Income Tax Appellate Tribunal - Mumbai
Srikant G. Shah vs Income Tax Officer on 22 August, 2006
Equivalent citations: [2007]108ITD577(MUM), [2008]300ITR324(MUM), (2007)110TTJ(MUM)422
ORDER
1. These seven appeals filed by the assessee against orders of the CIT (A)-XI, Mumbai and involving common issues are consolidated and decided by this common order for the sake of convenience.
2. It may be mentioned that all these appeals were originally disposed off by ITAT, B-Bench, Mumbai by the common order dated 30.12.04. Subsequently, the assessee filed an MA, which has been considered and disposed off by the Tribunal vide order dated 30.11.05 in MA No. 280/M/05 for all these years. As per this order, the original order of the Tribunal dated 30.12.04, referred to above, has been recalled for being decided afresh. Hence, the appeals were fixed for hearing and heard by us afresh.
3. The grounds of appeal raised by the assessee are similar for all the assessment years and it would suffice to reproduce these grounds from ITA No 4247/M/03 for the assessment year 2001-02 as under:
1. Under the facts and circumstances of the case, the learned CIT (A) erred in not deleting the sum of Rs. 12, 74, 733 being interest on client's account accrued and credited to respective client's accounts does not belongs o the appellant In spite of the facts, the learned CIT (A) has given a categorical finding that interest accrued on clients' accounts does not belong to the appellant. The return of income was filed under protest and with conditions.
2. The learned CIT (A) has not annulled the assessment but has given partial relief. The appellant is entitled to refund on the taxes paid under self assessment for the return filed in response to notice Under Section 148 of the Income Tax Act, 1961.
3. Under the facts and circumstances of the case, the learned CIT (A) erred in holding no refund of self assessment paid on revised return of income filed in response to notice Under Section 118 of the Income Tax Act, 1961 having not annulled the assessment proceedings and having given past relief only.
4. Under the facts and circumstances of the case, the learned CIT (A) erred in holding that no refund of self assessment tax paid as per return of income filed in response to notice Under Section 118 of Income Tax Act, 1961 having held that the interest accrued on the bank accounts disclosed in the return of income Rs. 12,71,733 does not belong to the appellant.
5. The interest income accrued on client accounts does not belong to the appellant in view of the various courts decisions. Even if the such interest income is offered for taxation under protest / under wrong advice / or by mistake. The assessmemt and income should be assessed according to the income tax act read with the court decisions and taxes should be collected or paid according to the rules of law and any taxes paid or by mistake under protest or wrong advice be refunded to the appellant.
6. The assessing officer has reopened assessment Under Section 118 of Income Tax Act, 1961 on the basis of interest accrued on clients account. The assessing officer is not entitled to frame reassessment order Under Section 113(3) read with 117 / 118 and can disallow expenses like motor car including depreciation on motor car, printing and stationery expenses and telephone expenses. It is beyond jurisdiction on the ground of beyond the scope assessing officer.
7 The CIT (A) on merit also ought not to have disallowed expenses namely, motor including depreciation on motor car, printing and stationery expenses, telephone expenses. It ought to have allowed expenses in full as all expenses are incurred for the purpose of business only.
4. The grounds of appeal challenging the validity of the proceedings initiated by the assessing officer Under Section 147 have not been contested by the learned Counsel for assessee, Sri S.E. Dastoor and therefore, on this issue, the orders of the learned CIT(A) for all the assessment years under appeal stand confirmed.
5. The substantial issue, which is common in all the assessment years pertains to bringing the interest income to the charge of tax, which is claimed as pertaining to the clients of the assessee. It would be appropriate to set out the facts in brief leading to this controversy The assessee is an advocate and also a solicitor. During the previous years relevant to the assessment years under appeal, the assessee was in receipt of the following incomes:
a) professional fees received for the services rendered to the clients
b) professional fees received for the services to be rendered to the clients and
c) amounts received from the clients in his capacity as a solicitor for the purpose of discharging obligations of the clients.
6. While there is no dispute regarding the taxability of the incomes at sl. Nos. 1 & 2 above, the assessee claimed that the amounts received from the clients in his capacity as a solicitor were only in the nature of deposits held by the assessee on behalf of the clients and 1o be utilized only for discharging the obligations of the clients. The assessee maintained a separate bank account in respect of such deposits. On these deposits, which are kept in a separate bank account, interest was credited by the bank on accrual basis. However, such interest was not declared by the assessee in the original returns of income filed by him. Thus, such income was not offered to tax. Admittedly, tax at source was deducted by the bank on such interest income credited to this bank account and the bank also issued TDS certificate in the name of the assessee. Even though, the assessee had not disclosed the interest income in the returns of income, he claimed credit for the TDS. The returns of income were processed Under Section 143(1) resulting into issue of intimations to the assessee allowing credit for the TDS. The relevant income for which the assessee claimed credit for TDS, was not disclosed in the returns of the income filed by the assessee and therefore, the assessing officer initiated proceedings Under Section 147 and notices Under Section 148 were issued for the relevant assessment years. The assessee filed returns of income in response to the aforesaid notices, wherein the interest income was offered for tax. Each of these returns of income was accompanied by a letter dated 22.11.02. In these letters, the assessee claimed that relevant interest income, which accrued on the account of the clients was not assessable in his hands but nevertheless such income was offered for tax conditionally with the following remarks:
However, to buy peace of mind and to avoid litigation, I am offering this as income for the above mentioned assessment years with clear understanding that no penalty proceedings Under Section 271(1)(c) of Income Tax Act, 1961 will be initiated and / or levied and no prosecution under Income Tax Act, 1961 will initiated. Thus, this offer is a conditional offer. You will also waive interest leviable Under Section 234B and 234C of Income Tax Act, 1961.
7. On the basis of these returns, the assessing officer completed the assessment, wherein the relevant interest income as declared by the assessee, was brought to the charge of tax. The assessing officer also initiated penalty proceedings Under Section 271(1)(c) and levied interest Under Section 234A, 234B & 234C. Aggrieved by these orders, the assessee filed appeals before the CIT (A), disputing the aforesaid interest incomes being added to his income, even though, the assessee himself had declared these incomes in the returns of income filed in response to notices issued Under Section 148. The learned CIT(A) has dealt with this issue for the assessment year 2001-02 for which a speaking order has been passed by him. He rejected the grounds raised by the assessee in this behalf and the relevant part of his order may reproduced below for the assessment year 2001-02:
4.1 Before me, the argument as discussed in earlier paragraphs, about maintaining separate bank account for money received on behalf of clients, were repeated and it was contended that:
• The interest accrued and credited in such bank account was not declared in the return of income as it rightly fully belonged to the clients to whom the appellant had to render an account.
• The appellant held funds as trustee in a fiduciary capacity.
• Neither such receipts nor income arising therefrom belonged to the appellant as per High court Rules. The appellant relied on following decisions:
Tanubai IX Desai 84 ITR 713 (Horn) Manilal Kher Ambalal & Co. 1 76 ITR 253 (Bom) • The interest on clients' account referred to above was declared in the return of income in response to notice Under Section 148 under duress and with the condition that no penalty proceedings / prosecution under Income Tax Act, 1961 shall be initiated.
• The appellant had wrongly fully declared the interest on clients accounts as income in the return of income filed in response to notice Under Section 148 of Income Tax Act, 1961 under a mistaken belief that it was not to be taxed by the assessing officer.
• The action of the assessing officer taxing the interest of Rs. 12,74,773 tantamounts to contempt of Court.
• If the claim of appellant for TDS on such interest was not found to be admissible only the claim for TDS should have been disregarded.
The appellant has produced before me copies of the books of account to substantiate the claim that interest accrued on the bank account wherein amounts received from clients are deposited, is apportioned to respective clients' account. A copy of the Hon'ble Bombay High Court Rules is also filed before me and my attention is invited specifically to Rule 10 to Rule 14.
4.2 I have considered the arguments of the appellant and the contentions of the assessing officer. The assessing officer has not disputed the fact that the amounts received from the clients are kept in a separate bank account and the interest on such bank account has been apportioned to the clients' account. I have also perused the High Court Rules produced before me.
From the facts of the case, the Rules of Hon'ble Bombay High Court and the judgments relied upon by the appellant, it is clear that interest accrued on bank account referred above, would not belong to the appellant as long as the appellant apportioned the interest accrued to the respective clients' account. However, it is to be noted that the appellant has suo-motu disclosed the interest income of Rs. 12,74,773 in the return filed in response to notice Under Section 148 of Income Tax Act, 1961 and has paid self-assessment tax on such income The return of income is duly verified document on oath by the appellant Moreover, as per proviso (b) to Section 240, the taxes chargeable on returned income cannot be refunded even if the assessment is annulled.
8. Similar view was adopted by the learned CIT(A) for all the remaining assessment years under appeal.
9. Not satisfied with the orders of the learned CIT(A), the assessee has come up before the Tribunal. Shri S.E. Dastoor, learned Counsel for assessee pointed out that the learned CIT(A) rejected the grounds of appeal raised before him on this issue for two reasons viz. (a) the assessee himself disclosed the income voluntarily in the returns of income filed in response to notices issued Under Section 148 and also paid self assessment tax on such income and credit for TDS relevant to this income was also allowed by the assessing officer and b) as per the proviso (b) to Section 240, the tax chargeable on the total income returned by the assessee cannot be refunded.
10. The learned Counsel for assessee contended that the learned CIT(A) has erred on both the issues. It is submitted that the interest incomes were offered by the assessee in response to notices issued Under Section 148 to buy peace of mind and to avoid litigation on the condition that penalty proceedings Under Section 271(1)(c) will not be initiated and the interest chargeable Under Section 234 b & 234C shall be waived. However, the assessing officer initiated penalty proceedings and also levied interest. It is true that subsequently, the penalty proceedings Under Section 271(1)(c) were dropped by the assessing officer but substantial interest has been charged Under Section 23413 & 234C. The learned Counsel submitted that in the letters, which were filed along with returns of income, it was clearly stated that the interest income belongs to the clients and not taxable in the hands of the assessee but still a conditional offer was made. The learned Counsel argued that in these circumstances, the assessee is entitled to dispute in appeal the inclusion of such interest income in his total income as the assessee is saddled with substantial liability on account of charging of interest. It is further submitted that even though, the assessee has offered any income in the return of income, he is not precluded from raising this issue in appeal and that this legal issue is squarely covered by the Hon'ble Bombay High Court judgment in the case of Nirmala L Mehta v. CIT 269 ITR 01 (Bom). The learned Counsel contended that the interest accruing to the clients of the assessee was not chargeable to tax in his hands as held by the Hon'ble Bombay High Court in the case of CIT v. Tanubai D. Desai 84 ITR 713 (Bom). If such income, which is not chargeable to tax at all is offered by the assessee conditionally or under some mis-conception, the assessee is legally entitled to raise this issue in appeal as held by the Hon'ble Bombay High Court in the case of Nirmala L Mehta (supra). In that case, the assessee was resident in Mumbai. In the month of August, 1987, she won a lottery of the Government of Sikkim having a prize money of Rs. 6,30,000. At relevant point of time, the income tax Act was not applicable to the State of Sikkim. The Government of Sikkim deducted a sum of Rs. 62,088 from the prize money as per the Sikkim Tax laws and the balance amount of Rs. 5,67,912 was paid. The assessee filed return of income for the assessment year 88-89, wherein she declared income from lottery at Rs. 5,67,912 after claiming deduction of Rs. 62,088 deducted by the Government of Sikkim. The assessing officer disallowed the claim and the assessee filed revision petition before the CIT, who directed that only net income of Rs. 5,67,912 can be taxed. The assessee raised an additional ground before the CIT claiming that the amount was not taxable at all as the income tax Act did not apply to the State of Sikkim for the assessment year 88-89. F3ut this ground was rejected on the basis that the assessee could not be permitted to raise this issue at the stage of hearing of revision petition. The assessee filed writ petition before the Hon'ble Bombay High Court and the High Court held as under:
Held, (i) that merely because the assessee offered the prize money won in the lottery of the Sikkim Government, to tax under the Income Tax Act, 1961 that would not take away her right to contend that the prize money was not chargeable and assessable to tax under the Income Tax Act, 1961 in the revisional jurisdiction.
(ii) That the prize money won by the assessee from the lottery of the Government of Sikkim could have been charged to tax only in accordance with the then existing income tax laws in the State of Sikkim and could not be charged to lax under the Income Tax Act, 1961.
11. Drawing support from the aforesaid judgment of Hon'ble Bombay High Court, the learned Counsel for assessee forcefully contended that the assessee is free to raise the issue regarding taxability of interest income even though, the assessee disclosed such income in the return.
12. Coming to observations of the learned CIT(A) that Section 240 read with proviso (b) is against the assessee, the learned Counsel invited our attention to the relevant provisions, which are reproduced bclow:
Refund on appeal, etc.
240. Where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the /Assessing] Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf:
[Provided that where, by the order aforesaid,
(a) an assessment is set aside or cancelled and an order of fresh assessment is directed to be made, the refund, if any, shall become due only on the making of such fresh assessment;
(b) the assessment is annulled, the refund shall become due only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee.]
13. The learned Counsel pointed out that Clause (b) of proviso is applicable in a case where the assessment is annulled. This is in contrast to Clause (a) of the proviso, which is applicable in a case where the assessment is set aside or cancelled and fresh assessment is directed to be made. It is submitted before us that in the present case, the assessments have not been annulled by the learned CIT(A) but only reduced with regard to certain disallowances made by the assessing officer from out of expenses incurred. The learned Counsel submitted that the implications of the word "annulment" have been explained by the Hon'ble Bombay High Court in the case of CIT v. Ratan Bai N.K. Dcbhash 230 ITR 495. While dealing with the powers of appellate authority, the Hon'ble Bombay High Court in the above case, observed as under
The legislature has thus used different expressions, such as, "annulling the assessment", "setting aside the assessment", or "canceling the order of penalty' The expression "cancellation of assessment" has been used in Section 116 of the Act which deals with the power of the assessing officer to reopen a best judgment assessment Under Section 144 of the Act It is thus clear that the Legislature has consciously and deliberately used the expression "annulment of assessment" in Section 251 of the Act The question that arises for consideration is in which case the order should be set aside and in which case "annulled" and what is the difference between "setting aside the assessment" and "annulment of the assessment" In our opinion, there is a material distinction between setting aside of an assessment and annulment of an assessment In a case where the order of assessment is set aside, it is open to the assessing officer to make a fresh assessment in accordance with law In the case of annulment, the order becomes non est.
14. The learned Counsel contended that it is clear that in the present case assessments have not been annulled and therefore, the reliance placed by the learned CIT(A) on the proviso (b) of Section 240 is incorrect
15. Coming to the merits of chargeabihty to tax of the relevant interest income, the learned Counsel for assessee submitted that the issue is squarely covered in assessee's favour by the decision of Hon'ble Bombay High Court in the case of Tanubhai D Desai (supra) In that case also the assessee was a practicing solicitor of the Hon'ble Bombay High Court and in the course of carrying on his profession, the assessee used to receive moneys from or on behalf of his clients and the same were deposited by him in a separate bank account. From this account, the assessee withdrew a sum of Rs. 3,25,000 and placed it in Fixed deposit with the bank The FD was renewed from time to time The assessee earned interest income on the FD, which was also appropriated by him Thus, the assessee never adjusted the interest earned by apportioning to different clients whose amounts were held in the said current account This interest income was not shown in the returns of income filed by the assessee for four assessment years and the assessments were completed on the basis of the returns Subsequently, re-assessment proceedings were taken Under Section 34 of the Indian Income Tax Act, 1922 {analogous to Section 147 of the Income Tax Act, 1961, on the ground that interest income had escaped assessment The relevant lacts of this case after the commencement of re-assessment proceedings are stated at page 7 14 of the report and the relevant part is reproduced below:
The ITO and the appellant Asst Commissioner held that the said amounts were includible in the personal assessment of the assessee The Tribunal, however, held to the contrary The Tribunal, after examining the position in law, held that the said amounts held in the assessee s clients' account, including the amount of the fixed deposits, were held by the assessee in a fiduciary capacity, that the said amounts of interest earned by the assessee were also held by him in a fiduciary capacity and that even though the assessee had not apportioned the interest so earned between his various clients whose moneys were so held by hi, it made no difference to the fiduciary capacity in which the assessee held the said amounts and also the said interest and that therefore the said amounts of interest were not includible in the personal assessment of the assessee.
16. The learned Counsel for assessee invited our attention to page 716 of the report wherein the High Court observed that the position of the solicitor vis-a-vis the moneys received by him from and on behalf of his clients is that of a quasi trust and he holds such moneys in a fiduciary capacity. The solicitor can deal with such moneys only to the extent provided for under the relevant Rules of High Court. The High Court further observed that corpus i.e. the moneys credited in the clients' accounts, is held by a solicitor in his fiduciary capacity and the income or interest derived from such corpus is equally held by him in his fiduciary capacity. AT page 719, the High Court observed that even if solicitor appropriates the income to himself, it would simply amount to breach of his fiduciary relationship and whatever may be consequences in law would follow. But this unauthorized act of converting any part of the corpus or income derived there-from would not convert those amounts into moneys held by him beneficial for himself. The High court upheld the conclusion reached by the Tribunal as correct in law and held that the income cannot be taxed in the hands of the solicitor. The learned Counsel contended that this decision of Hon'ble Bombay High Court is fully applicable to the facts of the assessee's case. It is submitted that at the most the credit allowed by the assessing officer for TDS can be withdrawn.
17. The learned DR forcefully supported the orders of the revenue authorities and reiterated that the amount voluntarily shown by the assessee in his returns of income cannot and should be excluded from the total income of the assessee.
18. We have given a careful consideration to the rival submissions made before us. We have also carefully gone through the relevant facts and the judicial pronouncements cited before us. In our view, the grounds raised by the assessee in appellate proceedings to the effect that the interest income disclosed by him in the returns of income filed in response to notices issued Under Section 148 must be excluded from his total income, has to be entertained and dealt with on merits. The Hon'ble Jurisdictional High Court's decision in the case of Nirmala L Mehta (supra) squarely applies to the facts of this case. In that case also the Hon'ble Bombay High Court observed that merely because the assessee offered the prize money won in the lottery of the Sikkim Government, that would not take away her right to contend that the prize money was not chargeable to tax under Income tax Act, 1961. In this case also, having conditionally offered the income for tax, the assessee raised the issue before the learned CIT(A) that such income is not legally includible in his total income. The learned CIT(A) rejected this plea on the ground that having already voluntarily disclosed the income, the assessee cannot raise such ground. This finding of the learned CIT(A) is not in consonance with the Hon'ble Bombay High Court decision referred above. Another basis on which the learned CIT(A) did not entertain the ground of appeal raised by the assessee is the provisions contained in proviso (b) of Section 240. The relevant section has already been reproduced above. A plain reading of the provision shows that Clause (b) of proviso applies only to a case where the assessment is annulled. In the present case, admittedly, the assessment is not annulled. The assessments have been partly confirmed by the learned CIT(A). Therefore, it cannot be said that in the present case, relevant assessments have been annulled. This is substantiated from the exposition of the word "annulment" as contained in the judgment of Hon'ble Bombay High Court in the case of M/s Ratanbai N.K. Dubhash referred to above. We, therefore, hold that the grounds of appeal raised by the assessee regarding taxability of interest income must be admitted and decided on merits.
19. Coming to the merits, there is no dispute about the factual position. The moneys have been received by the assessee in his capacity as a solicitor by way of deposits and to be utilized for meeting obligations of the clients. These moneys were put in a separate bank account and the interest accruing on this bank account was also apportioned by the assessee to various clients. All these amounts were shown in the accounts of the assessee as liability payable to the clients. The Hon'ble Bombay High Court decision in the case of Tanubai D. Desai (supra) is fully applicable to the facts of the assessee's case. In that case, the assessee had even appropriated the interest income for his own benefit. Nevertheless, the High court held that the income cannot be brought to the tax in the hands of the solicitor. Any other action can be taken against the assessee for unauthorisedly converting the clients money for his own benefit but such income cannot be brought to the charge of tax. The case of the assessee is on a better footing. The assessee has maintained separate account and has also apportioned the interest income to the respective accounts of the clients. It is notable that even the learned CIT(A) held on merits that the interest income was not taxable legally in the hands of the assessee. At para 4.2 of his order, the learned CIT(A) held as under:
From the facts of the case, the Rules of Hon'ble Bombay High Court and the judgments relied upon by the appellant, it is clear that interest accrued on bank account referred above, would not belong to the appellant as long as the appellant apportioned the interest accrued to the respective clients' account.
20. Thus, while accepting the claim of the assessee on merits, the learned CIT(A) refused to allow any relief to the assessee on the ground that the income was voluntarily disclosed by him. It is true that when the assessee did not disclose the interest income in the original returns of income filed by him, he wrongly claimed deduction for TDS. As per the provisions of Section 199 of the Act, credit for TDS shall be allowed for assessment year for which the relevant income is brought to the charge of the tax. When the income itself, was not shown by the assessee, in the original return of income, the claim for TDS was patently wrong. However, that should not be reason for bringing to the charge of tax such income, which is not chargeable to tax at all in the hands of the assessee as per the provisions of law. The assessing officer is within his right to deny credit for the TDS but he cannot bring to the charge of tax the income, which is not assessable in the hands of the assessee.
21. In view of the above discussion, we hold that the relevant interest income is not chargeable in the hands of the assessee and we direct the assessing officer to exclude such income from the assessee's total income for all the assessment years under appeal. The assessing officer is also directed to withdraw the credit in respect of TDS allowed to the assessee for all the assessment years.
22. The last ground raised by the assessee pertains to partial disallowance sustained by the learned CIT(A) from out of disallowance made by the assessing officer in respect of motor car expenses, depreciation on motor car, telephone expenses and printing and stationery expenses. Briefly stated the facts are that the assessing officer disallowed 20% from out of above expenses for personal use of the assessee. The learned CIT(A) restricted the disallowance to 10% in respect of motor car expenses, depreciation on motor car and telephone expenses. The disallowance from out of printing and stationery expenses was deleted by the learned CIT(A) for all the assessment years under appeal except for the assessment year 95-96, where he has upheld the disallowance to the extent of 10%.
23. The learned Counsel for assessee did not seriously contend regarding the merits of the disallowance sustained by the learned CIT(A), but he forcefully contended that in an assessment made by the assessing officer Under Section 147 of the Act, he cannot make such disallowances in respect of matters which have reached finality in the original assessment and which arc not in the nature of any escapement of income within the meaning of Section 147. The learned Counsel for assessee pointed out that the original assessment was made Under Section 143(1) and thereafter no notice Under Section 143(2) was issued. Notices for the relevant assessment years were issued Under Section 148 for the limited purpose of bringing to the charge of tax the interest income. However, during the course of re assessment proceedings, the assessing officer made enquiries regarding various expenses and thereafter he made disallowances. It is argued that this is not permissible under law. The learned Counsel strongly relied on the decision of Hon'ble Punjab & Haryana High Court in the case of Vipan Khanna v. CIT 255 ITR 220 (P&H). The relevant part of the ratio of this case is reproduced from the head notes as under:
According to the law laid down by the Hon'ble Supreme Court in CIT v. Sun Engineering works p. ltd 198 ITR 297, when proceedings Under Section 147 of the Act are initiated, the proceedings are open only qua items oj under assessment. The finality of assessment proceedings on other issues remains undisturbed. It makes no difference whether the assessment proceedings have become final on account of framing of an assessment Under Section 143(3) oj the Act or on account of non-issue of a notice Under Section 143(2) of the Act within the stipulated period. The amendments made in Sections 143 to 147 of the Act with effect from April 1, 1989, do not in any manner negate this proposition of law as enunciated by the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works P. ltd. 198 ITR 297.
24. The learned Counsel pointed out that the Hon'ble Punjab & Haryana High Court also considered decision of Hon'ble Supreme Court in the case of V. Jagan Mohan Rao v. CIT 75 ITR 373 (SC). The learned Counsel argued that once the proceedings Under Section 147 are validly initiated, the jurisdiction of the assessing officer is confined to only income, which has escaped assessment and the entire assessment cannot be made denovo after making enquiries. The learned DR relied on the provisions of Section 147.
25. We have considered the rival submissions in the light of the legal position as emerging from the provisions of law and the eases cited before us. Section 147 is applicable with effect from 01.04.1989 reads as under:
Income escaping assessment.
147 If the [Assessing] Officer /has reason to believe/ that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to lax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 112 or Section 118 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1. Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understood the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but
(i) income chargeable to lax has been under assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.]
26. From the above, it may be seen that once re-assessment proceedings have been validly initiated Under Section 147, the assessing officer is authorized to assess or reassess such escaped income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of assessment proceedings Under Section 147, it is clear that the jurisdiction of the assessing officer Under Section 147 is not merely confined to bringing to charge of tax the income referred to in the reasons recorded for issue of notice Under Section 148, but it also extends to bringing to charge of tax any other income which has escaped assessment and which comes to his notice during the re-assessment proceedings. The Hon'ble Punjab & Haryana High Court, in the case of Vipan Khanna (supra) held that it is only such income which has escaped assessment which can be brought to the charge of tax in the re-assessment framed Under Section 147. If during the course of re-assessment proceedings, the assessing officer notices that any other income chargeable has also escaped assessment, he is within his power to bring to charge of tax such income. However, the assessing officer cannot make any roving or fishing enquiries and he cannot proceed in a fashion as if entire proceedings are open before him. In that case, in response to the notice issue Under Section 148, the assessee filed returns of income for the relevant assessment years declaring same income as had been shown in the original returns. The assessing officer, thereafter, issued notices Under Section 143(3) and 142(1) requiring the assessee to produce the books of account and to furnish information specified in the letter issued by the assessing officer. Making of such enquiries was not approved by the Hon'ble High Court.
27. This issue arose before the Hon'ble Supreme Court in the case of V. Jaganmohan rao v. CIT (supra) and the ratio of this case may be reproduced from the head notes:
Once proceedings Under Section 34 are validly initiated the jurisdiction of the ITO is not restricted to the portion of the income that escapes assessment. Section 34 in terms says that once the ITO decides to re-open the assessment he could do so within the period prescribed by serving on the person liable to pay tax a notice containing all or any of the requirements which may be included in a notice Under Section 22(2) and may proceed to assess or re assess such income, profits or gains. Therefore, once ass4essment is reopened by issuing a notice under Sub-section (2) of Section 22, the previous under assessment is set aside and the whole assessment proceedings start afresh. Once valid proceedings are started Under Section 34(1)(b) the ITO not only had the jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year.
28. The Hon'ble Supreme Court was concerned with the interpretation of Section 34 of the Indian Income tax Act, 1922, which is now replaced by Section 147 of the Income Tax Act, 1961. It was observed by the Hon'ble Supreme Court that once valid proceedings arc started Under Section 34(1)(b), the ITO not only had jurisdiction but it was his duty to levy tax on the entire income that had escaped assessment during that year. The scope and ambit of the aforesaid Hon'ble Supreme Court decision has been explained by the Hon'ble Supreme Court in the case of ITO v. Sun Engineering works Pvt. Ltd. 198 ITR 297 (SC). We deem it proper to reproduce below the relevant part of the decision as under from pages 319 to 321 of the report:
The principle laid down by this court in V. Jaganmohan Rao's case, therefore, is only to the extent that once an assessment is validly reopened by issuance of a notice under Section 22(2) of the 1922 Act (corresponding to Section 148 of the Act), the previous underassessment is set aside and the Income-tax Officer has the jurisdiction and duty to levy lax on the entire income that had escaped assessment during the previous year. What is set aside is, thus, only the previous underassessment and not the original assessment proceedings. An order made in relation to the escaped turnover does not affect the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and identity. It is only in case of "underassessment" based on Clauses (a) to (d) of Explanation 1 to Section 147, that the assessment of tax due has to be recomputed on the entire taxable income. The judgment in V. Jaganmohan Rao's case , therefore, cannot be read to imply as laying down that, in the reassessment proceedings validly initiated, the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim re-computation of the income or redoing of an assessment and be allowed a claim, which he either failed to make or which was otherwise rejected at the time of original assessment, which has since acquired finality. Of course, in the reassessment proceedings, it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in v. Jaganmohan Rao's case , as laying down that reassessment wipes out the original assessment and that reassessment is not only confined to "escaped assessment" or "underassessment" but to the entire assessment for the year and starts the assessment proceedings be novo giving the right to an assessee to re-agitate matters, which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of Section 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the question arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions, which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the court must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jwaji Rao Scindia Bahadur v. Union of India , this court cautioned (at page 578 of AIR 1971 SC):
It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even all to be answered in that judgment.
Although Section 147 is a part of a taxing statute, it imposes no charge on the subject but deals merely with the machinery of assessment and in interpreting a provision of that kind, the rule is that construction should be preferred under Section 147 of the Act are for the benefit of the Revenue and not an assessee and are aimed at garnering the "escaped income" of an assessee, the same cannot be allowed to be converted as "revisional" or " review" proceedings at the instance of the assessee, thereby making the machinery unworkable.
As a result of the aforesaid discussion, we find that, in proceedings under Section 147 of the Act, the Income tax Officer may bring to charge items of income, which had escaped assessment other than or in addition to that item or items, which have led to the issuance of the notice under Section 148 and where reassessment is made under Section 147 in respect of income, which has escaped tax, the Income-tax Officer's jurisdiction is confined to only such income, which has escaped tax or has been under assessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to re-agitate questions, which have been decided in the original assessment proceedings. It is only the underassessment, which is set aside and not the entire assessment when reassessment proceedings are initiated. The Income-tax Officer cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters, which are not the subject matter of proceedings under Section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under Section 152(2). The words "such income" in Section 147 clearly refer to the income, which is chargeable to tax but has "escaped assessment" and the Income-tax Officer's jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment. Claims which have been disallowed in the original assessment proceedings cannot be permitted to be re-agitated on the assessment being reopened for bringing to tax certain income, which had escaped assessment because the controversy on reassessment is confined to matters, which are relevant only in respect of the income, which had not been brought to tax during the course of original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the item sought to be taxed as "escaped income". Indeed, in the reassessment proceedings for bringing to lax items, which had escaped assessment, it would be opened to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non-taxability of the items at all. Keeping in view the object and purpose of the proceedings under Section 117 of the Act, which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items not claimed in the original assessment proceedings, unless relatable to "escaped income", and re-agitate the concluded matters.
29. The legal position which emerges from the decisions of Hon'ble Punjab & Haryana High Court and Hon'ble Supreme Court referred to above may summarised as follows:
Once the re-assessment proceedings are validly initiated, it is a statutory duty of the assessing officer to bring to the charge of tax, the entire income, which has escaped assessment. His jurisdiction is not confined to the matters on the basis of which re-assessment proceedings were initiated. Section 147 is primarily for the benefit of the revenue and during the course of the reassessment proceedings, the assessee cannot claim any deduction or any benefit with regard to the matters which have already reached finality at the time of original assessment. The assessee cannot be permitted to convert the re-assessment proceedings as his appeal or revision in disguise and seek relief in respect of items earlier rejected or claim relief in respect items not claimed in the original assessment proceedings. The assessing officer can bring to the charge of tax any income which has escaped assessment and which comes to his notice during the course of re-assessment proceedings, but he cannot make roving and general enquiries as if the entire assessment was open before him.
30. Let us now examine the facts of the assessee's case, in the light of the legal position enunciated above. The returns of income originally filed by the assessee were accepted Under Section 143(1). The assessee is an advocate and a solicitor and claimed expenditure in respect of use of motor car, telephone, printing & stationery. These expenses stood allowed as the returns were accepted Under Section 143(1). The relevant assessments were re-opened for the purpose of bringing to the charge of tax, the relevant interest income. During the course of re-assessment proceedings, the assessing officer noticed that the assessee had claimed the entire expenditure Under Section 37(1) and no part of the expenditure was disallowed by the assessee for personal use. He, therefore, asked the assessee to furnish the details. However, the assessee neither furnished any details nor any satisfactory explanation. In these circumstances, the assessing officer estimated the expenditure for personal use at around 20%. In these facts, it would be too far fetched to hold that the assessing officer made any roving, fishing or general enquiries so as to make the assessment denovo The assessing officer only observed that personal use cannot be ruled out and therefore he asked the assessee to furnish the details In our view, under Section 147 and in the light of the legal position as discussed above, the assessing officer is within his jurisdiction to disallow part of the expenses which are not wholly and exclusively incurred for the purpose of the assessee s profession
31. Coming to the merits of the disallowances, no material was produced before us to controvert the finding of the learned CIT(A) or to show that no part of the expenditure is in the nature of personal expenditure of the assessee The learned CIT(A) has sustained disallowance merely at 10% of the telephone expenses, motor car and depreciation on motor car In the facts of the case, this cannot be said to be un reasonable or excessive The disallowance of printing and stationery expenses have been deleted by the learned CIT(A) except for the assessment year 95 96 We fail to understand as to why such disallowance shoald be sustained for the assessment year 95 96 when for all the assessment years there is a consistency finding by the learned CIT(A) that this expenditure was entirely for professional purpose Therefore, for the assessment year 95-96, we modify the order of the learned CIT(A) to the extent that the disallowance from out of the printing and stationery expenses is directed to be deleted With regard to the disallowances from out of other expenses as mentioned above, orders of the learned CIT(A) are upheld.
32. In the result, the appeals of the assessee are partly allowed Order pronounced on 22.08.2006.