Income Tax Appellate Tribunal - Delhi
Acit vs Star Ferro Alloys (P) Ltd. on 11 May, 2004
Equivalent citations: [2004]90ITD63(DELHI), (2005)94TTJ(DELHI)28
ORDER
K.C. Singhal, Judicial Member
1. The Hon'ble President, vide order dated 5.1.04, has nominated me as Third Member Under Section 255(4) of Income-tax Act, 1961 (in short as Act) to express my opinion on the questions referred to by the Members constituting the Bench. Both the Members have referred their separate questions. The learned Judicial Member (JM) has referred the following questions:
"Whether on the facts and in the circumstances of the case, the Judicial Member is right in upholding action of the Assessing Officer under Section 147 reversing CIT(A)'s order on the grounds that:
(1) The reasons recorded and the formation of belief that there was escapement of income for initiating the action under Section 147 were proper and valid;
(2) There was no change of opinion of AO because assessment under Section 143(3) had not been completed in the case and processing of return Under Section 143(1)(a) was not tantamount to assessment under Section 143(3).
(3) Since there was no assessment the provisions of explanation 2(b) of Section 147 was applicable in the case.
(4) Since the assessee had claimed excessive deductions including the deduction Under Section 80-O on gross amount instead of net amount, there was under statement of income by the assessee and hence provision of Explanation 2(b) of Section 147 applicable in the case.
(5) The initiation of proceedings and completion of assessment under Section 147 was within the limitation period as prescribed in Section 149 and 153.
Action under Section 147 is not barred if proceeding Under Section 143(3) was time barred."
On the other hand, the learned Accountant Member (AM) has referred the following questions:
"(i) Whether the Judicial Member was justified in holding that the initiation of proceedings under Section 147 was valid or the Accountant Member was justified in holding that the initiation of re-assessment proceedings was invalid, inasmuch as, nowhere the AO has recorded his satisfaction to the effect that "eh had reason to believe" that "any income chargeable to tax has escaped assessment"?
(ii) Whether the Accountant Member was justified in holding that the so called reasons recorded by the AO had any live link with the material available with the AO?
(iii) Whether the Accountant Member was justified in holding that the reasons recorded, if any, was without application of mind of the AO as the same was put to AO for his approval only?
(iv) Whether it is only AO's reason to believe which was necessary before issue of notice under Section 148 of the Act?"
2. At the initial stage of hearing it was seen that in fact there is no difference of opinion on question Nos. 3 to 5 as framed by the learned JM. The learned AM, in para 32 of his order, has clearly observed that there is no dispute to the contention of the DR that if no order has been passed on a valid return, then in view of Explanation to Section 147; it will be a case of deemed escapement of income. In the same para he has also observed that there is no dispute that proceedings Under Section 147 were initiated within the period of limitation and the assessment has also been completed within the limitation period. Further, learned AM has not expressed any opinion regarding Question Nos. 2 & 4. The only dispute between the learned members centers round the validity of initiation of re-assessment proceedings. When this position was confronted to both the parties, it was rightly agreed by them that basic difference of opinion between the learned Members was on the question whether the AO had reasons to believe that there was escapement of income. Hence, it was agreed that question to be answered may be re-framed. At this stage, however, thew learned counsel for the assessee argued for inclusion of the matter relating to the validity of the notice Under Section 143(2). This request was not accepted by me as neither there was any such dispute between the Members nor referred to in their questions. Finally, with the mutual consent of the parties, the question to be answered was re-framed as under:
"Whether on the facts of the case and in law, the re-assessment proceedings Under Section 147 were validly initiated".
3. The brief facts giving rise to this reference Under Section 255(4) are these: The assessee filed its return declaring income of Rs. 15,09,530/- on 15.12.89 against the due date of 31.12.89. This return was processed Under Section 143(1)(a) on 22.1.90. Subsequently, the notice Under Section 143(2) was issued on 23rd May, 90. However, the assessment could not be completed within the period of limitation i.e. by 31st March, 1992. Faced with this situation, the AO issued notice Under Section 147/148 on 15.12.92 after recording the reasons. The assessee filed a letter dated 16.2.93 objecting to the re-assessment proceedings Under Section 147 but without prejudice requested the AO to treat the return filed Under Section 139 as return filed pursuant to notice Under Section 148. Notice Under Section 143(2) was issued on 25th July, 1994 and finally, assessment was completed on 24th January, 1995. The CIT(A) upheld the initiation of reassessment proceedings as valid one. Hence, the present appeal was preferred before the Tribunal.
4. After hearing both the parties, the learned JM held (i) that in view of Explanation 2(b) to Section 147, the AO could validly issue notice Under Section 147 on 15.12.92 despite the fact that assessment could not be completed in pursuance of notice Under Section 143(2) dated 23rd May, 1990; (ii) that assessee had claimed excessive deduction Under Section 80-O which resulted in escapement of income; and (iii) that AO had reasons to believe that there was escapement of income on account of excessive claim Under Section 80-O and wrong claim of assessee regarding entertainment of expenses. Hence, the proceedings were validly initiated Under Section 147 (Paras 8 to 11 of the order of learned JM).
5. On the other hand, the learned AM opined (i) that reasons recorded by the AO revealed that initiation of proceedings Under Section 147 was for the purpose of examination only; (ii) that there was no material with the AO for formation of belief that there was escapement of income; (ii) that reasons were not recorded by AO himself which resulted in non application of mind by AO. Hence, it was held that proceedings Under Section 147 were not validly initiated.
6. The learned counsel for the assessee has reiterated he reasons given by the learned AM while the learned DR has relied on the reasonings given by the learned JM. Hence, the same need not be repeated.
7. After considering the submissions of both the parties and going through the orders of both the learned Members, I am inclined to agree that the reasoning given by the learned AM. To appreciate the controversy, it would be appropriate here to reproduce the reasons recorded by the AO as under:
"The assessee company has filed his return on 15.12.1989. The assessment was made Under Section 143(1)(a) on 22.1.1990. The company has claimed entertainment expenses on higher side and there is no receipt of donation of Rs. 5 lacs in the return. Expenses in the P&L A/c, credit in staff welfare, traveling, professional fees require investigation. Hence, if approved, notice under Section 148 may be issued."
A bare perusal of the above clearly reveals that nowhere the AO has recorded that he had reasons to believe that there was escapement of income. What has been mentioned is that assessee had claimed entertainment expenses on higher side but no material worth the name has been mentioned by him for coming to such conclusion. Further, he has merely expressed his doubts about the various expenses incurred by the assessee and regarding donation of Rs. 5 lacs received by the assessee. It is the settled legal position that before initiation of re- assessment proceedings, the AO must have some material/evidence in his possession on the basis of which he could have formed the belief that income had escaped assessment. Further, there must be live link between such material and formation of belief. These are the conditions precedent for initiating the proceedings Under Section 147. At this stage, it would be appropriate to quote the relevant observations of their Lordships of the apex court in the case of Lakhmani Mewal Das, 103 ITR 437 as under:
"The reasons for the formation of the belief contemplated by Section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the points as to whether action should be initiated for re-opening the assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words "definite information" which were there in Section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in Section 147 of the Act of 1961 would not lead to the conclusion that action can now be taken for reopening the assessment even if the information is wholly vague, indefinite, far-fetchd and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence."
Another decision which I would like to quote is the decision of the apex court in the case of Ganga Saran & Sons P. Ltd., 130 ITR 1 wherein their Lordships observed as under:
"The important words in Section 147(a) are "Has reason to belief"
and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. The court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which the is required to entertain the belief before he can issue notice Under Section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on fact and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid."
These two decisions clearly laid down that proceedings Under Section 147 cannot be initiated unless there is direct nexus or live link between the materials coming to the notice of the ITO and the formation of his belief that there has been escapement of income. Such formation of belief must be held in good faith and should not be a mere pretence. Such belief must not be arbitrary and irrational. This legal position has also not been disputed by the Members.
8. In view of the above legal position, the question to be examined is whether there is any material for forming a bonafide belief that there was escapement of income. The learned DR has not been able to point out any material to justify the action of the AO. The reasons recorded do not indicate any material on the basis of which it could be said that there was escapement of income. The learned JM has upheld the action of AO merely by stating that assessee had excessively claimed the deduction Under Section 80-O and wrongly claimed deduction of entertainment expenses. But there is no material worth the name for coming to such conclusion. Even excessive claim Under Section 80-O was never the basis for re-opening the assessment Under Section 147. Therefore, in my opinion, the learned AM was justified in holding that initiation of proceedings Under Section 147 was bad in law.
9. Besides this, the so called reasons recorded by AO shows that there was non application of mind of the part of the AO. It appears from the language that some staff official put up a note before the AO seeking his approval before issuing notice Under Section 148. Further, it appears that such note was put up in order to make investigation into the claim of the assessee regarding various expenses incurred by it. The so called reasons clearly shows that the AO wanted to make investigations into the claim of the assessee regarding entertainment expenses and other expenses as well as the donation of Rs. 5 lacs. In my opinion, the proceedings Under Section 147 cannot be resorted to for making roving enquiries. As noted in the earlier para, the Hon'ble Supreme Court has clearly held that belief must be held in good faith and could not merely be a pretence. In view of the same, it has to be held that provisions of Section 147 cannot be invoked merely for making investigation or roving enquiries. Therefore, even on this account, such proceedings were bad in law.
10. In view of the above discussion, I am entirely in agreement with the view expression by learned AM. Accordingly, it is held that re-assessment proceedings Under Section 147 were not validly initiated. The matter would now go back to the regular bench for necessary orders.