AO cannot assess other ‘escaped income’ if reason for issue of Notice under section 148 dropped

ACIT vs. Major Deepak Mehta (Chattisgarh High Court) – The Bombay High Court in Jet Airways (supra) observed that after issuing a notice under Section 148, the income which has initially formed a reason to believe that the income has escaped assessment, but as a matter of fact has not escaped assessment. The AO cannot proceed to assess some other income independently, however, it was observed that it is open for the AO to issue a fresh notice under Section 148 and proceed thereafter. The High Court of Delhi in Ranbaxy Laboratories Limited (supra), has taken the similar view.

The assessee filed his reply under Section 152 (2) stating therein that the said income which had formed reasons in the notice under Section 148 had not escaped assessment, as the same was disposed of in the same assessment year itself and for that no details were given.

The Tribunal has also come to the conclusion that, in fact, there was no escapement of assessment or no assessment in respect of the said head, which formed the reason to believe in the notice. In respect of other incomes no notice was issued and the assessee had no opportunity to put forward his case under Section 152 (2) of the Act, 1961, to avail benefit of the said Section for dropping the proceedings. Thus, the Revenue cannot take advantage of the Explanation 3 to Section 147, as the same is not available in the facts of the case.

Explanation 3 is applicable only in the event the income was formed opinion in the notice has been found correct and the proceeding in the respect of the said income was not dropped under Section 152 (2) of the Act, 1961.

The Supreme Court in Sun Engineering Works (P) Ltd. (supra) held that the issue was in respect of inclusion of other incomes in addition to that item or items which have led to the issuance of notice under Section 148 and it was found that the AO was right in including other incomes. On the issue as to when the item or items which have led to the issuance of notice under Section 148 has been dropped under Section 152 (2), what would be the stand of the AO was not in issue in the said case. It was further held that the AO cannot reopen the entire assessment except the un escaped income for which the proceedings have been initiated.

The Supreme Court in S. Sundaram Pillai (supra), had held, inter alia, that an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intend ment of the enactment.

In the case on hand, the main object and purpose of Section 147 read with Section 148 is that if there is any escaped assessment and the AO has reason to form the opinion a notice must be given to the assessee to file returns or to show that there was no escaped income and under Section 152 (2) the proceedings may be dropped. In that context, explanation provides that along with the proceedings for the escaped income which had formed reason to believe and the assessee has been properly intimated to show his case, proceedings of the other incomes may also be examined along with the said income.

HIGH COURT OF CHATTISGARH AT BILASPUR

INCOME TAX APPEAL NO 04 OF 2006

Assistant Commissioner Income Tax Raipur

VERSUS

Major Deepak Mehta

Judgement (Delivered on 8th day of November, 2011)

APPEAL UNDER SECTION 260 A OF THE INCOME TAX ACT,1961

Per SATISH K. AGNIHOTRI, J.

1. The instant appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short “the Act, 1961”) is against the order dated 7-10-2005 passed by the Income Tax Appellate Tribunal (for short “the Tribunal”) wherein the Tribunal has dismissed the appeal filed by the Revenue and partly allowed the cross objection filed by the assessee.

2. This Court vide order dated 18-8-2011 admitted the appeal on the following substantial question of law:

“Whether on facts and in the circumstances of the case the Tribunal was justified in annulling the assessment framed u/s 143 (3)/147 by the assessing officer.”

3. The facts, in brief, are that the assessee was engaged in the business of poultry farming in the name & style of Royal Poultry Farm. The assessee filed the income return for the AY 1997 – 98 on 22-12-1997 declaring its income of Rs. 1,49,854/-. The return was processed under Section 143 (1) on the finding that the capital work in progress under the head building as per scheduled `c’ shown in the balance sheet as on 3 1-3- 1996 for a sum of Rs. 15,35,551/- was not carried forward to the balance sheet as on 1-4-1996. The total fixed assets on closing balance as on 31-3-1996 was Rs. 52,51,629/- whereas the opening balance as on 1-4-1996 was shown at Rs. 31,35,246/-, showing the difference of Rs. 20, 16,383/- (sic Rs.2 1,16,383/-).