$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 12th December, 2012
+ ITA No.555/2012.
THE COMMISSIONER OF INCOME TAX-V ..... Appellant
Through: Mr. N. P. Sahni, Sr. Standing Counsel
with Mr. Ruchesh Sinha, Advocate.
versus
ORIENT CRAFT LTD. ..... Respondents
Through: Mr. Salil Aggarwal with Mr. P. C.
Yadav, Advocates
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V.EASWAR,J: (OPEN COURT)
The substantial question of law proposed by the Revenue in this appeal under
Section 260A of the Income Tax Act, 1961 (,,Act for short) is, in short, whether the
Income Tax Appellate Tribunal is right in law in holding that the reassessment
proceedings under section 147 were not validly initiated.
2. The assessee is a company and for the assessment year 2002-03 it filed a return
of income on 31st October, 2002 declaring a total income of Rs.4,45,35,395/-. The
return was processed under Section 143(1) on 27th February, 2003; the income
returned was accepted. Included in the return was a claim of Rs.8,74,20,642/- under
Section 80HHC and Rs.13,35,65,316/- under Section 10B. The assessee was a 100%
export-oriented undertaking and was entitled to substantial amounts as duty drawback,
ITA No.555/2012 Page 1 of 14
DEPB, premium on DEPB and on sale of quota etc. These were all declared in the
profit and loss account and the computation of income.
3. On 15th August, 2005, a notice under Section 148 of the Act was issued
reopening the assessment on the ground that income chargeable to tax had escaped
assessment. According to the reasons recorded under Section 148(2) for reopening the
assessment, the assessee was wrong in treating the proceeds of sale of quota as part of
the export turnover for claiming deduction under Section 80HHC. It was also the
opinion of the Assessing Officer that the sale proceeds of the quota cannot be
considered as export turnover but represented business income covered under Section
28(iv) and had to be reduced to the extent of 90% from the business income as
provided by Explanation (baa) to section 80HHC. Not doing so resulted in excessive
allowance of the deduction under Section 80HHC and consequently in escapement of
income chargeable to tax.
4. In response to the notice under Section 148 the assessee filed a return on 22nd
August, 2005 declaring total income at the same figure as in the original return of
income; it also questioned the jurisdiction of the Assessing Officer to reopen the
assessment and proceed with the reassessment proceedings. In the course of the
reassessment proceedings the Assessing Officer dealt with the assessees objection to
the issue of notice under Section 148. He held that the assessees case was covered by
clause(c) of Explanation 2 below Section 147, which provides that claiming excessive
deduction would amount to a case of income escaping assessment. He thus rejected
the assessees objection. On merits he held that the assessee was not entitled to any
deduction under Section 80HHC in respect of the premium on sale of quota. He also
held that the assessee was not entitled to the DEPB of Rs.2,55,74,491/-. The claim
under Section 80HHC was thus revised downward to Rs.6,83,94,510/- as against
Rs.8,74,20,642/- claimed in the original return which was accepted under Section
143(1). The reassessment order was accordingly passed on 31st October, 2006.
ITA No.555/2012 Page 2 of 14
5. Aggrieved, the assessee filed an appeal to the CIT(Appeals) questioning the
reassessment order both on the ground of jurisdiction and on merits. The
CIT(Appeals) rejected the objection to the jurisdiction and so far as the merits of the
assessees claim are concerned, held that the issue relating to the eligibility of the
assessee for the deduction under Section 80HHC in respect of premium on sale of
quota was covered in favour of the assessee by the order of the Tribunal in the earlier
years as well as the orders passed by his predecessor in the assessees case for the
assessment years 2000-01 and 20001-02 and accordingly upheld the assessees stand.
So far as the deduction claimed under Section 80HHC with reference to the DEPB
income is concerned, he held that only the profit on the transfer of DEPB licenses was
to be considered for being reduced under Explanation (baa) below Section 80HHC and
that 90% of the entire receipts or sale proceeds of the license cannot be reduced from
the profits of the business for the purpose of computing the deduction. He accordingly
accepted the assessees working of the deduction with regard to the DEPB income.
There were certain other minor issues which were also decided by the CIT(Appeals)
who ultimately allowed the assessees appeal in part.
6. Both the assessee and the Revenue filed appeals to the Income Tax Appellate
Tribunal. The assessee challenged the jurisdiction of the Assessing Officer to reopen
the assessment under Section 147 as also certain issues on merits which were decided
against it by the CIT(Appeals). The Revenues appeal related to the decision of the
CIT(Appeals) in respect of the premium on sale of quota and the DEPB income, both
for the purposes of Section 80HHC. The Tribunal took up the appeal of the assessee
and examined the reasons recorded for reopening the assessment and held that the only
issue on which the assessment was reopened was the deduction under Section 80HHC
with reference to premium on sale of export quota which issue had been decided by
the Tribunal in the assessees case for the assessment years 2000-01 and 2001-02 by
order dated 7th September, 2005, which orders were followed by the Tribunal for the
ITA No.555/2012 Page 3 of 14
assessment years 1999-2000 and 2003-04 vide order dated 21st November, 2008 and
that there was no fresh material which came to the notice of the Assessing Officer
after the original return was processed under Section 143(1) and having regard to the
orders of the Tribunal(supra) and the instruction of the CBDT dated 23rd February,
1998 regarding the treatment to be given to the premium received on transfer of
quotas, there was no escapement of income and thus the notice was without
jurisdiction. Reference was made to the judgment of the Supreme Court in the case of
CIT vs. Kelvinator of India Ltd.(2010) 320 ITR 561. Several other authorities were
adverted to by the Tribunal and eventually it was observed as under:-
"For the above discussion, we hold that since there was no
tangible material available with the AO to form the requisite
belief of escapement of income, the reopening of the completed
assessment is unsustainable in the eye of law. The same is,
therefore, cancelled."
In the above view of the matter, the Tribunal did not examine the merits of the
disallowances/additions made in the reassessment order.
7. The Revenue is in appeal before us. The following substantial question of law
arises and is framed:-
"Was the Tribunal right in law in holding that in the absence of any
tangible material available with the Assessing Officer to form the
requisite belief regarding escapement of income, the reopening of the
assessement made under Section 143(1) is bad in law?"
8. The Tribunal has extracted the reasons recorded by the Assessing Officer for
reopening the assessment. They are as follows:-
"On going through the return of income filed by the assessee, it is
revealed that while deducting 90% of other income from the profit
of business, premium on sale of quota of Rs.17,54,174/- included in
the sales was not considered. Therefore omission to deduction 90%
of Rs. 17,54,174/- from the profit of business resulted in excess
allowance of deduction u/s 80HHC of the Income Tax Act, 1961. In
ITA No.555/2012 Page 4 of 14
view of these facts there is reason of believe that the income
chargeable to tax has escaped assessment."
We think that the point taken on behalf of the assessee that even an assessment made
under Section 143(1) of the Act can be reopened under Section 147 only subject to
fulfillment of the conditions precedent, which include the condition that the Assessing
Officer must have "reason to believe" that income chargeable to tax has escaped
assessment, is sound. It is true that no assessment order is passed when the return is
merely processed under Section 143(1) and an intimation to that effect is sent to the
assessee. However, it has been recognised by the Supreme Court itself in Assistant
Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P. Ltd.(2007) 291 ITR
500, a decision that was relied upon by the revenue, that even where proceedings
under Section 147 are sought to be taken with reference to an intimation framed earlier
under Section 143(1), the ingredients of Section 147 have to be fulfilled; the
ingredient is that there should exist "reason to believe" that income chargeable to tax
has escaped assessment. This judgment, contrary to what the Revenue would have us
believe, does not give a carte blanche to the Assessing Officer to disturb the finality of
the intimation under Section 143(1) at his whims and caprice; he must have reason to
believe within the meaning of the Section. It would be appropriate to reproduce the
following portions from the judgment:-
"The scope and effect of section 147 as substituted with effect from
April 1, 1989, as also sections 148 to 152 are substantially different
from the provisions as they stood prior to such substitution. Under
the old provisions of section 147, separate clauses (a) and (b) laid
down the circumstances under which income escaping assessment
for the past assessment years could be assessed or reassessed. To
confer jurisdiction under section 147(a) two conditions were
required to be satisfied : firstly the Assessing Officer must have
reason to believe that income, profits or gains chargeable to
income tax have escaped assessment, and secondly he must also
have reason to believe that such escapement has occurred by
reason of either omission or failure on the part of the assessee to
disclose fully or truly all material facts necessary for his assessment
ITA No.555/2012 Page 5 of 14
of that year. Both these conditions were conditions precedent to be
satisfied before the Assessing Officer could have jurisdiction to issue
notice under section 148 read with section 147(a). But under the
substituted section 147 existence of only the first condition suffices.
In other words if the Assessing Officer for whatever reason has
reason to believe that income has escaped assessment it confers
jurisdiction to reopen the assessment. It is, however, to be noted that
both the conditions must be fulfilled if the case falls within the
ambit of the proviso to section 147. The case at hand is covered by
the main provision and not the proviso.
So long as the ingredients of section 147 are fulfilled, the
Assessing Officer is free to initiate proceeding under section 147
and failure to take steps under section 143(3) will not render the
Assessing Officer powerless to initiate reassessment proceedings
even when intimation under section 143(1) had been issued.
The inevitable conclusion is that the High Court has wrongly
applied Adani's case [1999] 240 ITR 224 (Guj) which has no
application to the case on the facts in view of the conceptual
difference between section 143(1) and section 143(3) of the Act."
We have searched the judgment in vain for the liberty said to have been given to the
Assessing Officer by the above judgment that the finality of an intimation under
Section 143(1) can be disturbed even by dispensing with the requirement of " reason
to believe". On the contrary the observations extracted above reiterate that the
intimation can be disturbed by initiating reassessment proceedings only "so long as
the ingredients of Section 147 are fulfilled" and with reference to Section 143(1) vis-
a-vis Section 147, the only ingredient is that there should be reason to believe that
income chargeable to tax has escaped assessment and it does not matter that there has
been no failure or omission on the part of the assessee to disclose full and true
particulars at the time of the original assessment. There is nothing in the language of
Section 147 to unshackle the Assessing Officer from the need to show "reason to
believe". The fact that the intimation issued under Section 143(1) cannot be equated
to an "assessment", a position which has been elaborated by the Supreme Court in the
ITA No.555/2012 Page 6 of 14
judgment cited above, cannot in our opinion lead to the conclusion that the
requirements of Section 147 can be dispensed with when the finality of an intimation
under Section 143(1) is sought to be disturbed. We are at pains to point out this
position, which seems fairly obvious to us, because of the argument frequently
advanced before us on behalf of the Revenue in other cases as well, under the
misconception, if we may say so with respect, that an intimation under Section 143(1)
can be disturbed on any ground which appeals to the Assessing Officer. The
consequence of countenancing such an argument could be grave. The expression
"reason to believe" has come to attain a certain signification and content, nourished
over a long period of years by judicial refinement painstakingly embarked upon by
great judges in the past. The expression has been judicially interpreted in a particular
manner. When Section 147 was recast with effect from 1st April, 1989, the legislature
sought to replace the expression "reason to believe" with the expression "for reasons
to be recorded by him in writing". But there were representations against the proposal
and bowing to them the original expression was restored. This aspect of the matter
has been brought out by the Supreme Court in Commissioner of Income Tax vs.
Kelvinator of Income-tax & Anr.(supra) in the following words:-
"However, one needs to give a schematic interpretation to the words
"reason to believe" failing which, we are afraid, section 147 would give
arbitrary powers to the Assessing Officer to reopen assessments on the
basis of "mere change of opinion", which cannot be per se reason to
reopen. We must also keep in mind the conceptual difference between
power to review and power to reassess. The Assessing Officer has no
power to review ; he has the power to reassess. But reassessment has to be
based on fulfilment of certain preconditions and if the concept of "change
of opinion" is removed, as contended on behalf of the Department, then, in
the garb of reopening the assessment, review would take place. One must
treat the concept of "change of opinion" as an in-built test to check abuse
of power by the Assessing Officer. Under the Direct Tax Laws
(Amendment) Act, 1987, Parliament not only deleted the words "reason to
believe" but also inserted the word "opinion" in section 147 of the Act.
However, on receipt of representations from the companies against
ITA No.555/2012 Page 7 of 14
omission of the words "reason to believe", Parliament reintroduced the
said expression and deleted the word "opinion" on the ground that it
would vest arbitrary powers in the Assessing Officer. We quote
hereinbelow the relevant portion of Circular No. 549 dated October 31,
1989 ([1990] 182 ITR (St.) 1, 29), which reads as follows :
"7.2 Amendment made by the Amending Act, 1989, to reintroduce the
expression `reason to believe' in section 147.-A number of
representations were received against the omission of the words
`reason to believe' from section 147 and their substitution by the
`opinion' of the Assessing Officer. It was pointed out that the meaning
of the expression, `reason to believe' had been explained in a number
of court rulings in the past and was well settled and its omission from
section 147 would give arbitrary powers to the Assessing Officer to
reopen past assessments on mere change of opinion. To allay these
fears, the Amending Act, 1989, has again amended section 147 to
reintroduce the expression `has reason to believe' in place of the words
`for reasons to be recorded by him in writing, is of the opinion'. Other
provisions of the new section 147, however, remain the same."
9. It would be appropriate at this juncture to take a brief survey of a few decisions
of the Supreme Court which have infused meaning and content to the expression
"reason to believe" appearing in Section 147.
10. A constitution bench of the Supreme Court in A.N. Lakshman Shenoy v. ITO
(1958) 34 ITR 275, speaking through S.K. Das, J held that an assessment cannot be
reopened on the basis of a mere guess, gossip or rumour. This was in the context of
the pre-1948 law relating to reassessment under which the Assessing Officer was
empowered to reopen the assessment on the basis of "definite information". Though
this judgment is based on the phraseology of Section 34 of the 1922 Act as it existed
before 1948 which did not contain the expression "reason to believe", that principle
was adopted by the Supreme Court while dealing with Section 34 of the Act after the
amendment made in 1948. In that year the words "definite information" were
replaced by the words "reason to believe". While expatiating on the new words, a
three-Judge Bench of the Supreme Court speaking through V. Ramaswami, J., in CIT
vs S. Narayanappa (1965) 63 ITR 219 opined as under:-
ITA No.555/2012 Page 8 of 14
"Again the expression "reason to believe" in section 34 of the
Income-tax Act does not mean a purely subjective satisfaction on the
part of the Income-tax Officer. The belief must be held in good faith:
it cannot be merely a pretence. To put it different, it is open to the
court to examine the question whether the reasons for the belief
have a rational connection or a relevant bearing to the formation of
the belief and are not extraneous or irrelevant to the purpose of the
section. To this limited extent, the action of the Income-tax Officer in
starting proceedings under section 34 of the Act is open to challenge
in a court of law (see Calcutta Discount Co. Ltd. v. Income-tax
Officer, Companies District 1, Calcutta)."
In Sheo Nath Singh vs. Appellate Assistant Commissioner of Income-tax (1971) 82 ITR
147 the Supreme Court (Hegde J) observed as under:-
"There can be no manner of doubt that the words " reason to
believe " suggest that the belief must be that of an honest and
reasonable person based upon reasonable grounds and that the
Income-tax Officer may act on direct or circumstances evidence but
not on mere suspicion, gossip or rumour. The Income-tax Officer
would be acting without jurisdiction if the reason for his belief that
the conditions are satisfied does not exist or is not material or
relevant to the belief required by the section. The court can always
examine this aspect though the declaration or sufficiency of the
reasons for the belief cannot be investigated by the court."
It was further observed that the reasons themselves cannot be stated to be beliefs,
which would be an obvious self-contradiction.
11. The entire law as to what would constitute "reason to believe" was summed up
by H.R.Khanna, J, speaking for the Supreme Court in Income Tax Officer v Lakhmani
Mewaldas (1976) 103 ITR 437. The following principles were laid down:-
(a) The powers of the Assessing Officer to reopen an assessment, though wide,
are not plenary.
ITA No.555/2012 Page 9 of 14
(b) The words of the statute are "reason to believe" and not "reason to
suspect".
(c) The reopening of an assessment after the lapse of many years is a serious
matter. Since the finality of a judicial or quasi-judicial proceedings are
sought to be disturbed, it is essential that before taking action to reopen the
assessment, the requirements of the law should be satisfied.
(d) The reasons to believe must have a material bearing on the question on
escapement of income. It does not mean a purely subjective satisfaction of
the assessing authority; the reason be held in good faith and cannot merely
be a pretence.
(e) The reasons to believe 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 Assessing Officer and the formation is belief regarding
escapement of income.
(f) The fact that the words "definite information" which were there in section
34 of the Act of 1922 before 1948, are not there in section 147 of the 1961
Act would not lead to the conclusion that action can now be taken for
reopening an assessment even if the information is wholly vague,
indefinite, far-fetched or remote.
12. In Commissioner of Income Tax vs. Kelvinator of Income-tax & Anr. (supra)
the Supreme Court observed as under:-
"However, one needs to give a schematic interpretation to the
words "reason to believe" failing which, we are afraid, section 147
would give arbitrary powers to the Assessing Officer to reopen
assessments on the basis of "mere change of opinion", which cannot
ITA No.555/2012 Page 10 of 14
be per se reason to reopen. We must also keep in mind the
conceptual difference between power to review and power to
reassess. The Assessing Officer has no power to review ; he has the
power to reassess. But reassessment has to be based on fulfilment of
certain preconditions and if the concept of "change of opinion" is
removed, as contended on behalf of the Department, then, in the
garb of reopening the assessment, review would take place. One
must treat the concept of "change of opinion" as an in-built test to
check abuse of power by the Assessing Officer."
It was also observed that after 1.4.1989 the Assessing Officer has power to reopen
provided there is "tangible material" to come to the conclusion that there is
escapement of income. This judgment has laid emphasis on two more aspects: that
there can be no review of an assessment in the guise of reopening and that a bare
review without any tangible material would amount to abuse of the power.
13. Having regard to the judicial interpretation placed upon the expression "reason
to believe", and the continued use of that expression right from 1948 till date, we have
to understand the meaning of the expression in exactly the same manner in which it
has been understood by the courts. The assumption of the Revenue that somehow the
words "reason to believe" have to be understood in a liberal manner where the finality
of an intimation under Section 143(1) is sought to be disturbed is erroneous and
misconceived. As pointed out earlier, there is no warrant for such an assumption
because of the language employed in Section 147; it makes no distinction between an
order passed under section 143(3) and the intimation issued under section 143(1).
Therefore it is not permissible to adopt different standards while interpreting the
words "reason to believe" vis-à-vis Section 143(1) and Section 143(3). We are unable
to appreciate what permits the Revenue to assume that somehow the same rigorous
standards which are applicable in the interpretation of the expression when it is
applied to the reopening of an assessment earlier made under Section 143(3) cannot
apply where only an intimation was issued earlier under Section 143(1). It would in
ITA No.555/2012 Page 11 of 14
effect place an assessee in whose case the return was processed under Section 143(1)
in a more vulnerable position than an assessee in whose case there was a full-fledged
scrutiny assessment made under Section 143(3). Whether the return is put to scrutiny
or is accepted without demur is not a matter which is within the control of assessee; he
has no choice in the matter. The other consequence, which is somewhat graver, would
be that the entire rigorous procedure involved in reopening an assessment and the
burden of proving valid reasons to believe could be circumvented by first accepting
the return under Section 143(1) and thereafter issue notices to reopen the assessment.
An interpretation which makes a distinction between the meaning and content of the
expression "reason to believe" in cases where assessments were framed earlier under
Section 143(3) and cases where mere intimations were issued earlier under Section
143(1) may well lead to such an unintended mischief. It would be discriminatory too.
An interpretation that leads to absurd results or mischief is to be eschewed.
14. Certain observations made in the decision of Rajesh Jhaveri (supra) are sought
to be relied upon by the revenue to point out the difference between an "assessment"
and an "intimation". The context in which those observations were made has to be
kept in mind. They were made to point out that where an "intimation" is issued under
section 143(1) there is no opportunity to the assessing authority to form an opinion
and therefore when its finality is sought to be disturbed by issuing a notice under
section 148, the proceedings cannot be challenged on the ground of "change of
opinion". It was not opined by the Supreme Court that the strict requirements of
section 147 can be compromised. On the contrary, from the observations (quoted by us
earlier) it would appear clear that the court reiterated that "so long as the ingredients
of section 147 are fulfilled" an intimation issued under section 143(1) can be subjected
to proceedings for reopening. The court also emphasised that the only requirement for
disturbing the finality of an intimation is that the assessing officer should have "reason
to believe" that income chargeable to tax has escaped assessment. In our opinion, the
ITA No.555/2012 Page 12 of 14
said expression should apply to an intimation in the same manner and subject to the
same interpretation as it would have applied to an assessment made under section
143(3). The argument of the revenue that an intimation cannot be equated to an
assessment, relying upon certain observations of the Supreme Court in Rajesh Jhaveri
(supra) would also appear to be self-defeating, because if an "intimation" is not an
"assessment" then it can never be subjected to section 147 proceedings, for, that
section covers only an "assessment" and we wonder if the revenue would be prepared
to concede that position. It is nobodys case that an "intimation" cannot be subjected
to section 147 proceedings; all that is contended by the assessee, and quite rightly, is
that if the revenue wants to invoke section 147 it should play by the rules of that
section and cannot bog down. In other words, the expression "reason to believe"
cannot have two different standards or sets of meaning, one applicable where the
assessment was earlier made under section 143(3) and another applicable where an
intimation was earlier issued under section 143(1). It follows that it is open to the
assessee to contend that notwithstanding that the argument of "change of opinion" is
not available to him, it would still be open to him to contest the reopening on the
ground that there was either no reason to believe or that the alleged reason to believe
is not relevant for the formation of the belief that income chargeable to tax has
escaped assessment. In doing so, it is further open to the assessee to challenge the
reasons recorded under section 148(2) on the ground that they do not meet the
standards set in the various judicial pronouncements.
14. In the present case the reasons disclose that the Assessing Officer reached the
belief that there was escapement of income "on going through the return of income"
filed by the assessee after he accepted the return under Section 143(1) without
scrutiny, and nothing more. This is nothing but a review of the earlier proceedings
and an abuse of power by the Assessing Officer, both strongly deprecated by the
Supreme Court in CIT vs. Kelvinator (supra). The reasons recorded by the Assessing
ITA No.555/2012 Page 13 of 14
Officer in the present case do confirm our apprehension about the harm that a less
strict interpretation of the words "reason to believe" vis-à-vis an intimation issued
under section 143(1) can cause to the tax regime. There is no whisper in the reasons
recorded, of any tangible material which came to the possession of the assessing
officer subsequent to the issue of the intimation. It reflects an arbitrary exercise of the
power conferred under section 147.
15. For the above reasons, we answer the substantial question of law framed by us
in the affirmative, in favour of the assessee and against the Revenue. The appeal of
the Revenue is accordingly dismissed. There shall be no order as to costs.
R.V.EASWAR, J
S. RAVINDRA BHAT, J
December 12, 2012
Bisht
ITA No.555/2012 Page 14 of 14
|
