HIGH COURT OF KERALA
Assistant Commissioner of Income-tax
WA NO. 1706 OF 2012
JANUARY 9, 2013
K.M. Joseph, J. – Appellant is the writ petitioner. It is a partnership firm engaged in jewellery business. There was a survey conducted under Section 133A by the Income Tax Department in the appellant’s premises on 01.02.2006. A statement of confession on additional income was recorded from the Managing Partner wherein he admitted certain irregularities in the Books of Account, and that unaccounted investments were made. He offered an income of Rs. 1,50,00,000 as additional income for investments made by the Partners in the business of the firm for the assessment year 2006-2007. It was stated that the income already projected for advance payment in 2006-2007 is One Crore and that the amount of Rs. 1,50,00,000 is over and above the estimated income for the year, so that the total income will be Rs. 2,50,00,000. The assessment for the year 2006-2007 was completed under Section 143(3) vide order dated 28.12.2008. However, the appellant was served with Ext.P6 notice dated 09.12.2011 wherein it was stated that the officer had reasons to believe that the appellant’s income chargeable to tax for the assessment year 2006-2007 had escaped assessment within the meaning of Section 147 of the Income Tax Act. A return was directed to be filed within thirty days. The appellant vide Ext.P7, relying on the Judgment of the Apex Court in GKN Driveshafts (India) Ltd. v. ITO  259 ITR 19, requested the officer to give in writing the recorded reasons for reopening the assessment. It was thereupon that Ext.P8 was issued, wherein, reference was made to the survey and the statement made by the Managing Partner. It is also indicated that the assessee had confirmed the statements by letter filed on 03.02.2009. Ext.P8 is dated 25.4.2012. The Writ Petition was filed challenging Ext.P6 notice. The learned Single Judge has found that the proceedings are only at the notice stage and it is for the appellant to submit objections and it was for the officer to take the proceedings to the logical conclusions by passing appropriate orders in accordance with law, after considering the objections. The Writ Petition was dismissed. Noting that the time for submitting objections was over, a further period of one month was given by the learned Single Judge. The proceedings were directed to be finalised within three months thereafter in accordance with law. It is feeling aggrieved by the said Judgment that the appellant is before us.
2. We heard Shri Anil D. Nair, learned counsel for the appellant and also Shri P.K. Ravindranath Menon, the learned senior counsel for the income tax department.
3. Learned counsel for the appellant would submit that Ext.P6 is vulnerable, as it is issued without jurisdiction. It is issued after the expiry of four years. He would rely on the following case law:
(1) Paul Mathews & Sons v. CIT  263 ITR 101
(2) Pala Marketing Co-operative Society Ltd. v. State of Kerala  236 ITR 604
(3) CIT v. Kelvinator of India Ltd. & Eicher Ltd.  320 ITR 561
(4) GKN Driveshafts (India) Ltd. (supra).
(5) Sitara Diamond (P.) Ltd. v. Dy. CIT  206 Taxman 19 (Bom.).
(6) Atma Ram Properties (P.) Ltd. v. Dy CIT  203 Taxman 408
(7) Catholic Syrian Bank Ltd. v. CIT  206 Taxman 182
4. Per contra, learned senior counsel for the Revenue drew our attention to the decisions of the Apex Court in Sowdagar Ahmed Khan v. ITO  70 ITR 79, Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd.  291 ITR 500 and Raymond Woollen Mills Ltd. v. ITO  236 ITR 34 (SC).
5. Learned counsel for the appellant sought considerable support from the decision of the Kerala High Court in Paul Mathews And Sons case (supra). It is necessary to notice the facts of that case. The assessee firm was a contractor. The assessment was completed under Section 143(3) for the year 1998-1999 on 07.02.2001 and for the assessment year 1999-2000, the assessment was completed on 08.03.2001. For the assessment year 2000-2001, the assessment was completed on 08.03.2001. There was a survey operation under Section 133A on 23.01.2001. A statement was recorded from the Managing Partner, wherein he admitted that there were irregularities and discrepancies in the books of account, in that, there was excess payment of cash over what was available as per the cash book and also unaccounted investment in properties and suppression of receipt and inflation of expenses. The Managing Partner offered an amount of Rs. 43 lakhs as additional income for the three years, i.e. Rs. 13 lakhs for 1998-1999, Rs. 10 lakhs for 1999-2000 and Rs. 20 lakhs for 2000-2011. The assessing officer determined the business income on the basis of reckoning net profit at 8%. The Commissioner of Income Tax, however, felt that it was erroneous and prejudicial to the interest of the Revenue on the basis that the additional income disclosed for each each year should have been taken into account separately while making the assessment. Acting under Section 263 of the Act, he set aside the assessment and directed the Assessing Officer to re-frame the assessment afresh. It was in the context of Section 263 of the Act that the Division Bench held, inter alia, as follows:
“The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent – if the order of the Income – Tax officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to section 263(1)of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase “”prejudicial to the interests of the Revenue ” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of Tax. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests to the Revenue. The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue……At the same time, the assessee having found that there were some omissions on its part, offered certain amounts as additional income for the years in question and gave a written offer to the Additional Commissioner. It was after verifying the account books and various materials gathered in the survey and after considering the offer made by the assessee that the Income-tax Officer had exercised a judicial discretion in the matter while completing the assessment. In the light of the voluntary disclosure in the letter given in writing by the assessee the facts given by it had been verified with the books of account and it was only after consideration of the various aspects of the matter and related facts that the Assessing Officer accepted the offer made by the assessee. In such circumstances, the view taken by the Income-tax Officer could not be said to be prejudicial to the Revenue nor could it be said to be erroneous. The order of revision was not valid.”
In Pala Marketing Co-operative Society Ltd. case (supra), a learned Single Judge was dealing with a case under Section 147 of the Act. A return of income was filed, wherein the assessee had deducted a sum towards depreciation allowance. On a certain basis, the assessment was completed under Section 143(3). An order was passed seeking to rectify the mistaken assessment as perceived. The appellate authority invalidated the proceedings for want of notice and opportunity. Fresh proceedings were taken under Section 154 and it was thereafter that a notice was issued under Section 148 to reassess the income. The assessee objected on the score that it was bad for limitation. The learned Single Judge held, inter alia, as follows:
“The primary facts regarding the claim of written down value had been furnished. However, while working the depreciation rate, instead of 331/3 per cent, for all items the assessee made a claim of 50 per cent, with reference to 12 items. This claim on the rate of depreciation could not be held to be failure to disclose fully and truly material facts necessary for assessment. It could not be stated that it was the duty of the assessee to point out that he had made a wrong claim in the rate of depreciation. The material facts having been placed before the Assessing Officer it was the duty of the Officer to draw the inference from those material facts disclosed. Section 147 is of special or extraordinary nature since it empowers reopening of an assessment after the period of limitation of four years and hence must satisfy the test strictly. Therefore, the notice issued for reassessment was not valid.”
In Kelvinator of India Ltd. & Eicher Ltd. case (supra), the Apex Court was dealing with the question as to whether the concept of “change of opinion” stands obliterated with effect from 01.04.1989, after substitution of Section 147 by the amendment in 1987. After perusal of the provisions, the Apex Court, inter alia, held as follows:
“On going through the changes quoted above, made to Section 147 of the Act, we find that prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in Section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. 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 fulfillment of certain pre-conditions 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. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. 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 omission of the words “reason to believe”, Parliament introduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.”
In GKN Driveshafts (India) Ltd. case (supra), the Court, inter alia, held as follows:
“When a notice under Section 148 of the Income-tax Act, 1961 is issued, the proper course of action for the noticee is to file the return and, if he so desires, to seek reasons for issuing the notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order.
On receiving notices under Section 148 the appellant filed the returns. The appellant also received notices under Section 143(2) calling for further information on certain points in connection with the returns. Thereupon the appellant filed writ petitions challenging the notices. The High Court dismissed the writ petitions holding that the petitions were premature and the appellant could raise its objections to the notices by filing reply to the notices before the Assessing Officer (see, e.g., (2002) 257 ITR 702). The appellant preferred appeals and the Supreme Court dismissed the appeals, observing that since the reasons for reopening of assessments under Section 148 had been disclosed in respect of five assessment years, the Assessing Officer had to dispose of the objections, if filed, by passing a speaking order before proceeding with the assessments for those years.”
In Sitara Diamond (P) Ltd. case (supra), the assessee who was a manufacturer in jewellery in a special economic zone claimed exemption under Section 10A which was allowed. After the expiry of four years of the relevant assessment year, the assessment was sought to be reopened on the ground that the assessee was a mere facilitator and not manufacturer. The Court took the view that the officer had recorded the finding of fact that the assessee was manufacturing jewellery in a special economic zone and there was no violation on his part to disclose fully and truly all material facts to the assessment. On the said basis, the Court interfered with the re-assessment. Therein, the Court, we notice, found that the reasons which were disclosed by the assessing officer do not set out as to what facts the assessee had failed to truly and fully disclose and therefore, the primary jurisdictional requirement for reopening the assessment beyond four years had not been fulfilled. In Atma Ram Properties (P) Ltd. case (supra), a bench of the High Court of Delhi was dealing with the assessment years 1999-2000 and 2000-2001. For the assessment year 2001-2002, certain additions were made as deemed dividend. The addition was restricted in appeal to a lesser sum. Thereafter, the assessing officer initiated re-assessment proceedings for the two assessment years, on the score that the appellate authority had restricted the addition, as the restricted amount was alone advanced to the appellant during the year 2001- 2002. Therefore, the assessing officer reasoned that as the addition on the issue of deemed dividend for advance was confirmed for the year 2001-2002, he had reason to believe that the income shown in the notice as received during 1999-2000 and 2000-2001 and escaped assessment. The Bench found that Explanation 1 to Section 147 does not help the Revenue. It was found that all material facts were available on the record and no material fact has to be inferred or discovered by the assessing officer. The assessing officer in spite of being aware of the facts, failed to apply or at best failed to consider whether Section 2(22)(e) of the Act was attracted. It was found that the failure to apply the law or a section to the admitted facts on record is not covered by Explanation 1 and the Explanation applies when the Officer fails to discover or infer material facts which, with due diligence, could have been discovered. It is noted that difference between facts and law, is well-recognised and understood. In Catholic Syrian Bank Ltd. case (supra) was found that the assessment was completed under Section 143(3) by computing the book profit under Section 115JB at a certain amount. Subsequently, the assessment was sought to be reopened. It is pertinent to note that it was in this case that the court noted that the reasons for reopening contained absolutely no reference to there being violation on the part of the assessee to truly and fully disclose all material facts. It was further found that Explanation (1)(i) was inserted in Section 115JB by the Finance Act, 2009 with retrospective effect from 1.4.2001. It was also found that there was no reference whatsoever for the formation of an opinion that there was failure to fully and truly disclose all material facts. The retrospective amendment by a law by Parliament would negate the inference which is sought to be drawn of the failure to disclose material facts, it was held.
6. Now let us examine the case law cited before us by the learned senior counsel for Revenue. In Sowdagar Ahmed Khan (supra), the Income Tax Officer found that the assessee has current account in a bank in the name of his father-in-law till the latter’s death, and that he has failed to disclose the advance. In the relevant returns, the assessee had not shown income from the property in the name of his sons and daughter, though many of the properties were purchased by him in their names. In the light of the newly gathered material, the officer also felt that certain cash credits were not genuine. It was found that the notice was not barred by limitation. It was further held as follows:
“There is also no substance in the contention of the assessee that the Income-tax Officer had no jurisdiction to issue notices under section 34(1)(a) of the Act because the original assessment orders showed that the cash credits in question were duly considered and accepted. In Kantamani Venkata Narayana & Sons v. First Additional Income-tax Officer, Rajahmundry it was pointed out by this court that the assessee does not discharge his duty to disclose fully and truly material facts necessary for the assessment of the relevant year by merely producing the books of account or other evidence. He has to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it may be assumed that, from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, he is not on that account precluded from exercising the power to assess income which had escaped assessment. At page 643 of the report Shah J., speaking for the court, observed as follows :
‘The Income-tax Officer had, therefore, prima facie, reason to believe that information material to the assessment had been withheld, and that on account of withholding of that information income liable to tax had escaped assessment. From the mere production of the books of account it cannot be inferred that there had been full disclosure of the material facts necessary for the purpose of assessment. The terms of the explanation are too plain to permit an argument being reasonably advanced, that the duty of the assessee to disclose fully and truly all material facts is discharged when he produces the books of account or other evidence which has a material bearing on the assessment. It is clearly implicit in the terms of Sections 23 and 34 of the Income-tax Act that the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year, and that the duty is not discharged merely by the production of the books of account or other evidence. It is the duty of the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment.’
In Raymond Woollen Mills Ltd. v. Income-Tax Officer And Others  236 ITR 34, the Apex Court was dealing with a case where the Officer reasoned that there was under-valuation of inventories and under-statement of profits which information was obtained by the Revenue in a subsequent assessment proceedings. The Court, inter alia, held as follows:
“In this case, we do not have to give a final decision as to whether there is suppression of material facts by the assessee or not. We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no new facts came to the knowledge of the Income-tax Officer after completion of the assessment proceeding. We are not expressing any opinion on the merits of the case. The questions of fact and law are left open to be investigated and decided by the assessing authority. The appellant will be entitled to take all the points before the assessing authority. The appeals are dismissed. There will be no order as to costs.”
In the last decision cited by the Revenue, namely the decision in Rajesh Jhaveri Stock Brokers (P.) Ltd. case (supra) Apex Court held as follows:
“Section 147 authorises and permits the Assessing Officer to asses or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO  191 ITR 662, for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd.  217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO  263 ITR 34(SC). 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.”
It was further held that under Section 147, after the substitution, existence of only the first condition suffices, namely that the Officer must have reason to believe that income, profits or gains chargeable to income tax, have escaped assessment. It was further held that, no doubt, both the conditions as stipulated will be necessary in a case governed by the proviso to Section 147.
7. Section 147 after it was substituted with effect from 1.4.1989, in so far as it is relevant for our purpose, reads as follows:
“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 (hereafter 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 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:
Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
Explanation I.- 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.”
8. We must here, at this stage, before we consider the contentions, notice the stand of the Revenue as disclosed in the statement filed before the learned Single Judge. Therein, it is, inter alia, stated as follows:
The assessment was completed under Section 143(3) on 22.12.2008 for the assessment year 2006-2007, accepting the taxable income of Rs. 1,14,28,850/-. There was a change of incumbent in the office of the Assistant Commissioner twice. The Assistant Commissioner of Income Tax who conducted the survey, got transferred and the notice under Section 143(2) was issued by another Assistant Commissioner. He also got transferred out. The assessment was completed by his successor, the Deputy Commissioner of Income Tax. Moreover, it is stated that consequent to the survey, the assessee informed the Additional Commissioner of Income Tax of their willingness to offer additional income of Rs. 1.5 Crores to cover up the unexplained investments and this offer was in addition of the projected income of Rs. 1 Crore. There is no mention that it is subject to verification of accounts which is the case set up by the appellant now. The request was only that not to again tax the income in the hands of the partners and that the same should not result in complication in sales tax cases. Thereafter, a letter was issued by the appellant stating that the offer of additional income during the survey was mistaken and the correct investment would not exceed Rs. 35 lakhs. It is also stated that the income has escaped assessment, in that, the disclosure made was neither considered by the new incumbent assessing officer, nor disclosed by the assessee in the return filed and there was failure to declare the true and full facts.
9. The matter relates to the assessment year 2006-2007. The assessment was completed on 22.12.2008. Ext.P6 impugned notice is dated 09.12.2011. It was admittedly, going by the statement, issued after the expiry of four years from the end of the assessment year. It is true that four years have elapsed from the end of the assessment year. But, the proviso to Section 147 permits action, if, inter alia, the assess has not disclosed fully and truly all material facts necessary for the assessment. Explanation (1) also declares that the production of account books or other evidence from which material evidence could have been even with due diligence discovered by the assessing officer will not necessarily amount to disclosure. As held by the Apex Court in Sowdagar Ahmed Khan (supra) duty is not discharged by production of the books of account or other evidence and the assessee has a duty to bring to the notice of the officer the particular items in the books of account or the portions of the documents which are relevant. Established fact of escaped income, is not the legal requirement at the initiation stage as held by the Apex Court. It is in the realm of subjective satisfaction. We would, therefore, think that we may not be justified in this proceedings to hold that Ext.P6 notice is without jurisdiction. We make this observation because the learned Single Judge has permitted the appellant to file objections to Ext.P6 notice and it is for the assessing officer to take a decision after considering the objections. We are only of the view that it is not open for us to veto further action pursuant to Ext.P6 on the basis of the Writ Petition filed by the appellant.
10. It is then contended by the appellant that the learned Single Judge ought to have followed the decision of the Apex Court in GKN Driveshafts (India) Ltd. case (supra). He points out that the Apex Court in the said case had directed the objections to be disposed of by a speaking order before proceeding with the assessments. He pointed out that the learned Single Judge has instead directed that the proceedings are to be finalised in accordance with law after giving time to the appellant to submit objections.
11. Learned senior counsel for the Revenue would point out that the decision of the Apex Court was rendered in the context where the assessee had availed of the opportunity to raise objections. Learned counsel for the appellant would respond by contending that the course directed by the Apex Court should be followed even in the facts of this case.
12. The Apex Court has in the aforesaid decision held, inter alia, that the proper course for the assessee when he receives the notice under Section 148 is to seek reasons if he so desires for the notices. The assessing officer is bound to give reasons. On receipt of the reasons, the assessee is entitled to file objections and the assessing officer is bound to dispose of the same by passing a speaking order. It was further held in the said case that as the reasons had been disclosed, the assessing officer had to dispose of the objections, if filed, by passing a speaking order before proceeding with the assessment.
13. We notice that this is a case where the appellant had not cared to file any objection to Ext.P6. It was in the exercise of discretionary jurisdiction that the learned Single Judge permitted the appellant to file objections. In fact, the stand of the learned senior counsel for the Revenue is that the objections will certainly be considered. In such circumstances, we only observe that the objections which the appellant has filed must necessarily be considered and reasons must be given. But, we do not deem it necessary that we should direct that a separate order must be passed.
Subject to the above observations, the Writ Appeal will stand dismissed.