Income Tax Appellate Tribunal - Mumbai
Hamid Zain Vasi, Mumbai vs Assessee on 16 August, 2011
आयकर अपील य अ धकरण,
धकरण, मंुबई यायपीठ 'एच
एच'
एच मंुबई
IN THE INCOME TAX APPELLATE TRIBUNAL
"H" BENCH, MUMBAI
ी बी.
बी रामकोट
रामकोट य,
य लेखा सद य,
य एवं ी अ मत शु ला, या यक सद य के सम
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं. / ITA no. 6930/Mum./2011
( नधारण वष / Assessment Year : 2005-06)
Mr. Hamid Zain Vasi .................... अपीलाथ /
110, Mahim Industrial Estate
Appellant
Off Mori Road, Mahim
Mumbai 400 016
बनाम v/s
Asstt. Commissioner of Income Tax ................... यथ /
Range-18(3), Mumbai Respondent
थायी लेखा सं./ Permanent Account Number - ABVPV4198G
राज व क ओर से / Assessee by : Dr. K. Shivram a/w
Mr. Ajay R. Singh
नधा रती क ओर से / Revenue by : Mr. Ajay
सनवाई
ु क तार ख / आदे श घोषणा क तार ख /
Date of Hearing - 12.02.2013 Date of Order - 05.04.2013
आदे श / ORDER
अ मत शु ला, या यक सद य के ारा /
PER AMIT SHUKLA, J.M.
The present appeal preferred by the Assessee, is against the impugned order dated 16th August 2011, passed by the learned Commissioner (Appeals)-XXIX, Mumbai, for the quantum of assessment passed under Mr. Hamid Zain Vasi 2 section 143(3) r/w section 147 of the Income Tax Act, 1961 (for short "the Act"), for the assessment year 2005-06:-
2. In grounds no.1 and 2, the assessee has challenged the validity of the proceedings initiated vide notice under section 148 of the Act, firstly on the ground that the 'reasons' on which re-opening was initiated has been ultimately dropped by the Assessing Officer, therefore, the whole basis for re-opening and making further addition for which there was no "reason to believe" under section 147 and thus passing of the assessment order is bad-
in-law and secondly, on similar ground rectification proceedings under section 154, were initiated and dropped, therefore, notice under section 148 on the same ground vitiates the said re-opening and thirdly, there is a "change of opinion". On merits, the assessee has challenged the addition on account of long term capital gains on treating the assets sold as commercial asset and re-working the written down value (WDV) and thereby denying the indexed cost of acquisition.
3. Facts in brief:- The assessee is an individual having income mainly under the heads "Income From Business", "Capital Gains" and "Income From Other Sources". The return of income was filed at an income of ` 12,90,380, on 29th October 2005, wherein the capital gain was shown from sale of gala situated at Mahim and exemption under section 54EC was claimed on account of investment of the capital gain so arisen in the Nabard bonds. Such a return of income was subject to scrutiny under section 143(2) and the assessment was completed under section 143(3) vide order dated 2nd November 2007, at an income of ` 14,38,530, after including the agricultural income for the rate purpose. By and large, the return of income was accepted. Thereafter, a notice under section 148 was issued vide notice dated 29th May 2009, after recording the following 'reasons':-
"4.5.2005 The assessee has sold one gala for Rs. 29,00,000/- thereby earning LTCG of Rs. 16,66,071/- out of net consideration, the assessee has Mr. Hamid Zain Vasi 3 invested Rs. 17,50,000/- in NABARD bonds and claimed the entire LTCG of Rs. 16,66,071/- as exempt. There A.O. should have restricted the LTCG exempt from the tax only to the extent allowable as per the provisions of section 54EC since the investment in the NABARD bond is less than the net consideration of Rs. 29 lac. The assessee is entitled to the to deduction u/s 54EC to the extent of Rs. 10,05,387/- and the balance LTCG of Rs. 6,60,684/- is taxable.
2. Further from the sale deed of the gala sold, it is seen that the market value assigned by the authorities is Rs. 43,38,425/- and, therefore, as per the provisions of section SOC the AO should have net consideration of sale as Rs. 43,38,425/- and not Rs 29 lac as adopted by the assessee. The working of LTCG should have been as under:-
Sale consideration (market value) 4338425.
Less Index cost as per statement 1233930.
LTCG 3104495
Less De. u/s 54EC on investment
of Rs. 17.50 lac in NABARD 1252266
Taxable LTCG 1852229
3. In view of the above, I am of the opinion that there is escapement of income of Rs.18,52,229/- in the assessment for which re-opening the assessment for the assessment year 2005-06 is proposed."
4. Before the Assessing Officer, objections were raised by the assessee that the value of gala sold which has been considered by the stamp valuation authorities at ` 43,38,425, instead of ` 29,00,000, on which the assessee had sold and thereby invoking the provisions of section 50C, is not applicable as the Departmental Valuation Officer in reference made under section 50C(2), has accepted the sale consideration declared by the assessee at ` 29,00,000 as correct valuation. Besides this, the investment made in NABARD bond on the capital gain under section 54EC is absolutely correct. Therefore, the entire basis for re-opening has become bad-in-law. The objection of the assessee was rejected by the Assessing Officer on the ground that the Assessing Officer's jurisdiction is not confined to the issues mentioned in the notice but also on the entire income which has escaped assessment. In support of this proposition, he relied on the judgment of the Hon'ble Supreme Court in Jaganmohan Rao v/s CIT, [1970] 75 ITR 373 (SC).
Mr. Hamid Zain Vasi 4 After rejecting the assessee's objections, the Assessing Officer, from the details furnished before him, observed that the property in question which was sold, was exploited by the assessee for commercial purpose as it was used by the firm in which he is a partner. Accordingly, he held that the capital gain of the property needs to be revalued by considering WDV of the property and not by taking the index cost of acquisition. Accordingly, he re- worked the long term capital gains in the following manner:-
Sale consideration ` 29,00,001 Capital Gain : = Sale Consideration WDV ` 29,00,001 - 5,31,441 L.T.C.G. = 23,68,560
5. The Commissioner (Appeals) confirmed the entire action of the Assessing Officer and dismissed the entire contentions of the assessee.
6. Before us, the learned Counsel for the assessee submitted that the proceedings initiated under section 147 is bad-in-law on various counts - firstly, in the return of income and in the original assessment proceedings, the Assessing Officer made necessary enquiry about the sale of gala exempt under section 54EC along with the sale deed. It was only after verification and examination of material on record, he has completed the assessment under section 143(3) vide order dated 2nd November 2007, after due application of mind. Therefore, such a re-opening amounts to "change of opinion"; Secondly, the issue and the grounds on which 'reasons' were recorded under section 147, the same has not been assessed or added by the Assessing Officer in the order passed under section 143 r/w section 143(3), therefore, the addition made on account of long term capital gains is beyond the scope of Ireasons recorded" and hence, the entire proceedings and additions made in the order have become invalid; Thirdly, once rectification proceedings under section 154 have been initiated on similar ground and were dropped, re-opening on the same issue under section 148, is untenable in law.
Mr. Hamid Zain Vasi 5
7. In support of these contentions, he relied upon catena of case laws including that of the Hon'ble Supreme Court and Jurisdictional High Court. For the proposition of change of opinion, the main reliance has been placed on the following case laws:-
i) CIT v/s Kelvinator of India Ltd. [2010] 320 ITR 561 (SC)
ii) Aventis Pharma Ltd. v/s ACIT & Ors [2010] 323 ITR 570 (Bom.)
iii) Rallis India Ltd. v/s ACIT [2010] 323 ITR 54 (Bom.)
iv) Asian Paints Ltd. v/s DCIT [2008] 308 ITR 195 (Bom.)
v) M.J. Pharmaceuticals Ltd. v/s CIT [2008] 297 ITR 119 (Bom.)
8. Further, in support of the contentions that the Assessing Officer cannot assess the income for which there is no "reason to believe" in the "reasons recorded", he placed reliance on the decision of Jurisdictional High Court in CIT v/s Jet Airways India Ltd. [2011] 331 ITR 236, Ranbaxy Laboratories v/s CIT, [2011] 336 ITR 136 (Del.) and the judgment of Jurisdictional High Court in CIT v/s Mohmed Juned Dadani, Income Tax Appeal no.964 and 967 of 2011, judgment dated 29th January 2013.
9. On merits, he submitted that the gala was never a business asset of the assessee and no depreciation has been claimed in any of the earlier years and this aspect of the matter has been accepted by the Revenue in earlier years even in the orders passed under section 143(3) for assessment years 2002-03 and 2003-04. Thus, the Assessing Officer could not have treated the said property as business asset and thereby working out the WDV of ` 5,31,441 on notional depreciation and also denying the benefit of the indexation.
10. On other hand, the learned Departmental Representative submitted that it is not a case of "change of opinion" as in the assessment order, there is no mention about examining of the assessee's working of the capital gain and applicability of provisions of section 50C. Thus, there cannot be a case of "change of opinion" because the Assessing Officer has not expressed any of Mr. Hamid Zain Vasi 6 his opinion in the assessment order. Secondly, he submitted that once the Assessing Officer has reopened the assessment under section 147, he can assess any other income which comes during the course of assessment proceedings and this aspect of the matter has been specifically provided in the statute by insertion of Explanation 3, brought in statute by Finance Act, 2009, with retrospective effect from 1st April 1999. On merits, he relied upon the reasoning and the findings given by the Assessing Officer and the learned Commissioner (Appeals).
11. We have heard the rival contentions, perused the findings given by the Assessing Officer & the learned Commissioner (Appeals) as well as the material placed on record. We find that the assessee had shown long term capital gain in the return of income on the sale of property which is a gala situated at Mahim in the following manner:-
STATEMENT OF L.T.C. GAIN On sale of Mahim Gala on 7.3.05 as 2900001 per agreement Less: Indexed cost of 1000000 in 1233930 2000 480 x 1000000/389 = 1666071 Less Investments in specified asset 1750000 i.e., NABARD bonds in 25.6.2005 LTC gain liable to tax Nil
12. From the records, it is also seen that the assessee has furnished a copy of agreement of sale of gala in the course of original assessment proceedings vide letter dated 10th February 2007 and the Assessing Officer vide questionnaire dated 24th September 2007, has specifically required the Assessee to furnish the details of assets shown under the head "Block of Assets" and the details of investment made in the bonds. In reply, the Assessee has explained the working of the long term capital gain and submitted that the entire amount of capital gain was invested in specified Mr. Hamid Zain Vasi 7 bond and exemption under section 54EC has rightly been claimed. The Assessing Officer accepted the Assessee's computation of capital gains and also his claim for exemption under section 54EC vide order dated 2nd November 2007 passed under section 143(3). Thereafter, the assessment has been sought to be re-opened under section 147, mainly on the two grounds, firstly, that the deduction under section 54EC is not correct because the assessee has not invested the entire consideration of sale but only the long term capital gain and, therefore, the assessee is entitled to deduction under section 54EC to the extent of ` 10,05,387 and the balance long term capital gain of 6,60,000 is taxable and secondly, as per the provisions of section 50C, the value taken by the stamp valuation authority of the property is at ` 4,83,84,250 which to be taxed instead of sale value of ` 29,00,000 as per the agreement. However, it is seen that, insofar as the second issue is concerned, the same was dropped in view of the valuation report submitted by the valuation department wherein the value of ` 29,00,000 shown by the Assessee has been accepted to be the proper market value. Thus, this ground for re-opening gets vacated and this has been accepted by the Assessing Officer also. Insofar as the first ground is concerned, the Assessing Officer found that the Assessee's claim under section 54EC is absolutely correct and no addition was made. Thus, on both the counts on which the Assessing Officer has entertained the reason to belief for the "reasons recorded" has been found to be no ground for re-opening the assessment and there was no income chargeable to tax which can be said to have escaped assessment.
13. On these facts, whether the addition on account of long term capital gain which has been made by the Assessing Officer and which were not forming part of the "reasons recorded" can be sustained or not. This aspect of the matter has been dealt in detail by the Jurisdictional High Court in Jet Airways (supra), wherein the Jurisdictional High Court have also analysed the provisions contained in Explanation 3 to section 147 which has been referred to before us by the learned Departmental Representative and have concluded Mr. Hamid Zain Vasi 8 that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reason for such issue were not included in the notice, however, I,f after issuing the notice under section 148, the Assessing Officer accepts the contentions of the assessee and holds that the income which he has initially formed a "reason to believe" had escaped assessment, which, later on, has been found as a matter of fact that it has not escaped assessment, then it is not open to the Assessing Officer independently to assess some other income. The Hon'ble Court has discussed the relevant provisions prior to amendment of 1st April 1989, post amendment and also in section of Explanation 3. The relevant observations and conclusion drawn by Their Lorcships are as under:-
"The condition precedent to the exercise of the jurisdiction under s. 147 is the formation of a reason to believe by the AO that any income chargeable to tax has escaped assessment. Upon the formation or a reason to believe, the AO, before making the assessment, reassessment or recomputation under s. 147 has to serve on the assessee a notice requiring him to furnish a return of his income. Upon the formation of the reason to believe that income chargeable to tax has escaped assessment, the AO is empowered to 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 s. 147.
The effect of Expln. 3 which was inserted by the Finance (No. 2) Act of 2009 is that even though the notice that has been issued under s. 148 containing the reasons for reopening the assessment does not contain a reference to a particular issue with reference to which income has escaped assessment, the AO may assess or reassess the income in respect of any issue which has escaped assessment, when such issue comes to his notice subsequently in the course of the proceedings. The reasons for the insertion of Expln. 3 are to be found in the Memorandum Explaining the Provisions of Finance (No. 2) Bill of 2009. The memorandum treats the amendment to be clarificatory and contains the following Explanation : "Some Courts have held that the AO has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent. With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in s. 147 to provide that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for Mr. Hamid Zain Vasi 9 such issue has not been included in the reasons recorded under sub-s. (2) of s. 148."
In order to appreciate the reasons for the amendment inserting Expln. 3, it would be necessary to advert to some of the judgments of the High Courts, prior to the amendment. The Punjab & Haryana High Court, in its decision, in Vipan Khanna vs. Asstt. CIT (2002) 175 CTR (P&H) 335 : (2002) 122 Taxman 1 (P&H) dealt with the question as to whether, after initiating proceedings under s. 147 on the ground that the petitioner had claimed depreciation at a higher rate, the AO would be justified in launching an inquiry into issues which were not connected with the claim of depreciation. This question was answered in the negative. A Division Bench of the Kerala High Court held in Travancore Cements Ltd. vs. Asstt. CIT (2008) 219 CTR (Ker) 359 :
(2008) 305 ITR 170 (Ker) : (2009) 179 Taxman 117 (Ker), that upon the issuance of a notice under s. 148(2), when proceedings were initiated by the AO on issues in respect of which he had formed a reason to believe that income had escaped assessment, it was not open to the AO to carry out an assessment, or reassessment in respect of other issues which were totally unconnected with the proceedings that were already initiated and which came to his knowledge during the course of the proceedings. The Division Bench held that in respect of an issue which is totally unconnected to the basis on which the AO formed a reason to believe that income escaped assessment and issued a notice under s. 148, it was open to him to issue a fresh notice by following subs. (2) of s. 148 with regard to the escaped income which came to his knowledge during the course of the proceedings.
The Kerala High Court held as follows : "
The AO gets jurisdiction under s. 148 to assess or reassess the income which has escaped assessment only after sub-s. (2) of s. 148 is complied with. The question is whether sub-s. (2) of s. 148 has to be complied with if any other income chargeable to tax has escaped assessment, or which comes to his knowledge subsequently in the course of the proceedings. In other words, when proceedings are already on in respect of one item in respect of the income for which he had already recorded reasons is it necessary that he should record reasons for assessing or reassessing any of the items which are totally unconnected with the proceedings already initiated. Suppose under two heads, income has escaped assessment and those two heads are inter-linked and connected, the proceedings initiated or notice already issued under sub-s. (2) of s. 148 would be sufficient if the escaped income on the second head comes to the knowledge of the officer in the course of the proceedings. But if both the items are unconnected and totally alien then the assessing authority has to follow sub-s. (2) of s. 148 with regard to the escaped income which comes to his knowledge during the course of the proceedings." Hence, the view of the Punjab & Haryana High Court and the Kerala High Court was that, once the AO has reason to believe that income chargeable to tax has escaped assessment and proceeds to issue a notice under s. 148, it is not open to him to assess or, as the case may be, reassess the income under an independent or unconnected issue, which was not the basis Mr. Hamid Zain Vasi 10 of the notice for reopening the assessment. Parliament stepped in to correct what it regarded as an incorrect interpretation of the provisions of s. 147. The Memorandum Explaining the Provisions of Finance (No.
2) Bill of 2009 states in this background that some Courts had held that the AO has to restrict the reassessment proceedings only to issues in respect of which reasons have been recorded for reopening the assessment and that it was not open to him to touch upon any other issue for which no reasons have been recorded. This interpretation was regarded by Parliament as being contrary to legislative intent. Hence, Expln. 3 came to be inserted to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under s. 147 though the reasons for such issue were not included in the reasons recorded in the notice under s. 148(2).
The effect of s. 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) The AO must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the AO has to serve on the assessee a notice under sub-s. (1) of s. 148; (iii) The AO may assess or reassess such income, which he has reason to believe, has escaped assessment 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 the section; and (iv) Though the notice under s. 148(2) does not include a particular issue with respect to which income has escaped assessment, he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.
Now the submission of the learned counsel appearing on behalf of the assessee in the present case is that the words "and also" in s. 147 postulate that the AO may assess or reassess the income which he has reason to believe has escaped assessment together with any other income chargeable to tax which has escaped assessment and which comes to his notice during the course of the proceedings. In other words, unless the AO assesses the income with reference to which he had formed a reason to believe within the meaning of s. 147, it would not be open to him to assess or reassess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings. On the other hand, it has been urged on behalf of the Revenue that even if, during the course of assessment or, as the case may be reassessment, the Assessing Officer does not assess or reassess the income which he has reason to believe has escaped assessment and which formed the subject-matter of a notice under s. 148(2), it is nonetheless open to him to assess any other income which, during the course of the proceedings is brought to his notice as having escaped assessment.
The rival submissions which have been urged on behalf of the Revenue and the assessee can be dealt with, both as a matter of first principle, Mr. Hamid Zain Vasi 11 interpreting the section as it stands and on the basis of precedents on the subject. Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to believe under s. 147 and following the issuance of a notice under s. 148, the AO has the power to assess or reassess the income, which he has reason to believe had escaped assessment and also any other income chargeable to tax. The words "and also" cannot be ignored. The interpretation which the Court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament having used the words "assess or reassess such income and also any other income chargeable to tax which has escaped assessment", the words "and also" cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word "or". The legislature did not rest content by merely using the word "and".
The words "and", as well as "also" have been used together and in conjunction. The Shorter Oxford Dictionary defines the expression "also" to mean 'further, in addition, besides, too'. The word has been treated as being relative and conjunctive. Evidently, therefore, what Parliament intends by use of the words "and also" is that the AO, upon the formation of a reason to believe under s. 147 and the issuance of a notice under s. 148(2) must assess or reassess : (i) 'such income'; and also (ii) any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The words 'such income' refer to the income chargeable to tax which has escaped assessment and in respect of which the AO has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. If the income, the escapement of which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the AO to independently assess only that income which comes to" his notice subsequently in the course of the proceedings under the section as having escaped assessment. If upon the issuance of a notice under s. 148(2), the AO accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of s. 147 w.e.f. 1st April, 1989 clearly stipulated that the AO has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter.
Mr. Hamid Zain Vasi 12 In CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 :
(1992) 198 ITR 297 (SC) : (1992) 64 Taxman 442 (SC), the Supreme Court dealt with the following question of law in the course of its judgment :
"Where an item unconnected with the escapement of income has been concluded finally against the assessee, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item for the purpose of computation of the escaped income ?"
The issue which arose before the Supreme Court was whether, in the course of a reassessment on an escaped item of income could an assessee seek a review in respect of an item which stood concluded in the original order of assessment. The Supreme Court dealt with the provisions of s. 147, as they stood prior to the amendment on 1st April, 1989. The Supreme Court held that the expression "escaped assessment" includes both "nonassessment" as well as "underassess- ment". Income is said to have escaped assessment within the meaning of the section when it has not been charged in the hands of an assessee during the relevant assessment year. The expression "assess" refers to a situation where the assessment of the assessee for a particular year is, for the first time, made by resorting to the provisions of s. 147. The expression "reassess" refers to a situation where an assessment has already been made but the AO has reason to believe that there is underassessment on account of the existence of any of the grounds contemplated by Expln. 1 to s. 147. The Supreme Court adverted to the judgment in V. Jaganmohan Rao vs. CIT (1970) 75 ITR 373 (SC), which held that once an assessment is validly reopened, the previous underassessment is set aside and the ITO has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. The Court held that the object of s. 147 enures to the benefit of the Revenue and it is not open to the assessee to convert the reassessment proceedings as an appeal or revision and thereby seek relief in respect of items which were rejected earlier or in respect of items not claimed during the course of the original assessment proceedings.
The judgment in V. Jaganmohan Rao vs. CIT (supra) dealt with the language of ss. 22(2) and 34 of the Act of 1922 while the judgment in Sun Engg. Works (P) Ltd. (supra) interprets the provisions of s. 147 as they stood prior to the amendment on 1st April, 1989. The effect of the amended provisions came to be considered in two distinct lines of precedent on the subject. The first line of authority, to which a reference has already been made earlier, adopted the principle that where the AO has formed a reason to believe that income has escaped assessment and has issued a notice under s. 148 on certain specific issues, it was not open to him during the course of the proceedings for assessment or reassessment to assess or reassess any other income, which may have escaped assessment but which did not form the subject-matter of the notice under s. 148. This view was adopted in Mr. Hamid Zain Vasi 13 the judgment of the Punjab & Haryana High Court in Vipan Khanna (supra) and in the judgment of the Kerala High Court in Travancore Cements Ltd. (supra), This line of authority, would now cease to reflect the correct position in law, by virtue of the amendment which has been brought in by the insertion of Expln. 3 to s. 147 by Finance (No. 2) Act of 2009.
The effect of the Explanation is that once an AO has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice under s. 148, it is open to him to assess or reassess income in respect of any other issue though the reasons for such issue had not been included in the reasons recorded under s. 148(2).
The second line of precedent is reflected in a judgment of the Rajasthan High Court in CIT vs. Shri Ram Singh (2008) 217 CTR (Raj) 345 : (2008) 306 ITR 343 (Raj). The Rajasthan High Court construed the words used by Parliament in s. 147 particularly the words that the AO 'may 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 s.147. The Rajasthan High Court held as follows:
".....it is only when, in proceedings under s. 147 the AO, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had 'reason to believe' to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under s. 147. To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under s. 147, the AO were to come to the conclusion, that any income chargeable to tax, which, according to his 'reason to believe', had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under s. 147."
20. Parliament, when it enacted the Expln. (3) to s. 147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it effected the amendment by bringing in Expln. 3 to s. 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain Courts that the AO has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment.
Mr. Hamid Zain Vasi 14 The corrective exercise embarked upon by "Parliament in the form of Expln. 3 consequently provides that the AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice under s. 148(2). The decisions of the Kerala High Court in Travancore Cements Ltd. (supra) and of the Punjab & Haryana High Court in Vipan Khanna (supra) would, therefore, no longer hold the field. However, insofar as the second line of authority is concerned, which is reflected in the judgment of the Rajasthan High Court in Shri Ram Singh (supra), Expln. 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H) : (1989) 46 Taxman 315 (P&H). The decision in Atlas Cycle Industries (supra) held that the AO did not have jurisdiction to proceed with the reassessment, once he found that the two grounds mentioned in the notice under s. 148 were incorrect or nonexistent.
The decisions of the Punjab & Haryana High Court in Atlas Cycle Industries (supra) and of the Rajasthan High Court in Shri Ram Singh (supra) would not be affected by the amendment brought in by the insertion of Expln. 3 to s. 147. Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the AO could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Expln. 3 by the Finance Act (No. 2) of 2009. However, Expln. 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of s. 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Sec. 147 has this effect that the AO has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.
We have approached the issue of interpretation that has arisen for decision in these appeals, both as a matter of first principle, based on Mr. Hamid Zain Vasi 15 the language used in s. 147(1) and on the basis of the precedent on the subject. We agree with the submissions which has been urged on behalf of the assessee that s. 147(1) as it stands postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the AO may assess or reassess such income "and also" any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words "and also" are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion of Expln. 3 to s. 147. Parliament must be regarded as being aware of the interpretation that was placed on the words "and also" by the Rajasthan High Court in Shri Ram Singh (supra). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of s. 147(1) as they stood after the amendment of 1st April, 1989 continue to hold the field.
In that view of the matter and for the reasons that we have indicated, we do not regard the decision of the Tribunal in the present case as being in error. The question of law shall, accordingly, stand answered against the Revenue and in favour of the assessee. The appeal is, accordingly, dismissed. There shall be no order as to costs.
14. In this case, the High Court has also discussed the judgment of Hon'ble Supreme Court in V. Jaganmohan Rao v/s CIT [1970] 75 ITR 373 (SC), as relied upon by the Assessing Officer in this case.
15. This judgment has been further followed by the Hon'ble Delhi High Court in Ranbaxy Laboratories (supra) and Madras High Court in ACIT v/s Major Deepak Mehta, [2012] 344 ITR 641 (Mad.). The Gujarat High Court in CIT v/s Mohmed Juned Dadani (supra) has taken into consideration of these judgments and the provisions of which Explanation-3 which was inserted with retrospective effect and has further observed and held as under:-
"27. From the above, it can be seen that the explanation was meant to be clarificatory in nature and to put the issue beyond any legal controversy. When the Legislature found that in face of the provisions contained in Section 147 of the Act post 01.04.1989 some of the courts had taken a view that the Assessing Officer is restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute. Thus, the explanation was meant to be merely clarificatory in nature and was introduced with Mr. Hamid Zain Vasi 16 the purpose of putting at rest the legal controversy regarding the true interpretation of Section 147 of the Act which had arisen on account of certain judicial pronouncements. We have noticed that prior to enactment of Explanation 3 to Section 147, Punjab and Haryana High Court in case of Commissioner of Income Tax Vs. Atlas Cycle Industries reported in 180 ITR 319 (supra) had taken a restricted view of the power of the Assessing Officer to make any addition on the grounds not mentioned in the reasons recorded for reopening the assessment. We may also notice that Kerela High Court in case of Travencore Cements Ltd. Vs. Assistant Commissioner of Income-Tax and anr reported in 305 ITR 170 had taken somewhat similar stand.
28. Explanation 3 to Section 147 of the Act thus does not in any manner, even purport to expand the powers of the Assessing Officer under Section 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case of S.Sundaram Pil!ai v/s V.R.Pattabiraman reported in AIR 1985 Supreme Court 582 the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision. It was observed as under:
52. Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is-
(a) to explain the meaning and intendment of the Act itself
(b) where there is any obscruity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve.
(c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful.
(d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and
(e) It cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same.
29. Above decision has been referred to and relied upon in several subsequent decisions. Above proposition being well settled, it is not necessary to refer to all such decisions.
30. We may also approach the question from a slightly different angle. It is not in dispute that once an assessment is reopened by a valid exercise of jurisdiction under Section 147 of the Act, it is open for the Assessing Officer to assess or reassess any income which had Mr. Hamid Zain Vasi 17 escaped assessment which comes to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice under Section 148 of the Act. In a notice for reassessment which has been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax has escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established unless ofcourse some other ground viz, non-filing of the return at all etc. is available to the Assessing Officer. If such non-disclosure of material facts is established with respect to the reason recorded for issuing notice for reopening the assessment, it would be open for the Assessing Officer to thereafter even assess other income which might have escaped assessment but which may not necessarily satisfy the requirement of non-disclosure of true and full material facts. If in such a situation, the stand of the revenue is accepted, a very incongruent situation would come about if ultimately the Assessing Officer were to drop the ground on which notice for reopening had been issued but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening has been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions are being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented.
31. As already noted, except for the Punjab and Haryana High Court in case of Majinder Singh Kang Vs. Commissioner of Income-Tax and anr (supra) all courts have uniformly taken a view that Explanation 3 to Section 147 of the Act does not change the situation insofar as the present controversy is concerned. Leading decision of Bombay High Court in case of CIT vs. Jet Airways (I) Ltd. has been followed by different High Courts. In case of CIT vs. Jet Airways (I) Ltd. ,the High Court, in its elaborate decision considering the statutory provisions, different judicial pronouncements and the explanatory memorandum for introduction of Explanation 3 to Section 147 of the Act, ruled in favour of the assessee.
32. Punjab and Haryana High Court in case of Majinder Singh Kang Vs. Commissioner of Income- Tax and anr (supra) ofcourse has sounded a different note. We may, however, notice that the explanatory memorandum to Explanation 3 to Section 147 of the Act was not brought to the notice of the High Court in the said decision. The High Court gave considerable importance on such Explanation 3 to Section 147 of the Act and the language used therein."
Mr. Hamid Zain Vasi 18
16. Thus, respectfully following the aforesaid proposition of law laid down by the High Courts, we hold that the addition of ` 6,47,144, on account of long term capital gain as assessed by the Assessing Officer is beyond the scope of income escaping assessment under section 147. Further, we also agree with the contentions of the learned Counsel for the assessee that the view taken by the Assessing Officer in the present assessment order amounts to "change of opinion" as not only the issue of long term capital gain but also the exemption under section 54EC and sale consideration has been examined by the Assessing Officer and thereafter he accepted the Assessee's computation. There is no new material on record to show that the Assessee's computation and the claim is erroneous. Accordingly, on this count also, the re-opening under section 147 is invalid in the eyes of law. Thus, on the preliminary ground itself, the addition made by the Assessing Officer in the long term capital gain gets vitiated. Consequently, the impugned order passed by the learned Commissioner (Appeals) is set aside and the ground raised by the Assessee is treated as allowed.
17. Before parting with this order, we would like to state that we are not adjudicating the issue on merit as on the preliminary grounds itself, we have allowed the Assessee's appeal.
18. प रणामतः नधा रती क अपील वीकत ृ मानी जाती है ।
18. In the result, Assessee's appeal is treated as allowed.
आदे श क घोषणा खले
ु यायालय म दनांकः 5th April 2013 को क गई ।
Order pronounced in the open Court on 5th April 2013 Sd/- Sd/-
बी.
बी. रामकोट
रामकोट य अ मत शु ला
लेखा सद य या यक सद य
B. RAMAKOTAIAH AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
मंुबई MUMBAI, दनांक DATED: 5th April 2013
Mr. Hamid Zain Vasi
19
आदे श क त ल प अ े षत / Copy of the order forwarded to:
(1) नधा रती / The Assessee;
(2) राज व / The Revenue;
(3) आयकर आयु (अपील) / The CIT(A);
(4) आयकर आयु / The CIT, Mumbai City concerned;
(5) वभागीय त न ध, आयकर अपील य अ धकरण, मंुबई / The DR, ITAT, Mumbai;
(6) गाड फाईल / Guard file.
स या पत त / True Copy
आदे शानसार
ु / By Order
द प जे. चौधर / Pradeep J. Chowdhury
वर नजी स चव / Sr. Private Secretary
उप / सहायक पंजीकार / (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मंुबई / ITAT, Mumbai