Delhi High Court
Rose Serviced Apartments Pvt. Ltd. & ... vs Dy. Commissioner Of Income Tax on 25 January, 2011
Author: Sanjiv Khanna
Bench: Chief Justice, Sanjiv Khanna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ Writ Petition (Civil) No. 5988/2008
Rose Serviced Apartments Pvt. Ltd. & Anr. ....Petitioners
Through Mr. Prakash Kumar, Advocate.
VERSUS
Dy. Commissioner of Income Tax .....Respondent
Through Ms. Prem Lata Bansal, Advocate.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE SANJIV KHANNA
1. Whether Reporters of local papers may be
allowed to see the judgment?
2. To be referred to the Reporter or not ?
3. Whether the judgment should be reported
in the Digest ?
% ORDER
25.01.2011
The petitioner No. 1 - Rose Serviced Apartments India Pvt. Ltd.
has filed the present writ petition for quashing of the notice under Section
148 of the Income Tax Act, 1961 (‗Act' for short) and the re-assessment
proceedings. The petitioner No. 1 has also impugned the order dated 15th
July, 2008 passed by the Assessing Officer dismissing the objections of
the petitioner No. 1 to initiation of the reassessment proceedings.
2. The contention raised by the petitioner No. 1 is that the
reassessment proceedings have been initiated on mere change of opinion
WPC 5988/09 Page 1 of 23
as the issue; interest received and interest paid by the petitioner No. 1 was
examined during the course of the original assessment proceeding albeit
no addition was made. It is submitted that the petitioner no.1-assessee has
made true and full disclosure of primary facts. And lastly, the assessing
officer without application of mind and without verification has issued the
reassessment notice on the basis of the audit report.
3. Petitioner No. 1 is a company and it is stated in the writ petition that
it is in the business of trading of long term investments and real estate etc.
For the assessment year 2001-02, a return declaring loss of Rs.59,43,670/-
was filed on 31st October, 2001. On the income side, the petitioner No. 1
had declared income of Rs.52,29,039/- as interest on inter-corporate
loans; and under the head of ‗Expenditure' interest on loans from Body
Corporate of Rs.34,09,398/-, interest paid to banks of Rs.80,90,541/- and
interest to other third parties of Rs.2,83,359/- was claimed as a deduction.
4. The petitioner No. 1's return was selected for scrutiny and notice
under Section 143(2) of the Act was served on it on 25 th October, 2002.
By a questionnaire dated 15th January, 2003, the Assessing Officer asked
for detailed information with regard to interest paid and interest received
by the petitioner No. 1. Points 14 and 15 raised in the said questionnaire
read as under:-
WPC 5988/09 Page 2 of 23
―(14) From the profit & loss account it is seem that
in the name of business there is no business activity,
only interest on FDR etc. has been shown at Rs. 64
lacs (approx.). Please justify the claim of expenses.
(15) Please give details of rate of interest paid to
bank and other parties with amount and period.‖
5. The petitioner No. 1 replied to the said questionnaire on 28 th
January, 2003. Along with the said letter, annexures giving details of the
interest paid were enclosed. Thereafter, the Assessing Officer issued
another questionnaire dated 26th February, 2003 seeking further details in
respect of interest paid and received by the petitioner No. 1. In this
questionnaire, reference was made to the Balance Sheet wherein the
petitioner No. 1 had shown interest on inter-corporate loans, FDRs and
income tax refund. It was stated that the petitioner No. 1 had taken secured
and unsecured loans and had invested in share application money. The
petitioner No. 1 was asked to give details of the parties to whom the loans
were given, with date, rate of interest and amount of interest. The
petitioner No. 1 in their reply dated 11th March, 2003 had stated :-
―You will kindly appreciate that the assessee
company has received during the year a sum of
Rs.52.29 lacs as interest on loans given to other
parties as detailed in ANNEXURE-A to this reply.
From the perusal of the aforementioned details it will
be seen that the assessee had advanced a sum of
Rs.3,47,83,959/- as on 31.3.2000 and a further sum
WPC 5988/09 Page 3 of 23
of Rs.1,90,62,332/- was advanced during the year
with inter-corporate entities against interest. Out of
the aforesaid amounts Rs.1,00,81,763/- was received
back and a balance sum of Rs.4,89,93,567/- was still
invested by the company in inter-corporate loans.
This activity shows that the assessee is regularly and
consistently deploying its funds with inter-corporate
entities for consideration of interest and the amount
of interest received/receivable in this regard has been
duly declared as business income of the assessee
company during the under consideration.
Similarly a sum of Rs.1,00,00,000/- was invested by
the company in fixed deposits with Banks and during
the year under consideration a sum of Rs.3,11,409/-
was received or receivable as interest on such FDS.
Interest on income-tax refund amount to
Rs.8,95,700/- is the amount of interest received by
the assessee from income tax department being
excess amount of tax or TDS or under the other
various provisions of Tax Laws. From the amounts
received and declared as business income of the
assessee as aforesaid, it is further evident that all the
aforesaid amounts represent return on investments
made by the assessee. In these circumstances, the
income received or receivable by the assessee is a
business receipt and therefore, be assessed as income
from business.
It is further submitted that you have also observed
and admitted in the query itself ―that these receipts
are business receipts and in addition to this there is
no business activity carried on by the company.‖
It is, however to bring to your notice, that in addition
to the investment business the assessee is also
engaged in the real estate activity which is also the
main business activity of the assessee and has made
various investments in earlier as well as in the year
WPC 5988/09 Page 4 of 23
under consideration for acquisition of properties as
detailed in ANNEXURE B to this reply.
There was a scheme for permitting broadcasting
business by the Govt. to private entrepreneurs,
specially incorporated for this purpose. In the
broadcasting business huge investment is required to
be made in properties. The management of the
company considered such investment as viable
investment for furtherance of its objects. Therefore,
the company through its nominees made investment
in the incorporation of such companies. These
companies filed applications in different states
seeking permission of the broadcasting business. Out
of these companies only Hind Broadcasting Co. Pvt.
Ltd., Bollywood Broadcasting Co. Pvt. Ltd.,. were
required to make further deposits with the Govt. for
seeking licence. Ultimately licenses were granted for
the broadcasting business in favour of Hindustan
Broadcasting Co. Pvt. Ltd. and Bollywood
Broadcasting Co. Pvt. Ltd. Maratha Broadcasting
Co. Pvt. Ltd. has also made investment for
acquisition of property in Pune.
In these circumstances, it is evident that all these
payments/advances were made by the company for
the furtherance of its business activities only.
Activities in these companies are still going on and it
is expected that ultimately huge surplus as income
will be earned by the company.
From the aforesaid it is evident that out of loans of
Rs.14,27,16,407/- whether secured or unsecured
raised by the company, have been totally invested by
the company as detailed above for the furtherance of
its business activities.
In view of the aforesaid facts & circumstances and
the business activities of real estate as well as
WPC 5988/09 Page 5 of 23
investments being carried on by the assessee, it is
evident that the expenses claimed by the assessee
have been incurred wholly & exclusively for the
purpose of business and therefore, are allowable
business expenses.‖
6. Along with the said letter, the petitioner No. 1 had enclosed details
of parties from whom interest was received as well as full details of the
investments with the amounts, the reasons for the purpose of investment
and full details of loans and advances to corporate bodies with
justification. The same were enclosed as Annexures A to D.
7. By another reply dated 26th March, 2003, the petitioner No. 1
justified their claim why interest paid to the banks should be treated as
revenue expenditure and not capital expenditure. The petitioner No. 1 also
answered the query on the rate of interest keeping in view the rate of
interest being charged on loans given by the petitioner No.1 and the
interest being paid by it on loans taken from others. It was stated as
under:-
―2. With respect to your query on the rate of
interest being charged on loans given @ 11.5% and
16% whereas, the interest is being paid @ 18% &
21% on loans raised, it is submitted that the assessee
company had raised loans from Splender Finance
Ltd. in earlier years @ 21% for payment of advances
for acquisition of properties for real estate business.
This loan was squared up during the year out of
further loan raised from Bank @ 13% p.a.(average).
WPC 5988/09 Page 6 of 23
Similarly, in the earlier years loan was raised from
Supreme Holdings Ltd. @ 18% for business
purposes. Part of this loan was also repaid by the
company out of interest generation of income and
efforts are being made to repay the balance
immediately so that burden of interest on the
company be reduced.
The assessee company out of funds received from its
shareholders or other inter-corporate bodies/directors
etc., without any interest, paid the same against
interest @ 16% p.a. to Energy Infrastructures India
Limited. Such loans were also reduced during the
year substantially.
Another loan given during the year was to Asian
Hotels Ltd. @ 11.50% p.a. This loan was in fact
given on 28.3.2001 and as such no interest was
accrued/received during the year.
The assessee submits that since loans received were
utilized for business purposes, such loans cannot be
considered similar to loans given by the company
out of its surplus funds. The loans were given to earn
additional income whereas loans received and
utilized for business were raised considering that
these were utilized for acquisition of stock in trade
i.e. property and that such stocks shall be re-sold at
an earlier date on profits and thus assessee company
will be able to earn profits on the one hand and on
the other hand will be able to retain other funds.‖
8. The Assessing Officer passed an assessment order on 28th March,
2003 accepting the returned income.
9. As stated above, notice under Section 148 of the Act dated 28th
March, 2008 was issued for reassessment. The petitioner No. 1 furnished
WPC 5988/09 Page 7 of 23
their return of income on 21st April, 2008. By an earlier letter dated 15th
April, 2008, the petitioner No. 1 had asked the Assessing Officer for
furnishing of reasons recorded for initiating proceedings under Section
147 of the Act. On 9th May, 2008, the petitioner No. 1 was provided with
reasons for reopening of assessment. The reasons read:-
―Reasons for the belief that income has escaped
assessment. On perusal of the assessment record, it
reveals that the following income has escaped
taxation within the meaning of Section 147 of the
Act. These are :
(i) Return declaring a loss of Rs.59,43,670/-
filed on 31.10.2001 was assessed under the
provisions of section 143(3) of the I.T. Act,
1961 at returned loss on 28.3.2003.
(ii) Audit scrutiny pointed out that interest on
loans advanced by assessee to companies was
not charged though interest paid on loans
taken was allowed which resulted in under
assessment of the income to the tune of
Rs.55.40 lacs.‖
10. Petitioner No. 1 filed detailed objections questioning and stating that
the reassessment proceedings were not justified and amount to mere
change of opinion. It was further stated that there was no failure on the
part of the petitioner No. 1 to disclose fully and truly all material facts,
which is a precondition for initiating of reassessment proceedings after a
WPC 5988/09 Page 8 of 23
period of 4 years from the end of the assessment year. Reliance was placed
on several judgments including a Full Bench decision of this Court in the
case of CIT vs. Kelvinator, (2002) 256 ITR 1 (Del). Reference was made
to the questionnaire and the responses given by the petitioner No. 1 during
the original assessment proceedings.
11. By order dated 15th July, 2008, the Assessing Officer rejected the
objections raised by the petitioner No.1 and has recorded the following
reasons for doing so:-
―1. Section 149/151(1) states that if there is a
reason to believe that income of the assessee has escaped
assessment, notice u/s 148 can be issued with the prior
approval of CIT if four years but not more than six years
have elapsed from the end of the relevant assessment
year unless the income chargeable to tax which has
escaped assessment amounts to or is likely to amount to
one lakh rupees or more for that year.
2. In the instant case notice u/s 148 was issued
on 28.03.2008 and sent through registered post on
28.03.2008. Another copy of the notice was served by
hand on 31.3.2008 at 6.30 P.M. upon one Shri Raj
Kumar of the assessee company. The service of the
notice was therefore valid as it was served before the
expiry of six years from the end of the relevant
assessment year.
3. There was a reason to believe on the basis of
information received from the audit scrutiny that your
income had escaped assessment and the quantum was
much more than Rs. 1 lacs.
WPC 5988/09 Page 9 of 23
4. Reasons were recorded for obtaining the prior
approval of Ld. CIT, Delhi-V before issuing the notice.
5. From the above facts it is evident that all the
legal and technical conditions were satisfied before
issuing notice u/s 148 and the notice was not issued in
absence of jurisdiction.
The notice u/s 148 may therefore be treated as
valid and proceedings u/s 143(2) be complied with
accordingly.
12. Mere reading of the aforesaid order shows failure on the part of the
Assessing Officer to deal with the contentions, issues and objections raised
by the petitioner No.1. The order dated 15th July, 2008, is a cryptic and a
general order, not specifically dealing with the factual position and the
objections raised by the petitioner No.1.
13. The reasons for reopening of the assessment have been quoted
above. It is recorded that audit scrutiny had indicated that interest was not
charged, though interest on loans taken was allowed as a deduction. It is
clear from the correspondence exchanged, questionnaire raised and the
answers given by the petitioner No.1 that the question of interest received
as well as the charge was specifically examined by the Assessing Officer
before passing of the first/original assessment order. This question did not
escape the notice of the Assessing Officer. He raised the issue and applied
WPC 5988/09 Page 10 of 23
his mind as is clear from the questionnaire and the answers given. He
accepted the assessee's contention. (See paragraphs 4 to 7 quoted above,
wherein the questionnaire, replies by the petitioner have been quoted and
considered). We are not concerned and need not examine at this stage
whether the original decision of the Assessing Officer was correct or
incorrect. Incorrect decision by an Assessing Officer does not confer
jurisdiction to reopen assessment even after the amendment of Section
147/148 of the Act with effect from 1st April, 1989. The said question is no
longer res integra and was answered by Delhi High Court in the case of
Jindal Photo Films Ltd. Vs. Commissioner Income Tax (1998) 234 ITR
170 , in which it has been held as follows:-
―The power to reopen an assessment was conferred
by the Legislature not with the intention to enable the
Income-tax Officer to reopen the final decision made
against the Revenue in respect of questions that directly
arose for decision in earlier proceedings. If that were not
the legal position it would result in placing an
unrestricted power of review in the hands of the
assessing authorities depending on their changing
moods.‖
.............
Reverting back to the case at hand, it is clear from the
reasons placed by the Assessing Officer on record as
also from the statement made in the counter affidavit
that all that the Income-tax Officer has said is that he
WPC 5988/09 Page 11 of 23
was not right in allowing deduction under section 80-I
because he had allowed the deductions wrongly and,
therefore, he was of the opinion that the income had
escaped assessment. Though he has used the phrase
‗reason to believe' in his order, admittedly, between the
date of the orders of assessments ought to be re-opened
and the date of forming of opinion by the Income-tax
Officer nothing new has happened. There is no change
of law. No new material has come on record. No
information has been received. It is merely a fresh
application of mind by the same Assessing Officer to the
same set of facts. While passing the
original orders of assessment the order dated February
28, 1994, passed by the Commissioner of Income-tax
(Appeals) was before the Assessing Officer. That order
stands till today. What the Assessing Officer has said
about the order of the Commissioner of Income-tax
(Appeals) while recording reasons under section 147 he
could have said even in the original orders of
assessment. Thus, it is a case of mere change of opinion
which does not provide jurisdiction to the Assessing
Officer to initiate proceedings under section 147 of the
Act.
It is also equally well settled that if a notice under
section 148 has been issued without the jurisdictional
foundation under section 147 being available to the
Assessing Officer, the notice and the subsequent
proceedings will be without jurisdiction, liable to be
struck down in exercise of writ jurisdiction of this court.
If ‗reason to believe' be available, the writ court will not
exercise its power of judicial review to go into the
sufficiency or adequacy of the material available.
However, the present one is not a case of testing the
sufficiency of material available. It is a case of absence
of material and hence the absence of jurisdiction in the
Assessing Officer to initiate the proceedings under
section 147/148 of the Act.‖
WPC 5988/09 Page 12 of 23
14. The said reasoning was affirmed and adopted by a Full Bench of
Delhi High Court in Commissioner of Income Tax Vs. Kelvinator of
India Ltd. (supra). This decision of the Delhi High Court was approved by
the Supreme Court in Commissioner of Income Tax Vs. Kelvinator of
India Limited (2010) 2 SCC 723, elucidating the law and observing as
follows:-
―5. On going through the changes, quoted above, made
to Section 147 of the Act, we find that, prior to Direct
Tax Laws (Amendment) Act, 1987, re-opening could be
done under above two conditions and fulfillment of the
said conditions alone conferred jurisdiction on the
Assessing Officer to make a back assessment, but in
Section 147 of the Act [with effect from 1-4-1989], they
are given a go-by and only one condition has remained,
viz., that where the Assessing Officer has reason to
believe that income has escaped assessment, confers
jurisdiction to re-open the assessment. Therefore, post-1-
4-1989, power to re-open is much wider. However, one
needs to give a schematic interpretation to the words
"reason to believe" failing which, we are afraid, Section
147 would give arbitrary powers to the Assessing
Officer to re-open assessments on the basis of "mere
change of opinion", which cannot be per se reason to
reopen.
6. We must also keep in mind the conceptual difference
between power to review and power to re-assess. The
Assessing Officer has no power to review; he has the
power to re-assess. But re-assessment has to be based on
fulfillment of certain pre-condition and if the concept of
"change of opinion" is removed, as contended on behalf
WPC 5988/09 Page 13 of 23
of the Department, then, in the garb of re-opening the
assessment, review would take place.
7. One must treat the concept of "change of opinion"
as an in-built test to check abuse of power by the
Assessing Officer. Hence, after 1-4-1989, Assessing
Officer has power to re-open, provided there is "tangible
material" to come to the conclusion that there is
escapement of income from assessment. Reasons must
have a live link with the formation of the belief. Our
view gets support from the changes made to Section 147
of the Act, as quoted hereinabove. Under the Direct Tax
Laws (Amendment) Act, 1987, Parliament not only
deleted the words "reason to believe" but also inserted
the word "opinion" in Section 147 of the Act. However,
on receipt of representations from the Companies against
omission of the words "reason to believe", Parliament
re-introduced the said expression and deleted the word
"opinion" on the ground that it would vest arbitrary
powers in the Assessing Officer.
8. We quote herein below the relevant portion of
Circular No. 549 dated 31-10-1989, which reads as
follows:
"7.2 Amendment made by the Amending Act,
1989, to reintroduce the expression `reason to
believe' in Section 147.--A number of
representations were received against the
omission of the words `reason to believe' from
Section 147 and their substitution by the `opinion'
of the Assessing Officer. It was pointed out that
the meaning of the expression, `reason to believe'
had been explained in a number of court rulings in
the past and was well settled and its omission
from Section 147 would give arbitrary powers to
the Assessing Officer to reopen past assessments
on mere change of opinion. To allay these fears,
the Amending Act, 1989, has again amended
WPC 5988/09 Page 14 of 23
Section 147 to reintroduce the expression `has
reason to believe' in place of the words `for
reasons to be recorded by him in writing, is of the
opinion'. Other provisions of the new Section 147,
however, remain the same.‖"
15. In the present case there is also no allegation that there was fault or
failure on the part of the assessee to disclose true and full facts. The
questionnaire and answers given have been mentioned above. True and
full facts were given and furnished to the Assessing Officer. In the present
case notice of reassessment was issued after end of four years from the end
of the assessment year, therefore, the first proviso to Section 147 applies.
The said section and its proviso read as under:-
―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
WPC 5988/09 Page 15 of 23
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:
Provided further that the Assessing Officer may assess
or reassess such income, other than the income involving
matters which are the subject matters of any appeal,
reference or revision, which is chargeable to tax and has
escaped assessment.‖
16. The aforesaid first proviso has to be read with explanation 1 to
Section 147, which reads as under:-
"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.‖
17. Reading of the explanation 1 of the proviso makes it clear that mere
production of books of accounts or other material from which the
Assessing Officer could, with due diligence, have discovered escapement
of income, does not bar reassessment proceedings. Yet at the same time if
the proviso applies and the assessee has fully and truly disclosed all the
material facts necessary for assessment for that assessment year,
reassessment proceedings cannot be initiated. Way back in 1961, The
WPC 5988/09 Page 16 of 23
Supreme Court in the case of Calcutta Discount Co. Ltd. Vs. CIT (1961)
41 ITR 191 has observed as under:-
―............It is for him to decide what inferences of
facts can be reasonably drawn and what legal inferences
have ultimately to be drawn. It is not for
somebody else-far less the assessee-to tell the assessing
authority what inferences, whether of facts or law,
should be drawn. Indeed, when it is
remembered that people often differ as regards what
inferences should be drawn from given facts, it will be
meaningless to demand that the assessee
must disclose what inferences-whether of facts or law-he
would draw from the primary facts.‖
..............
............The scheme of the law clearly is that where the
Income-tax Officer has reason to believe that an
underassessment has resulted from non-disclosure he
shall have jurisdiction to start proceedings for
reassessment within a period of eight years ; and where
he has reason to believe that an under- assessment has
resulted from other causes he shall have jurisdiction to
start proceedings for reassessment within four years.
Both the conditions, (i) the Income-tax Officer having
reason to believe that there has been underassess-
ment and (ii) his having reason to believe that such
under assessment has resulted from non-disclosure of
material facts, must co-exist before the
Income-tax Officer has jurisdiction to start proceedings
after the expiry of four
years. The argument that the court ought not to
investigate the existence of one of these conditions, viz.,
that the Income-tax Officer has reason to believe that
WPC 5988/09 Page 17 of 23
underassessment has resulted from non-disclosure of
material facts, cannot therefore be accepted.‖
18. Following this judgment in Income Tax Officer, Calcutta and Ors.
Vs. Lakhmani Mewal Das (1976) 103 ITR 437 (SC) it was observed as
follows:-
"7. .........Another requirement is that before notice
is issued after the expiry of four years from the end of
the relevant assessment years, the Commissioner should
be satisfied on the reasons recorded by the Income-tax
Officer that it is a fit case for the issue of such notice.
We may add that the duty which is cast upon the
assessee is to make a true and full disclosure of the
primary facts at the time of the original assessment.
Production before the Income-tax Officer of the account
book or other evidence from which material evidence
could with due diligence have been discovered by the
Income-tax Officer will not necessarily amount to
disclosure contemplated by law. The duty of the assessee
in any case does not extend beyond making a true and
full disclosure of primary facts. Once he has done that
his duty ends. It is for the Income-tax Officer to draw the
correct inference from the primary facts. It is no
responsibility of the assessee to advise the Income-tax .
Officer with regard to the inference which he should
draw from the primary facts. If an Income-tax Officer
draws an inference which appears subsequently to be
erroneous, mere change of opinion with regard to that
inference would not justify initiation of action for
reopening assessment.
8. The grounds or reasons which lead to the formation of
the belief contemplated by Section 147(a) of the Act
must have a material bearing on the question of
escapement of income of the assessee from assessment
WPC 5988/09 Page 18 of 23
because of his failure or omission to disclose fully and
truly all material facts. Once there exist reasonable
grounds for the Income-tax Officer to form the above
belief, that would be sufficient to clothe him with
jurisdiction to issue notice. Whether the grounds are
adequate or not is not a matter for the Court to
investigate. The sufficiency of grounds which induce the
income-tax Officer to act is, therefore, not a justiciable
issue. It is, of course, open to the assessee to contend
that the Income-tax Officer did not hold the belief that
there had been such non-disclosure. The existence of the
belief can be challenged by the assessee but not the
sufficiency of reasons for the belief. The expression
"reason to believe" does not mean a purely subjective
satisfaction on the part of the Income-tax Officer. The
reason must be held in good faith. It cannot be merely a
pretence. It is open to the Court to examine whether the
reasons for the formation of the belief have a rational
connection with or a relevant bearing on the formation
of the belief and are not extraneous or irrelevant for the
purpose of the section. To this limited extent, the action
of the Income-tax Officer in starting proceedings in
respect of income escaping assessment is open to
challenge in a Court of law (see observations of this
Court in the case of Calcutta Discount Co Ltd. v.
Income-tax Officer [1961]41ITR191(SC) and
Narayanappa v. Commissioner of Income-tax.
[1967]63ITR219(SC) while dealing with corresponding
provisions of the Indian Income-tax Act. 1922).‖
19. The decision above holds good even after the amendment with
effect from 1st April, 1989 as has been observed by a Division Bench of
this Court in IPCA Laboratories Ltd. Vs. Gajanand Meena (2001) 251
ITR 461 wherein it has been observed as under:-
WPC 5988/09 Page 19 of 23
―The position of law after 1st April, 1989, is not in
dispute. By virtue of a proviso to Section 147, no action
can be taken for reopening after four years unless the
AO has reason to believe that income has escaped
assessment by reason of the failure on the part of the
assessee to disclose fully and truly all material facts
necessary for assessment. In the present case, the
affidavit and the reasons disclosed indicate that the
Department has purported to reopen the assessment only
on the basis of change of opinion. This position is, in
fact, conceded vide para 3 of the affidavit-in-reply dt.
13th march, 2001. The reasons also do not spell out
failure on the part of the assessee to disclose fully and
truly all material facts.... We are satisfied on the facts of
the present case that reopening is sought on the basis of
change of opinion. Further, even in the reasons, there is
nothing to indicate that reopening is sought on the
ground of the failure on the part of the Petitioner to
disclose fully and truly all material facts.‖
20. In Haryana Acrylic Manufacturing Company Vs. The
Commissioner of Income-tax IV and Anr. (2009) 308 ITR 38 it has been
observed :-
―Viewed in this light, the proviso to Section 147 of the
said Act, carves out an exception from the main
provisions of Section 147. If a case were to fall within
the proviso, whether or not it was covered under the
main provisions of Section 147 of the said Act would
not be material. Once the exception carved out by the
proviso came into play, the case would fall outside the
ambit of Section 147.
Examining the proviso [set out above], we find that no
action can be taken under Section 147 after the expiry of
WPC 5988/09 Page 20 of 23
four years from the end of the relevant assessment year
if the following conditions are satisfied:
(a) an assessment under Sub-section (3) of Section 143
or this section has been made for the relevant
assessment year; and
(b) unless any income chargeable to tax has escaped
assessment for such assessment year by reason of the
failure on the part of the assessee:
(i) 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
(ii) to disclose fully and truly all material facts necessary
for his assessment for that assessment year.
Condition (a) is admittedly satisfied inasmuch as the
original assessment was completed under Section 143(3)
of the said Act. Condition (b) deals with a special kind
of escapement of income chargeable to tax. The
escapement must arise out 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. This is clearly not the case
here because the petitioner did file the return. Since
there was no failure to make the return, the escapement
of income cannot be attributed to such failure. This
leaves us with the escapement of income chargeable to
tax which arises out of the failure on the part of the
assessee to disclose fully and truly all material facts
necessary for his assessment for that assessment year. If
it is also found that the petitioner had disclosed fully and
truly all material facts necessary for its assessment, then
no action under Section 147 could have been taken after
the four year period indicated above. So, the key
question is whether or not the petitioner had made a full
and true disclosure of all material facts.
WPC 5988/09 Page 21 of 23
In the reasons supplied to the petitioner, there is no
whisper, what to speak of any allegation, that the
petitioner had failed to disclose fully and truly all
material facts necessary for assessment and that because
of this failure there has been an escapement of income
chargeable to tax. Merely having a reason to believe that
income had escaped assessment, is not sufficient to
reopen assessments beyond the four year period
indicated above. The escapement of income from
assessment must also be occasioned by the failure on the
part of the assessee to disclose material facts, fully and
truly. This is a necessary condition for overcoming the
bar set up by the proviso to Section 147. If this condition
is not satisfied, the bar would operate and no action
under Section 147 could be taken.
21. The Supreme court in Assistant Commissioner of Income-tax v.
Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 has expounded
and explained :-
―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
WPC 5988/09 Page 22 of 23
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.‖
(emphasis supplied)
22. We are not examining the contention relating to the audit objection,
effect thereof and the alleged non-application of mind by the Assessing
Officer. The said question is left open.
23. In view of the aforesaid reasoning, the present writ petition is
allowed and a writ to certiorari is issued quashing the notice under Section
148 of the Act dated 28th March, 2008 and the order dated 15th July, 2008.
Reassessment proceedings for the assessment year 2001-2002 are also
quashed. There shall be no order as to costs.
SANJIV KHANNA, J.
CHIEF JUSTICE JANUARY 25, 2011/ KKB WPC 5988/09 Page 23 of 23