Delhi High Court
Consolidated Photo And Finvest Ltd. vs Asst. Commissioner Of Income Tax on 17 January, 2006
Equivalent citations: (2006)200CTR(DEL)433, [2006]281ITR394(DELHI)
Author: T.S. Thakur
Bench: T.S. Thakur, B.N. Chaturvedi
JUDGMENT T.S. Thakur, J.
Page 427
1. In this petition for a writ of certiorari, the petitioner calls in question the validity of a notice issued to it under Section 148 of the Income-tax, 1961 (for short "the Act"), proposing to reopen the assessment for the assessment year 1998-99 on the ground that income exigible to tax for the said year has escaped assessment.
2. The facts giving rise to the filing of the petition may be summarized as under:
3. The petitioner-company carries on business as an import agent. For the assessment year 1998-99, it had filed a return under Section 139 of the Act and declared a loss of Rs.2,96,44,790/-. It had, for that year, received interest free advances/trade deposits from its principals to pay the import bills against Letter of Credit opened by the petitioner, at its own cost. These interest free funds could, according to the petitioner, be used for any gainful activity till such time the same were utilised to meet the demand under the import bills. The petitioner claims to have utilised these funds in making short-term advances by way of inter-corporate deposits and had earned interest income on the same which income was, according to the petitioner, incidental to its business. Petitioner's further case is that it had, during the assessment proceedings, furnished details of all the expenses incurred by it including the import expenses comprising interest, foreign exchange fluctuation, rebate and discount, LC charges/bank charges and hundi charges. The Assessing Officer had concluded the assessment proceedings by an order dated 27th September, 2000 in terms of Section 143(3) of the Act. More than four years later, the petitioner received a notice under Section 148 of the Act from the Assessing Officer, alleging that income of the petitioner for the assessment year under consideration had escaped assessment hence required reassessment. The petitioner was, accordingly, called upon to file its return of income in response whereto the petitioner filed the very same return as was originally filed and accepted. The petitioner at the same time requested respondent No.1 to furnish the reasons for the proposed reopening of the assessment, which reasons respondent No.1 summarised in the following words:
"The return of income in this case was filed on 28.11.1998 declaring loss of Rs.2,96,44,790. Thereafter the assessment Under Section 143(3) was completed on 27.09.2000 at a loss of Rs.2,95,44,790 after making an addition of Rs.1,00,000 on account of legal and professional charges to the returned loss of Rs.2,96,44,790.
On perusal of the record, it is noticed that during the year under consideration the assessed has debited expenses amounting to Rs.16,48,23,292 under the head "Import Agency Exp.", which includes the following:
Page 428 1 Interest on supplier credit 4,55,14,793/-
2 Foreign Exchange fluctuation 3,79,85,090/-
3 Rebate & discount 6,58,46,708/-
4 L.C. Charges & other 1,39,15,851/-
5 Hundi charges. 15,60,850/-
Taking in view of the nature of the income declared by the assessed, I am of the view that the aforesaid exp. Have no relevance with the any of the sources of the income and these exp. have been wrongly claimed and allowed.
On a further perusal of the asstt. records, it is seen that during the year under consideration the assessed has incurred certain administrative and personal exp. to the extent of Rs.7,27,000 to earn dividend income of Rs.1,58,58,710/- which has been claimed as exempt Under Section 10(33) of I.T. Act. These exp. of Rs.7,27,000 which were to be disallowed have not been disallowed in the assessment completed Under Section 143(3) vide order dated 27/09/2000.
In view of these facts, I have reason to believe that exp. of Rs.16,55,50,292 requires disallowance and the same have escaped from the assessment in terms of clause (c) of expn. 2 of section 147 of the I.T. Act, the assessed has failed to disclose fully and truly all materials facts necessary for assessment.
4. By its letters dated 25th April, 2005 and 15th September, 2005, the petitioner objected to the initiation of re-assessment proceedings, inter alia, on the ground that the re-opening of the assessment was bad in law in as much as the proposed re-assessment was based on a mere change of opinion. Respondent No.1 rejected the said objection in terms of an order dated 21st October, 2005, in which the respondent observed that the re-assessment had become necessary as the assessed had failed to disclose fully and truly all the material facts necessary for the assessment which had resulted in escapement of income. Relying upon the decisions of the Supreme Court, the respondent held that mere production of the evidence by the petitioner before the Income-tax Officer was not enough. The assessed was duty bound to bring to the notice of the assessing authority all material and relevant facts which may lie embedded in the evidence produced by the assessed no matter the assessing authority could have uncovered such facts but had not actually done so. The present petition, as already noticed above, assails the correctness of the said order and prays for quashing of the impugned notice proposing to re-open the assessment.
5. Appearing for the petitioner, Mr. Vohra, strenuously argued that the petitioner-assessed had disclosed all material facts and information including the details of the expenditure incurred by it and allowed by the assessing officer while making the assessment. He urged that although the order of assessment made by the Assessing Officer did not refer to the details regarding the expenditure claimed by the petitioner yet the deduction of the said expenditure from the taxable income of the petitioner was sufficient to demonstrate that the Assessing Officer had applied his mind and granted the Page 429 deduction after being satisfied that the same was legally allowable. He laid considerable emphasis on the reply submitted by the petitioner to the questionnaire issued by the Assessing Officer and the information furnished to the Assessing Officer in terms of letter dated 6th September, 2000 before the completion of the assessment proceedings. It was argued that the assessed had in the reply to the questionnaire made a mention about the expenses claimed by it and asserted that there was a nexus between interest income earned by the assessed and the said expenses. The disclosure of the details regarding the expenses and other information demanded from the petitioner was according to Mr. Vohra sufficient to give rise to a presumption that the Assessing Officer had applied his mind to the said details and made a conscious order granting deduction claimed by the assessed. Any attempt to reopen the assessment in such circumstances would, according to the learned counsel, amount to re-assessment merely on the basis of a change of opinion which was legally impermissible. Reliance was placed by Mr. Vohra upon judicial pronouncements in an attempt to show that a mere change of opinion was not sufficient for re-opening a validly concluded assessment. Reliance was also placed upon a decision of the Full Bench of this Court in CIT v. Kelvinator of India 256 ITR 1 in support of the submission that an order of assessment must be presumed to have been passed by the Assessing Officer concerned after due and proper application of mind. It was further contended by Mr. Vohra that the proposed re-assessment in relation to the administrative and personal expenditure to the tune of Rs.7,27,000/- claimed by the petitioner was, in any case, impermissible in the light of proviso to Section 14-A, which was, according to the learned counsel, directly attracted to the case at hand and disabled the Assessing Officer from re-assessing or enhancing the assessment or otherwise increasing the liability of the assessed under Section 154 in any assessment year beginning on or before the 1st April, 2001. It was submitted that even assuming that expenditure of Rs.7,27,000/- was not allowable under Section 14-A, the proviso to the said provision would save any deductions allowed on that account for any assessment year prior to 1st April, 2001.
6. On behalf of the respondent, it was argued by Mr. Goel that the mere production of account books or other evidence relevant to the making of an assessment did not tantamount to disclosure within the meaning of Section 147 of the Act. He urged that although the petitioner had given a reply to the questionnaire and referred to the expenses claimed by way of a deduction, there was nothing in the order of assessment to show that the Assessing Officer had critically examined the said claim or material. He contended that even the petitioner had not in its reply to the notice under Section 148 made any assertion to the effect that the material furnished by him to the Assessing Officer before the conclusion of the assessment had been examined and analysed while passing the order of assessment. It was not, therefore, a case where the proposed re-assessment was based on a mere change of opinion. It was, according to the learned counsel a case where the Assessing Officer had recorded no opinion whatsoever on the admissibility of deductions claimed by the petitioner. He urged that Clause (c) of Explanation 2 to Section 147 made it abundantly clear that cases in which the taxable income had been Page 430 made the subject of excessive relief under the Act or cases in which excessive loss or depreciation allowance or any other allowance under the Act had been computed, would constitute cases of escaped assessment within the meaning of Section 147 of the Act. Grant of relief by way of deduction of expenses from the taxable income of the petitioner would, therefore, constitute escapement of income chargeable to tax if such deductions were not otherwise legally permissible. He further argued that the Assessing Officer had not examined or applied his mind to the deduction of Rs.7,27,000/- towards administrative and personal expenses nor was there anything on record to suggest that any question at any stage was asked from the assessed about the said expenditure or its exigibility to tax. The Assessing Officer was, in that view, perfectly justified in concluding that income chargeable to tax had escaped assessment. It was also submitted that the conclusions drawn by the Assessing Officer in the notice under Section 148-A of the Act and the reasoned order passed in terms of the procedure stipulated by the Supreme Court in GKN Driveshafts (India) Ltd. v. I.T.O. and Ors. 259 ITR 19 were prima facie in nature and did not prevent the petitioner from justifying its claim for deduction before the Assessing authority nor would it prevent the Assessing authority from granting to the petitioner such relief as may otherwise be permissible in law. He urged that the final order made on the basis of the impugned notice was appealable before the CIT (Appeals) and then before the Tribunal in which appeals, the petitioner would be free to urge all contentions including the contention that the Assessing Officer had no reason to believe that any income chargeable to tax had escaped assessment.
7. We have given our anxious consideration to the submission made at the bar and perused the record. Chapter XIV of the Act prescribes the procedure for assessment. While Sections 139 to 145, inter alia, provide for filing of returns, issue of permanent account numbers, self-assessment, refund, inquiry before assessment, best judgment assessments and method of accounting etc., Section 147 deals with income escaping assessment. A careful reading of Section 147 of the Act makes it clear that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he may, subject to the provisions of Section 148 to 153, assess or re-assess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice in the course of the proceedings under the said provisions. The Assessing Officer can, while doing so, re-compute the loss or the depreciation allowance or any other allowance as the case may be for the assessment year concerned. Proviso to Section 147 stipulates a period of limitation within which action for re-assessment can be initiated, and provides that no action under Section 147 shall be taken after the expiry of four years from the end of the relevant assessment year in cases where an assessment under sub-Section (3) of Section 143 has been made unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessed to either make a return under Section 139 or to respond 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.
Page 431
8. It is clear from the above that the two critical aspects which need to be addressed in any action under Section 147 are whether the Assessing Officer has "reason to believe" that any income chargeable to tax has escaped assessment and whether the proposed reassessment is within the period of limitation prescribed under the proviso to Section 147. Explanation (1) to the said provision makes it clear that production of account books or other evidence from which the Assessing Officer could with due diligence discover material evidence would not necessarily amount to disclosure within the meaning of the proviso that stipulates an extended period of limitation for action in cases where the escapement arises out of the failure on the part of the assessed to disclose fully and truly all material facts necessary for assessment. Explanation (2) to Section 147, on the other hand, stipulates the circumstances in which income chargeable to tax shall be deemed to have escaped assessment. It reads thus:
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 assessed although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessed but no assessment has been made and it is noticed by the Assessing Officer that the assessed has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
(c) where an assessment has been made; but -
income chargeable to tax has been underasssessed ; or such income has been made the subject of excessive relief under this Act; or excessive loss or depreciation allowance or any other allowance under this Act has been computed.
9. The above would show that cases falling in Clause (c) of Explanation (2) (supra) in which income chargeable to tax has been under-assessed or assessed at too low a rate or cases in which income has been made the subject of excessive relief under the Act or where excessive loss or deprecation allowance or any other allowance under the Act has been computed, would constitute cases of income escaping assessment. There is considerable authority for the proposition that the jurisdiction of the Assessing Officer to initiate proceedings would depend upon whether he has reasons to believe that any income chargeable to tax has escaped assessment. A long string of decisions rendered by the Supreme Court have emphasized that the belief of the Assessing Officer must be in good faith and must not be a mere pretence. The Apex Court has further held that there must be a nexus between the material before the Assessing Officer and the belief which he forms regarding the escapement of the assessed's income. A writ Court, therefore, is entitled to examine whether the Assessing Officer's belief was in good faith and whether such reasons had a nexus with the action proposed to be taken.
Page 432
10. It is common ground that in the present case the Assessing Officer had not received any additional information from any outside source or quarter but the fact that there was no such information did not make any material difference. Action under Section 147 was permissible even if the Assessing Officer gathered his reasons to believe from the very same record as had been the subject matter of the completed assessment proceedings. What Mr. Vohra argued was that the Assessing Officer could not, on the basis of the very same material as was available to him at the time of assessment, initiate action under Section 147 for doing so, would constitute action based entirely on a change in his opinion. The contention is that if the material was available to the Assessing Officer and if an assessment order based on that material is passed by him, a re-assessment using the very same material or inferences available from that material should tantamount to a mere change of opinion, which cannot, according to the petitioner, constitute a valid ground for re-assessment.
11. We may, before going into the merits of the main contention urged before us, deal with the question of limitation feebly argued by Mr. Vohra. As noticed earlier, the proviso to Section 147 envisages action in the ordinary course within a period of four years from the end of the relevant assessment year. That limitation does not, however, apply to cases where income chargeable to tax has escaped assessment on account, inter alia, of the failure of the assessed to disclose fully and truly all material facts. The argument that production of the account books and other documentary evidence relevant for assessment must imply a full and true disclosure of all material facts must be rejected out of hand in the light of the provisions of Explanation (1), according to which mere production of the books of accounts or other evidence from which the Assessing Officer could have, with due diligence, discovered the material evidence does not necessarily amount to a disclosure within the meaning of the proviso. The action initiated by the respondent does not in that view suffer from any error of jurisdiction to warrant interference from this Court in exercise of its writ jurisdiction.
12. That brings us to the question whether the assessing officer had any reason to believe that income exigible to tax had escaped assessment. The contours of the court's review jurisdiction in such cases have been stated in a series of pronouncements to which we may briefly advert at this stage.
13. In Calcutta Discount Company Ltd. v. Income Tax Officer 41 ITR 191, the apex Court held that while it was the duty of the assessed to disclose all facts which had a bearing on the question, what inference should be drawn from the facts so disclosed was a matter to be examined by the Income Tax Officer. The Court further held that the Income Tax Officer could issue a notice for re-opening the assessment if he had reasons to believe that the income, profits or gains had been under-assessed and that such under-assessment was due to non-disclosure of material facts by the assessed. The Court observed that whether the Income Tax Officer had prima facie reasonable grounds for believing that there has been a non-disclosure of primary fact, that was by Page 433 itself sufficient to give jurisdiction to him to issue a notice for re-opening the assessment. The adequacy or otherwise of the grounds of such belief was not open to investigation by the Court. The Court further held that if there are in fact some reasonable grounds for the Income Tax Officer to believe that there had been a non-disclosure as regards any fact which could have a material bearing on the question of under-assessment, it would be sufficient to give jurisdiction to the officer to issue a notice. Whether the grounds were adequate or not is not a matter for the court to investigate. The sufficiency of the grounds, declared the court, was not a justiciable issue.
14. In Kantamani Venkata Narayana & Sons v. First Additional Income Tax Officer 63 ITR 638, the apex Court held that in proceedings under Article 226 of the Constitution of India challenging the jurisdiction of the Income Tax Officer to issue a notice for re-opening the assessment, the High Court was only concerned with examining whether the conditions which invested the Income Tax Officer with the powers to re-open the assessment existed. It is not, observed the Court, within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The Court also held that from a mere production of the books of account, it could not be inferred that there had been full disclosure of the material facts necessary for the purposes of assessment. The terms of the explanation, declared the court, were too plain to permit an argument that the duty of the assesee to disclose fully and truly all material facts would stand discharged when he produces the books of account or evidence which has a material bearing on the assessment. The Court observed :
It is the duty of the assessed to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment.
15. To the same effect is the decision of the Supreme Court in Malegaon Electricity Co. P. Ltd. v. C.I.T. 78 ITR 466 where the Court observed :
It is true that if the Income-Tax Officer had made some investigation, particularly if he had looked into the previous assessment records, he would have been able to find out what the written down value of the assets sold was and consequently he would have been able to find out the price in excess of their written down value realised by the assessed. It can be said that the Income-Tax Officer if he had been diligent could have got all the necessary information from his records. But that is not the same thing as saying that the assessed had placed before the Income-Tax Officer truly and fully all material facts necessary for the purpose of assessment. The law casts a duty on the assessed to "disclose fully and truly all material facts necessary for his assessment for that year.
Page 434
16. In Income Tax Officer v. Lakhmani Mewal Das 103 ITR 437, the Court held that grounds or reasons which lead to the formation of belief contemplated by Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessed from assessment. Once there exist reasonable grounds for the Income Tax Officer to form the above belief, that would be sufficient to clothe him with the jurisdiction to issue a notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induced the Income Tax Officer is, therefore, not a justiciable issue. 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 relevant for the purpose of the section. To that limited extent only, the action of the Income Tax Officer can be challenged in the Court. The following observations are, in this regard, apposite :
As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the 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 assessed 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 point as to whether action should be initiated for reopening 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 farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessed from assessment.
17. In Praful Chunilal Patel v. Asst. Commissioner of Income Tax 236 ITR 832, a division bench of the Gujarat High Court, incorporated the word 'reason' in the phrase 'reason to believe' in the following words :
The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has a cause or justification to think or suppose that income had escaped assessment , he can be said to have a reason to believe that such income had escaped assessment. The words "reason to believe: cannot mean that the Assessing Officer should have finally ascertained the facts by legal evidence. They only mean that he forms a belief from the examination he makes and if he likes from any information that he receives. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would amount to saying that he had reason to believe that such income had escaped assessment. The justification for his belief is not to be judged from the standards of proof required for coming to a final decision. A belief though justified for the purpose of initiation of the proceedings under Section 147, may Page 435 ultimately stand altered after the hearing and while reaching the final conclusion on the basis of the intervening enquiry. At the stage where he finds a cause or justification to believe that such income has escaped assessment, the Assessing Officer is not required to base his belief on any final adjudication of the matter.
18. To the same effect is the view expressed by the same court in Gruh Finance Ltd. v. Joint Commissioner of Income Tax (Assessment) 243 ITR 482 where the Court held that if no conscious consideration of the material available on record is made and a mistake has been committed, it will not prevent the competent officer to exercise powers under Section 147 of the Act. The Court observed :
We have also seriously, considered the entire case law from which aforesaid paragraphs are relied on. In so far as the expressions "reason to believe" and "change of opinion" are concerned, we are of the view that though the material was available on record, at the time of first assessment, when no conscious consideration of the material is made and a mistake has been committed, it would not, in any case, create an embargo or a ban on the competent officer to exercise powers under the amended section 147 of the Income-tax Act, 1961, as prima facie, there could not be "change of opinion" in that factual scenario. It has also not been shown to us on behalf of an assessed. If conscious application of mind is made to the relevant facts and material available or existing at the relevant point of time while making assessment and again a different or divergent view is sought, it would tantamount to "change of opinion", whereas , in the case of existing material, no conscious attempt has been made, it would tantamount to mistake in not considering the relevant point or proposition and it would not be a " change of opinion.
19. In the light of the authoritative pronouncements of the Supreme Court referred to above, which are binding upon us and the observations made by the High Court of Gujarat with which we find ourselves in respectful agreement, the action initiated by the assessing officer for reopening the assessment cannot be said to be either incompetent or otherwise improper to call for interference by a writ court. The Assessing Officer has in the reasoned order passed by him indicated the basis on which income exigible to tax had in his opinion escaped assessment. The argument that the proposed reopening of assessment was based only upon a change of opinion has not impressed us. The assessment order did not admittedly address itself to the question which the assessing officer proposes to examine in the course of re-assessment proceedings. The submission of Mr. Vohra that even when the order of assessment did not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the assessing officer and had been held in favor of the assessed is too far fetched a proposition to merit acceptance. There may indeed be a presumption that the assessment proceedings have been regularly conducted, but there can be no presumption that even when the order of assessment is Page 436 silent, all possible angles and aspects of a controversy had been examined and determined by the assessing officer. It is trite that a matter in issue can be validly determined only upon application of mind by the authority determining the same. Application of mind is, in turn, best demonstrated by disclosure of mind, which is best done by giving reasons for the view which the authority is taking. In cases where the order passed by a statutory authority is silent as to the reasons for the conclusion it has drawn, it can well be said that the authority has not applied its mind to the issue before it nor formed any opinion. The principle that a mere change of opinion cannot be a basis for reopening computed assessments would be applicable only to situations where the assessing officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the assessing officer either generally or in the form of a reply to the questionnaire served upon the assessed. What is important is whether the assessing officer had based on the material available to him taken a view. If he had not done so, the proposed reopening cannot be assailed on the ground that the same is based only on a change of opinion.
20. In the result, this writ petition fails and is hereby dismissed but in the circumstances without any order as to costs.