Income Tax Appellate Tribunal - Chandigarh
Shri Manish Ajmera vs Asstt. Commissioner Of Income Tax on 14 March, 2005
Equivalent citations: (2005)96TTJ(CHD)896
ORDER
M.A. Bakshi, Vice President
1. We find it convenient to dispose of this bunch of five appeals -three by the assessee and two by the revenue by this consolidated order. The appeals of the assessee are relating to assessment years 95-96, 96-97 and 97-98 and the appeals of the revenue are for the assessment years 95-96 and 97-98. Parties have been heard and record perused.
2. The relevant facts briefly stated are that assessee was engaged in the lottery business in the name and style of Manish Lottery Agencies, Jaipur uptil assessment year 95-96. The assessee was also carrying on the lottery business at New Delhi in the name and style of M/s Ravi Ajmera from assessment year 93-94 onwards. Assessee had also started its lottery business from Pune under the name and style of Ravi Ajmera, Pune. The assessee being individual is residing at Jaipur and controlling the business in Jaipur and Pune through its headquarter and controlling office at Jaipur. The nature of lottery business carried on by the assessee in assessment years 94-95 and 95-96 in the name of Manish Lottery Agencies, Jaipur was as a stockist/dealer/distributor/wholesaler. As a result of ban for the lottery business in Rajasthan, the assessee did not carry on the said business from 28.3.95 onwards at Jaipur. The business in the name of Ravi Ajmera, Delhi and Ravi Ajmera, Pune is in the nature of sole distributor/super stockist/organizer. Assessee had filed the returns of income for the respective assessment years. For the assessment year 95-96, return of income was filed on 31st Oct., 1995 declaring income of Rs. 2,44,85,735. This return was revised on 12.4.96 declaring income of Rs. 2,44,65,460. Assessment was completed by the AO Under Section 143(3) on 23rd March, 1998 at income of Rs. 2,46,12,260. Subsequently, the AO has issued notice Under Section 148 on 22.3.02 by recording the following reasons:-
(1) Prize winning ticket amount reflected in the balance sheet on the current asset side not taken to the profit & loss a/c by the assessee.
(2) Valuation of closing stock - the assessee had shown the opening stock at Rs. 61,73,240 but there is no closing stock at the end of the financial year.
(3) Advance purchases and advance sales have not been taken to the profit & loss a/c.
The AO completed the reassessment on 31.3.2003 at Rs. 15,12,97,910. The AO had invoked the provisions of Section 145(3) and applied net profit rate of 3% on the turnover.
3. Assessee appealed to the CIT(A) challenging the reopening of the assessment as well as the additions made. The CIT(A) has upheld the action of the AO in reopening the assessment. So, however, the income determined by the AO has been reduced. The CIT(A) has applied the GP rate in respect of the advance sales thereby sustaining the addition of Rs. 14,47,247. The addition of Rs. 5 lakhs on account of disallowance of expenses in respect of Jaipur business has also been upheld by the CIT(A).
4. For the assessment year 96-97, the assessee had filed the return of income on 31.10.1996 declaring loss of Rs. 60,620. The return had been processed Under Section 143(1). Subsequently, rectification Under Section 154 was carried and the loss restricted to Rs. 47,619. Subsequently, AO issued notice Under Section 148 on 7.3.2002 by recording the following reasons:-
(1) Capital gain on sale of land of Rs. 53,200 was liable to be assessed in assessment year 96-97 instead of 97-98.
(2) Mercantile system of accounting is not followed.
(3) Advance purchase and advance sales have not been taken with the profit & loss account.
The AO made reassessment on 31.3.2003 at Rs. 3,51,84,140 by estimating the net profit at 3% of the turnover by invoking the provisions of Section 145(3).
5. On appeal, the CIT(A) has upheld the reopening of the assessment. So, however, the trading addition has been reduced to Rs. 83,26,118. The CIT(A) has applied a GP rate in respect of all the sales including advance sales. The addition of Rs. 53,200 on account of capital gain has also been sustained by the CIT(A).
6. For the assessment year 97-98, assessee had filed the return of income on 29.10.97 declaring income of Rs. 1,17,610/-. Assessment Under Section 143(3) was completed at income of Rs. 2,40,133/-. The AO issued a notice Under Section 148 on 6.6.2001 by recording the following reasons:-
Assessee has shown advance sales of Rs. 1,91,84,860/-in the liability side of M/s Ravi Ajmera, Delhi. Similarly, in the balance sheet of M/s Ravi Ajmera, Pune, advance sales of Rs. 80,72,730 in the liability side and advance purchases of Rs. 81,60,812/- in the asset side of the balance sheet has been shown. The sustaining an addition of advance sales/advance purchases have not been reflected in the profit and loss account of the respective concerns. Therefore, profit shown has not been shown by the assessee during the year under consideration.
The AO completed the reassessment at Rs. 3,09,69,730/- by estimating the net profit at 3% on turnover after invoking the provisions of Section 145(3).
7. On appeal, the CIT(A) has reduced the addition to Rs. 70,56,300. It may be pertinent to mention that the CIT(A) has sustained the addition for the assessment year 95-96 by applying the net profit rate on advance sales only.
8. For the assessment year 96-97, the CIT(A) estimated the profit on advance sales at Rs. 15,98,096/-. He has further made an addition of Rs. 67,28,022 in respect of regular sales by adopting the same rate of profit. Similarly, for the assessment year 97-98, the CIT(A) has estimated the profit on advance sales at Rs. 15,92,343 by applying a net profit of 0.83%. In respect of regular sales, addition of Rs. 54,63,957 has been made by applying the same profit rate. It may also be pertinent to mention that for the assessment year 96-97, the CIT(A) applied the net profit rate of Delhi business and for the assessment year 95-96 and 97-98, the CIT(A) adopted the net profit rate of Pune and Delhi businesses.
9. The ld. Counsel for the assessee contended that reopening of assessment in this case for all the assessment years is invalid, it was contended that for the assessment year 95-96, the original assessment had been made Under Section 143(3). As per proviso to Section 147, the reopening of assessment is not permissible if there was no failure on the part of the assessee in compliance with any notices or to dispose fully and truly all material facts necessary for assessment. It was fairly conceded that the AO could reopen the assessment within the period of four years if conditions provided Under Section 147 are satisfied. After the expiry of four years from the end of the relevant assessment year, the proviso to Section 147 makes it difficult for the revenue authorities to reopen the assessment insofar as the escapement of income must be as a result of failure of the assessee in complying with any notices or to disclose fully and truly all material facts necessary for assessment. It was further contended that as per the reasons recorded for reopening of assessments for the respective assessment years, it was evident that assessee had disclosed all the material facts material facts for purposes of assessment and had also complied with all the notices issued from time to time. According to the ld. Counsel for the assessee, the AO has reopened the assessment on mere change of opinion, which is not permissible Under Section 147. In support of the contention that no reopening is permissible on change of opinion, reliance was placed on the following decisions:-
(i) CIT v. Foramer France, 264 ITR 566;
(ii) CIT v. Rajasthan Patrika Ltd., 258 ITR 300 (Raj.);
(iii) Marundhar Hotels Pvt. Ltd. v. DCIT, 259 ITR 509 (Raj.);
(iv) Raj Kumar Bapana v. UOI and Anr., 251 ITR 802 (Raj.);
(v) CIT v. A.R. Enterprises, 2002(#) WLC 51 (Raj.);
(vi) Praful Chunilal Patel: Vasant Chunnilal Patel v. ACIT, 236 ITR 832, 838 (Guj.);
(vii) Krishna Metal Industries v. H.M. Algotar, 225 ITR 853, 856-857 (Guj.) &;
(viii) VXL India Ltd. v. ACIT, 215 ITR 295, 297 (Guj.).
10. The ld. Counsel for the assessee pointed out that for the assessment year 95-96, a notice Under Section 148 could be issued by 31st of March, 2000 if there was escapement of income for any reasons specified Under Section 147. Since notice Under Section 148 was issued on 22nd of March, 2002 for the assessment year 95-96, the conditions provided under proviso to Section 147 were to be satisfied for the validity of the notice issue Under Section 148. It was contended that since there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment, notice Under Section 148 was invalid and bad in law.
11. Even on merits, the revenue, according to the ld. Counsel, was not justified in rejecting the method of accounting regularly employed by the assessee. According to the ld. Counsel, the assessee had followed a recognized method of accounting and, therefore, there was no justification for rejection of the same. It was further contended that the rate of profit applied by the revenue authorities was unreasonable and uncalled for. The ld. Counsel for the assessee also contended that the assessee was reflecting the sales as well as purchases on the basis of the date of draw of the lottery. The sales and purchases were considered as advance sales and purchases. There was no defect in the method of accounting or in the books of account maintained by the assessee. Therefore, the additions made by the revenue authorities were uncalled for and unjustified. It was accordingly pleaded that the appeals of the assessee may be accepted.
12. The ld. D.R., on the other hand, contended that from 1.4.89, provisions of Section 147 had undergone a change and the reopening of assessment was permissible if there was escapement of income for any reason. It was contended that for the assessment years 95-96 and 97-98, the assessments were completed Under Section 143(3). For the assessment year 95-96, the assessee had not disclosed any profit in respect of advance sales. There was thus non-disclosure of material facts by the assessee as a result of which the AO was entitled to issue notice Under Section 148. For the assessment year 96-97, no assessment was made Under Section 143(3). Therefore, the proviso to Section 147 is not applicable. The AO could issue notice within the period of limitation if there was escapement of income for any reason. For the assessment year 97-98, notice Under Section 148 has been issued within a period of four years from the end of the assessment year. Therefore, the conditions as per proviso to Section 147 are not required to be satisfied. There was escapement of income as a result of non-disclosure of profit by the assessee in respect of advance sales. Therefore, the AO was justified in rejecting the book results and estimating the profit. It was further contended that the AO had adopted a reasonable rate of profit in respect of the turnover disclosed by the assessee as well as in respect of the advance sales. The CIT(A) has reduced the net profit rate substantially which is not justified.
13. We have given our careful consideration to the rival contentions. In order to appreciate the rival contentions, it would be useful to refer to the provisions of Section 147 as applicable from 1.4.89. The Section reads as under:-
"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 (hereinafter 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 form the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return Under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 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 understated 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 tax 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."
A perusal of the Section 147 reproduced above reveals that certain circumstances have been provided under Explanation 2 by virtue of which the income chargeable to tax is deemed to have escaped assessment. One of the circumstances provided under Explanation 2 is where a return of income has been furnished by an assessee but no assessment has been made and it is noticed by the AO that assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return. For the assessment year 96-97, no assessment was made Under Section 143(3). The AO has discovered that assessee had understated the income insofar as the advance sales and purchases had not been taken into account in determining the profits relating to the previous year. Since no assessment was made Under Section 143(3), proviso to Section 147(1) is not applicable for the assessment year 96-97. It is, therefore, evident that notice Under Section 148 for" the assessment year 96-97 was validly issued for the reasons recorded by the Assessing Officer, which have been reproduced elsewhere in this order.
14. For the assessment years 95-96 and 97-98, assessments were made Under Section 143(3). The AO had made assessments after due scrutiny. Assessee had reflected advance sales in the balance sheet and the AO had not disturbed the trading results of the assessee after due scrutiny. Since the period of four years had expired, it was not open to the AO to issue notice Under Section 148 unless the income chargeable to tax had escaped assessment by reason of failure on the part of the assessee to make a return Under Section 139 or in response to notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for assessment for that assessment year. Assessee had disclosed the material facts in the statement of accounts. The view of the AO that income of the assessee had escaped assessment may, for argument's sake, be accepted but the escapement, if any, was not by reason of assessee's failure to disclose fully and truly all material facts necessary for assessment. Therefore, for the assessment years 95-96 and 96-97, proviso to Section 147 debars the AO from reopening of assessments. While making the assessments Under Section 143(3), the AO had full facts available for determination of income of the assessee. The AO has made assessments Under Section 143(3) after due application of mind. For the assessment year 95-96, the reasons for reopening of assessment, as indicated elsewhere in this order, are that the prize winning tickets reflected in the balance sheet had not been taken into account to the profit & loss account; that the assessee had shown opening stock at Rs. 61,72,240 but no closing stock was disclosed at the end of the financial year and that advance purchases and advance sales were not taken to the profit & loss account. The CIT(A) has upheld the reopening of assessment on the sole ground that the accounting treatment given by the assessee in respect of purchase and sale of lottery tickets pertaining to the lottery draws next year through advance purchases and advance sales account was not correct. In our considered view, it is a question of opinion. The AO while framing assessments Under Section 143(3) impliedly accepted the method of accounting regularly employed by the assessee.
15. The issue before us is as to whether on a mere change of opinion the revenue is entitled to reopen the assessment made Under Section 143(3). It would be relevant to refer to the decision of the Full Bench of the Delhi High Court in the case of CIT v. Kelvinator of India Ltd., 256 ITR 1. In this case, their Lordships of the Delhi High Court held as under:-
"The scope and effect of Section 147 as substituted with effect from April 1, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently amended by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989, as also of Sections 148 to 152 have been elaborated in Circular No. 549, dated October 31, 1989. A perusal of Clause 7.2 of the said circular makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression "reason to believe" from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on a mere change of opinion. It is, therefore, evident that even according to the Central Board of Direct Taxes a mere change of opinion cannot form the basis for reopening a completed assessment.
A statute conferring an arbitrary power may be held to be ultra vires article 14 of the Constitution of India. If two interpretations are possible, the interpretation which upholds constitutionality should be favoured. In the event it is held that by reason of Section 147 the Income-tax Officer may exercise his jurisdiction for initiating a proceeding for reassessment only upon a mere change of opinion, the same may be held to be unconstitutional.
An order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of Section 143. When a regular order of assessment is passed in terms of the Sub-section (3) of Section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act, 19872, judicial and official acts have been regularly performed. It be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi judicial function to take benefit of its own wrong. Hence, it is clear that Section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate re-assessment proceedings upon a mere change of opinion."
16. Similar view has been expressed by the Hon'ble Supreme Court in the case of C. In the said case, their Lordships of the Supreme Court held as under:-
From the decision of the High Court (see [2001] 247 ITR 436] that (i) Section 147 substituted in the Income-tax Act, 1961, by the Direct Tax Laws (Amendment) Ac, 1987, had made a radical departure from the original Section 147, inasmuch as Clauses (a) and (b) had been deleted and under the proviso thereto notice for reassessment would be illegal if issued more than four years after the end of the assessment year, if the original assessment were make Under Section 143(3); (ii) Section 153 related to the passing of an order of assessment and not to the issuing of a reassessment notice Under Section 147/148, (iii) the direction or finding contemplated by Section 153(3)(ii) had to be a finding in relation to the particular assessee and the particular year and to be a finding it had to be directly involved in the disposal of the case; (iv) on the facts, the notices issued under Section 148 on November 20,1998, to the assessee for reopening the original assessment for the assessment years 1988-89, 1989-90 and 1990-91, on the basis of the Appellate Tribunal's decision rendered in the case of Boudier Christian relating to the assessee's technicians deputed to India, the income of the assessee was to be treated as fee for technical services and not as business income as assessed in the original assessments for those assessment years, were without jurisdiction as they were barred by limitation in view of proviso to Section 147, as amended by the Direct Tax Laws (Amendment) Act, 1987, as that was the provision that was applicable on November 20, 1998, when the reassessment notices were issued, and admittedly there was no failure on the part of the assessee to disclose fully and truly all material facts for assessment; (v) on the facts, the notices were bad as they were only on the basis of a change of opinion and the law that an assessment could not be reopened on a change of opinion was the same before and after amendment by the Direct Tax Lass (Amendment) Act, 1987, of Section 147, and (vi) as the notices were without jurisdiction, the assessee should not be relegated to the alternative remedy, the Department preferred appeals to the Supreme Court. The Supreme Court saw no reason to differ and dismissed the appeals."
17. From the aforementioned decisions, it becomes abundantly clearly that reopening of assessment is not permissible on change of opinion even under the amended provisions of Section 147. Moreover, when the assessment is reopened after the expiry of four years from the end of the assessment year, the escapement of income has got to be by reason of failure of the assessee to file the returns or failure of the assessee to disclose fully and truly all material facts necessary for assessments. In this case, even the Assessing Officer has not alleged that there was any non-disclosure of material facts by the assessee at the time of original assessment. Whether the system of accounted adopted by the assessee is acceptable or not is a question of opinion. While framing the original assessment, as pointed out earlier, the AO considered the system of accounting adopted by the assessee as acceptable. In the reassessment made Under Section 147, the system of accounting adopted by the assessee has not been considered to be appropriate. It is, therefore, evident that there has been a change of opinion on the basis of which reassessment has been made. In the light of the law laid down by the Hon'ble Supreme Court in the case of CIT v. Foramer France (supra), the reopening of assessment on a mere change of opinion, especially when there is no non-disclosure of material facts by the assessee, is not permissible. Respectfully following the aforesaid decision of the Hon'ble Supreme Court, the reassessments made by the AO for the assessment years 95-96 and 97-98 are held to be illegal and the same are accordingly cancelled.
18. For the assessment year 96-97, no assessment was made Under Section 143(3). The return of income had been processed by the AO Under Section 143(f). Notice Under Section 148 was issued after the expiry of four years from the end of the previous year. The reasons for reopening of assessment are that capital gain on sale of land was liable to be assessed in the assessment year 96-97 as against the assessment year 97-98; that mercantile system of accounting is not followed and that advance purchases and advance sales have not been taken to the Profit & Loss Account. The above issues are evidently to be decided on the basis of evidence and enquiry. Admittedly, the AO had not issued any notice to the assessee Under Section 143(2). On the basis of reasons recorded by the AO, one cannot come to the definite conclusion that income of the assessee had escaped assessment. It is a different matter that after making inquiry, the AO could take a view that the income of the assessee as returned was not acceptable. Since there was no definite material available on record to establish that income of the assessee had escaped assessment, it was not permissible for the AO to reopen the assessment for making fishing inquiries. The decision of the Punjab & Haryana High Court in the case of Vipan Khanna v. CIT, 255 ITR 220, is relevant for the purpose of determination of the issue in hand. In the said case, their Lordships held as under:-
According to the law laid down by the Supreme Court in CIT v. Sun Engineering Works P. Ltd. (1992) 198 ITR 297, when proceedings under Section 147 of the Act are initiated, the proceedings are open only qua items of underassessment. 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) of 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 and 147 of the Act with effect from April 1, 1989, do not in any manner negate this proposition of law as enunciated by the Supreme Court in the case of CIT v. Sun Engineering Works P. Ltd.[1992)] 198 ITR 197."
19. In the present case, the issues raised by the AO for reopening of assessments are on the basis of original return filed by the assessee. The AO had not issued notice Under Section 143(2) for verification of the return. Thus, the assessment in respect of the return had become final. There was no fresh information available to the AO on the basis of which it could be said with some amount of certainty that income of the assessee had escaped assessment. The issues raised by the Income-tax Officer were such that inquiries could be made and issues determined after consideration of the material on record, the evidence, if any, furnished by the assessee and submissions made by the assessee. As per the Hon'ble Punjab & Haryana High Court's decision in the case of Vipan Khanna (supra), such a course is not open Under Section 147. Before a notice Under Section 148 is issued for reopening of assessment Under Section 147, the AO has to form an opinion on the basis of material on record that income of the assessee has escaped assessment. As already pointed out, on the basis of material available to the AO at the time of the assessment Under Section 143(3) or 143(1), the AO cannot change his opinion for the purpose of making reassessment. There has got to be some material on the basis of which the AO could have reasons to believe that the income of the assessee has escaped assessment. Such a belief is not permissible on the basis of mere change of opinion. The AO in this case had not issued any notice Under Section 143(2) considering the return as correct.
20. Taking the totality of the facts and circumstances of this case into consideration and in the light of the decisions cited, we are of the considered view that reopening of assessments for all the three assessment years is not valid. The same are accordingly cancelled.
22. In the result, whereas the appeals of the assessee are allowed the appeals of the Revenue are dismissed as infructuous.