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Validity of: Re-assessment - Escaped income as per notice under s.148 not added
December, 25th 2007

ACIT vs Mahalaxmi Chemical Works
Citation 2007 17 SOT 140 
 
Validity of: Re-assessment - Escaped income as per notice under s.148 not added
The notice under s.148 was issued for the reason that interest paid was not allowable since funds taken on interest were not used for business purpose. During reassessment said interest was not disallowed, accepting the assessee's explanation. The reassessment for that reason could not be held to be invalid since there was prima facie reason to believe at the time of issue of notice under s.148 that income had escaped assessment.

Limitation for re-assessment - Non-issue of notice under s.143(2) with in specified period
The notice under s.143(2) was issued after lapse of 12 months from the end of the month in which return under s.148 was filed. Therefore, the reassessment framed was time barred.

ITAT, Mumbai

ACIT vs Mahalaxmi Chemical Works

IT Appeal Nos. 2258 to 2260 and 2436 to 2438 (Mum.) of 2003

G.C. Gupta, Judicial Member and D.C. Agrawal, Accountant Member

17 February 2006

Ajoy Kumar Singh for the Appellant
Deepak Lala for the Respondent

ORDER

Per Bench

1. These are the appeals filed by assessee as well as Revenue against the order of the Learned CIT(A).

2. The Revenue in its appeals in ITA Nos. 2258, 2259 and 2260/Mum./2003 for assessment years 1995-96, 1996-97 and 1998-99, has raised the following grounds :

Grounds of appeal in ITA No. 2258/Mum./2003

(i) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to exclude amount of sales tax and L/C opening charges from the total turnover for computing the deduction under section 80HHC.

(ii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to reduce the net profit declared by the assessee by the net amount of excise duty paid (total amount paid less the amount of refund received) and to consider the profits so arrived to adopt as the profit of the business for computing deduction under section 80HHC.

(iii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer for calculation of 80HHC deduction whereas he is silent about the quantification of the deduction.

(iv) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in not appreciating that the amount of Central Excise, Modvat Credit, Sales Tax payment, Sales, closing stock and depreciation are all verifiable items.

Grounds of appeal in ITA No. 2259/Mum./2003

(i) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to exclude amount of sales tax and L/C opening charges from the total turnover for computing the deduction under section 80HHC.

(ii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to reduce the net profit declared by the assessee by the net amount of excise duty paid (total amount paid less the amount of refund received) and to consider the profits so arrived to adopt as the profit of the business for computing deduction under section 80HHC.

(iii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer for calculation of section 80HHC deduction whereas he is silent about the quantification of the deduction.

(iv) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in not appreciating that the amount of Central Excise, Modvat Credit, Sales Tax payment, Sales, closing stock and depreciation are all verifiable items.

Grounds of appeal in ITA No. 2260/Mum./2003

(i) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to exclude amount of sales tax and L/C opening charges from the total turnover for computing the deduction under section 80HHC.

(ii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer to reduce the net profit declared by the assessee by the net amount of excise duty paid (total amount paid less the amount of refund received) and to consider the profits so arrived to adopt as the profit of the business for computing deduction under section 80HHC.

(iii) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in directing the Assessing Officer for calculation of 80HHC deduction whereas he is silent about the quantification of the deduction.

(iv) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in not appreciating that the amount of Central Excise, Modvat Credit, Sales Tax payment, Sales, closing stock and depreciation are all verifiable items.

(v) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in allowing the depreciation allowance of Rs. 17,900 without giving the base of these findings for assessment year 1998-99.

3. Following grounds have been raised by the assessee in ITA Nos. 2436, 2437 and 2438/Mum./2003 for the assessment years 1995-96, 1996-97 and 1998-99, which are reproduced as under :

Grounds of appeal in ITA No. 2436/Mum./2003

(i) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing the notice under section 148 dated 27-10-1999 for the assessment year 1995-96.

(ii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing notice under section 143(2) dated 12-9-2001 after the lapse of more than 12 months in response to the appellants letter dated 4-12-1999 filed in pursuance of notice under section 148 dated 27-10-1999.

(iii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in continuing the reassessment proceedings under section 147 when all the reasons for initiating the reassessment proceedings were found to be incorrect and non-existent.

(iv) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in passing the assessment order under section 143(3) read with section 147.

(v) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in including the Excise Duty of Rs. 25,73,352 incurred by the appellant on goods exported out of India as a part of Direct Costs attributable to exports while recomputing the deduction under section 80HHC.

(vi) TheCommissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in considering the remuneration to partners of Rs. 2,00,000 as part of Indirect Costs attributable to Exports.

Grounds of appeal in ITA No. 2437/Mum./2003

(i) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing the notice under section 148 dated 27-10-1999 for the assessment year 1996-97.

(ii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing notice under section 143(2) dated 12-9-2001 after the lapse of more than 12 months in response to the appellants letter dated 4-12-1999 filed in pursuance of notice under section 148 dated 27-10-1999.

(iii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in continuing the reassessment proceedings under section 147 when all the reasons for initiating the reassessment proceedings were found to be incorrect and non-existent.

(iv) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in passing the assessment order under section 143(3) read with section 147.

(v) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in including the Excise Duty of Rs. 15,10,092 incurred by the appellant on goods exported out of India as a part of Direct Costs attributable to Exports while recomputing the deduction under section 80HHC.

(vi) TheCommissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in considering the remuneration to partners of Rs. 2,00,000 as part of Indirect Costs attributable to Exports.

(vii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in considering the interest paid on Bank overdraft of Rs. 4,01,817 as part of indirect costs attributable to exports while re-computing the deduction under section 80HHC.

(viii) The Commissioner of Income-tax (Appeals) erred in considering the interest received on Bank Fixed Deposits of Rs. 22,06,414 as assessable under the head Income from other sources when the Assessing Officer has correctly assessed it under the head Business Income.

Grounds of appeal in ITA No. 2438/Mum./2003

(i) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing the notice under section 148 dated 27-10-1999 for the assessment year 1998-99.

(ii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in issuing notice under section 143(2) dated 12-9-2001 after the lapse of more than 12 months in response to the appellants letter dated 4-12-1999 filed in pursuance of notice under section 148 dated 27-10-1999.

(iii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in continuing the reassessment proceedings under section 147 when all the reasons for initiating the reassessment proceedings were found to be incorrect and non-existent.

(iv) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in passing the assessment order under section 143(3) read with section 147.

(v) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in including the Excise Duty of Rs. 8,76,618 incurred by the appellant on goods exported out of India as a part of Direct Costs attributable to Exports while recom-puting the deduction under section 80HHC.

(vi) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in considering the remuneration to partners of Rs. 2,00,000 as part of Indirect Costs attributable to Exports.

(vii) The Commissioner of Income-tax (Appeals) failed to appreciate that the Assessing Officer has erred in considering the interest paid on Bank overdraft of Rs. 47,587 as part of indirect costs attributable to exports while re-computing the deduction under section 80HHC.

(viii) The Commissioner of Income-tax (Appeals) erred in considering the interest received on Bank Fixed Deposits of Rs. 31,44,870 as assessable under the head Income from other sources when the Assessing Officer has correctly assessed it under the head Business Income.

(ix) The Commissioner of Income-tax (Appeals) failed to appreciate that the claim for depreciation allowance being option, the Assessing Officer has erred in thrusting the depreciation allowance of Rs. 17,900 on the appellant.

4. Before coming to the merit of the case, the Learned Counsel for the assessee had challenged reopening of the assessment under section 148(1) of the Income-tax Act, 1961 (in short Act) and also that assessments are time-barred because notice under section 143(2) of the Act were issued in all the cases, after expiry of one year from the date of filing of a letter in response to the notice under section 148(1), wherein, the assessee had submitted that return filed originally should be treated as the one filed in response to notice under section 148(1).

5. On reopening of assessment for all these years, the Assessing Officer recorded the following reasons :

During the course of assessment proceedings for the assessment year 1997-98 it was found that the assessee was given interest-free loan amounting to Rs. 16,59,627. This loan it is further seen are containing an assessment year 1998-99 also and the assessee has not charged any interest on these loans. This contrast with the fact that the assessee has paid interest of Rs. 10,981. Therefore, the interest paid by the assessee deserves to be disallowed equivalent to the amount of interest receivable at the rate of 14 per cent of the loan amount given. The interest receivable comes to Rs. 2.32 lakhs since the assessee has paid interest amounting to Rs. 10,981. Therefore, the entire amount of Rs. 10,981 has to be disallowed. This view has been supported by numerous court decisions. In support of this contention the reliance is placed as mentioned below:

(a) Triveni Engineering Works v. CIT 167 ITR 754 (All.)

(b) H.R. Sugar Factory v. CIT 171 ITR 363 (All.)

(c) Phalton Sugar Works Ltd. v. CIT 208 ITR 989 (Bom.) and 216 ITR 479 (Bom.).

Therefore, in view of the above mentioned facts the income amounting to Rs. 10,981 has escaped assessment and the case was reopened under section 147 of Income-tax Act, 1961.

6. The Assessing Officer recorded similar reasons for other years except the change of figures relating to disallowance of interest. However, while completing the assessment under section 148(1), the Assessing Officer accepted the claim of the assessee about interest and did not make any addition, by observing as under :

3.2 The issue of interest disallowance in assessment year 1997-98 was not contested by the Department and hence the contention of the assessee is accepted. However, on explanation of the return, it transpired that the assessee has claimed excess deduction under section 80HHC. The assessee while calculating under section 80HHC did not account for export freight, insurance, excise & octroi duty paid, remuneration to partners, interest paid, depreciation as part of direct cost and indirect cost attributable to exports. The assessee was querred vide letter dated 13-2-2002 on this issue.

The Assessing Officer made the addition by re-computing deduction under section 80HHC of the Act.

7. Beforethe Learned CIT(A), the assessee challenged the reopening of the assessment on the ground, that the issue on which the assessment was re-opened was finally dropped and no addition on that account was made. Once very basis of escapement of income does not survive, then re-assessment proceedings will also not survive. The Learned CIT(A) considered the first submission of the assessee and upheld the reopening by observing as under :

I have considered the submissions of the appellant. Admittedly the re-assessment proceedings were initiated on the issue of interest-free loans advanced to related parties. However, while framing the assessment, the Assessing Officer realised that subsequent to the issue of notice, the CIT(A) had decided the issue in favour of the appellant and the department had accepted the decision of CIT(A). Therefore, no disallowance was made on this account. However, while examining the case, the Assessing Officer realised that the computation of deduction made in the earlier assessment order had some errors and he proceeded to examine the issue to correct the error. The provisions of section 147 empowers the Assessing Officer, if any income chargeable to tax has escaped assessment to reassessed such income and also any other income chargeable to tax which is escaped assessment and which came to his notice subsequently in the course of reassessment proceedings.

The Punjab & Haryana High Court in the case of Vipin Khanna 255 ITR 220 has held that even after the amendment to section 147 with effect from 1-4-1989 the Assessing Officer is not empowered to carry out general review of his own order under section 143(3) making inquiry into various other issues in reassessment proceedings. In the instant case, however, the Assessing Officer has not undertaken a general review of various issues in the reassessment. The issue of excessive deduction under section 80HHC was deleted from the return accompanying the documents and the Assessing Officer was not out of jurisdiction to correct the anomaly and ensure correct amount of deduction was allowed to the appellant. The appellant has also relied on the decision of Delhi High Court in the case of Kelvinator of India Ltd. which states that even after 1-4-1989, reassessment cannot be based on mere change of opinion. In this decision, the Delhi High Court held that the Assessing Officer does not have power to review his own order in the garb of re-assessment. Mere change of opinion cannot be the basis of reassessment. In this case, before me, the facts are different in that the particular issue of Excise Duty had not been examined in the earlier assessment. Thus, it cannot be said that reassessment was done on a mere change of opinion.

8. On the question as to whether reassessment proceedings are invalid because under section 143(2) was issued more than 12 months after the issue of notice under section 148, the Learned CIT(A) observed as under:

As the regard the issue, of notice under section 143(2) after one year, this, as well as the other issue regarding change of opinion, had not been raised before the Assessing Officer at the time of reassessment. The appellant subjected itself to the reassessment proceedings. Since the issue was not challenged at the stage of assessment, it cannot be raised at the appellate stage.

Thus, the learned CIT(A) did not entertain this ground of the assessee on the plea that this issue was not raised before the Assessing Officer. The Learned CIT(A), however, deleted the addition made on account of computation under section 80HHC.

9. Before us, the Learned Counsel for the assessee submitted that proceedings under section 148(1) are bad because the basis on which, notice under section 148(1) was issued, did not survive as the Assessing Officer did not make any addition on account of disallowability of interest. The Assessing Officer had not gone into the nexus between interest bearing borrowings invested into interest-free advances. Without this, it could not be said that any part of interest is disallowable and, therefore, income has escaped assessment. Regarding assessment having become time-barred, the Learned Counsel for the assessee submitted that notices under section 143(2) were issued in all these cases on 27-10-1999. These were received on 14-11-1999 and the assessee had furnished reply on 6-12-1999 to the effect that return already filed should be treated as the one filed in response to notice under section 148(1). Therefore, notice under section 143(2) should have been issued on/or before 5-12-2000. They were, in fact, issued on 12-9-2001. He relied on the decision of the Special Bench in the case of Raj Kumar Chawla v. ITO [2005] 94 ITD 1 (Delhi) and also Division Bench of the Tribunal in the case of Uma Polymers (P.) Ltd. v. Asstt. CIT [2002] 123 Taxman 226 (Mum.) (Mag.) for the proposition that provisions under section 143(2) are mandatory and non-issuance of notice under this sub-section shall render order passed under section 143(3) as invalid.

10. Against this, the Learned Departmental Representative submitted that for the validity of reassessment, what has to be seen is, whether the Assessing Officer has information in his possession on the basis of which he could have re-opened the assessment. If that information has a nexus with the reopening of the assessment, then reopening would be justified. It is immaterial as to what happens during the course of assessment proceedings. It is possible that quantum of escapement of income may increase. It may go down or it may not survive at all. The Assessing Officer will see the facts as they were available before him at the time of re-opening of assessment. He would not be concerned with the facts discovered subsequently. At the time when he reopened the assessment, he had with him, the assessment order for the assessment year 1997-98, according to which, a part of interest paid on borrowed funds were treated as disallowable as funds were used for non-business purposes. Regarding assessment having become time-barred, the Learned D.R. submitted that these provisions would not be applicable to proceedings under section 148. The Learned D.R. relied on the decision of the Delhi Bench in Poonam Rani Singh v. Dy. CIT [2005] 97 ITD 390, for the proposition that re-opening could not be held invalid merely because in the ultimate analysis, no escapement is found.

11. We have considered the rival submissions and material on record. So far as re-opening of the assessment is concerned, we are of the view that the Assessing Officer was justified in re-opening of the assessment because at that point of time, when he re-opened the assessment, he had with him assessment order for the assessment year 1997-98 which became the basis for forming the opinion that a part of the interest paid on borrowed fund needed to be disallowed because funds were not utilised for business purposes. The facts as available to the Assessing Officer at the time of re-opening of the assessment has only to be seen for justifying or otherwise the re-opening of the assessment. The information should have direct nexus with the escapement of income. The information available should be relevant and belief of the officer should be rational. The Court can only examine as to whether the process of formation of belief was in accordance with law. Adequacy of material is not relevant. It is also not relevant as to whether in the ultimate analysis same amount of addition was made. It is always possible that on subsequent enquiries some more material is discovered and greater amount of escaped income is brought into light. The Assessing Officer is bound to make addition of greater amount and cannot confine himself to the originally estimated amount when he reopened the assessment. Similarly, the Assessing Officer is also duty bound to make addition of smaller amount if he discovers, on enquiry and investigation, that escaped income is less than what he originally estimated at the time of re-opening of assessment. The belief at the time of re-assessment of the assessment is only prima facie and not final. Similarly, the amount of escaped amount is also tentative and not final. There is always possibility of the quantum of escaped income varying in final analysis on the basis of particulars given to the assessee for explaining the case. It is possible that assessee may be able to explain the entire amount or part of amount or the Assessing Officer may discover greater amount of concealed income. The subsequent discovery of facts cannot undo the belief judiciously formed by the Assessing Officer on the basis of material available at that point of time. We beneficially rely on the decision in the case of Poonam Rani Singh (supra) referred to by the Learned D.R. In point No. 2 at Page-409 in Para-32 the Tribunal observed as under :

2. The reopening cannot be held to be invalid merely because in the ultimate analysis no escapement of income is found in relation to any ground on the basis of which proceedings for reopening were initiated. In other words, if there was requisite material for assumption of jurisdiction at that stage but the same could not substantiate during reassessment proceedings, then proceedings under section 147 cannot be held to be invalid.

3. The reassessment proceedings may be initiated on one ground but the reassessment may be done on any other ground, if such ground comes to the notice of Assessing Officer during the course of assessment proceedings. It is, therefore, open to the Assessing Officer to consider other items even though they were not included under section 148.

12. Thus merely because the Assessing Officer did not make any addition on account of disallowability of interest, it could not be said that re-opening of the assessment were invalid because in our considered view on the basis of material available at the time of re-opening of the assessment/recording the reasons, the Assessing Officer was justified in re-opening the assessment. Thus, this ground of the assessee is rejected. However, we are not satisfied with the arguments of the Learned D.R. that decision of the Special Bench in Raj Kumar Chawlas case (supra) would not be applicable to the facts of the present case. Head notes from that decision reads as under:

Section 143(2), read with section 148 of the Income-tax Act, 1961 - Assessment - Notice of - Assessment year 1995-96 - Whether return filed pursuant to notice under section 148 must be assumed and treated to be return filed to notice under section 139 and assessment must thereafter be made under section 143 or 144 after complying with mandatory provisions - Held, yes - Whether, therefore, proviso to section 143(2) which mandates service of notice within 12 months from end of month in which return is filed, also applies to returns filed pursuant to notice under section 148 and it is incumbent upon assessing authority to issue notice under section 143(2) within period as stipulated in proviso to section 143(2) in respect of return filed pursuant to notice under section 148 - Held, yes - Whether no assessment can be made if notice under section 143(2) is not served within period prescribed by proviso under section 143(2) and, thus, return filed will be deemed as accepted - Held, yes.

13. Thus, respectfully following the above decision of the Special Bench of the Tribunal, we are of the considered view that notice under section 143(2) in this case should have been issued within one year of the letter filed by the assessee on 6-12-1999. As the notices under section 143(2)(1) were issued for all the years on 12-9-2001, such issuance of notice is beyond statutory limit and, therefore, assessment framed in pursuance to these notices are barred by limitation. Hence, the assessment for all these years are, therefore, cancelled. We do not consider it necessary to go into the merits of the addition done by the Assessing Officer and deleted by the Learned CIT(A) for the simple reason that reassessments do not survive.

14. In the result, appeals filed by the Revenue are dismissed and appeals filed by the assessee are partly allowed.

 
 
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