Income Tax Appellate Tribunal - Indore
Malhar Rao Tatya Saheb Holkar vs Income-Tax Officer. on 26 April, 1995
Equivalent citations: [1995]54ITD562(INDORE)
ORDER
Per Shri O. P. Jain, J. M. - These appeals by the assessee pertain to the assessment years 1977-78 and 1978-79. All the appeals were heard together and are being disposed of as under :-
I.T.A. Nos. 116 and 117/Ind/1995 :
2. These appeals are directed against the consolidated order of the CIT (A) dated 20th December, 1994, pertaining to the two assessment years under consideration, whereby he has upheld reopening of the assessment and the matter has been set aside to the Assessing Officer for the reason that the Assessing Officer has failed to make a proper estimate of the total income under various heads.
3. The brief facts as available on record are that for the assessment year 1977-78 and 1978-79, returns of income were not filed by the assessee. Therefore, on 22nd May, 1980, the Assessing Officer had issued a notice under section 148 of the Income-tax Act, to the assessee. In response to that notice also no returns were filed. The assessee also failed to comply with the notices issued under sections 142(1) and 143(2) of the Income-tax Act. Hence the assessments were completed ex parte on 27th March, 1985.
4. The assessee appealed before the CIT (A). It was pleaded, inter alia, that reopening of the reassessment is illegal, inasmuch as the Assessing Officer has failed to mention the formation of the required opinion leading him to believe that any income has escaped assessment. In that connection, reference was made to the order sheet entry dated 22nd May, 1980, made by the Assessing Officer. In support of this stand, reference was made to the decision of the Supreme Court in the case of Johri Lal (HUF) v. CIT [1973] 88 ITR 439 and certain other decisions. The CIT (A) was of the opinion that the cited decisions cannot be applied in the instant case, inasmuch as the assessee had been declaring positive income in the earlier years. He rejected the contention of the assessee with the following observations :-
"But the same ratio does not apply to a case where positive total income was being returned year after year and suddenly the assessee stops filing return of income without intimating any reason. Therefore, the mere fact that there was positive total income in the earlier years is sufficient for formation of belief that the income of the years for which return has not been filed has escaped assessment. May be the Assessing Officer has failed to put such fact in black and white in the recorded reasons dated 22-5-1980, but keeping in view totality of the circumstances, such reasons are held to exist in the present case and, therefore, I hold that 148 notices issued for the two years under appeal do not suffer from any legal invalidity. Accordingly, the reassessment proceedings are held to be valid and for this reason the assessment order cannot be cancelled."
5. Aggrieved by the aforesaid finding of the CIT (A), the assessee has come up in appeal before the Tribunal. Sh. Ramji Dubey, ld. Representative for the assessee has reiterated the stand that was advanced before the CIT (A). He has argued that mere non-filing of the return of income would not justify action under section 147. According to him, before initiating action under section 147, the Assessing Officer is required to record reasons for the belief that income has escaped assessment due to failure of the assessee to disclose material facts or on account of non-filing of the return. In support of this stand, reference was made to the following decisions :-
(i) Johri Lal (HUF)s case (supra).
(ii) Khan Bahadur Hormasji Maneckji Dossabhoy Hormasji Bhiwandiwalla & Co. v. B. K. Sahu, IAC [1991] 188 ITR 203 (Bom.).
6. The ld. counsel for the assessee has argued that in the instant case, the Assessing Officer before issue of notice under section 148 did not mention in the reasons recorded that he has reason to believe that income chargeable to tax has escaped assessment. In that connection, he has submitted that the order sheet entry dated 22nd May, 1980, wherein reasons were recorded reads as under :-
"No returns for assessment years 1977-78 and 1978-79 filed. Issued notice under section 148."
7. Thus, it was contended that action initiated under section 147 is illegal, bad in law and null and void and as such the consequential assessment framed by the Assessing Officer may be annulled.
8. On the other hand, the ld. Departmental Representative has supported the order of the CIT (A). He has filed copies of the assessment orders pertaining to the assessment years 1974-75 to 1976-77 and has submitted that these orders go to indicate that in the earlier years the assessee had income above the exempted limit. Thus, according to him, the Assessing Officer had reason to believe that the income chargeable to tax has escaped assessment and this fact is evident from the assessment completed after the issue of notice under section 148. He has also referred to clause (a) of Explanation 2 to section 147, which reads as under :-
"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."
9. Placing strong reliance on the aforesaid explanation, it was argued that since no return of income was filed and the income exceeded the maximum amount which is not chargeable to income-tax, it has to be deemed that the income chargeable to tax has escaped assessment and for the reason the Assessing Officer was perfectly justified in initiating action under section 147 and issuing notice under section 148.
10. We have considered the rival submissions and have gone through the decisions as also the legal provisions referred before us. It may be mentioned at the out-set that the Explanation 2 to section 147 relied by the ld. Departmental Representative, already extracted above, cannot be availed of by the Revenue, since the same came on the statute book by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), with effect from 1st April 1989. That Explanation was not available for the assessment years under consideration nor the same was on the statute book at the time when notice under section 148 of the Act was issued. It would be proper to mention here that section 147 of the Act has undergone drastic changes. Section 147, as it was at the relevant time read as under :-
"Section 147. Income escaping assessment-If -
(a) the ITO has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that 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 or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).
Explanation 1. - 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 income chargeable to tax has been under-assessed; or
(b) where such income has been assessed at too low a rate; or
(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (XI of 1922); or
(d) where excessive loss or depreciation allowance has been computed.
Explanation 2. - Production before the ITO of account books or other evidence from which material evidence could with due diligence have been discovered by the ITO will not necessarily amount to disclosure within the meaning of this section."
11. Section 147 as it now stands was substituted for the then existing section with effect from 1st April, 1989. In order to explain the scope and effect of the newly substituted section 147, the Central Board of Direct Taxes had issued Circular No. 549 dated 31st October, 1989. Paragraph 7.3 of the said circular deals with the deemed cases of income escaping assessment for the purpose of which Explanation 2 to section 147 was brought on the statute book. The said paragraph roads as under :-
"Under the old provisions of Explanation 1 to section 147, income chargeable to tax was deemed to have escaped assessment if it has been under-assessed or assessed at too low a rate or if any excessive relief or loss or depreciation allowance had been allowed. The new provisions in this respect, as contained in Explanation 2 to new section 147, are more elaborate and cover those cases where assessments have been completed (called as scrutiny cases) as well as those cases were no assessments have been completed (called as non-scrutiny cases). Thus, the new Explanation 2 to the section clarifies that the following shall be deemed to be cases of income escaping assessment :-
(i) Where no return of income has been furnished by the assessee, although the total income is above the taxable limit.
(ii) Where a return of income has been furnished, but no assessment has been made (i.e., in a non-scrutiny case) -if the assessee is found to have understated his income or claimed excessive loss, deduction, allowance or relief in the return.
(iii) Where an assessment has been made (i.e., in a scrutiny case) - if income chargeable to tax has been under assessed or assessed at too low a rate or if any excessive relief or loss or depreciation allowance or any other allowance under the Act has been allowed."
12. The argument that before issue of a notice under section 148, the Assessing Officer is to form a belief that the income has escaped assessment stands supported by this decision cited on behalf of the assessee. In the case of Johri Lal (HUF) (supra) the Honble High Court has observed that formation of required belief by the ITO before proceedings can be validly initiated under section 34(1) (a) is a condition precedent. The fulfilment of this condition is not a mere formality, it is mandatory, and failure to fulfil that condition would vitiate the entire proceedings. That was the case under the Income-tax Act, 1922. The ratio of the said decision would apply with full force to the reopening of an assessment under section 147 of the Income-tax Act, 1961.
13. The decision of the Bombay High Court in the case of Khan Bahadur Hormasji Maneckji Dossabhoy Hormasji Bhiwandiwalla & Co. (supra), is directly on the point. In this case, the Honble High Court has held that in order that the ITO may form the belief that income has escaped assessment due to the failure of the assessee to disclose material facts, there should be something more than mere fact of non-filing of the return or non-disclosure of what is considered by the ITO to be full particulars. In this connection, the following observations of the Honble High Court can be quoted with advantage :-
"To illustrate the point, let us assume the case of an assessee who does not file his returns of income. The mere fact that returns of income were not filed cannot, by any stretch of imagination, lead to the belief that income assessable to tax has escaped assessment. For the formation of that belief, you require something more than the mere fact of non-filing of return or non-disclosure of what is considered by the Income-tax Officer to be full particulars. Indirect support for the view is available in the decisions of the Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 and in the case of ITO v. Madnani Engg. Works Ltd. [1979] 118 ITR 1."
14. In view of the reasons already discussed above, we are of the considered opinion that reopening of the assessments for the two years under consideration is bad and as such the proceedings taken in pursuance of the notice under section 148 stands vitiated. That being so, the assessments are hereby quashed.
15. The next objection is taken to the setting aside of the order to the Assessing Officer for a fresh decision. It is the case of the assessee that after holding that the notice issued under section 142 of the Act was void and bad in law, the CIT (A) should have cancelled/annulled the assessment order. The issue involved has been dealt with by the CIT (A) in paragraph 1.4 of his order as under :-
"However, as far as issue of notices under section 143(2) and 142(1) are concerned, the submissions of the ld. counsel are found to be justified. After going through the case records it is seen that 143(2) and 142(1) notices for both the years were issued on 13-3-1985 for the first time filing the case for hearing on 21-3-1985 and these were served on 17-3-1985. Thereafter, for reasons beyond my imagination, the Assessing Officer has again issued notices under section 143(2) and a consolidated notice under section 142(1) for the two years on 20-3-1985 fixing the case for hearing on 26-3-1985 and these were served on 21-3-1985. When the second set of notices have been served on the date which was fixed for compliance of the first set of notices, it is quite proper on the part of the appellant to argue that first set of notices have become non est and no cognizance can be taken of the same. Therefore, only the second set of notices survive whose legality is to be examined. Undoubtedly, no returns have been filed in response to 148 notices in any of the years under appeal while the provisions of the Act require that 143(2) notices can be issued only in a case where return has already been filed. In this background I hold that there was no occasion for the ITO to issue 143(2) notices and accordingly, these are held to be void and bad in law. This also shows inapplication of mind on the part of the Assessing Officer. Further, proceedings of the two years are separate and independent proceedings and the statutory requirement of the Act demands that a separate notice be issued for each year. However, the Assessing Officer has issued only one consolidated notice under section 142(1) of the Act which otherwise would have been legally valid on 20-3-1985. For this reason such notice served on 21-3-1985 also is held to be defective and invalid. Further, it is a fact that 23rd & 24th March, were closed holidays on account of Saturday and Sunday and, therefore, the appellant got only three clear working days before making compliance on 26-3-1985 which is not a reasonable opportunity if the principles of natural justice are to be followed. As a matter of fact it was for this reason for 271(b) penalty order for the assessment year 1977-78 has been quashed by the Honble Tribunal and following such order I have no hesitation in holding that the appellant has been prevented with a reasonable opportunity as required under the law and assessment has been made hurriedly since it was going to be time-barred shortly. In this background the assessment order of the two years is found to suffer from procedural irregularities and for this reason alone the two assessment orders are held to be worth being set aside."
16. The ld. counsel for the assessee has submitted that since overlapping notices were issued, the assessee was mis-led and as such he has been deprived of a proper opportunity in the matter. On the other hand, the ld. Departmental Representative supported the order of the CIT (A).
17. We have considered the rival submissions. Since the assessment orders have been quashed by us, it is not at all necessary to decide the aforesaid ground of appeal. However, we are of the opinion that in case the reopening of the assessment is held to be valid, then the CIT (A) would be justified in setting aside the matter to the Assessing Officer for the fresh decision, inasmuch as the proper opportunity of hearing was not provided to the assessee. That being so, we find no merit in ground No. 3 of the appeal.
18. In the result, the appeals will be treated as allowed.
I.T.A. Nos. 166/Ind/92 and 955/Ind/90 :
19. These appeals have been filed against the levy of penalty under section 271(1) (a) of the Income-tax Act. As already stated above, no returns of income were filed by the assessee. The assessee also failed to file the returns even after issue of notices under section 148. In the circumstances, the Assessing Officer had initiated proceedings for levying penalty under section 271(1) (a) and had levied the penalty of Rs. 6,12,272 and Rs. 10,15,450 for the assessment years 1977-78 and 1978-79 respectively. The appeals preferred by the assessee were dismissed by the CIT (A).
20. The ld. counsel for the assessee has submitted that vide order dated 20th December, 1994, the assessments have been set-aside by the CIT (A) to the Assessing Officer for a fresh decision and since the assessments have been set aside, the income at present would be zero and as such no penalty is leviable. He has also submitted that framing of the assessments itself is being challenged in I.T.A. Nos. 116 and 117/Ind/95. On the other hand the ld. Departmental Representative has supported the levy of penalty.
21. We have considered the rival submissions. In the quantum appeals, we have quashed the assessments. That being so, no penalty is leviable and we hold accordingly.
22. In the result the appeals stand allowed.