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Difference in income as per TDS certificates & ROI not necessarily leads to income escapement

IN THE ITAT KOLKATA BENCH ‘B’

Meheria Reid & Co.

Versus

Income-tax Officer, Ward 5(4) Kolkata

IT APPEAL NOS. 53 & 54 (KOL.) OF 2010

[Assessment yearS 2005-06 & 2006-07]

DECEMBER 28, 2012

ORDER

Pramod Kumar, Accountant Member

This is second round of proceedings, in these cases, before this Tribunal. Originally, all these appeals, along with revenue’s appeal for the assessment year 2006-07 i.e. ITA No. 119/Kol/2010, were disposed of vide order dated 24th February, 2012 by a bench consisting of brothers Shri N Vijaykumaran, Judicial Member (as he then was), and Shri C D Rao, Accountant Member (as he then was). However, aggrieved by the order so passed by the Tribunal, assessee carried the matter in further appeal before the Hon’ble Calcutta High Court, and Their Lordships were pleased to remit the matter back to this Tribunal vide judgment dated 1st August, 2012 wherein Their Lordships have, inter alia, observed as follows:

“After going through the impugned judgment and order of the learned Tribunal, we have noticed that the learned Tribunal has not decided the question of jurisdiction at all. There was no discussion or reason. The question of jurisdiction admittedly goes to the very root of the matter. We feel, as has rightly been pointed out by Mr Khaitan, that this question has to be decided first. After deciding the said question first, if the learned Tribunal feels that the matter may be decided on merit, the Tribunal can do so.

We have examined the aspect of merit, and noticed that the relevant materials placed before the learned Tribunal which were not at all considered or discussed. Therefore, on merits also, this requires reconsideration. Accordingly, we set aside the impugned judgment and order of the learned Tribunal, and remand the matter for fresh hearing on the question of jurisdiction first, with reasons. If the question of jurisdiction is decided against the assessee, then the Tribunal will decide the matter on merits taking into consideration all the material placed before it earlier as well as material which might be placed afresh before the Tribunal.

Let the hearing on remand be completed within a period of three months from the date of communication of this order”

2. The matter is now placed before this quorum vide directions contained in Hon’ble Vice-President’s note dated 14th November, 2011. That’s how we have come to be in seisin of these appeals.

3. We will take up the assessment year 2005-06, i.e. ITA No. 53/Kol/2010, first.

4. This appeal is directed against the order dated 12th January, 2009 passed by the learned Commissioner (Appeals) in the matter of assessment under section 143(3) r.w.s. 147 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), for the assessment year 2005-06. Grievance of the assessee, on the question of jurisdiction, is as follows:

That in the absence of any valid reasons to believe that income of the assessee has escaped assessment, within meanings of section 147 of the Income-tax Act, 1961, the notice issued by the Assessing Officer under section 148 was without jurisdiction, and, therefore, the impugned assessment order passed on 15th December, 2008, in pursuance to such notice, is liable to be annulled.

5. Briefly stated, the relevant material facts are like this. The assessment in this case was completed under section 143(1) of the Act, but subsequently, the assessment was reopened for the following reasons recorded by the Assessing Officer-copies placed before us at pages 20 and 21 of the paper-book:

12.2.2008

The assessee (has) shown professional income in the P & L account Rs. 16,74,352 but on verification of TDS certificates, it is seen that on Rs. 18,63,234. TDS deducted for Rs. 96,861.

Hence, the discrepancy may be verified. This is a fit case for reopen(ing) the assessment under section 147. Issue notice under section 148.

Sd/xx (illegible)

Certified to be true copy

Sd/xx (illegible)

Income Tax Officer

Ward 54(4), Kolkata

6. Vide letter dated 27th February, 2008 also, a copy of which was placed before us at page 19 of the paper-book, the Assessing Officer has advised the assessee the reasons of reopening the assessment as follows:

“In response to your letter dated 22.2.2008, this is to inform you that the revenue audit has pointed out that your professional income shown, and totalling of TDS certificate, differs. Hence, re-opening of your assessment for the assessment year 2005-06″

7. In substance thus, it is an undisputed position that the assessment has been reopened on the ground that the discrepancy between professional income declared by the assessee and the professional income as per tax deduction at source certificates is at variance, and it, therefore, requires verification to find out whether any taxable income has escaped assessment. There is a categorical mention in the reasons recorded for reopening the assessment that “the discrepancy may be verified”. The short question we are required to adjudicate is whether, on these undisputed material facts, the reassessment proceedings so initiated can be said to be sustainable in law.

8. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

9. We have taken due note of the fact that the original assessment proceedings were completed under section 143(1) of the Act and that the reassessment proceedings are initiated within four years but that does not, as is the settled legal position, does not imply, as has been indirectly suggested by the learned Departmental Representative, that assessment proceedings can be revisited even in the absence of legally sustainable reasons for formation of prima facie belief that income has escaped assessment. In other words, irrespective of whether or not the original assessment has been completed under scrutiny assessment or summary assessment, it is necessary that conditions precedent for invoking section 147 have to be satisfied. Hon’ble Bombay High Court, in the case of Prashant S Joshi v. ITO [2010] 324 ITR 154  had an occasion to deal with this question and also consider the scope of Hon’ble Supreme Court’s judgment in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd [2007] 291 ITR 500  in this regard. After elaborately considering Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokes (P.) Ltd. (supra), Their Lordships of Hon’ble Bombay High Court have observed that “Hon’ble Supreme Court held that so long as the ingredients of section147 are fulfilled, the Assessing Officer is free to initiate proceedings under section 147, and that the failure to take steps under section 143(3) will not render him powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued”. ” In other words”, according to Hon’ble Bombay High Court, “when an intimation has been issued under section 143(1), the Assessing Officer is competent to initiate reassessment proceedings provided that the requirements of section 147 are fulfilled”. It is thus concluded that ” In such a case [i.e. when the reopening is within four years and the income tax return is processed under section 143(1)] as well, the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment”. It is thus clear that even when the original assessment is under section 143(1) and even when reassessment proceedings are initiated within a period of four years, it is still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny. No doubt that at the stage of initiating reassessment proceedings, it is not necessary to establish that there has been an escapement of income, but essentially there have to be valid reasons to believe that income has escaped assessment and these reasons, on stand-alone basis, must be considered appropriate for arriving at the conclusion arrived at by the Officer recording the reasons. The mere fact that the assessment has been completed under section 143(1) per se cannot be a good ground to reopen the assessment, without satisfying the conditions precedent for invoking section 147 i.e. reasons for forming opinion that income has escaped the assessment. Elaborating upon this aspect of the matter, Hon’ble Shri R V Easwar, the then Senior Vice-President of this Tribunal, has, in the Third Member decision in the case of Telco Dadajee Shackjee Ltd. v. Dy. CIT [IT Appeal No. 4613/Mum/2005, dated 12-5-2010] in his inimitable words, observed as follows:

“…..it needs to be remembered that section 147 applies both to section 143(1) as well as section 143(3), and, therefore, except to the extent that the reassessment notice under section 143(1) cannot be challenged on the ground of a mere change of opinion, still it is open to the assessee to challenge the notice on the ground that there is no reason to believe that income chargeable to tax has escaped assessment. The reason to believe must have a live link to formation of belief that income chargeable to tax had escaped assessment when the return was processed and accepted under section 143(1). To hold that in every case where a return was processed and accepted under section 143(1), the Assessing Officer will be free to reopen the same under section 148 even in the absence of a live link between the reasons recorded and the formation of belief, would be to make the conditions of section 147 and 148 otiose as regards notices of reopening issued in the cases where the return was originally processed under section 143(1)…..”

10. The true test for validity of reassessment proceedings, even in the cases in which original assessment has been completed under section 143(1), must, therefore, lie in whether or not the reasons recorded for reopening the assessment can be held to be sustainable in law.

11. It is also well settled in law, as has been held by Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. v. R B Wadkar [2004] 268 ITR 332 as well, that “……….It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons.” Their Lordships added that “The reasons recorded should be self explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….”. When we examine the facts of this case in the light of the above legal position that there is nothing in the reasons to indicate that there is an escapement of income, but, at the most, need to verify that the reasons of discrepancy between income from profession as per return of income vis-à-vis as per the certificates of tax deduction at source. A variation in these two figures does not necessarily lead to escapement of income, because, for example, when income is booked on mercantile basis, the aggregate of such amounts, on which taxes have been deducted at source during the relevant previous year, will not necessarily tally with the income figure. There is thus no cause and effect relationship between the aggregate of payments, in respect of which taxes have been deducted at source, being more than relevant income having been booked in the profit loss account, and the income escaping assessment. In other words, just because the aggregate of such payments is more than income booked in the profit and loss account, as is the situation in the case before us, there is no valid reason to indicate that income has escaped assessment. All that the Assessing Officer records is the fact that these two figures are different, but then this fact does not necessarily lead to the inference that the income has escaped assessment, and, therefore, the Assessing Officer himself refers to the need to verify the matter by observing that “the discrepancy may be verified”. So far so good, but then the fallacy creeps in when the Assessing Officer concludes that, for the said reason, “this is a fit case for reopening the assessment”. As Hon’ble Bombay High Court has observed, in the case of Hindustan Lever Ltd. (supra), the reasons should provide link between evidence and the conclusion. The evidence is that the figures of professional receipts as per TDS certificates and as shown in the profit and loss account vary, but then this does not lead to the conclusion that the income has escaped assessment. As a matter of fact, as we will see in paragraph 15 of this order a little later, on the same date and vide identical reasons recorded, the Assessing Officer has also reopened the assessment for subsequent assessment year as well, in which professional income as per profit and loss account was far more than the aggregate of figure of payments as per tax deduction at source certificates. It is thus the difference per se and not the professional income as per profit and loss account being less than the figure as per tax deduction at source certificates which is proximate cause of reopening the assessment. In any event, the difference between receipt and income is too significant to be ignored. There may be need to verify but that mere need to verify does not bring the matter within the scope of cases in which reassessment proceedings can be validly initiated. What is needed, to successfully invoke the reassessment proceedings, is the reasons to believe that income has escaped assessment. No doubt, even a prima facie reason for believing that income has escaped assessment is sufficient to invoke the reassessment proceedings, but there is a subtle, though significant, distinction between reasons to believe and reasons to suspect. While the former is good enough to hold that income has escaped assessment and initiate suitable remedial measures in respect thereof, the latter can at best be the ground enough to verify and examine the matter further. The mere fact that matter needs to verified and deserves to examined further can, in our humble understanding, never be a reason good enough to believe, even if it is a good reason to suspect so, that income has escaped assessment, and therefore, a reason good enough to invoke the reassessment proceedings. An Assessing Officer may have a hunch that here is a case in which some income may have escaped assessment but that hunch or suspicion, howsoever legitimate, cannot be a reason to “believe” that income has escaped assessment. The condition precedent for invoking section 147 is, thus, far from satisfied. In this view of the matter, in our considered view, the very initiation of reassessment proceedings on the facts of this case was devoid of legally sustainable merits. We, therefore, quash the reassessment proceedings. As the reassessment proceeding itself is quashed, we see no need to deal with the matter on merits and dismiss the related grievances, raised by the assessee on merits of the case, as infructuous.

12. In the result, the appeal for the assessment year 2005-06 is allowed in the terms indicated above.

13. That takes us to the assessee’s appeal for the assessment year 2006-07 i.e. ITA No. 54/Kol/2012.

14. This appeal is directed against the order dated 12th January, 2009 passed by the learned Commissioner (Appeals) in the matter of assessment under section 143(3) r.w.s. 147 of the Income-tax Act, 1961, for the assessment year 2005-06. Grievance of the assessee, on the question of jurisdiction, is as follows:

That in the absence of any valid reasons to believe that income of the assessee has escaped assessment, within meanings of Section 147 of the Income-tax Act, 1961, the notice issued by the Assessing Officer under section 148 was without jurisdiction, and, therefore, the impugned assessment order passed on 15th December, 2008, in pursuance to such notice, is liable to be annulled.

15. The relevant facts of the case are materially similar with the facts of the assessment year 2005-06 which we have dealt with above. The assessment in this case also was completed under section 143(1) of the Act, but subsequently, the assessment was reopened for the following reasons recorded by the Assessing Officer-copies placed before us at pages 23 and 24 of the paper-book

12.2.2008

The assessee (has) shown professional income in the P & L account Rs. 28,99,380 but on verification of TDS certificates, it is seen that TDS deducted for Rs. 74,094 on an amount of Rs. 14,01,497

Hence, the discrepancy may be verified. This is a fit case for reopen(ing) the assessment under section 147. Issue notice under section 148.

Sd/xx (illegible)

Certified to be true copy

Sd/xx (illegible)

Income Tax Officer

Ward 54(4), Kolkata

16. Vide letter dated 27th February, 2008 also, a copy of which was placed before us at page 22 of the paper-book, the Assessing Officer has advised the assessee the reasons of reopening the assessment as follows:

“In response to your letter dated 22.2.2008, this is to inform you that the revenue audit has pointed out that your professional income shown, and totalling of TDS certificate, differs. Hence, reopening of your assessment for the assessment year 2006-07″

17. In substance thus, it is an undisputed position that the assessment has been reopened on the ground that the discrepancy between professional income declared by the assessee and the professional income as per tax deduction at source certificates is at variance, and it, therefore, requires verification to find out whether any taxable income has escaped assessment. There is a categorical mention in the reasons recorded for reopening the assessment that “the discrepancy may be verified”. The short question that we are required to adjudicate is whether, on these undisputed material facts, the initiation of reassessment proceedings can be held to be legally sustainable.

18. We have heard the rival contentions, perused the material on record, and duly considered factual matrix of the case as also the applicable legal position.

19. We have noted in the present year, the professional receipts as per the profit and loss account were far more than aggregate of professional receipts as per tax deduction at source certificates. In this view of the matter, it is difficult to understand as to how can anyone form belief, or even a suspicion, that an income has escaped assessment. The income which is offered to tax is clearly more than the income as per the tax deduction at source certificates. It is, therefore, a clear case of non-application on this aspect of the matter and, in any case, the reassessment proceedings have been initiated on the short ground of need for verification of which, as we have noted earlier in this order, cannot be a legally sustainable reason for reopening a completed assessment even under section 143(1). The observations we have made in paragraph numbers 9 to 11, for the assessment year 2005-06, are applicable, with equal force, for this assessment year as well. Accordingly, for all these reasons, we quash the reassessment proceedings for the assessment year 2006-07 also. As the reassessment proceeding itself is quashed, we see no need to deal with the matter on merits and dismiss the related grievances, raised by the assessee on merits of the case, as infructuous.

20. In the result, the appeal for the assessment year 2006-07 is also allowed in the terms indicated in this order.

21. To sum up, both the appeals filed by the assessee are allowed in the terms indicated above.


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