section 147/income-tax act

[2004] 140 taxman 16 (bom.)

High Court of Bombay

Ador Technopack Ltd.

v.

Dr. Zakir Hussein, Deputy Commissioner

V.C. Daga and J.P. Devadhar, JJ.

Writ Petition No. 2228 of 2003

March 31, 2004

Assessing Officer cannot reopen assessment on account of
income escaping assessment, especially, when Commissioner
has reopened assessment by setting aside original one and
on remand, proceedings are pending before Assessing
Officer for assessment afresh

Section 147, read with sections 148 and 263, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment year 1996-97 - Whether concept of ‘reason to believe’ comes into picture only if income chargeable to tax has escaped assessment - Held, yes - Whether once order of assessment to extent it relates to under-assessment of an item is set aside and proceedings are remanded to Assessing Officer, their, assessment proceedings in respect of that item are pending so long as final assessment does not take place - Held, yes - Whether so long as assessment is pending, Assessing Officer cannot have any reason to believe that income chargeable to tax for assessment year in question has escaped assessment - Held, yes - Whether income cannot be said to have escaped assessment within meaning of section 147, if assessment proceedings in respect of that income and/or issue are still pending and have not yet been culminated into a final order - Held, yes - Whether if conclusive and final judicial decision is holding field then, identical issue cannot be a subject-matter of administrative decision under sections 147 and 148 - Held, yes - Whether Assessing Officer can reopen assessment on account of income escaping assessment, especially, when Commissioner has reopened assessment by setting aside original one and on remand, proceedings are pending before Assessing Officer for assessment afresh - Held, no

Words and phrases - ‘reasons to believe’ as occurring in section 147 of the Income-tax Act, 1961

Facts

For the assessment year 1996-97, the assessee claimed depreciation at the rate of 25 per cent on its tin packaging unit and during the assessment proceedings, filed bills showing purchase of raw material backed by the certificate of the chartered engineer certifying such purchase. The Assessing Officer passed the assessment order under section 143(3) and allowed depreciation at the rate of 25 per cent. Subsequently, the Commissioner exercising his power under section 263, held that the tin packaging unit of the assessee was commissioned and trial runs were made during the months of November and December, 1996 as per the third annual report of the assessee and, as such, the tin packaging unit was put to use only after September, 1996 and, therefore, the said unit was not entitled to claim depreciation at the rate at which it was allowed by the Assessing Officer. He, therefore, set aside the assessment order to the extent it allowed depreciation at the rate of 25 per cent on the tin packaging unit and remanded the matter to the Assessing Officer with direction to reconsider the assessment, limited to the issue relating to the grant of depreciation on the tin packaging unit and to pass fresh order of assessment. After remand, the Assessing Officer did not pass any fresh assessment order. Instead, the Assessing Officer reopened the assessment of the assessee on 28-3-2003 and served a notice under section 148 to the assessee. He reopened the assessment for the reason that the depreciation at the rate of 25 per cent on addition to plant and machinery during the year was allowed to the assessee, but it was seen that the machinery was put to use during November and December, and, therefore, depreciation was to be allowed at the rate of 50 per cent of the allowable depreciation, and that the aforesaid resulted in escapement of income by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of the income.

On writ :

Held

The operation of both sections 147 and 263 is somewhat similar in the sense that if the Commissioner under section 263 finds that the assessment order is prejudicial to the interests of the revenue, he can reopen the issue, and at the same time, the Assessing Officer, under sections 147 and 148 can reopen the assessment, if he has a reason to believe that income chargeable to tax has escaped assessment. Therefore, virtually both the provisions are for reopening the assessment, one at the level of the Commissioner and, other at the level of the Assessing Officer. [Para 23]

In the instant case, the assessment order was validly reopened by the revisional authority and the order of assessment had been set aside in part. What was set aside was the assessment in respect of a certain item which was under assessed. In the event, under-assessment is set aside in part, then, the rest of the original order of assessment does not get affected. In other words, the original assessment order is upset only to the extent ordered by the revisional authority. Untouched order of the assessment becomes final and conclusive. The original assessment order to the extent it is untouched retains its character and identity. The revisional order, in the instant case, had affected the order to the extent under-assessment was noticed and to the extent that order was set aside. Once the order of assessment to the extent it relates to under-assessment of an item is set aside and the proceedings are remanded to the Assessing Officer, then, the assessment proceedings in respect of that item are pending so long as the final assessment does not take place. Now the mute question would be whether, during the pendency of the assessment proceedings, one can have ‘reason to believe’ that the income has escaped assessment. The words ‘reasons to believe’ suggest honest belief of a reasonable man based on direct or circumstantial evidence held in good faith; not a mere pretence. Belief 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. It must be found on reasonable grounds. [Para 24]

The words ‘reason to believe’ convey honest rational belief of a reasonable man based on cogent reasons entertained in good faith. The question that arises would be whether this concept can be invoked in a case where conclusive and final findings are recorded by the higher Court or Tribunal or Forum conclusively holding happening of a particular event. Obviously, the answer has to be in the negative. Similarly, in the instant case, when the Commissioner vide his order passed under section 263, had set aside the original assessment and had directed the Assessing Officer to reframe the assessment on the issue of allowance of depreciation, after examining all the facts of the case and after providing opportunity of hearing to the assessee, it could not be said that the income had escaped assessment. When the reassessment proceedings, pursuant to the order of the Commissioner, were pending and the Assessing Officer was entitled to examine all the aspects of the matter on the issue of allowance of depreciation, the question of income escaping assessment did not arise and, consequently, the question of reopening the assessment on the ground that the Assessing Officer had reason to believe that the income chargeable to tax had escaped assessment did not arise at all. [Para 27]

In the instant case, when the order of assessment, though in part, was set aside and the finding that the under-assessment was required to be enquired into and reassessment was required to be done had become final and conclusive, the question of entertaining reasonable belief that the income chargeable to tax had escaped assessment did not arise, muchless when the assessment proceedings were still pending. Thus, it was not open for the Assessing Officer to invoke powers under sections 147 and 148. In other words, so long as the assessment proceedings in respect of certain income subsist, the income cannot be said to have escaped assessment. Such proceedings, if initiated, will have to be held as invalid, ab initio void and illegal. [Para 28]

The concept of ‘reason to believe’ comes into picture if the income chargeable to tax has escaped assessment. So long as the assessment is pending, the assessing authority cannot have any reason to believe that income chargeable to tax for the assessment year in question has escaped assessment. Income cannot be said to have escaped assessment within the meaning of section 147 if the assessment proceedings in respect of that income and/or issue are still pending and have not yet been culminated into a final order. [Para 29]

The function of the Assessing Officer is to administer the Act with solicitude for public treasury and with fairness to the taxpayers. If the conclusive and final judicial decision is holding the field then, the identical issue cannot be a subject-matter of administrative decision under sections 147 and 148. Thus, the impugned notice issued under section 148 and reasons recorded in support thereof were liable to be quashed and set aside. [Para 31]

It is no doubt true that operation of both sections 147 and 263 is somewhat similar in the sense that if the Commissioner under section 263 finds that the assessment order is prejudicial to the interests of the revenue, he can reopen the issue and, at the same time, the Assessing Officer, under sections 147 and 148 can reopen assessment on account of income having escaped assessment. Sections 147 and 148 can be pressed into service to reopen assessment so long as the proceedings under section 263 are not finally terminated. In other words, during the pendency of such proceedings, the powers under sections 147 and 148 to reopen assessment can always be exercised. But once the assessment, insofar as it is prejudicial to the interests of the revenue is set aside by the Commissioner and the Assessing Officer is directed to make fresh assessment regarding grant of depreciation after examining all the aspects, the question of income escaping assessment would arise only when the reassessment order is passed by the Assessing Officer. In the instant case, admittedly, reassessment pursuant to the order of the Commissioner had not yet been finalised. Therefore, during the pendency of the reassessment proceedings, it was not open to the Assessing Officer to presume that the income had escaped assessment. [Para 33]

The record showed that the assessee had filed all the necessary documents backed by the certificate of the chartered engineer along with statement of claim to show how the amount of depreciation at the rate of 25 per cent was calculated. Relevant evidence in support of data as to when the machinery was installed so as to justify its claim for depreciation at the rate of 50 per cent which was allowed in the original order of assessment by the Assessing Officer, was also disclosed. The hearing was attended by the representative of the assessee from time-to-time. In the circumstances, no failure on the part of the assessee to disclose all material fully and truly could be attributed. If the Assessing Officer has taken a wrong decision that by itself cannot be a ground to reopen the assessment that too, beyond the period of four years. In the instant case, no reasons were found alleging any failure on the part of the assessee to disclose, fully and truly, all material for the assessment. On that count also, invocation of the powers under section 147 and issuance of notice under section 148 were absolutely bad in law. [Para 36]

Therefore, the impugned notice issued by the Assessing Officer under section 148 and reasons recorded in support thereof under section 147 were quashed and set aside. [Para 37]

Cases referred to

Ghanshyamdas v. Regional Asstt. Commissioner [1964] 51 ITR 557 (SC) [Para 11], S.K. Kochhar v. ITO [1984] 145 ITR 255/[1983] 13 Taxman 414 (All.) [Para 11], G.K.N. Driveshafts India Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963 (SC) [Para 15], CIT v. Gulam Rasool [1997] 225 ITR 904/91 Taxman 167 (MP) [Para 16], CIT v. Kanubhai Engineers (P.) Ltd. [2000] 241 ITR 665 (Cal.) [Para 16], Sheo Nath Singh v. AAC [1972] 3 SCC 234 [Para 24], ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) [Para 25], Lachhiram Basantlal, In re AIR 1931 Cal. 545 [Para 29], Sir Rajendranath Mukerjee v. CIT [1934] 2 ITR 71 (PC) [Para 29], Hargovindsing Narainsing v. CIT [1973] 90 ITR 435 (Bom.) [Para 29], State of Assam v. Deva Prasad Barua [1970] 75 ITR 18 (SC) [Para 30], CIT v. S. Raman Chettiar [1965] 55 ITR 630 (SC) [Para 30] and CIT v. Ranchhoddas Karsondas [1959] 36 ITR 569 (SC) [Para 30].

B.P. Pandit, P.P. Pandit and P.P. Prabhu for the Petitioner. R.V. Desai and P.S. Jetly for the Respondent.

Judgment

V.C. Daga, J. - This petition is directed against the notice dated 28th March, 2003 issued under section 148 of the Income-tax Act, 1961 (the “Act” for short) and the proceedings initiated pursuant to the said notice.

The Facts :

2. The facts giving rise to the present petition, in nut shell, are as under :

The petitioner is a public limited company having its registered office at Mumbai and factory at Nasik (hereinafter referred to as “assessee” for short). On 29th November, 1996, the assessee filed return of income for the assessment year 1996-97 and claimed depreciation @ 25% in its Tin Packaging Unit. The assessee, during the assessment proceedings, filed bills showing purchases of raw material backed by the certificate of the Chartered Engineer certifying such purchases.

3. The respondent No. 1 issued notice under section 143(2) of the Act. In response thereto; all material documents with necessary information together with relevant evidence in support of the claim of depreciation in ‘Tin Packaging Unit’ @ 25% was tendered to the Assessing Officer, the respondent No. 1 to complete the assessment of the petitioner-assessee. The said respondent No. 1, after careful scrutiny of documents with other evidence completed assessment and passed an order of assessment under section 143(3) of the Act, in which claim for depreciation @ 25% with respect to the ‘Tin Packaging Unit’ of the assessee was allowed.

4. On 21st March, 2001, respondent No. 2, the Commissioner of Income-tax finding order of assessment prejudicial to the interest of the Revenue invoked revisional powers and issued notice under section 263 of the Act, and, after hearing parties to the said proceedings, passed an order holding that ‘Tin Packaging Unit’ of the assessee was commissioned and trial runs were made during the months of November and December, 1996 as per the third annual report of the assessee, as such the ‘Tin Packaging Unit’ was put to use only after September, 1996. Consequently, the said unit was not entitled to claim depreciation at the rate at which it was allowed by the Assessing Officer. In the result, the assessment order to the extent it allowed depreciation @ 25% in the ‘Tin Packaging Unit’ came to be set aside and the matter was remanded to the Assessing Officer with direction to reconsider the assessment limited to the issue relating to the grant of depreciation in the Tin Packaging Unit and to pass fresh order of assessment after examining all the aspects, facts and circumstances of the case following principles of natural justice by affording reasonable opportunity of hearing to the assessee. The petitioner/assessee did not challenge this order, with the result, it achieved finality.

5. After remand, as indicated above, the assessee’s representative appeared before the Assessing Officer, respondent No. 1 from time to time and reiterated that the assessee was entitled to depreciation @ 25% in the ‘Tin Packaging Unit’ as was allowed in the original assessment order. However, it appears that respondent No. 1, the Assessing Officer did not complete the assessment. He could not pass assessment order within a period of one year from the date of passing of the order as required under section 153(2A) of the Act. The respondent No. 1, finding that he is running short of time to complete assessment, chose to invoke powers under sections 147 and 148 of the Act and issued notice dated 28th March, 2003.

6. The assessee, after receipt of the aforesaid notice under section 148 of the Act, through its representative; vide letter dated 28th April, 2003 requested for the reasons recorded under section 147 before issuing notice under section 148. No reasons were furnished by the Assessing Officer in spite of written request. The assessee, therefore, issued reminder vide its letter dated 8th May, 2003. In spite of this reminder, no reasons were furnished. On the contrary, respondent No. 1 issued notice under sections 143(3) and 142(1) to complete the assessment for the pending assessment. Consequently, third time request for reasons was made, renewed and reiterated by another letter dated 18th August, 2003. In spite of series of repeated reminders respondent No. 1 failed to furnish reasons; which compelled the assessee to invoke extraordinary writ jurisdiction of this Court under articles 226 and 227 of the Constitution of India through this petition.

7. On being noticed, respondents appeared through their counsel and disclosed reasons recorded under section 147 prior to issuance of notice under section 148, which read as under :

“Notice under section 147 read with section 148 was issued on 28-3-2003 to you by then Assessing Officer. The reasons for reopening the assessment are as follows :

The depreciation of Rs. 53,93,833 @ 25% on addition to plant and machinery during the year was allowed to the assessee. It is seen that the machinery was put to use during November & December. Therefore, depreciation was to be allowed at 50% of the allowable depreciation. The aforesaid resulted in escapement of income by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment of the income.”

After receipt of the aforesaid reasons, the prayer of the petitioner to amend petition was allowed so as to enable it to challenge validity of the reasons recorded in support of notice under section 148. Now the petitioner is not only challenging the notice issued under section 148 based on the following submissions.

Submissions :

8. Mr. Pandit, learned counsel appearing for the petitioner submits that notice under section 148 read with section 147 is invalid and ineffective in law. He contends that the petitioner had disclosed all material facts necessary for determination of claim of depreciation @ 25% on ‘Tin Packaging Unit’. He further contends that the petitioner during the course of assessment proceedings had filed all documents backed by the certificate of the Chartered Engineer along with statement of claim to show, how it was calculated @ 25% with relevant evidence in support of the data as to when the machinery was installed after 30th September, 1995 so as to justify its claim for depreciation @ 25% which was allowable in the original order of assessment by the Assessing Officer.

9. Mr. Pandit further submits that respondent No. 2 having set aside the assessment order vide its order dated 21st March, 2001 and having directed the Assessing Officer to reconsider and reassess the issue with respect to the allowance of depreciation on ‘Tin Packaging Unit’, it was necessary for respondent No. 1 to complete assessment and pass appropriate order on or before 31st March, 2003 i.e., within one year from the date of the order passed under section 263 of the Act. Having failed to complete the assessment within statutory time-frame, it was not open, under the provisions of the Act, to invoke jurisdiction under sections 147 and 148 to claim extended period of limitation to complete pending assessment.

10. Mr. Pandit, learned counsel for the petitioner further contends that, during the pendency of the assessment proceedings, the Assessing Officer could not have any reason to believe that the income for the assessment year 1996-97 has escaped assessment. He submits that income for that assessment year could not be said to have escaped assessment within the meaning of section 147 if the assessment proceedings in respect of that income are pending for determination. He, thus, submits that the impugned notice is not only without jurisdiction and without authority of law but it also suffers from legal malice.

11. Mr. Pandit placed reliance on the judgment of the Apex Court in the case of Ghanshyamdas v. Regional Asstt. Commissioner [1964] 51 ITR 557 and on the case of S.K. Kochhar v. ITO [1984] 145 ITR 2551  (All.) to contend that notice issued under section 148 read with section 147 including reasons recorded in support thereof are ab initio null and void.

12. Mr. Pandit, at the cost of repetition, reiterated that in the initial assessment proceedings, the petitioner/assessee had filed all material documents in support of its contention that ‘Tin Packaging Unit’ was ready for trial production in the beginning of August 1995. He further pointed out from para 4 of the petition that certificate of Chartered Engineer and copy of Bill of purchase was filed during the course of assessment proceeding. It was also pointed out from para 5 of the petition that from time to time petitioner and his representative appeared before respondent No. 1 with all material particulars and details along with relevant documents necessary for determining the claim of depreciation with respect to Tin Packaging Unit of the assessee and the Assessing Officer, the respondent No. 1 after due scrutiny of documents completed assessment and allowed petitioner’s claim for depreciation @ 25%. On the canvass of these undisputed facts, he submits that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year in question.

13. Mr. Pandit further submits that notice under section 148 of the Act was issued on 28th March, 2003, which is clearly beyond the period of four years from the end of assessment year 1996-97. On this count, he contends that the reasons recorded to reopen the assessment do not suggest or remotely impute any failure or omission in any manner on the part of the petitioner/assessee to disclose fully and truly all material facts necessary for its assessment for the assessment year in question as envisaged by proviso to section 147 of the Act. No reasons in this behalf are to be found. He submits that in absence of reasons it is not possible to read the mind of the authority recording reasons while invoking powers under section 147 of the Act.

14. Mr. Pandit further contends that in the case, where reopening of assessment is after four years, the Assessing Officer must have reason to believe that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. He further contends that the petitioner has averred in the petition that it has fully and truly disclosed all the material facts in support of its claim of depreciation for the full year on the commissioning of its Tin Packaging Unit and the said averments have not been denied by the respondents in their reply as such the averments made by the petitioner in this behalf should be treated as having admitted by the respondents. It should be treated as admission on the part of the respondents for want of their denial in their counter affidavit. In the above view of the submissions, learned counsel for the petitioner submits that the impugned notice including reasons recorded in support thereof are liable to be quashed and set aside.

Per Contra :

15. Mr. Desai, learned senior counsel appearing for the Revenue contends that the present petition is premature. He submits that in view of the disclosure of reasons, now the petitioner should be directed to raise all objections before the Assessing Officer as per decision of the Apex Court in G.K.N. Driveshafts India Ltd. v. ITO [2003] 259 ITR 191 .

16. Mr. Desai further submits that on true and proper interpretation of sections 147 and 263 of the Act, the order which was passed by the Commissioner of Income-tax under section 263 does not have any effect on the powers of the Assessing Officer to invoke provisions of sections 147 and 148 of the Act. Both powers are independent. They can be exercised independently considering the facts and circumstances of each case. He placed reliance on the judgment of the Madhya Pradesh High Court in the case of CIT v. Gulam Rasool [1997] 225 ITR 9042  and CIT v. Kanubhai Engineers (P.) Ltd. [2000] 241 ITR 665 (Cal.). Mr. Desai, thus, contends that the notice issued under section 148 is legal and valid and it complies with the requirements of section 147. In the circumstances, Mr. Desai submits that the petition is liable to be dismissed.

Statutory provisions :

17. Before proceeding to consider the rival contentions, it would be profitable to review relevant statutory provisions applicable to the facts of the present case.

“147. Income escaping assessment.—If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance as the case may be, for the assessment year concerned (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response 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.

Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—

  (a)   where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;

  (b)   where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;

   (c)   where an assessment has been made, but—

      (i)   income chargeable to tax has been under-assessed; or

     (ii)   such income has been assessed at too low a rate; or

   (iii)   such income has been made the subject of excessive relief under this Act; or

    (iv)   excessive loss or depreciation allowance or any other allowance under this Act has been computed.

148. Issue of notice where income has escaped assessment.—(1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so.

**                                                                             **                                                                                    **

263. Revision of orders prejudicial to revenue.—(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.

Explanation.—For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,—

  (a)   an order passed on or before or after the 1st day of June, 1988, by the Assessing Officer shall include—

   (i)   an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A;

  (ii)   an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorised by the Board in this behalf under section 120;

  (b)   ‘record’ shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner;

   (c)   where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.

(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

Explanation.—In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.”

Issues :

18. The submissions advanced by the rival parties give rise to the following issues :

1. Whether, in the facts and circumstances of the case, the Assessing Officer is denuded of his powers under sections 147 and 148 of the Act when the order setting aside the assessment with order of remand has become final and conclusive and the assessment proceedings pursuant to such order passed under section 263 are pending with the Assessing Officer for assessment in accordance with law?

2. Whether, in the facts and circumstances of the case, can it be said that there was a failure on the part of the petitioner/assessee to fully and truly disclose all the material facts necessary for determination of claim of depreciation on ‘Tin Packaging Unit’ of the petitioner?

Consideration :

As to Issue No. 1 :

19. This issue relates to the powers of the Assessing Officer to issue notice under section 148 of the Act, especially, when the revisional authority has already reopened the assessment in exercise of revisional powers under section 263 of the Act and on remand the assessment is pending. In other words, issue for consideration, in the facts and circumstances of this case, is : can the Assessing Officer invoke the powers to reopen assessment on the premise that the income chargeable to tax has escaped assessment for the assessment year in question. Mr. Pandit, appearing for the petitioner contended that the assessment proceedings being pending, income cannot be said to have escaped assessment warranting invocation of powers under section 147 read with section 148 of the Act. He submitted that until final assessment order is passed in pursuance of the directions issued under the order of remand passed under section 263, the said powers are not available. As against this, Mr. Desai appearing for the Revenue contends that the powers of Commissioner of Income-tax under section 263 and powers of Assessing Officer under section 148 are independent of each other and, therefore, even after the Commissioner has invoked jurisdiction under section 263, it is open to the Assessing Officer to invoke jurisdiction under section 148 of the Act.

20. Let us examine the strength of the rival contentions in the backdrop of the facts found in this petition. In order to appreciate rival submissions, one has to turn to the scheme engrafted under the aforesaid provisions of the Act. Section 147 deals with income escaping assessment. Under this section, if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under section 147 or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. Proviso to section 147 lays down that where an assessment under section 143(3) or section 147 has been made for the relevant assessment year no action can be taken under section 147 after expiry of four years from the end of relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under section 142(1) or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

21. Section 148 contemplates notice to be issued by the Assessing Officer to the assessee requiring him to furnish return of his income within a prescribed period.

22. Section 263 provides for revision of the order prejudicial to the interest of the Revenue; wherein the Commissioner is given power to call for and examine the record of any proceeding under the provisions of the Act and, if he considers that any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Once revisional power is exercised by the Commissioner and the assessment is set aside and the case is remanded to the Assessing Officer, then, under section 153(2A) of the Act, it is obligatory on the part of the Assessing Officer to complete the assessment proceedings within a period of one year from the end of the financial year in which the order under section 263 is passed.

23. The operation of both these sections is somewhat similar in the sense if the Commissioner under section 263 of the Act finds that the assessment order is prejudicial to the interest of the Revenue he can reopen the issue, at the same time, the Assessing Officer, under sections 147 and 148 of the Act can reopen assessment if he has a reason to believe that income chargeable to tax has escaped assessment. Therefore, virtually both the provisions are for reopening the assessment, one at the level of the Commissioner and, other at the level of the Assessing Officer. Now the question is : whether Assessing Officer can reopen the assessment on account of income escaping assessment, especially, when the Commissioner has reopened the assessment by setting aside the original one and on remand the proceedings are pending before the Assessing Officer for assessment afresh.

24. In this case, the assessment order is validly reopened by the revisional authority and the order of assessment has been set aside in part. What is set aside is the assessment in respect of an item which is under-assessed. In the event, under-assessment is set aside in part, then, the rest of the original order of assessment does not get affected. In other words, the original assessment order is upset only to the extent ordered by the revisional authority. Untouched order of the assessment becomes final and conclusive. The original assessment order to the extent it is untouched retains its character and identity. The revisional order, in this case, has affected only that portion of the order to the extent under-assessment was noticed and to the extent order is set aside. Once the order of assessment to the extent it relates to under-assessment of an item is set aside and the proceedings are remanded to the Assessing Officer, then, the assessment proceedings in respect of that item are treated as pending so long the final assessment does not take place. Now the mute question is : whether, during the pendency of the assessment proceedings, one can have ‘reason to believe’ that the income has escaped assessment. In order to answer this question, one has to understand the meaning and concept of the words “reason to believe”. The words “reasons to believe” suggest honest belief of a reasonable man based on direct or circumstantial evidence held in good faith; not a mere pretense. Belief 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. It must be found on reasonable grounds. The words “reason to believe” occurring in section 147 of the Act received judicial recognition over the period of time. The Apex Court in the case of Sheo Nath Singh v. AAC [1972] 3 SCC 234 interpreted the said words in the following terms :

“. . . 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 circumstantial 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. . . .” (p. 239)

25. The Apex Court, in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, has held that reason for formation of belief for reopening of assessment must have rational connection or relevant bearing on the formation of belief. The essential requirement for initiating reassessment proceedings under section 147 read with section 148 is that the Assessing Officer must have a reason to believe that any income chargeable to tax has escaped assessment for any assessment year.

26. The words “reason to believe” have also been defined in various dictionaries. As per Legal Thesaurus (Regular Edition) by William C. Burton, the reason to believe means ‘clue’. Clue means indication or suggestion.

27. On the above canvass, having examined the judicial as well as the dictionary meaning of the words “reason to believe”, it is clear that the said words convey honest rational belief of a reasoanble man based on cogent reasons entertained in good faith. Now the question is : can this concept be invoked in a case where conclusive and final findings are recorded by the higher court or tribunal or forum conclusively holding happening of a particular event. Take for an illustration, ‘A’ is convicted for an offence of having committed theft and the conviction has become final and conclusive, in that event, can anybody say that he has reason to believe that ‘A’ has committed theft. Obviously, the answer has to be in negative. Similarly, in the present case, when the Commissioner of Income-tax, vide his order passed under section 263 of the Act, has set aside the original assessment and has directed the Assessing Officer to reframe the assessment on the issue of allowance of depreciation, after examining all the facts of the case and after providing reasonable opportunity of hearing to the assessee, it cannot be said that the income has escaped assessment. When the reassessment proceedings pursuant to the order of the Commissioner of Income-tax are pending and the Assessing Officer is entitled to examine all the aspects of the matter on the issue of allowance of depreciation, the question of income escaping assessment does not arise and, consequently, the question of reopening the assessment on the ground that the Assessing Officer has reason to believe that the income chargeable to tax has escaped assessment does not arise at all.

28. Turning to the facts of the present case on hand, when the order of assessment, though in part was set aside and the finding that the under-assessment was required to be enquired into and reassessment is required to be done has become final and conclusive, the question of entertaining reasonable belief that the income chargeable to tax has escaped assessment, in our considered opinion, does not arise muchless when the assessment proceedings are still pending. Thus, it was not open for the Assessing Officer to invoke powers under sections 147 and 148 of the Act. In other words, so long as the assessment proceeding in respect of certain income subsist, the income cannot be said to have escaped assessment. Such proceedings, if initiated, will have to be held as invalid, ab initio void and illegal.

29. It is, thus, clear that the concept of reason to beieve comes in picture if the income chargeable to tax has escaped assessment. So long as the assessment is pending, the assessing authority cannot have any such reason to believe that income chargeable to tax for the assessment year in question has escaped assessment. Income cannot be said to have escaped assessment within the meaning of this section if the assessment proceedings in respect of that income and/or issue are still pending and have not yet been culminated into a final order. This question came up for consideration before the Supreme Court in the case of Ghanshyamdas (supra). Relying on the decision of the Calcutta High Court in the case of Lachhiram Basantalal, In re AIR 1931 Cal. 545 and of the Judicial Committee in Sir Rajendranath Mukerjee v. CIT [1934] 2 ITR 71 (PC), it was laid down that if the assessment proceedings have been initiated, the income cannot be said to have escaped assessment until a final order of assessment is passed on the pending proceedings. Income cannot be said to have escaped assessment when the assessment proceedings are still pending The dictum laid down is clearly understandable principle. How can an escapement of an income from an assessment be predicted before an assessment is complete? The same view has been taken in Hargovindsing Narainsing v. CIT [1973] 90 ITR 435 (Bom.). In that case, the Karta of the assessee-HUF, died in September, 1954. Thereafter, disputes arose among the members of the family and a court receiver was appointed. For the assessment year 1956-57, the ITO issued a notice, under section 22(2) of the Indian Income-tax Act, 1922, in the name of the family to the court receiver and in response to the notice the court receiver filed returns. The ITO did not pass any orders on the ground that the notice served on the court receiver and the returns submitted by him were invalid and proceed to initiate proceedings under section 34 of that Act. It was held that at the relevant time the assets of the assessee-family were in charge and under the control of the court receiver and the notice served on the court receiver under section 22(2) and the returns submitted by him were valid. Even if it were assumed that the returns were invalid that would not authorise the ITO to initiate proceedings under section 34. This could not be regarded as a case where no return had been filed by the assessee or that his income had escaped assessment. The proceedings under section 34 were, therefore, not valid.

30. If the valid return of the income has been submitted by the assessee within a period fixed under section 139(4) for submission of return, section 147 will not apply during the pendency of the return is a settled law laid down by the Apex Court State of Assam v. Deva Prasad Barua [1970] 75 ITR 18 (SC); CIT v. S. Raman Chettiar [1965] 55 ITR 630 (SC); CIT v. Ranchhoddas Karsondas [1959] 36 ITR 569 (SC).

31. Considered from another angle, the function of the Assessing Officer is to administer Income-tax Act with solicitude for public treasury and with fairness to the tax payers. He is necessarily armed with necessary powers. Up to four years an assessment is open to his unreserved consideration on his formation of the requisite belief. If he has such reason, he has the power, and it is his duty, to reopen the door and demand the amount legally owing. His formation of belief is not a judicial decision, but an administrative decision. It does not determine anything at this initial stage, but the Assessing Officer has a duty to proceed so as to obtain what the taxpayer was always bound to pay if the increase is justified at all. The decision to initiate proceedings is not to be proceeded by any judicial or quasi-judicial enquiry. His reasoning may be the result of official information or his own investigation or may come from any source that he considers reliable. His reason is not to be judged by a Court by the standard of what the ideal man would think. In this backdrop, if the formation of reasonable belief is not a judicial decision but an administrative decision of the Assessing Officer, can he be allowed to invoke powers under sections 147 and 148 of the Act on the face of the conclusively available judicial verdict of the revisional authority holding that a particular item of income or deduction chargeable to tax has been under-assessed. If the conclusive and final judicial decision is holding the field covering the issue, then, the identical issue cannot be a subject matter of administrative decision under sections 147 and 148 of the Act. In our view, on this count also the impugned notice issued under section 148 of the Act and reasons recorded in support thereof are liable to be quashed and set aside.

32. At this stage, let us consider the strength of the submissions advanced by Mr. Desai, appearing for the Revenue that proceedings under section 147 are distinct and separate from proceedings under section 263. Merely because proceedings under section 263 are initiated by issuing a notice in that behalf, the Assessing Officer is not debarred from initiating proceedings under section 147 as held by the Madhya Pradesh High Court in the case of Gulam Rasool (supra).

33. The law laid down in the said judgment is not at all applicable to the facts of the present case. It is no doubt true that operation of both these sections is somewhat similar in the sense if the Commissioner under section 263 of the Act finds that the assessment order is prejudicial to the interest of the Revenue he can reopen the issue, at the same time, the Assessing Officer, under sections 147 and 148 of the Act can reopen assessment on account of income having escaped assessment. Sections 147 and 148 can be pressed into service to reopen assessment so long as the proceedings under section 263 are not finally terminated. In other words, during the pendency of such proceedings, the powers under sections 147 and 148 to reopen assessment can always be exercised. But once the assessment in so far as it is prejudicial to the interest of the Revenue is set aside by the Commissioner of Income-tax and the Assessing Officer is directed to make fresh assessment regarding grant of depreciation after examining all the aspects, the question of income escaping assessment would arise only when the reassessment order is passed by the Assessing Officer. In the present case, admittedly, reassessment pursuant to the order of the Commissioner of Income-tax has not yet been finalised. Therefore, during the pendency of the reassessment proceedings it is not open to the Assessing Officer to presume that the income has escaped assessment. The decision of the Madhya Pradesh High Court in the case of Gulam Rasool (supra) does not support the contention of the Revenue. In that case, notice under section 148 was already issued by the Assessing Officer prior to the issuance of notice under section 263 of the Act. In that case, the Tribunal had held that the Commissioner of Income-tax was not justified in invoking jurisdiction under section 263 when the Income-tax Officer had already issued notice of reopening the assessment under section 147/148 of the Act. In that context it was held by the Madhya Pradesh High Court that both section 147/148 and section 263 are for reopening the assessment - one at the level of Income-tax Officer and other at the level of Commissioner of Income-tax. It was further held that both the authorities can invoke their powers after the assessment order, but both are not exclusive of each other. In the present case, the facts are altogether different. Firstly, in the present case, the notice under section 148 has been issued after the order under section 263 was passed. Secondly, the reassessment pursuant to the order under section 263 has not been finalised at the time of issuance of notice under section 148 of the Act. Therefore, the decision of the Madhya Pradesh High Court in the case of Gulam Rasool (supra) does not support the case of the Revenue.

34. The submission advanced by Mr. Desai, relying on the judgment of the Apex Court in the case of G.K.N. Driveshafts (India) Ltd. (supra) that the petitioner should be asked to raise all its objections to the validity of the notice before the Assessing Officer does not survive in view of our finding that the powers under sections 147 and 148 could not have been invoked by the Assessing Officer in the peculiar facts of this case.

As to Issue No. 2 :

35. In view of our finding on issue No. 1, now it is really not necessary to delve upon issue No. 2 to consider as to whether, in the facts and circumstances of the case, the assessee has disclosed all material facts necessary for determination of depreciation at the rate of 25% on its Tin Packaging Unit. However, since the parties have addressed us at length, we propose to record our finding in this behalf.

36. After going through the return of income, we are satisfied that the assessee has filed all the necessary documents backed by the certificate of the Chartered Engineer along with statement of claim to show how the amount of depreciation at the rate of 25% was calculated. Relevant evidence in support of data as to when the machinery was installed after 30th September, 1995 so as to justify its claim for depreciation @ 50% which was allowable in the original order of assessment by the Assessing Officer, was also disclosed. The hearing was attended by the representative of the assessee from time to time. In the circumstances, no failure on the part of the assessee to disclose all material fully and truly can be attributed. If the Assessing Officer has taken a wrong decision that by itself cannot be a ground to reopen the assessment that too beyond the period of four years. In this case, no reasons are to be found alleging any failure on the part of the assessee to fully and truly disclose all material for the assessment. On this count also, invocation of the powers under section 147 and issuance of notice under section 148 are absolutely bad in law.

37. In the result, impugned notice dated 28th March, 2003 issued by the Assessing Officer under section 148 of the Act and reasons recorded in support thereof under section 147 are quashed and set aside. Petition is allowed. Rule is made absolute in terms of prayer clauses (a) and (b) with no order as to costs.

nn

 

 [S1]1. [1983] 13 Taxman 414.

 [S2]1. [2002] 125 Taxman 963.

 [S3]2. 91 Taxman 167.