Madras H.C : the issuance of notice under section 148 of the Income-tax Act is valid in law when notice issued under section 143(2) is pending consideration

High Court Of Madras

Kone Elevator India (P.) Ltd. vs. ITO

Assessment Year : 1998-99

Section : 147

Elipe Dharma Rao And M. Venugopal, JJ.

Tax Case (Appeal) No. 41 Of 2008

March 8, 2011

JUDGMENT

Elipe Dharma Rao, J. – The above tax case appeal is filed against the order dated October 15, 2007, passed by the Income-tax Appellate Tribunal, Chennai Bench “B” in I.T.A. No. 1340 (MDS)/2006.

2. The brief facts necessary for the disposal of the case are that the assessee-company had filed its return of income for the assessment year 1998-99 on October 30, 1998, admitting “nil” income, which was processed under section 143(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) on May 10, 1999. Subsequently, the assessee filed a revised return on November 26, 1999, admitting “nil” income by enclosing some more TDS certificates that were omitted to be enclosed along with the original return of income, which were also processed on March 29, 2001. Again, a revised order was passed on June 27, 2002, giving credit to some more TDS certificates which resulted in an additional refund of Rs. 8,86,226.

3. Thereafter, it was noticed that on a perusal of the records, the assessee-company had not computed the income under section 115JA of the Act properly. Therefore, on facts, there was a reason to believe that the income assessable to tax has escaped assessment. In view of the same, a proceeding under section 147 of the Act was initiated by issuing a notice under section 148 of the Act on December 23, 2003. In response to the said notice, the assessee’s representative, M/s. N.C. Rajagopal and Co., chartered accountants, vide their letter dated January 5, 2004, informed that the original return filed for the assessment year 1998-99 may be treated as the one filed in response to the notice issued under section 148 of the Act. Further, notice for hearing under section 143(2) of the Act was issued to the assessee on December 16, 2004. In response to this notice, Shri R. Niranjan Chawala of M/s. N.C. Rajagopal and Co., chartered accountants, appeared on behalf of the assessee.

4. After hearing the representative of the assessee, the Assessing Officer has given his reasons for reopening the assessment for the assessment year 1998-99 as follows :

“(A) The assessee-company has not admitted income under section 115JA under the pretext of having unabsorbed depreciation and unabsorbed loss.

(B) The provisions for bad and doubtful debts was omitted to be considered for arriving the book profit under section 115JA of the Act.

(C) The assessee-company has not credited the royalty written back in the profit and loss account which were written back by the collaborator which is clearly a taxable income. Therefore, the aforesaid reasons are the basis leading to the conclusion that income otherwise taxable has escaped assessment and, hence, the notice under section 148 has been issued to you for the assessment year 1998-99.”

5. The Assessing Officer, on a consideration of the facts and circumstances of the case, held that as per section 115JA, the assessee did not have any business loss or unabsorbed depreciation to be carried out to the assessment year 1998-99. Further, the assessee claims that the provision for bad and doubtful debts amounting to Rs. 3,14,37,439 is an ascertained liability and, hence, this is not liable for inclusion in book profit for the purpose of section 115JA. However, as per the decision of this court in the case of Dy. CIT v. Beardsell Ltd. [2000] 244 ITR 256/[2001] 116 Taxman 149, provision for bad and doubtful debts not written off in the profit and loss account does not represent “ascertained liability” and this is certainly liable for inclusion in book profit. But for such a claim which is not an ascertained liability the book profit would have been higher. By resorting to such claim, the assessee has clearly tried to suppress its income.

6. Further, the assessee has claimed that an accumulated royalty of Rs. 2,61,18,013 which was debited in the profit and loss account for the assessment years 1991-92 to 1997-98 was written back to the profit and loss account for this assessment year since the royalty was waived by their collaborator, M/s. Kone OY Finland. The assessee considered this royalty written back in the “profit and loss account appropriation account”, instead of crediting the same in the profit and loss account. Since the royalty had been debited to the profit and loss account from the accounting year ending March 31, 1991, onwards, the waiver of royalty is clearly a taxable income and has to be treated as income and the book profit under section 115JA of the Act has to be arrived at accordingly.

7. As against the said order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals)-III and the said appeal was allowed by an order dated February 17, 2006, holding as follows :

“I have considered the various submissions made by the appellant’s representative both on the issue of jurisdiction and on the merits. After going through the documents furnished in support of the facts that a valid notice under section 143(2) has been issued within the time limit permitted under the Act and allowing the proceedings to remain inconclusive, the Assessing Officer does not get jurisdiction to initiate action under section 148 of the Act as held by the apex court in the two cases relied on by the appellant. I, therefore, hold that the assessment has not been validly reopened and, hence, the impugned order passed is ab initio void. Inasmuch as the reassessment proceedings have been struck down as not valid in law, other grounds of appeal are not considered. The appellant succeeds on this ground.”

8. As against the said order, the Department filed an appeal before the Income-tax Appellate Tribunal and the Tribunal, by its order dated October 15, 2007, reversed the findings of the Commissioner of Income-tax (Appeals)-III, holding as under :

“We have heard the rival submissions. The Commissioner (Appeals) quashed the assessment order on the ground that the Assessing Officer issued notice under section 143(2) within the time permitted under the Act and allowed the proceedings to remain inconclusive. According to the Commissioner (Appeals) under such circumstances the Assessing Officer cannot assume jurisdiction to initiate action under section 148 of the Act. It was made clear before us that the time for completing the assessment under section 143(3) did expire. No proceedings in this regard were pending before the Assessing Officer. As such there was no error in the issuance of notice under section 148. We have taken into consideration the entire conspectus of the case. In our opinion, the Commissioner (Appeals) was not correct in quashing the assessment on the ground that the proceedings pursuant to the notice under section 143(2) were inconclusive. Since no proceedings were pending in this regard we hold that the initiation of the reassessment proceedings was valid under the law. Accordingly, we set aside the impugned order and restore the issue to the file of the Commissioner (Appeals) with a direction to decide the issue afresh.”

9. As against the said order, the assessee has filed the present tax case appeal.

10. While admitting the appeal, this court formulated the following substantial question of law :

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the issuance of notice under section 148 of the Income-tax Act is valid in law when notice issued under section 143(2) is pending consideration ?”

11. Learned counsel appearing for the assessee submitted that the Income-tax Appellate Tribunal erred in holding that the proceeding under section 148 of the Act has been validly initiated and that the assessment is not liable to be annulled on the ground of lack of jurisdiction.

12. The learned counsel also submitted that the Income-tax Appellate Tribunal failed to notice that the jurisdiction under section 147 of the Act can be invoked only if the proceedings under section 143(2) of the Act has resulted in an assessment or in the alternative, proceedings for enquiry under section 143(2) of the Act has not been initiated by issuing notice. Once a notice under section 143(2) is issued, proceedings under section 147 of the Act cannot be initiated, so long as the said notice has not fructified in an order under section 143(3) of the Act.

13. Learned counsel further submitted that the Income-tax Appellate Tribunal erred in holding that since the time for completing the assessment under section 143(3) of the Act had expired after issuing notice under section 143(2) of the Act, proceedings under section 147 of the Act could be initiated.

14. In support of her submissions, the learned counsel relied on the decision of the hon’ble Supreme Court reported in the case of Trustees of H.E.H. the Nizam’s Supplemental Family Trust v. CIT [2000] 242 ITR 381/109 Taxman 193, wherein the hon’ble Supreme Court has held as under (headnote) :

“It is settled law that unless the return of income already filed is disposed of, notice for reassessment under section 148 of the Income-tax Act, 1961, cannot be issued, i.e., no reassessment proceedings can be initiated so long as assessment proceedings pending on the basis of the return already filed are not terminated. A return of income filed in the form prescribed along with an application for refund under section 237 of the Act is a valid return. Filing of return in the form prescribed under section 139 of the Act along with the application for refund is not an empty formality. It assumes importance if such return had not been filed earlier.”

15. In the instant case, for the assessment year 1998-99, the assessee filed its return of income on October 30, 1998, which was processed under section 143(1)(a) of the Act on May 10, 1999. The assessee filed its revised return of income on November 26, 1999, which was also processed on March 29, 2001, and final order was passed on June 27, 2002. Thereafter, on a perusal of records, it was noticed that the assessee-company has not computed the income under section 115JA of the Act properly. Therefore, on facts, there was a reason to believe that the income assessable to tax has escaped assessment. In view of the same, proceedings under section 147 of the Act was initiated by issue of notice under section 148 of the Act on December 23, 2003, which is within the prescribed time limit.

16. To fortify the aforesaid contention, in the decision reported in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC), the hon’ble Supreme Court has held in paragraph 17 as under (page 511) :

“The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied : firstly, the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.”

17. Therefore, applying the aforesaid ruling of the apex court to the facts and circumstances of the case, the Assessing Officer came to the subjective satisfaction as indicated in his letter dated February 7, 2005 referred to above. Therefore, it cannot be stated that the contention of the learned counsel for the appellant that the Assessing Officer has no jurisdiction to reconsider the matter or to initiate reassessment proceedings once the proceedings are concluded. As laid down by the Supreme Court, the condition precedent is that the Assessing Officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment. As could be seen from the assessment order, it is seen that as per section 115JA of the Act, the assessee did not have any business loss/unabsorbed depreciation to be carried out to the assessment year 1998-99.

18. With regard to the inclusion of book profit, the assessee claims that the provision for bad and doubtful debts amounting to Rs. 3,14,37,439 is an ascertained liability and, hence, this is not liable for inclusion in book profit for the purpose of section 115JA of the Act. But, according to the Assessing Officer, as per the decision of this court in the case of Beardsell Ltd. (supra), provision for bad and doubtful debts not written off in the profit and loss account does not represent “ascertained liability” and this is certainly liable for inclusion in book profit. But for such a claim which is not an ascertained liability the book profit would have been higher by this amount. By resorting to such a claim, the assessee has clearly tried to suppress its income.

19. With regard to the claim of accumulated royalty, the assessee has claimed that accumulated royalty of Rs. 2,61,18,013 which was debited in the profit and loss account for the assessment years 1991-92 to 1997-98 was written back to the profit and loss account for this assessment year since the royalty was waived by their collaborator, M/s. Kone OY Finland. The assessee considered this royalty written back in the “profit and loss account appropriation account”. Instead of crediting the same in the profit and loss account, since the royalty had been debited to the profit and loss account from the accounting year ending March 31, 1991, onwards, the waiver of royalty is clearly a taxable income and has to be treated as income and the book profit under section 115JA of the Act arrived accordingly.

20. Considering the above reasons given by the Assessing Officer, we consider it appropriate to hold that it is not proper to accept the contention of the learned counsel for the assessee that there is no material before the Assessing Officer for coming to the subjective satisfaction that he has reason to believe that certain income assessable to tax has escaped assessment for the assessment year 1998-99.

21. As per the decision of the hon’ble Supreme Court, once the Assessing Officer has come to the conclusion that the taxable amount has escaped assessment, two conditions were required to be satisfied on the basis of the materials placed before him. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of the first condition alone is sufficient. In other words, if the Assessing Officer has reason to believe that certain income assessable to tax has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. Hence, we are not able to appreciate the contention of the learned counsel for the appellant that the Assessing Officer has no jurisdiction to reopen the assessment.

22. The finding of the Assessing Officer is that as per section 115JA, the assessee did not have any business loss or unabsorbed depreciation to be carried out to the assessment year 1998-99. Further, the assessee has claimed that an accumulated royalty of Rs. 2,61,18,013 which was debited in the profit and loss account for the assessment years 1991-92 to 1997-98 was written back to the profit and loss account for this assessment year since the royalty was waived by their collaborator, M/s. Kone OY Finland. The assessee considered this royalty written back in the “profit and loss account appropriation account”, instead of crediting the same in the profit and loss account. Since the royalty had been debited to the profit and loss account from the accounting year ending March 31, 1991, onwards, the waiver of royalty is clearly a taxable income and has to be treated as income and the book profit under section 115JA of the Act has to be arrived at accordingly. In the facts and circumstances of the case, the Assessing Officer has rightly assessed the matter and passed the assessment order. In such circumstances, the tax case appeal stands dismissed. We answer against the assessee and in favour of the Revenue.

[Citation : 340 ITR 454]

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