called upon the petitioner to state the extent of his shareholding. In so far as the petitioner is concerned, he had claimed deduction under section 57(iii) of the Act on the ground that he had purchased the shares for the purpose of earning dividend income, which is the requirement of section 57(iii). It could not, therefore, be said that there was any omission on the part of the petitioner to disclose fully and truly all material facts which resulted in escapement of income. All that seems to have happened is that the respondent while making assessment in the case of Mastek Ltd. has upon perusal of the shareholding pattern found that the petitioner had in all, over the years purchased 9,16,150 shares out of the total authorized capital of 50,00,000 shares and total issued and subscribed paid-up capital of 30,56,200 shares, which, according to him, was a pointer to the fact that the petitioner had purchased the shares to gain the controlling stake and not to earn dividend income and as such was in the nature of capital investment and not for the purpose of earning income.

41. As noticed earlier, from the statement of income filed by the petitioner it is apparent that a major portion of his income is from dividend income. Under the statute, there is no obligation on a person acquiring shares to state the percentage of shares he has acquired in a company. In the circumstances, as has been rightly contended by the learned counsel for the petitioner, the issue involved is a question of difference of perception of the assessee and the Assessing Officer, but that merely because, according to the Assessing Officer, the motive for purchasing the share is different than what is stated by the petitioner, would not give rise to a reason to believe that the petitioner had not disclosed fully and truly all material facts when all the primary facts were already there before the Assessing Officer.

42. Moreover, the facts indicate that the petitioner had obtained the loans in question to utilize the same for the purpose of purchasing the shares of the company, Mastek Ltd. The shares had yielded dividend income which was in the nature of income from other sources on which the petitioner had paid tax. In the circumstances, in the light of the decision of the Bombay High Court in the case of Ormerods (India) Pvt. Ltd. (supra), what is required to be considered is as to what was the purpose for purchasing the shares. The purpose for purchasing the shares, as is apparent from the record, is to gain dividend income. Pursuant to the purchase of shares, the petitioner has in fact earned dividend income and has paid tax thereon. The Assessing Officer while reopening the assessment has attributed to the petitioner a motive behind purchasing the shares of gaining controlling stake in the said company. The Bombay High Court, in the above referred case, has held that the use of the expression “purpose” in section 12 of the Act of 1922 which is in pari materia with section 57(iii) of the Act, the word “purpose”, cannot certainly mean a motive for a transaction. Much less can it mean the ulterior motive or the ulterior object of purchasing the shares of the company. In Smt. Virmati Ramkrishna (supra) this court had laid down various propositions of law on an analysis of the provisions of section 57(iii) of the Act. The relevant proposition of law for the purpose of the present petition, as laid down in the said decision, is that the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure. In the present case, the respondent has mixed up the purpose of purchase of the shares with the motive and by imputing motive to the petitioner for purchasing the shares, has come to the conclusion that the petitioner had not purchased the shares for the purpose of earning dividend income.

43. Clause (iii) of section 57 of the Act speaks of any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. The words “wholly and exclusively used for the purpose of making or earning such income” mean that the expenditure should be wholly incurred for the purpose of earning such income, that is to say, the expenditure should not have been made for any other purpose. In the present case, it is not the case of the Department that the petitioner has expended any part of the loan amount on the interest of which deduction is claimed under section 57(iii) of the Act for any purpose other than purchasing shares which have yielded dividend income. The manifest and immediate purpose for obtaining the loan is to purchase shares for earning dividend income. It is obvious that if the petitioner would not have paid interest on the loan raised by him he would not have been able to get the dividend income. In these circumstances, therefore, there was a direct nexus between the expenditure of Rs. 51,33,658 and Rs. 39,01,689 respectively incurred by the petitioner as interest and the earning of dividend income, on which the petitioner has paid income-tax. Thus, as has been rightly contended on behalf of the petitioner, even if motive were to be attributed to the petitioner of having purchased the shares for the purpose of gaining controlling stake in the company, the same would not be relevant, as what has to be considered is the purpose for purchasing the shares. On facts, it is apparent that the amount obtained by way of loans has been invested by the petitioner for purchasing the shares. No part of the amount has been used for any other purpose, hence, the said amount has been used wholly and exclusively for the purpose of purchasing the shares which has yielded income taxable under the head “Income from other sources”. In the aforesaid premises, even if any motive were to be attributed to the petitioner, the same would not be relevant for the purpose of section 57(iii) of the Act, inasmuch as, the entire amount had been used for the purpose of buying shares which had yielded dividend income. In the circumstances, the very basis for reopening the assessment is misconceived.

44. As regards the decision of this High Court in the case of Sarabhai Sons (P.) Ltd. (supra), on which reliance has been placed on behalf of the respondent for contending that the purpose for purchasing the shares being to gain controlling stake, the expenditure incurred was not for the purpose of earning income and as such, the petitioner was not entitled to claim interest expenditure under section 57(iii) of the Act, a perusal of the said decision indicates that in the facts of the said case, the assessee had purchased the shares with the clear purpose or object of getting 100 per cent. control over SOML. In the facts of the said case, the assessee was the managing agent. The shares of SOML were held by the assessee along with two other groups of shareholders, viz., Kasturbhai group and Patel group. The assessee held 11,264 shares, the Kasturbhai group held 24,975 shares and the Patel group held 12,737 shares. The assessee was also the managing agent of SOML. It was agreed amongst the shareholders that the assessee should purchase all the shares in order to improve the business of SOML by holding 100 per cent. shares of SOML, which would have enabled it to implement the expansion projects. This decision was taken in September, 1967. The assessee agreed to purchase the shares at the rate of Rs. 197.5 per share. Payment of the price was spread over a period of two years. Ten per cent. of the price was to be paid on the date of purchase and the balance amount was to be paid in instalments ranging from twelve to twenty four months with interest at nine per cent. to be paid on the outstanding amount. The assessee met with some difficulties in acquiring 2,522 shares as there was resistance from the owners of those shares. Meanwhile, a proposal was put forward by KPPL to purchase all the shares of SOML. Pursuant to that proposal, the assessee sold 46,454 shares equity shares of SOML to KPPL on April 25, 1968, at the same purchase price, viz., Rs. 197.5 per share. The purchase price was to be paid by KPPL partly in cash at the time of delivery of shares and the balance amount was to be paid in two instalments. Interest at the rate of nine per cent. was to be paid by KPPL on the balance amount. During the financial year which ended on March 31, 1969, the assessee paid by way of interest Rs. 6,05,291 to the shareholders from whom it had purchased shares. It received Rs. 3,18,195 as interest from KPPL for the unpaid price of the shares which it had sold to KPPL. The assessee claimed net deficiency in the interest account calculated on the basis of interest paid by the assessee to the shareholders of SOML on the unpaid purchase price and interest received by the assessee on the unpaid sale price by KPPL as a deduction in computing its income from other sources. Thus, in the facts of the said case, the assessee had purchased the shares after September, 1967, and had sold the same on April 15, 1968. The main purpose for transferring the shares was to improve the business of SOML by holding 100 per cent. shares of SOML to implement the expansion projects. Thus, the assessee had held the shares for the period from October, 1967, to April, 1968. Despite the fact that the assessee had acquired more than 90 per cent. of the shares, the assessee sold the same merely because it could not gain 100 per cent. share. It was after the selling of the shares as aforesaid that the assessee had claimed interest expenditure under section 57(iii) of the Act. It is in the background of the aforesaid facts, that the court was satisfied that from the very nature of the transaction, it becomes apparent that the expenditure which was incurred by the assessee was not for the purpose of earning income, but for the purpose of getting full control over SOML. The facts of the present case are totally different from the facts of the said case, inasmuch as in the present case, the petitioner has been purchasing the shares of Mastek Ltd. over a period of time and has been earning dividend income therefrom. There is nothing to indicate that the petitioner has purchased the shares only for the purpose of gaining controlling stake in the said company. Moreover, in the light of the decision of the Bombay High Court in the case of Ormerods (India) P. Ltd. (supra), it is apparent that once it is shown that the purpose of buying the shares is to earn the dividend income, even if there is a motive behind the same, if the amounts have been invested for the sole purpose of earning dividend income, merely because there is a different motive, the same would not disentitle the assessee from claiming interest expenditure under section 57(iii) of the Act.

45. In so far as the reliance placed upon the decision of this High Court in the case of Dishman Pharmaceuticals and Chemicals Ltd. (supra) is concerned, section 2(22)(e) of the Act lays down that “dividend” includes any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. Thus, by enacting section 2(22)(e) of the Act the Legislature had created a deeming fiction and has made the payments referred to therein as “dividend” for the purposes of the Act. By virtue of the said provision, a person who obtains loans from a company, in which he holds not less than 10 per cent. voting power, the payment received by such person is deemed to be a dividend and becomes taxable as such under the provisions of the Act. Hence, for the purpose of computing his dividend income, the shareholding of such person who has obtained loan from the said company is required to be disclosed. In the facts of the said case, the assessee did not disclose that he had crossed the threshold under section 2(22)(e) of the Act, hence, he had failed to disclose fully and truly material facts, namely, that he had availed of a loan from the company in which he was holding not less than 10 per cent. of the voting power, which in view of the said provision would be deemed to be his dividend income. Thus, in the facts of the said case, the loan availed of from the company was deemed to be his dividend income and by not giving such information, the assessee did not permit the Assessing Officer to arrive at the correct computation of his income. Thus, a case falling under section 2(22)(e) of the Act would stand on a different footing from a case like the present one, inasmuch as, in view of the provisions of section 2(22)(e) of the Act there is an obligation on the assessee holding more than 10 per cent. share in a company and obtaining loan therefrom, to disclose the said fact to the Assessing Officer as the said loan amount is deemed to be his dividend income. In such a case, by not disclosing the extent of shareholding in such company, the assessee failed to disclose his income. Thus, section 2(22)(e) and section 57(iii) operate in different fields. Section 2(22)(e) of the Act creates a deeming fiction whereby a loan is deemed to be dividend income. Under section 57(iii) of the Act, an assessee is entitled to deduction in respect of expenditure incurred wholly and exclusively for the purpose of earning income, which in the facts of the present case is dividend income. In a case under section 57(iii) of the Act if the income is in the nature of dividend income, it would be actual dividend income and not dividend by virtue of a deeming fiction as contemplated under section 2(22)(e) of the Act. In the circumstances, the said decision would have no applicability to the facts of the present case.

46. The decision of the Andhra Pradesh High Court in the case of KCP Ltd. (supra) also would not be applicable to the facts of the present case inasmuch as, in the facts of the present case, there was no obligation on the petitioner to disclose his shareholdings in Mastek Ltd. as the same was not a material fact necessary for his assessment for the purpose of deciding his claim for deduction under section 57(iii) of the Act.

47. The decision of the Madras High Court in the case of Tamil Nadu Petroproducts Ltd. (supra), also does not carry the case of the respondent any further as in the facts of the present case it cannot be said that the petitioner has made a false claim. In the light of the decision of the Supreme Court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC), the petitioner was fully justified in making the claim under section 57(iii) of the Act.

48. Reliance placed on behalf of the respondent on the decision of the Bombay High Court in the case of Dr. Amin’s Pathology Laboratory (supra) is misconceived, inasmuch as there was no obligation on the part of the petitioner to draw the attention of the Assessing Officer to the extent of his shareholding in Mastek Ltd. as the same was not a material fact for the purpose of computing the income of the petitioner for claiming interest expenditure under section 57(iii) of the Act.

49. In the light of the aforesaid facts, it is not possible to state that the petitioner has failed to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration and as such, the requirements of the proviso to section 147 of the Act have not been satisfied in the present case. The assumption of jurisdiction by the Assessing Officer, of reopening the assessment under section 147 of the Act by issuing the impugned notice under section 147 of the Act is, therefore, invalid and without authority of law and as such, the impugned notices cannot be sustained.

50. For the foregoing reasons, the petitions succeed and are, accordingly, allowed. The impugned notices dated March 11, 2002, issued under section 148 of the Act in relation to the assessment years 1996-97 and 1995-96 respectively, are hereby quashed and set aside. Rule is made absolute accordingly in both the petitions, with no order as to costs.

51. Ms. Bela Trivedi, J.M -Having had the opportunity of hearing the oral judgment passed by my learned sister (Ms. Justice Harsha Devani), I express my inability to accept the views expressed by her in the instant case.

52. The petitioner by way of the present petitions has challenged the notices dated March 11, 2002, issued by the respondent under section 148 of the Income-tax Act, 1961 (hereinafter referred to as “the said Act”), seeking to reopen the petitioner’s assessment for the assessment years 1995-96 and 1996-97, on the ground of being bad, illegal, contrary to law and without jurisdiction.

53. The short facts giving rise to the present petitions are that the petitioner had filed his return of income for the assessment year 1995-96 on March 29, 1996, declaring total loss of Rs. 7,45,759 and for the assessment year 1996-97 on November 29, 1996, declaring his total income of Rs. nil. For the sake of convenience, the facts from Special Civil Application No. 4549 of 2002 are referred to. From annexure B annexed to the said petition, it appears that the return of income for the assessment year 1996-97 filed by the petitioner was processed under section 143(1)(a) of the said Act on May 14, 1997, and in response to the notice under section 143(2) of the Act, the chartered accountant of the petitioner had attended the case. Thereafter, the Deputy Commissioner of Income-tax, Circle-4, Ahmedabad, had determined the total income of the petitioner at Rs. nil, as per the assessment order dated December 23, 1998, passed under section 143(3) of the said Act. The petitioner, thereafter, received the impugned notice dated March 11, 2002, from the respondent issued under section 148 of the said Act, proposing to reopen the assessment for the assessment year 1996-97, and calling upon the petitioner to file a return within the prescribed time limit for the said assessment year. In response to the said notice, the petitioner addressed a letter dated March 22, 2002, to the respondent requesting that the return filed on November 29, 1996, for the assessment year 1996-97 be treated as return in response to the notice, and that the reasons recorded for the reopening of the assessment be communicated to him. The said letter dated March 22, 2002, appears to have been received in the office of the Joint Commissioner of Income-tax, Ahmedabad, on April 2, 2002 (annexure C). According to the petitioner, the respondent did not provide him the reasons, nor dropped the assessment proceedings and, therefore, the present petition was filed. The petition appears to have been filed on April 26, 2002.

54. In response to the petition, the respondent filed his reply, stating, inter alia, that the case was reopened under section 147 of the Act and a valid notice under section 148 of the Act was issued ; that, there were sufficient reasons to believe about the escapement of income chargeable to tax as evident from the reasons recorded, before the issuance of notice under section 148 of the said Act and that the petition was filed at a premature stage, and even otherwise being devoid of merits, deserved to be dismissed. The respondent also annexed with the reply, the reasons recorded for reopening the assessment.

55. The petitioner, in response to the said reply and the reasons annexed thereto, filed the affidavit-in-rejoinder, stating, inter alia, that the reopening per se was without jurisdiction, bad in law and void ab initio and, therefore, the court should interfere and declare the proceedings as invalid, illegal and without jurisdiction. The petitioner, in the said rejoinder, also gave para-wise reply to the reasons recorded by the respondent for reopening of the assessment under section 147 of the Act. The petitioner also annexed with the said rejoinder certain documents as annexures D and E.

56. The following moot question arises before this court :

“Could the notice issued under section 148 invoking the proviso to section 147 of the Income-tax Act, 1961, be set aside in a petition filed under article 226 of the Constitution of India, when such notice is based upon the reasons recorded in detail, by the Assessing Officer demonstrating his belief as to how legally and factually the income of the petitioner-assessee chargeable to tax had escaped assessment, and as to how such escapement was on account of the failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the relevant assessment years 1995-96 and 1996-97 ?”

57. The learned senior advocate, Mr. S. N. Soparkar, for the petitioner and the learned senior standing counsel, Mr. M. R. Bhatt, for the respondent have made their respective submissions at length, relying upon various decisions of the hon’ble Supreme Court, of this court as well as the other courts in support of their respective contentions. However, before adverting to the said submissions, it would be necessary to advert to the contentions raised by the respondent in his reply about the alternative remedy being available to the petitioner and about the petition having been filed at a very premature stage. The court is alive to the legal position to the effect that once the petition is admitted, it should not be dismissed at the time of final hearing only on the ground of the same being premature or on the ground of the existence of alternative remedy being available to the petitioner. The court is also alive to the legal position settled by the hon’ble Supreme Court in many cases to the effect that the existence of alternative remedy itself would not be an absolute bar to the maintainability of the petition, if it is found that the authority has acted wholly without jurisdiction or that the impugned notice per se appears to be illegal or bad in law or suffers from mala fides, etc.

58. However, it may be stated that the hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/125 Taxman 963 (SC), while upholding the order of the Division Bench of the High Court of Delhi, which had taken the view that the concerned appellant could have taken all the objections in its reply to the notices under section 148 of the said Act and that the writ petition at the stage of notice was premature, observed as under (page 20) :

“We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order.”

59. In view of the abovereferred proposition of law laid down by the hon’ble Supreme Court, the proper course of action for the assessee, where the notice under section 148 of the Act is issued would be to file return and if the assessee so desires to seek reasons for issuing the notice. On the receipt of the reasons furnished by the Assessing Officer, the assessee would be entitled to file his objections to the issuance of such notice, and in that case, the Assessing Officer is bound to pass a speaking order before proceeding further with the assessment. In the instant case, though the petitioner, vide his letter dated February 23, 2002, requested the respondent to treat his return filed on November 29, 1996, as the return in response to the said notice and also requested the respondent to furnish the reasons, the petitioner, without waiting for a reasonable time to enable the respondent to furnish the reasons, rushed to this court by filing the present petition. The petitioner had an ample opportunity to file objections before the respondent after obtaining the reasons from him, which the petitioner did not avail of and, hence, the present petition challenging the notice under section 148 of the Act is required to be held as having been filed at a premature stage.

60. So far as the existence of the alternative remedy is concerned, it is pertinent to note that Chapter XX of the Income-tax Act provides for the appeals and revisions to be filed before the appropriate forums. The order of assessment or reassessment passed by the Assessing Officer under section 147 of the Act is also appealable before the appellate officer and the order of the appellate officer is further appealable before the Appellate Tribunal. The aggrieved assessee or the Commissioner, as the case may be, could also require the Appellate Tribunal to refer to the High Court any question of law arising from such orders. Hence, when the judicial and quasi-judicial statutory authorities have been established under the Special Act, the normal course of action to be followed by the assessee would be to approach such authorities and ventilate his grievances. Further, whenever the matters are referred to the High Court under the Income-tax Act, the High Court exercises advisory jurisdiction and decides the questions of law raised therein. However, whenever the original writ jurisdiction of the High Court, which is extraordinary in nature, is invoked under article 226 of the Constitution, by the assessee challenging the legality and validity of the notice under section 148 of the Act, a number of disputed questions of facts are raised. In such petitions, the High Court is expected to decide as to whether there was any failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Whether there was any willful non-disclosure of material facts on the part of the assessee or not would be disputed questions of facts, and would differ from case to case. Unless such disputed questions of facts are thrashed out by the concerned quasi-judicial statutory authorities constituted under the Act, it would not be appropriate for the High Court to enter into the arena of the disputed questions of facts in writ jurisdiction, more particularly when the entire record of the original assessment or reassessment are not produced in the petition.

61. An apprehension was raised by the learned advocate, Mr. Soparkar, that the assessee would be subjected to an unnecessary lengthy proceedings and harassment if he is directed to go to such authority, which has acted without jurisdiction in reopening the assessment already closed. Though there is some substance in the said submission of Mr. Soparkar, the same cannot be vindicated inasmuch as in a rare case where the notice issued under section 148 of the Act per se appears to be without jurisdiction or where the authority per se appears to have acted with mala fide intention or arbitrarily, the High Court may entertain the writ petition, questioning the legality of such notice and grant appropriate reliefs. However, that would be in exceptional and rare cases. In ordinary course, the assessee is expected to follow the due process of law and the process as prescribed under the Act, and the assessee cannot be permitted to undermine and bypass the statutory authorities, expressing lack of confidence in such authorities, in whom the Legislature itself has put the confidence.

62. The present petitions are such which involve a number of disputed questions of facts as regards non-disclosure of material facts and escapement of income chargeable to tax, as shall be demonstrated hereinafter, and, therefore, it could not be said that the impugned notices under section 148 of the Act are per se without jurisdiction or bad in law. The petitioner having filed the petitions without exhausting the statutory remedies available under the said Act, the same deserve to be dismissed on that ground alone. However, since the petitions have been admitted in 2002 and heard finally in 2011 on all the issues raised by the learned advocates for the parties, they are being decided on the merits also.

63. As stated earlier, the present petitions have been filed challenging the validity of the impugned notices issued by the respondent under section 148 of the Act, proposing to reopen the assessment after the expiry of four years from the end of the relevant assessment years. The impugned notice dated March 11, 2002, for the assessment year 1996-97 is challenged in Special Civil Application No. 4549 of 2002 and similar notice for the assessment year 1995-96 is challenged in Special Civil application No. 4551 of 2002. The reasons recorded by the respondent-Assessing Officer before issuing the said notices as contemplated under section 148(2) of the Act are produced on record along with the affidavits-in-reply filed by the respondent to these petitions.

64. It is needless to say that the court has to consider the relevant provisions of the Act as prevailing at the time of the relevant assessment years. In the instant cases, relevant to the assessment years are 1995-96 and 1996-97, and the assessment order was passed on March 31, 1998, for the assessment year 1995-96 and on December 23, 1998, for the assessment year 1996-97. Therefore, the relevant provisions of section 143(1)(a) under which the return of the petitioner was processed, section 143(2) under which the notice was issued and section 143(3) under which the assessment was framed by the then Assessing Officer, as prevailing during the period 1997-98 shall have to be considered.

65. It may be stated that the whole controversy centers round the disputed claim of the petitioner for the deduction under section 57(iii) of the Act. The relevant part of the said provision is reproduced as under for the beneficial reference.

“57. Deductions.-The income chargeable under the head ‘Income from other sources’ shall be computed after making the following deductions, namely :-. . .

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

66. It may also further be stated that since the validity of the impugned notices is required to be judged from the reasons recorded by the respondent prior to the issuance of the said notices, it would be germane to reproduce the relevant parts of the said reasons for easy reference :

“(1) Facts of the case

The assessee is an individual was having his residence at C/13, Avani Flats, Nr. H. L. Commerce College, Navrangpura, Ahmedabad. For the assessment year 1996-97, the assessee submitted his return of income on November 29, 1996, disclosing nil income. The scrutiny assessment under section 143(3) of the Income-tax Act, 1961, was completed on December 23, 1998. In the return of income filed, the assessee has claimed interest expenses of Rs. 51,33,658 from ‘income from other sources’ under section 57(iii) of the Income-tax Act, 1961. The assessee did not submit any information as to how the interest expenditure claim under section 57(iii) is laid out or expended wholly and exclusively for the purpose of making or earning dividend and interest income taxable in other sources head. During the course of the assessment proceedings also, the assessee only submitted that the borrowing were made for either repaying the earlier loan or for making investments in shares of Mastek Ltd. The assessee claimed that since investments were made in shares, which are generating dividend income and, therefore, interest expenditure is allowable under section 57(iii) of the Income-tax Act. The assessee did not submit the details relating to his controlling interest or his total holding in Mastek Ltd. The assessee is a director in Mastek Ltd. and increase in the shareholding in Mastek Ltd. is not for the purpose of earning dividend but for acquiring controlling stake in the company (Mastek Ltd.). To determine the clear purpose for making investments in these shares, relevant facts such as percentage holding of the assessee and his group, increase in holding, purpose of such increase, etc., are necessary. The deduction under section 57(iii) is allowable only when the expenditure was incurred wholly and exclusively for the purpose of earning the said income, i.e., dividend.

(2) How income has escaped assessment :

The assessee has claimed interest expenditure on fund borrowed for the purpose of making investments in shares of Mastek Ltd. The claim of such interest was Rs. 51,33,658. The provisions of section 57(iii) under which the said claim was made is quoted below :

‘(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.’

In view of the above, it is quite clear that if the interest expenditure is not solely for the purpose of earning dividend income, the same is not allowable as an expenses under section 57(iii) of the Income-tax Act, 1961. Prima facie the assessee has invested in shares to acquire the controlling stake in the company, namely, Mastek Ltd. and his investment was not apparently for the purpose of earning dividend income. Considering this, the assessee was allowed excess claim of interest to the extent of Rs. 51,33,658. As per Explanation 2(c)(i) and (iv) of section 147, such excess allowance of interest is deemed to be the income which has escaped assessment.

The assessee has not submitted the following information/details relevant to decide the purpose of making investments in the shares of Mastek Ltd. Balance-sheet and capital account of the assessee was not filed along with the return or during the assessment proceedings. In the absence of the balance-sheet, the details of investment, source of investment, application of fund for the purpose of making investments in shares, etc., have not been disclosed by the assessee. How much percentage of shares, the assessee and his group was holding in Mastek Ltd. was not submitted by the assessee. This is very relevant in the light of the Gujarat High Court’s judgment discussed above.

Details of total borrowings and their use for making investments in shares have not been submitted by the assessee. The details of loans taken with date and amount and investments made with a copy of accounts of the persons and also to linking up of the loans taken for investments, etc., and interest paid during the year, has to been furnished. The assessee has not submitted the details of loans taken nor the copies of accounts from all the parties were furnished. Thus, the assessee has not discharged the primary onus of giving details of loans taken, interest paid and linking the same with the investments made in shares.

The assessee nowhere submitted the investments in the shares of Mastek Ltd.

The approximate shareholding pattern for the assessment year from the details of the return are as follows :

Assessment year 1995-96 1996-97

Total number of shares held in the MASTEK 8,83,350 9,16,150

Authorized capital 50,00,000 50,00,000

Issued subscribed and paid up capital 30,00,000 30,56,200

The above data has been culled from and the comparison has been derived from the details of the income-tax returns of the company Mastek Ltd. in which the abovenamed assessee is a director and it can be safely deduced that the shares were purchased with clear purpose of object of getting controlling interest over the company and the only purpose or even the dominant purpose was not the earning dividend income.

In the absence of balance-sheet and other relevant information, the real nature of investments could not be decided and as such, income has escaped assessment by way of excessive deduction. In view of the non-allowable interest of Rs. 51.33 lakhs claimed by the assessee from dividend income taxable income to that extent has escaped assessment within the meaning of Explanation 2(c)(i) and (iv) of section 147 of the Income-tax Act, 1961.

(3) Legal aspects of reopening the assessment :

For reopening an assessment completed under section 143(3) of the Income-tax Act, 1961, beyond four years, the following conditions need to be satisfied :

(i) The Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.

(ii) The escapement of income should be by reasons of failure on the part of the assessee who disclosed fully and truly all material facts necessary for that assessment year.

(iii) More than six years have not lapsed from the end of the relevant assessment year.

(iv) The income escaped is likely to amount to Rs. 1 lakh or more.

In the assessee’s case, all the above four conditions, required for issue of notice under section 148, are satisfied as under :

(i) In view of the foregoing paras, the assessee has claimed deduction of interest on funds borrowings for the purpose of making investments in the shares of Mastek Ltd., which is not allowable under section 57(iii) of the Income-tax Act, 1961, considering the factual and legal position discussed above. As per Explanation 2(c)(i) and (iii) of section 147, such excessive allowance is deemed to be the case where income has escaped assessment. In view of this, there is sufficient reason to believe that substantial income chargeable to tax has escaped assessment.

(ii) In this case, as discussed earlier, the assessee has not submitted the balance-sheet, capital account, his holding in Mastek Ltd., linking of investments with the borrowings, copy of accounts of lenders, etc. These information’s are very relevant to decide whether the expenses was solely incurred for the purpose of earning dividend or not. If the assessee would have disclosed the facts relating to the nature of investments in the shares of Mastek Ltd., the deduction under section 57(iii) would not have been allowed to the assessee. It is, therefore, clear that the substantial income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In view of this, the second condition is also satisfied in the assessee’s case.

(iii) Assessment can be reopened up to six years from the end of the relevant assessment year. For the assessment year 1996-97, six years period will end on March 31, 2003, therefore, this assessment can be legally reopened by March 31, 2003.

(iv) The income likely to have escaped assessment should be Rs. 1 lakh or more in this case more than Rs. 51.33 lakhs have escaped assessment from the above, it is clear that all the conditions required for reopening the assessment are satisfied in the assessee’s case.”

67. The respondent, after considering the relevant judicial decisions, recorded the following conclusions :

“5. Conclusion

It can be seen from the return of the income that the assessee has claimed interest payments of Rs. 51,33,658 on the borrowed (capital) fund for acquiring the shares of the company Mastek Ltd., in which the assessee is a managing director. The assessee has no intention to earn income by investing the borrowed capital for the purchase of shares of the company in which the assessee is a promoter director. Thus, the assessee has borrowed the money for the investment purpose and, hence, the interest paid is not allowable as expense under section 57(iii) of the Income-tax Act, 1961.

In view of the above, I am of the firm belief that substantial income has escaped assessment within the meaning of section 147, for which assessments need to be reopened.”

68. So far as the reasons are concerned, it is pertinent to note that though it is mandatory on the part of the Assessing Officer to record reasons under section 148(2) of the Act before issuing the notice seeking reopening of the assessment, there is no set format prescribed in which such reasons must be recorded. However, before assuming the jurisdiction to reopen the assessment under section 147 of the Act beyond a period of four years from the end of the relevant assessment year, the Assessing Officer is expected to record his subjective satisfaction, mainly on two points, namely, (1) that he had a reason to believe that the income chargeable to tax had escaped assessment, and (2) that such escapement had occasioned by reason of the failure on the part of the assessee either to make the requisite return of his income, or to disclose fully and truly all material facts for his assessment for the relevant assessment year.

69. The expression “reason to believe” used in section 147 has been interpreted by the hon’ble Supreme Court in many decisions, however, a very pertinent observations made by the Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500/105 taxmann 316 (SC), are reproduced as under (page 511) :

“Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662 (SC), for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is ‘reason to believe’, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)).”

70. From the above observations made by the hon’ble Supreme Court, it is clear that the formation of belief by the Assessing Officer is within the realm of his subjective satisfaction, and that the Assessing Officer before initiating the action under section 147 of the Act, should have reason or justification to believe that the income chargeable to tax had escaped assessment. The expression “reason to believe” cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. Therefore, lets us examine the facts of these cases in the light of the submissions made by the learned advocates for the parties, to decide as to whether the respondent-Assessing Officer before issuing the impugned notices, had reason to believe that the income of the petitioner chargeable to tax had escaped assessment for the relevant assessment years, and as to whether such escapement was on account of failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment justifying the reopening of the assessment already closed.

71. In the first limb of his arguments, learned senior advocate, Mr. Soparkar, for the petitioner, assailing the very jurisdiction of the respondent in issuing the impugned notices proposing to reopen the assessment, invoking the proviso to section 147 of the Act, submitted that the assessment for the concerned assessment years was already completed earlier by one Assessing Officer under section 143(3) of the Act on December 23, 1998, and hence, the same could not have been reopened by way of review by the present respondent. According to Mr. Soparkar, mere change of opinion should not be the reason to reopen the assessment in the absence of any tangible material to show that there was escapement of income from assessment. However, the learned senior advocate, Mr. M. R. Bhatt, for the respondent submitted that it is neither the case of review nor of change of opinion, but it is the case where the tangible material, which was not considered by the then Assessing Officer at the time of framing original assessment, was subsequently noticed by the present respondent, on the basis of which the reopening has been proposed. Mr. Bhatt further submitted that the petitioner could challenge the existence of the material or the reason, but could not challenge the sufficiency of the material or of the reason.

72. There could not be any disagreement to the above submission made by Mr. Soparkar on the limited powers of the Assessing Officer to reopen the assessment, more particularly in view of the decision of the hon’ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561/187 Taxman 312 (SC), in which the hon’ble Supreme Court while giving a schematic interpretation to the words “reason to believe”, examined the scope of reopening of the assessment and held as under (page 564) :

“Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review ; he has the power to reassess. But reassessment has to be based on fulfilment of certain pre-condition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief.”

73. In this regard, it is also pertinent to note that in the case of Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [2001] 247 ITR 818/[2002] 124 Taxman 491 (SC), it was observed by the hon’ble Supreme Court, while not interfering with the decision of the High Court, that merely because the case of the assessee was accepted as correct in the original assessment for the relevant assessment year, it would not preclude the Income-tax Officer from reopening the assessment of an earlier year, on the basis of fresh materials found in the course of assessment of the next assessment year.

74. In the instant cases, as transpiring from the reasons recorded by the respondent, it is significant to note that the respondent has sought to reopen the assessment of the relevant assessment years on the basis of fresh material, namely, the income-tax returns of the company, Mastek Ltd. and the details of shareholdings of the petitioner in the said company as found from the said returns. From the said fresh material, it was found by the respondent that the petitioner had the shareholdings to the extent of 8,33,350 in the year 1995-96 which had increased to 9,16,150 in the year 1996-97, out of the issue subscribed and paid-up capital of Rs. 30 lakhs and Rs. 30,56,200 respectively. On the basis of the said fresh and tangible material pertaining to the quantum and the pattern of the shareholdings of the petitioner in the said Mastek Ltd. in which the petitioner was the promoter and director, the respondent had deduced a belief that the shares were purchased by the petitioner during the relevant assessment years with clear purpose of getting controlling interest over the company, and that the expenditure incurred during those assessment years for the purchase of shares of the said company was not for the sole purpose of earning the dividend income from the said shares. From the said reasonings recorded by the respondent, it clearly transpires that the respondent had considered the fresh and tangible material, which had not been considered earlier by the then Assessing Officer at the time of framing original assessment, and that the said material had also the link with the formation of the belief that the income had escaped assessment during the relevant assessment years. It is not disputed that the details of income-tax returns of the Mastek Company and the details of shareholdings of the petitioner in the said company were not there with the concerned Assessing Officer and not considered by him at the time of framing original assessment. Therefore, when the present respondent on having received fresh material, has sought to reopen the assessment, on his forming a belief that the income of the petitioner chargeable to tax had escaped assessment, it could not be said that the respondent was reviewing the earlier assessment or was seeking to reopen the assessment on the basis of “mere change of opinion”. As rightly submitted by Mr.Bhatt, once the reasonable nexus between fresh material and the formation of the belief is established in the reasons recorded by the Assessing Officer, the court should not go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Assessing Officer.

75. It was next contended by the learned senior advocate, Mr. Soparkar, that the pre-requisite condition that the escapement of income was on account of failure on the part of the assessee to disclose fully and truly all materials necessary for his assessment for reopening of the assessment, was not satisfied in these cases, inasmuch as the petitioner, at the relevant time of the proceedings of original assessment, had furnished all the details to the concerned Assessing Officer showing the expenses incurred towards the payment of interest amounts on the loans taken for the purchase of shares of Mastek Ltd. and other companies, as well as the details of the dividend income earned by the petitioner from the said shares for the purpose of claiming deduction under section 57(iii) of the Act. According to Mr. Soparkar, if the concerned Assessing Officer had any doubt against such deduction as claimed by the petitioner, he would have called for the further material and decided whether such claim was allowable or not. Mr. Soparkar also submitted that the present respondent has sought to reopen the assessment on the ground that the petitioner had not submitted the balance-sheet and capital account, etc., along with his return or during the original assessment proceedings, however, as per the instructions received from his client, i.e., the petitioner, the petitioner being an individual was not maintaining the balance-sheet and the capital accounts, but the same were subsequently prepared and furnished to the concerned Assessing Officer. Placing heavy reliance on the judgement of our High Court in case of Akbarali Jummabhai (supra), Mr. Soparkar submitted that the respondent-Assessing Officer could not have expected the petitioner to submit the material which was not in existence or was not within the knowledge of the petitioner.

76. It is difficult to accept the said submission of Mr. Soparkar for the simple reason that it runs contrary to the record of the present petitions. It is pertinent to note that while dealing with the allegations contained in the reasons produced by the respondent along with his affidavit-in-reply, the petitioner in his affidavit-in-rejoinder, has categorically stated that the said information of balance-sheet, capital accounts, his holdings in Mastek Company, etc., were never called for by the then Assessing Officer during the course of the entire original assessment proceedings, and then, in the very next paragraph of the said affidavit-in-rejoinder, it has been stated that the petitioner had filed all necessary documents (annexure E) along with the return of income. Now, if the documents collectively marked as annexure E to the affidavit-in-rejoinder filed in Special Civil Application No. 4551 of 2002 are seen, there are copies of balance-sheets as on March 31, 1995, of the petitioner and his wife, along with other details of the expenses/income and the investments in shares. If the said documents, balance-sheets and capital accounts were subsequently prepared and furnished during the course of original assessment, as sought to be submitted by Mr. Soparkar, on the instructions of the petitioner, the petitioner would not have stated on oath in the rejoinder that the said information or details were never called for by the then Assessing Officer. Further, if the said documents were not in existence and were not maintained by the petitioner, the same would not have been produced by the petitioner along with his return of income, as stated by him in his affidavit-in-rejoinder. Such inconsistent statements in the affidavit-in-rejoinder made by the petitioner, does not inspire confidence to hold that the petitioner had furnished the material documents along with his return of income or during the course of original assessment. Be that as it may, from the said record of the petitions, it could not be said that the present respondent had expected from the petitioner to produce such documents which were not in existence or not within the knowledge of the petitioner. Under the circumstances, the decision in the case of Akbarali Jummabhai (supra) relied upon by Mr. Soparkar has no relevance to the facts of this case and not helpful to the petitioner.

77. The submission of Mr. Soparkar that the then Assessing Officer could have called for other and further material at the time of framing original assessment, also cannot be accepted. As transpiring from the orders of assessment at annexure B to the petitions, return of the petitioner for the assessment years 1995-96 and 1996-97 were processed under section 143(1)(a) and the notices were issued under section 143(2) of the Act and the assessment was framed under section 143(3) of the Act as per the provisions prevailing at the relevant time. Now, having regard to the said provisions prevailing at the relevant period of 1997-98, it transpires that at the relevant period, the concerned Assessing Officer did not have the power or authority to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or reliefs under section 143(1)(a) of the Act, under which provision, the assessment of the petitioner was originally processed. Of course, the notice was issued under section 143(2) of the Act by the then Assessing Officer, however, at the relevant time, the Assessing Officer could issue notice only to ensure that the assessee had not understated the income or had not computed excessive loss, etc., and could require the assessee to attend his office or to produce any evidence in support of the return. The Assessing Officer at the relevant time had no powers to issue notice under section 143(2) in respect of any loss, exemption, deduction, allowance, or relief made in the return which was found inadmissible. Such powers are there now in section 143(2) of the said Act. Further, as per the provisions of section 143(3), as prevailing at the relevant time, the Assessing Officer could only make the assessment of the total income or the loss of the assessee, and determine sum payable by him on the basis of such assessment. The Assessing Officer at the relevant time, had no such powers to adjudicate upon the claim either to allow or reject, as powers are now there under section 143(3) of the Act. In the circumstances, the submission of Mr. Soparkar that the then Assessing Officer could have called for the material or evidence from the petitioner for adjudicating upon the claim of the petitioner as regards deduction under section 57(iii) of the Act, does not merit acceptance.

78. Heavy reliance was placed upon the judgment of the hon’ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) by Mr. Soparkar, and also in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), in the case of CIT v. Bhanji Lavji [1971] 79 ITR 582 (SC), to submit that the only duty which is cast upon the assessee under the Act, is to make true and full disclosure of all primary facts at the time of original assessment, and thereafter, it is for the Assessing Officer to draw correct inferences from the primary facts. According to Mr. Soparkar, it is not the duty of the assessee to advise the Assessing Officer as to what inference he should draw from the primary facts furnished by the assessee, and if the Assessing Officer draws an inference which appears subsequently to be erroneous, that would not justify the initiation of action against the assessee for reopening the assessment. In the instant cases, runs the submission of Mr. Soparkar, the petitioner had already furnished all primary facts and materials like details of expenditure incurred on the payment of loans taken by the petitioner for the purchase of shares of Mastek Ltd. and other companies and also details showing the dividend income earned by the petitioner from the said shares. According to Mr. Soparkar, it was not obligatory on part of the petitioner to furnish the details about his shareholdings in Mastek Ltd. or about the investments made or about linkage of his borrowings with his investments, as has been sought to be expected from the petitioner by the respondent in the “reasons”. According to Mr. Soparkar, in the absence of any specific provision requiring the assessee-petitioner to furnish such details as primary details for claiming deduction under section 57(iii) of the Act, it could not be said that there was failure on the part of the petitioner to disclose truly and fully all material facts necessary for his assessment.

79. As against that, the learned senior advocate, Mr. M. R. Bhatt, for the respondent, relying upon the judgments of the hon’ble Supreme Court in the case of Indi-Aden Salt Mfg. and Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624/25 Taxman 356 (SC), in the case of A. L. A. Firm v. CIT [1991] 189 ITR 285/189 Taxman 285 (SC), in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456/69 Taxman 627 (SC) and the judgments of other High Courts, more particularly of the Andhra Pradesh High Court in the case of KCP Ltd. (supra), vehemently submitted that what facts are material and necessary for a particular claim of deduction, would differ from case to case and that merely because the Income-tax Act does not mandate the assessee to submit specific primary facts in support of his claim for deduction under section 57(iii) of the Act, it does not absolve the petitioner-assessee from making true and full disclosure of material facts required for such claim. According to Mr. Bhatt, had the petitioner disclosed fully and truly about his investments and shareholdings in Mastek Ltd. in which he was the promoter and director, during the course of original assessment proceedings, it would have been found out by the then Assessing Officer that the expenditure claimed as deduction under section 57(iii) of the Act by way of payment of interest on loans taken for the purchase of shares, and by way of interest on loans taken for repayment of loans taken for the purchase of shares of Mastek company, was not incurred wholly and exclusively for the purpose of earning the dividend income from the said shares, but the said expenditure was incurred for the purpose of getting the controlling interest in Mastek Company, as has been found by the present respondent now. Mr. Bhatt submitted that the said material fact being very primary, non-furnishing of the same by the petitioner at the time of process of original assessment had resulted into failure on the part of the petitioner to disclose truly and fully all material facts necessary for his assessment and therefore, the respondent had rightly initiated the action for reopening of the assessment.

80. In order to appreciate the rival contentions raised by the learned advocates for the parties, it would be beneficial to reproduce the relevant part of the observations made by the hon’ble Supreme Court in the case of Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC), wherein the Supreme Court while considering the scope of disclosure, duty of the assessee and that of the Assessing Officer, etc., has observed as under (pages 199 to 202) :

“Before we proceed to consider the materials on record to see whether the appellant has succeeded, in showing that the Income-tax Officer could have no reason, on the materials before him, to believe that there had been any omission to disclose material facts, as mentioned in the section, it is necessary to examine the precise scope of disclosure which the section demands. The words used are ‘omission or failure to disclose fully and truly all material facts necessary for his assessment for that year’. It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material, and necessary for assessment will differ from case to case. 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, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and, taking all these together, to decide what the legal inference should be.

There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example-‘I have produced the account books and the documents : You, the Assessing Officer, examine them, and find out the facts necessary for your purpose : My duty is done with disclosing these account books and the documents’. His omission to bring to the assessing authority’s attention these particular items in the account books, or the particular portions of the documents, which are relevant, will amount to ‘omission to disclose fully and truly all material facts necessary for his assessment’. Nor will he be able to contend successfully that by disclosing certain evidence, he should be deemed to have disclosed other evidence, which might have been discovered by the assessing authority if he had pursued investigation on the basis of what has been disclosed. The Explanation to the section, gives a quietus to all such contentions ; and the position remains that so far as primary facts are concerned, it is the assessee’s duty to disclose all of them-including particular entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed.

Does the duty, however, extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. 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. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law-he would draw from the primary facts.

If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ?

It may be pointed out that the Explanation to the sub-section has nothing to do with ‘inferences’ and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose ‘inferences’-to draw the proper inferences being the duty imposed on the Income-tax Officer.

We have, therefore, come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.

The position, therefore, is that if there were in fact some reasonable grounds for thinking that there had been any non-disclosure as regards any primary fact, which could have a material bearing on the question of under assessments that would be sufficient to give jurisdiction to the Income-tax Officer to issue the notices under section 34. Whether these grounds were adequate or not for arriving at the conclusion that there was a non-disclosure of material facts would not be open for the court’s investigation. In other words, all that is necessary to give this special jurisdiction is that the Income-tax Officer had when he assumed jurisdiction some prima facie grounds for thinking that there had been some non-disclosure of material facts.”

81. It would be further relevant to reproduce the observations made by the hon’ble Supreme Court in the case of Indi-Aden Salt Mfg. and Trading Co. P. Ltd. (supra), as under (page 628) :

“. . . mere production of evidence before the Income-tax Officer was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could not have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts-the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That was immaterial. But if there is omission to disclose material facts, then, subject to the other conditions, jurisdiction to reopen is attracted. It is sufficient to refer to the decision of this court in Calcutta Discount’s case [1961] 41 ITR 191 (SC) where it had been held that if there are some primary facts from which reasonable belief could be formed that there was some non-disclosure or failure to disclose fully and truly all material facts, the Income-tax Officer has jurisdiction to reopen the assessment.”

82. Further, in the case of Phool Chand Bajrang Lal (supra), the hon’ble Supreme Court has observed as under (page 478) :

“One of the purposes of section 147, appears to us to be, to ensure that a party cannot get away by willfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing’. It would be travesty of justice to allow the assessee that latitude.”

83. From the abovestated legal position, it clearly emerges that what are primary facts necessary and material for assessment would differ from case to case and that failure or omission on the part of the assessee to disclose material facts truly and fully will give rise to initiation of action for reopening of the assessment already closed. So far as the facts of the present case are concerned, as transpiring from the reasons recorded by the Assessing Officer, he has culled out from the details of income-tax returns of Mastek Company that the petitioner had huge shareholdings in the Mastek Company, which had increased from 1995-96 to year 1996-97. From the percentage and the pattern of the shareholdings of the petitioner, the respondent had deduced the belief that the shares were purchased with the clear purpose of getting controlling interest over the company. According to the respondent, the expenditure claimed by way of deduction under section 57(iii) of the Act towards payment of interest on loans taken for the purchase of shares of Mastek Ltd. was not expended wholly and exclusively for the purpose of earning income from such shares, but was expended for getting controlling interest over the company, which was not permissible under section 57(iii) of the Act. He has also stated that the petitioner had not disclosed fully and truly all material facts relating to his investments and shareholdings and details of assets and liabilities to link the borrowings with the investments, which had resulted in the excess allowance of interest. The respondent had, after recording the factual and legal matrix, arrived at a belief that substantial income had escaped assessment due to the failure on the part of the petitioner to disclose fully and truly all material facts and, therefore, the assessment needed to be reopened. Considering the said reasons recorded by the Assessing Officer, supported by the legal position, it could not be said that the belief of the respondent that there was failure on the part of the petitioner to disclose fully and truly material facts, was not well founded or was erroneous. As held by the hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), the expression “reason to believe” in section 147 cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion, what is required is the reason to believe but not the established fact of escapement of income.

84. It was then sought to be submitted by Mr. Soparkar, placing heavy reliance on the decision in the case of Ormerods (India) Pvt. Ltd. (supra) that the purpose of purchase of shares made by the petitioner should not have been mixed up with the motive for the purchase of shares, as sought to be done by the present respondent, inasmuch as the word “purpose” cannot mean a motive for a transaction, much less can it mean ulterior motive or the ultimate object of purchasing the shares by the assessee. According to Mr. Soparkar, the said judgment of the Bombay High Court has been indirectly confirmed by the hon’ble Supreme Court in the case of Rajendra Prasad Moody (supra), in which it has been held, inter alia, that what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income and it is immaterial whether the income was in fact earned from the said expenditure. Thus, according to Mr. Soparkar, the respondent has proceeded on the wrong assumption about the purpose of purchasing the shares indirectly imputing the motive against the petitioner.

85. On the other hand, Mr. M. R. Bhatt, learned senior advocate for the respondent, has placed heavy reliance on the decision of this High Court in the cases of Sarabhai Sons (P.) Ltd. (supra), Smt. Virmati Ramkrishna (supra), Smt. Padmavati Jaikrishna (supra), to submit that for claiming deduction under section 57(iii) of the Act, the expenditure must have been incurred wholly and exclusively for the purpose of earning income and that expenses should not have been incurred for such purpose, as also for another purpose or for mixed purpose. Mr. Bhatt also relied upon the recent judgment of our High Court in Special Civil Application No. 15304 of 2010 and submitted that in similar case like the present one, the court upheld the action of the Assessing Officer in reopening the assessment as the amount which ought to have been treated as “deemed income” under section 2(22)(e) of the Act had escaped assessment on account of failure on the part of the assessee to disclose full and true material facts.

86. From the bare reading of section 57(iii) of the Act, it transpires that the expenditure must have been incurred wholly and exclusively for the purpose of earning income for which the expenditure was incurred. As such, there cannot be any disagreement with the ratios of judgments cited by Mr. Soparkar and Mr. Bhatt, as in all these cases, the crux of the decisions is, inter alia, that the expenditure must have been incurred wholly and exclusively for the purpose of earning income, and it is immaterial whether the income was in fact earned or not. However, it is pertinent to note that in section 57(iii), the emphasis is on the expression “wholly and exclusively” which precedes the words “for the purpose of making or earning such income”. Therefore, for claiming deduction under section 57(iii) of the Act, the expenditure must not be expended for the purpose other than the purpose of earning income or for the mixed purpose of earning income and other extraneous purpose. In the instant cases, the respondent had deduced a belief from the fresh tangible material that the expenditure incurred by the petitioner was not expended wholly and exclusively for the purpose of earning income from shares, but such expenditure was incurred also for the purpose of gaining controlling interest over the company, the said purpose could not be said to be the exclusive or sole purpose, and hence, the deduction under section 57(iii) of the Act was not permissible.

87. Though Mr. Soparkar, learned senior advocate for the petitioner, has sought to distinguish the judgment of our High Court relied upon by Mr.M. R. Bhatt, learned senior advocate for the respondent, in the case of Sarabhai Sons (P.) Ltd.M (supra), in the opinion of this court, the ratio laid down in the said case and the other cases relied upon by Mr.Bhatt, squarely cover the issue involved in the present cases, for holding that the expenditure must have been incurred for the sole purpose of earning income and that the expenditure should not have been incurred for such purpose, as also for another purpose or for mixed purpose. Of course, the distinction between “purpose” and “motive” must always be borne in mind, for what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee for incurring the expenditure, as held in the said cases. It is also required to be noted that in all the cases relied upon by Mr. Soparkar and Mr. Bhatt for the purpose of interpretation of section 57(iii) of the Act, the issue, as to whether the expenditure incurred was wholly and exclusively for the purpose of earning income or not, was thrashed out at all levels by the statutory authorities constituted under the Income-tax Act and, ultimately, references were made to the respective High Courts, whereas in the instant cases, the said issue still needs to be decided by the respondent-Assessing Officer, as what is recorded in the reasons by him, is only his belief before initiating the action against the petitioner for reopening of the assessment. As per the decision of the hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra), the respondent while recording reasons had only formed a belief and not conclusively decided or ascertained the fact by legal evidence about the escapement of income. Further, as per the observations made by the hon’ble Supreme Court in the case of GKN Driveshafts India Ltd. (supra), the assessee has the opportunity to file objections against the reasons recorded by the Assessing Officer and the Assessing Officer is bound to pass a speaking order thereon.

88. For the reasons stated above, it is held that in the instant cases, when the foundation or the substratum is laid by the respondent in the reasons, considering all factual and legal position demonstrating his belief that the income chargeable to tax of the petitioner had escaped assessment, and that such escapement was by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for his assessment for the relevant assessment years, it could not be said that the assumption of jurisdiction exercised by the respondent under section 147 of the Act after expiry of four years from the end of the relevant assessment years was bad, illegal or invalid. There being no infirmity or illegality in the impugned notices issued by the respondent under section 148 of the Act proposing to reopen the assessment for the assessment years 1995-96 and 1996-97, it does not warrant any interference of this court exercising extraordinary writ jurisdiction under article 226 of the Constitution of India and, therefore, both the petitions deserve to be dismissed.

89. However, it is clarified that it will be open for the petitioner to file his objections against the reasons recorded by the respondent, and the respondent shall decide the said objections, if any, submitted by the petitioner, by passing a speaking order in accordance with law, as held by the hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. (supra) and without being influenced by the observations made in this judgment.

90. For the foregoing reasons, the petitions are dismissed with no order as to costs. Interim relief, if any, stands vacated. Rule is discharged.

91. In view of the difference of opinion between the Members of the Bench, the matter be placed before the hon’ble the Chief Justice.

92. Akil Kureshi, J. – These petitions were previously heard together by a Division Bench of this court comprising of the hon’ble Ms. Justice H. N. Devani and the hon’ble Ms. Justice Bela Trivedi. On April 13, 2011, the learned judges recorded their separate conclusions. The hon’ble Ms. Justice H. N. Devani was of the opinion that the petitions are required to be allowed. The hon’ble Ms. Justice Bela Trivedi, however, opined that both the petitions should be dismissed. In view of the difference of opinion, the Bench placed the matter before the hon’ble the Chief Justice, in turn these petitions are placed before me for hearing and opinion of the third member.

93. Both the learned judges in their differing opinions, have recorded the facts quite elaborately. However, I would like to state very briefly relevant facts.

94. The petitioner is an individual and is common in both the petitions. The petitioner has challenged two separate notices issued by the Assessing Officer seeking to reopen the assessments of the petitioner for the assessment years 1995-96 and 1996-97 respectively. These notices, the petitioner has challenged in two separate petitions on various grounds.

95. Special Civil Application No. 4551 of 2002 pertains to the assessment year 1995-96. The petitioner had filed his return of income on March 29, 1996, declaring total loss of Rs. 7,45,759. In the return, which the assessee had filed, he had claimed interest expenditure of Rs. 39,01,689 from income from other sources under section 57(iii) of the Income-tax Act, 1961. In the return at item No. IV, income from the other sources, the assessee wrote “as per note 6”.

96. At note 6, the assessee described his income from other sources as under :

Rs.

“(6). Income from other sources :

Dividend 16,75,157

Bank interest 15,691

Interest on IT refund 1,010

16,91,858

Less : Interest paid to loans 39,01,689

-22,09,831 “

97. At item No. V to the schedule, the assessee described interests paid on various loans to different creditors. The total interest paid comes to Rs. 39,01,689. At the bottom of such item No. V, the assessee had stated, “this claim against dividend income from Mastek Ltd.” Such claim was not disturbed by the Assessing Officer in his scrutiny assessment, of course without any elaborate discussion in the assessment order and the assessment was taken in scrutiny. The Assessing Officer framed assessment on March 31, 1998, assessing a total loss of Rs. 3,53,622. During the assessment, the Assessing Officer had raised certain queries. The petitioner replied to such queries under communication dated February 15, 1998. In the said letter, he had stated that he had founded a company, viz., Mastek Ltd. and is currently the director of the said company. In the letter, the assessee provided the details of new investments during the year. He stated that the assessee had invested in shares of some of the companies. In the statement at schedule A, the assessee gave details of such investments.

98. The Assessing Officer thereupon proceeded to frame the assessment as noted above by the order dated March 31, 1998. In the assessment order itself, he referred to the letter dated February 15, 1998, of the assessee.

99. It was this assessment which the Assessing Officer desired to reopen, for which he issued notice dated March 11, 2002. He also had separately recorded his reasons for reopening. He was of the opinion that against the claim of interest expenditure under section 57(iii) of the Act, the assessee did not submit any information how such expenditure was laid out or expended wholly and exclusively for the purposes of earning dividend. The assessee only submitted that the borrowing was made for either repaying earlier loans or for making investments in shares of Mastek Ltd. The assessee did not submit the details including his controlling interest or total holding in Mastek Ltd. of which he is a director. The Assessing Officer was of the opinion that the increase of the assessee’s holding of shares of Mastek Ltd. was not for the purpose of earning dividend, but for acquiring the controlling stake of the company. To determine the real purpose for making investment in the shares, relevant facts such as percentage of holding of the assessee and his group, increase in holding, purpose of such increase, etc., were necessary since deduction under section 57(iii) is allowable only when the expenditure is incurred wholly and exclusively for the purpose of earning the income.

100. The Assessing Officer placed reliance on the decision of this court in Smt. Virmati Ramkrishna (supra), in which parameters for claiming deduction under section 57(iii) of the Act have been discussed. The Assessing Officer was of the opinion that the assessee did not submit relevant details to decide the real purpose of making the investment in the shares of Mastek Ltd. which emerged from the income-tax records of Mastek Ltd., which reflected the shareholding pattern of the assessee. He was of the opinion that from the details of the income-tax return of the Mastek Ltd. in which the assessee was a director, it can be deduced that the shares were purchased with clear purpose of acquiring controlling interest of the company and not of the sole or even the dominant purpose of earning dividend income. The Assessing Officer was of the opinion that the said income had escaped assessment and that such escapement was due to the reason of the assessee failing to disclose truly and fully all material facts necessary for such assessment.

101. In Special Civil Application No. 4549 of 2002, the petitioner has challenged a notice dated March 11, 2002, issued by the Assessing Officer seeking to reopen assessment previously framed after scrutiny for the assessment year 1996-97. For the said assessment year, the assessee had filed his return of income on November 29, 1996, declaring total income nil. The case of the petitioner was taken in scrutiny. During the assessment, the Assessing Officer raised certain queries. The assessee replied to such questions of the Assessing Officer under his communication dated December 14, 1998, in which he stated that, “the assessee has been assessed under section 143(3) for the assessment years 1992-93, 1993-94, 1994-95 and 1995-96. Initially, loan was taken for acquiring shares of Mastek Ltd. and, thereafter, loans were taken to repay earlier loans taken”. Along with the letter, he also produced interest conformation of various parties.

102. On December 21, 1998, the assessee wrote yet another letter to the Assessing Officer along with which he produced the proof of payment of interest to various parties. He further stated that, “I request you to refer to para . . . . of my letter dated . . . submitted for the assessment year 1995-96, explain regarding the purpose of loan, etc., was given”.

103. In the return itself filed by the assessee, he had claimed income from other sources of Rs. 51,81,906 towards dividend income from Indian companies as per the list. He had from such income claimed deduction of Rs.51,33,658 towards interest paid to various creditors from whom monies were borrowed for making investment for earning such income. In the list of dividend income, the assessee had showed a net dividend receipt of Rs.11,65,228 from Mastek Ltd. showed TDS of Rs. 2,91,298 and thereby disclosed a gross dividend income of Rs. 14,65,525.

104. The assessment order on such return was passed after scrutiny on December 23, 1998. The Assessing Officer recorded that, “looking to the practice followed for the assessment year 1995-96, the total income is determined at nil”.

105. For reopening such assessment, the Assessing Officer issued impugned notice dated March 11, 2002. The Assessing Officer recorded reasons that he believed that income chargeable to the tax escaped assessment and that such escapement was for the reason of the assessee failing to disclose truly and fully all material facts necessary for such assessment. Such reasons are the same as those recorded for the earlier assessment year 1995-96 and it is, therefore, not necessary to record them separately.

106. The hon’ble Ms. Justice H. N. Devani formed an opinion that it was apparent that the petitioner had disclosed all primary facts necessary for his assessment for the assessment years under consideration. The learned judge thereafter also proceeded to examine whether income chargeable to tax had escaped assessment. She came to the conclusion that on facts it was apparent that the amount obtained by loans had been invested by the petitioner for purchasing the shares. No part of the amount was used for any other purpose. Such amount, therefore, had been used wholly and exclusively for the purpose of purchase of the shares which yield income taxable under the head “Income from other sources”. She, therefore, held as under :

“In the aforesaid premises, even if any motive were to be attributed to the petitioner, the same would not be relevant for the purpose of section 57(iii) of the Act, inasmuch as, the entire amount had been used for the purpose of buying shares which had yielded dividend income. In the circumstances, the very basis for reopening the assessment is misconceived.”

107. In short, she held in favour of the petitioner on both counts, viz., that there was no failure on the part of the assessee to disclose truly and fully all material facts and, therefore, assessment previously framed after scrutiny could not be reopened beyond the period of four years from the end of the relevant assessment year. She also held that the claim of deduction under section 57(iii) of the Act was valid and that, therefore, the very basis for reopening the assessment that income chargeable to tax had escaped assessment was absent.

108. The hon’ble Ms. Justice Bela Trivedi, however, was unable to adopt the view of her colleague. She, under a separate dissenting order, came to the conclusion that the petitioner should have availed of alternative remedy. She referred to the decision in the case of GKN Driveshafts (India) Ltd. (supra). She also observed that the petitions involved a number of disputed questions of facts as regards non-disclosure of material facts and escapement of income chargeable to tax. On these grounds, she believed that the petitions were not required to be entertained. Nevertheless, she also proceeded to examine the petitions on the merits.

109. She held that the notices for reopening of the assessment were valid. She concluded that the Assessing Officer had sufficient reason to believe that income chargeable to tax had escaped assessment and that such escapement was on account of the assessee failing to disclose full facts. In the concluding portion of her opinion, therefore, she permitted the Assessing Officer to proceed further with the assessment, but clarified that such proceedings shall be carried on without being influenced by the observations made in the order.

110. On the basis of pleadings on record, learned senior counsel, Mr. Soparkar, vehemently contended that notices for reopening the assessment by the Assessing Officer were invalid. Original returns were taken in scrutiny. The Assessing Officer raised queries with respect to this very aspect of investment made in Mastek Ltd. by purchase of the shares by the assessee. The assessee gave detailed replies. Being satisfied with the replies, the Assessing Officer did not make any additions under this head, though certain other additions were made. Learned counsel submitted that such assessment cannot be reopened on mere change of opinion. In any case, in the absence of any failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, the assessment cannot be reopened beyond a period of four years.

111. In support of his contentions in additions to various decisions cited before the Bench, the counsel relied on the following decisions :

(1) V. D. M. Rm. M. Rm. Muthia Chettiar v. CIT [1969] 74 ITR 183 (SC), wherein the income-tax return of the assessee was sought to be reopened by the Department on the ground that the income of the minor taxable in the hands of the father had escaped assessment. In that case, the apex court did not permit reopening beyond a period of four years, on the ground that there was an obligation on the part of the Income-tax Officer to compute the income individually, including the income of the minor son and thereby no obligation was imposed on the taxpayer to disclose the income liable to be included under such head.

(2) Reliance was also placed on a decision of the apex court in the case of ITO v. Radheshyam Ladia [1987] 166 ITR 134/32 Taxman 32F (SC), wherein the decision in the case of V. D. M. Rm. M. Rm. Muthia Chettiar (supra), came up for consideration before the apex court. The apex court did not find it necessary to refer the issue to the larger Bench.

(3) The learned counsel also relied on a decision in the case of Ormerods (India) (P.) Ltd. (supra), wherein the claim of the assessee for deduction of interest paid on the borrowed funds for investment for the purpose of earning income came to be disallowed by the Tribunal. The Bombay High Court was of the opinion that ‘The motive for the purchase of shares and the purpose for purchase of the shares should not be allowed to be mixed-up’.

The counsel pointed out that the said decision of the Bombay High Court was approved by the apex court in the case of CIT v. Rajendra Prasad Moody (supra).

112. On the other hand, learned senior counsel, Mr. Manish Bhatt, submitted that the Assessing Officer had recorded detailed reasons for reopening the assessment. The assessee had not disclosed full facts about his investments and the purchase of shares in Mastek Ltd. The assessee’s holding before and after purchase of shares, the controlling interest in the company and other relevant factors were not placed before the Assessing Officer at the time of framing original assessment. It was only during the assessment of Mastek Ltd. that the Assessing Officer, by chance, came upon such material. The assessee, therefore, must be held to have failed to disclose fully and truly all material facts, necessary for assessment. Learned counsel relied on the decision of this court in Smt. Virmati Ramkrishna v. CIT [1981] 131 ITR 659 (Guj) (Appendix). The counsel pointed out that the decision in the case of Smt. Virmati Ramkrishna (supra) (Appendix) was considered and followed in a subsequent decision of this court in the case of Sarabhai Sons (P.) Ltd. (supra).

113. The counsel relied on the following decisions :

“(1) In CIT v. Smt. P. K. Kochammu Ammu Peroke reported in [1980] 125 ITR 624 (SC), wherein the decision of the apex court in the case of V. D. M. Rm. M. Rm. Muthia Chettiar [1969] 74 ITR 183 (SC), came up for consideration. The apex court was examining the validity of the penalty under section 271(1)(c) of the Income-tax Act, imposed on the assessee. The Bench did not agree with the ratio of the decision in the case of the V. D. M. Rm. M. Rm. Muthia Chettiar [1969] 74 ITR 183 (SC) but, in view of the changed rule position eliminating any scope for arguing that the assessee, therein, was bound to disclose certain income in the returns filed by him, the court refrained from referring the case to the larger Bench. In CIT v. Smt. P. K. Kochammu Amma reported in [1980] 125 ITR 624 (SC), the apex court observed as under :

‘(4) It is true that the form of the return prescribed by rule 12 of the Income-tax Rules, 1962, which was in force during the relevant assessment year did not contain any separate column for showing the income of the spouse and minor child liable to be included in the total income of the assessee, but it did contain a note stating that if the income of any other person is includible in the total income of the assessee under the provisions, inter alia, of section 64, such income should also be shown in the return under the appropriate head. This note clearly required the assessee to show in the return under the appropriate head of income, namely, “Profits and gains of business or profession” the amounts representing the shares of the husband and minor daughter of the assessee in the profits of the two partnership firms. The assessee, however, failed to disclose these amounts in the return submitted by her and there was, plainly and manifestly a breach of the obligation imposed by section 139, sub-section (1), requiring the assessee to furnish a return of her income in the prescribed form. To accept the contention that despite the note the assessee was still not liable to show in the return the amounts representing the shares of her husband and minor daughter in the two partnership firms would render the note meaningless and futile and turn it into a dead-letter and that would be contrary to all recognised canons of construction. The assessee was guilty of concealment of this item of income which plainly attracted the applicability of section 271 sub-section (1) clause (c).’

(2) Reliance was also placed on the decision in the case of CIT v. Abdul Rahim Khan M. Pathan [2000] 243 ITR 409 (Guj). In the said case, the court held that income of the step-child would have to be clubbed with the income of the assessee, since section 64(1)(iii) of the Act would be attracted. The court was of the opinion that the assessee was obliged to disclose the alleged income in the income-tax return, when he married his brother’s widow, as, on the ground of such marriage, the minors became his step-children. Since, he did not do so, the court was of the opinion that the Assessing Officer was justified in reopening the assessment.

(3) In the case of Honda Siel Power Products Ltd. v. Deputy CIT reported in [2012] 340 ITR 53 (Delhi) wherein the expression, ‘failure to fully and truly disclosure of all material particulars’, occurring in section 147 of the Act came up for consideration before the Bench.

(4) To support the reopening beyond four years, reliance was also placed on a decision of the apex court in the case of Sri Krishna Pvt. Ltd. v. ITO reported in [1996] 221 ITR 538 (SC) and in ITO v. Selected Dalurband Coal Co. P. Ltd. reported in [1996] 217 ITR 597 (SC).”

114. Having, thus, heard learned counsel for the parties and having perused the material on record as well as the opinion of the two learned Members of the Bench, who, previously heard the special civil applications, I am of the opinion that the question of availability of alternative remedy need not detain us for long. The present is the case, wherein the assessee had approached this court challenging the very validity of the notices for reopening of the assessments, which were previously framed after scrutiny. The case of the assessee was that reopening notices were without jurisdiction. On the admitted facts, the assessee contended before this court that the Assessing Officer could not have reopened the assessment beyond a period of four years from the end of the relevant assessment years.

115. Such petitions were admitted and were pending before this court for a number of years. I am of the opinion that such petitions cannot be dismissed merely on the ground of availability of alternative remedy. Firstly, the petitioner relied on facts and material already on record, which were undisputed or indisputable. His contention that there was true and full disclosure of material facts on his part, needs to be examined in these petitions. Whether the assessee satisfied such requirements, and, therefore, can validly contend that the reopening of assessments beyond a period of four years was invalid, is to be judged on the basis of material on record. If the assessee had discharged his primary duty, obviously, the Assessing Officer would, thereafter, have no jurisdiction to reopen the assessment beyond a period of four years.

116. Such question would go to the root of the matter and strike at the very jurisdiction of the Assessing Officer to reopen the assessment. Only upon jurisdictional facts being established that the Assessing Officer can proceed to reopen the assessment. It is well-settled through a series of decisions of this court as well as of the apex court that where there is lack of inherent jurisdiction in the Authority, an alternative remedy, even if available, would not be a bar to entertain a writ petition. In the case of Garden Finance Ltd. v. Asst. CIT [2004] 268 ITR 48/137 Taxman 49 (Guj)(FB) it was held as under (page 87) :

“On a perusal of the aforesaid decisions, it appears to me that prior to the GKN case [2003] 259 ITR 19 (SC), the courts would entertain the petition challenging a notice under section 148 and permit the assessee to satisfy the court that there was no failure on the part of the assessee to disclose fully and truly all material facts for assessment. Upon reaching such satisfaction the court would quash the notice for reassessment. The question is why did the court not require the assessee to appear before the Assessing Officer.

Earlier when the court required the assessee to before the Assessing Officer, the Assessing Officer would not pass any separate order dealing with the preliminary objections and much less any speaking order, and the Assessing Officer would deal with all the objections at the time of assessment. Hence, if the assessee was not permitted to challenge the reassessment notice under section 148 at the initial stage, the assessee would thereafter have to challenge the reassessment itself entailing the cumbersome liability of paying taxes during pendency of the appeal before the Commissioner (Appeals), second appeal before the Income-tax Appellate Tribunal and then reference/ tax appeal before the High Court. It was in this context that the Constitution Bench had observed in Calcutta Discount’s case [1961] 41 ITR 191 that where an action of an executive authority, acting without jurisdiction subjected, or was likely to subject, a person to lengthy proceedings and unnecessary harassment, the High Courts would issue appropriate orders or directions to prevent such consequences and, therefore, the existence of such alternative remedies as appeals and reference to the High Court was not always a sufficient reason for refusing a party quick relief by a writ or order prohibiting an authority acting without jurisdiction from continuing such action and that is why in a fit case it would become the duty of the courts to give such relief and the courts would be failing to perform their duty if reliefs were refused without adequate reasons.

What the Supreme Court has now done in the GKN case [2003] 259 ITR 19 is not to whittle down the principle laid down by the Constitution Bench of the apex court in Calcutta Discount’s case [1961] 41 ITR 191 but to require the assessee first to lodge preliminary objections before the Assessing Officer who is bound to decide the preliminary objections to issuance of the reassessment notice by passing a speaking order and, therefore, if such order on the preliminary objections is still against the assessee, the assessee will get an opportunity to challenge the same by filing a writ petition so that he does not have to wait till completion of the reassessment proceedings which would have entailed the liability to pay tax and interest on reassessment and also to go through the gamut of appeal, second appeal before the Income-tax Appellate Tribunal and then reference/ tax appeal to the High Court.

Viewed in this light, it appears to me that the rigour of availing of the alternative remedy before the Assessing Officer for objecting to the reassessment notice under section 148 has been considerably softened by the apex court in the GKN case in the year 2003. In my view, therefore, the GKN case does not run counter to the Calcutta Discount’s case [1961] 41 ITR 191 but it merely provides for challenge to the reassessment notice in two stages, that is-

(i) raising preliminary objections before the Assessing Officer and in case of failure before the Assessing Officer,

(ii) challenging the speaking order of the Assessing Officer under section 148 of the Act.”

117. The decision in the case of the GKN Driveshafts (India) Ltd. (supra), was rendered after the notices for reopening assessments were issued by the Assessing Officer and challenged by the assessee. Therefore, the question of following the procedure laid down therein, would not arise in the present case.

118. This brings me to the central question, whether the notice for reopening the assessments were invalid. The scope of section 147 of the Act and the power of the Assessing Officer for reopening the assessments, previously, framed after scrutiny has come up for consideration before the apex court and various High Courts, on a number of occasions. The principles are well laid down and do not need much elaboration. From the days of Calcutta Discount Co. Ltd. (supra), it is well settled that it is the duty of the assessee to make full and true disclosure of all primary facts. His duty, however, does not extend beyond this. 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 as to what inference of facts can be reasonably drawn and what legal conclusions are to be ultimately drawn. It is not for the assessee to tell the assessing authority as to what inference on facts or law should be drawn from the primary facts. It is also held by the apex court in the case of Ess Ess Kay Engineering Co. P. Ltd. v. (supra) that merely because certain facts were disclosed in the original assessment, it does not preclude the Assessing Officer from reopening the assessment of the assessee under section 147 of the Act on noticing the additional findings of facts arrived at from fresh material obtained in the course of assessment in the next assessment year.

119. Some of the principles emerging from the various decisions of this court as well as of the apex court were culled out by the Division Bench of this court in the case of Dishman Pharmaceuticals and Chemicals Ltd. (supra), which reads as under (page 240 of 346 ITR) :

“From the above judicial pronouncements, the following principles can be culled out :

(i) To confer jurisdiction to the Assessing Officer to reopen the assessment under section 147 of the Income-tax Act beyond four years from the end of the assessment year, the following two conditions must be satisfied (a) that the Assessing Officer must have reason to believe that the income chargeable to tax has escaped assessment ; and (b) that the same was occasioned, on account of either failure on the part of the assessee to make a return of his income for that assessment year, or to disclose fully and truly all material facts necessary for assessment of that year ; (ii) both the above conditions are conditions precedent and must be satisfied simultaneously before the Income-tax Officer can assume jurisdiction to reopen the assessment beyond four years of the end of the assessment year ; (iii) such reasons must be recorded and if the reasons recorded by the Assessing Officer do not disclose satisfaction of these two conditions, reopening notice must fail ; (iv) there is no set format in which such reasons must be recorded. It is not the language but the contents of such recorded reasons which assumes importance. In other words, a mere statement that the Assessing Officer had reason to believe that certain income has escaped assessment and such escapement of income was on account of non-filing of the return by the assessee or failure on his part to disclose fully and truly all material facts necessary for assessment would not be conclusive. Nor absence of any such statement would be fatal, if on the basis of reasons recorded, it can be culled out that there were sufficient grounds for the Assessing Officer to hold such beliefs ; (v) such reasons must emerge from the reasons recorded by the Assessing Officer and cannot be supplied through an affidavit filed before the court. However, the Gujarat High Court in the case of Aayojan Developers v. ITO [2011] 335 ITR 234 (Guj) has accepted the view that to elaborate such reasons already recorded, reference would be permissible to the affidavit filed by the Department before the court ; (vi) what would amount to true and full disclosure of all material facts must depend on each case and no strait jacket formula of universal application can be provided. It can, however, safely be stated that the duty of the assessee is to disclose primary facts and it is not his duty to lead the Assessing Officer to any particular inference of fact or of law on the basis of such primary disclosures. In other words, once the assessee discharges his duty of stating all the primary facts, what inferences and conclusions should be drawn is the duty of the Assessing Officer ; (vii) at the time of ascertaining whether the notice was validly issued, what could be the probable conclusion of fresh assessment if reopening is permitted, is not the inquiry of the court. In other words, the merits of the proposed action, through opening of the assessment, cannot be gone into by the court beyond a prima facie stage.”

120. It is not necessary to burden this judgment with various other authorities on the point, since, as already recorded, the parameters for reopening the assessment within and beyond a period of four years from the end of relevant assessment year, have been well laid down by a series of decisions by the various courts.

121. We may, now, advert to the facts of the present case.

122. In the present case, the assessee filed his return for the assessment year 1995-96. In the return, he had disclosed that he had paid interest on various loans totalling to Rs. 39,01,689. This was adjusted against dividend income from Mastek Ltd. He, further, disclosed that he had received dividend of Rs. 16,75,157, against which he claimed deduction towards interest paid on various loans. Thus, the fact that the assessee had paid interest on the loans and such interest he claimed as deduction under the dividend income from Mastek Ltd. was very much within the knowledge of the Assessing Officer in the original return, itself. Moreover, in response to the queries raised by the Assessing Officer, the assessee filed further documents. Vide letter dated February 15, 1998, the assessee made further disclosures in which in the first paragraph itself he stated that he had worked for two years with NOCIL after which he co-funded Mastek Ltd. He was currently the director of Mastek Ltd. He gave details of various investments made by him in shares. He supplied the details at schedule A to the letter. After taking into account such material, the Assessing Officer, passed his order of assessment. In the assessment order, he referred to the assessee’s letter dated February 15, 1998, and the contents of such letters also. Some of the claims of the assessee were disallowed and the original loss of Rs.7.45,759 was reduced to Rs. 3,53,622. Significantly, however, no additions were made with respect to the claim of deduction on the interest paid for funds used for purchase of shares of Mastek Ltd.

123. In the next assessment year, i.e., the assessment year 1996-97, once again, the return of the assessee was taken in scrutiny. The Assessing Officer raised several queries. The assessee thereupon wrote to the Assessing Officer on December 14, 1998, providing interest confirmation letters from various parties. He, further, stated that he was assessed under section 143 of the Act for the assessment years 1992-93, 1993-94, 1994-95 and 1995-96. He stated that, initially, loans were taken for acquiring shares of Mastek Ltd. and, thereafter, loans were taken to repay earlier loans. Once again, during such assessment, the assessee addressed a letter to the Assessing Officer, providing the proof of payment of interest to various parties. He, further, requested the Assessing Officer to refer to earlier letter for the assessment year 1995-96, explaining the purpose for which the loan was taken. Even in the original returns that the assessee filed, he had claimed dividend income of Rs. 15,81,906, which included a gross dividend of Rs. 14,15,525 and a net dividend of Rs. 11,65,227 after deduction of TDS of Rs. 2,91,298 from Mastek Ltd. Against such dividend income, he claimed deduction of interest of Rs. 51,33,658 paid to various entities.

124. It was after such a scrutiny and taking into account, the returns filed by the assessee and further material produced during scrutiny that the Assessing Officer framed the assessment observing that looking to the practice followed for the assessment year 1995-96, the total income is determined. He made no additions under any of the heads including, deduction of interest paid for earning dividend income.

125. Section 57(iii) of the Income-tax Act provides as under :

“57. Income chargeable under the head ‘Income from other sources’ shall be computed after making the following deductions, namely : . . .

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.”

126. The issue which is being raised by the Assessing Officer through reopening of the assessment is that the assessee was not entitled to any deductions for the interest paid for borrowings, which he utilized for purchase of shares in Mastek Ltd. The case of the Assessing Officer in brief is that such investments were not made for the purpose of earning dividend, but, for the purpose of acquiring controlling shares in Mastek Ltd. and recorded the reasons for the same. He, therefore, opined that the assessee was not entitled to deduction under section 57(iii) of the Act since such expenditure cannot be held to have been incurred exclusively for the purpose of earning such income.

127. Whether the Assessing Officer is justified in holding such, prima facie, belief is not an issue, on which I need to make any conclusive statement. The question is whether did the assessee fail in his duty to disclose fully and truly all primary facts. This question is important since the Assessing Officer sought reopening of the assessment beyond a period of four years from the end of the relevant assessment year.

128. To my mind, considering the facts emerging from the record, it cannot be stated that the assessee failed in his duty. His duty was to make the disclosure about the investments as well as the interest paid for borrowings for making such investments. On the basis of such material, if the Assessing Officer was of the opinion that any further inquiry was necessary to examine the nature of such investments and to ascertain whether the investment was made for the sole purpose of earning dividend income or was predominantly or exclusively for the purpose of acquiring controlling shares of Mastek Ltd. it was open to the Assessing Officer to make further inquires. To my mind, nothing is pointed out to suggest that the assessee owed such a duty to disclose further facts in this regard.

129. Whether the certain expenditure is made wholly and exclusively for the purpose of earning dividend income is to be judged in the light of the provisions of section 57(iii) of the Act. It may be that by virtue of the decision of the Division Bench in the case of Smt. Virmati Ramkrishna, it was arguable whether the assessee had made such investments for the sole and exclusive purpose of earning income or whether with the dominant or sole purpose of acquiring controlling shares of the company. However, this is not in the same as to suggest that beyond disclosing the investments made, the borrowings for making such investment, the interest paid and the dividend earned, the assessee owed no further duty to make disclosures with respect to various aspects that the Assessing Officer wanted to examine after reopening the assessment.

130. As already noted, in both the assessments, the assessee had disclosed primary facts in the returns filed. Further, the Assessing Officer had raised certain queries about borrowings and the interest paid thereon and the dividend earned. The assessee, on both the occasions, supplied necessary material through letters and documents produced on record. Thus, during the scrutiny assessment proceedings, the Assessing Officer was actually aware about the claim of the assessee under section 57(iii) of the Act. If, on the basis of such disclosures, the Assessing Officer was curious to verify the percentage shift in the holding of the assessee, in the company in question, it was well within his powers to ask for such material during the assessment. However, the primary onus to provide such details even if not disclosed cannot be shifted on the assessee.

131. Under the circumstances, if the assessment was sought to be reopened within a period of four years from the end of the relevant assessment year, the situation may have been different. It was perhaps open for the Revenue to contend that, since there was no opinion formed by the Assessing Officer on the original assessment, on such an issue, reopening of assessment cannot be stated to be based on mere change of opinion. However, the present case is related to reopening of assessment beyond a period of four years. Reopening notice must, therefore, be quashed.

132. I am, however, unable to concur with the view of the hon’ble Justice Devani when she holds that even on the merits, no additions could have been made. She examined the nature of interest paid by the assessee, the nature of investment made in purchase of shares of Mastek Ltd. and came to the conclusion that the interest paid on borrowed funds, which were utilized for the purpose of shares for earning dividend would fall within the parameters of section 57(iii) of the Act.

133. With profound respect, I am unable to adopt such a line. Such an issue, in my opinion, was wholly within the purview of the Assessing Officer. The material necessary to examine the nature of investment made by the assessee in purchasing shares of Mastek Ltd. had to be brought on record. Its effect on the claim towards expenditure in the form of interest paid on the borrowed funds had to be judged on the basis of various facts and circumstances. Such facts have not yet been brought on record. What would be the ultimate outcome of such a consideration, particularly, bearing in mind the decision of this court in the case of Smt. Virmati case (supra) cannot be pre-judged. Such issue, in my humble opinion, ought to have been left open for the assessing authorities to be judged on the basis of facts, which may be brought on record, if ultimately, the assessment was permitted to be reopened. This was, therefore, in my opinion, was not a case, where it could be held that even on the merits the Revenue was not justified in suggesting that any taxable income had escaped assessment.

134. Such conclusion would not be fatal to the petitioners, when I hold that there was no failure on the part of the assessee to disclose fully and truly all material facts, necessary for assessment. The notices for reopening the assessments beyond a period of four years, from the end of the relevant assessment years, must fail on that ground alone.

135. In the result, both the petitions are allowed. The impugned notices are quashed. Rule, in each petition, is made absolute.

[Citation : 346 ITR 254]

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