Case Law Details
IN THE HIGH COURT OF DELHI
Haryana Acrylic Manufacturing Company
Vs.
Commissioner Of Income-tax
WP(C) 4074/2007
(2009) 308 ITR 38 (Del)
Judgment delivered on: 03.11.2008
JUDGMENT
Badar Durrez Ahmed, J.-This writ petition is directed against the notice dated 29-3-2004 issued by the Assistant Commissioner of Income-tax, Central Circle-18, New Delhi under section 148 of the Income-tax Act, 1961 (‘said Act’), re-opening the assessment in respect of assessment year 1998-99. It is also directed against the order dated 2-3-2005 passed by the Assistant Commissioner of Income-tax, Central Circle-18, New Delhi on the objections filed by the petitioner.
2. The petitioner had filed its return of income on 30-11-1998 declaring nil income. In the course of the assessment proceedings the petitioner was required to submit certain information which included details with regard to the share application money received by the petitioner in the relevant year. By a letter dated 5-3-2001 (Annexure P-2) the petitioner submitted various details including bank statements, particulars of cheques received towards share application money and confirmation relating to the share application money received during the year from Hallmark Healthcare Limited. The assessment was completed on 7-3-2001 under section 143(3) of the said Act at nil income and the assessee was allowed to carry forward its unabsorbed depreciation of Rs. 20,21,235. In the assessment order the Assessing Officer specifically noted that:-
“In compliance to departmental notices assessee’s representative Sh. V.K. Goel, C.A appeared from time to time. Details as required were filed and verified?”
3. Thereafter, on 29-3-2004 the impugned notice under section 148 of the said Act was issued by the Assistant Commissioner of Income-tax. The notice indicated that the said officer had reason to believe that income in respect of which the petitioner was assessable and chargeable to tax for the assessment year 1998-99 had escaped assessment within the meaning of section 147 of the said Act. The notice also required the assessee to deliver a return in the prescribed form in respect of the said assessment year. By virtue of the letter dated 11-5-2004 addressed to the Assistant Commissioner of Income-tax, the petitioner submitted that it had already filed its Income-tax return for the assessment year 1998-99 on 30-11-1998 declaring the income at nil The petitioner stated that it did not have any income except what was already declared and that the return already filed be taken as the return filed in response to the said notice under section 148 of the said Act. The petitioner also filed a duplicate Income-tax return along with copies of all the annexures on 28-4-2004. By the very same letter dated 11-5-2004, the petitioner requested the Assistant Commissioner of Income-tax to supply it with a copy of the reasons recorded by the Assistant Commissioner of Income-tax for forming the reasonable belief that there was escapement of income, at the earliest.
4. The Assistant Commissioner of Income-tax supplied the reasons for initiating the proceedings under section 148 of the said Act dated 29-3-2004, sometime in September 2004. The reasons which were supplied to the petitioner in September, 2004 were as under:-
“Haryana Acrylic Mfg. Co. Pvt. Ltd.
A.Y. 1998-99
Reasons for initiating the proceedings under section 148 of the Income-tax Act.-Return of income in this case was filed on 30-11-1998 declaring nil income. Assessment under section 143(3) was completed at nil income on 7-3-2001. It has come to the notice that the assessee company has taken accommodation entries from one of the companies of Sh. Sanjay Rastogi, i.e., Hallmark Healthcare Ltd. vide cheque No. 201845 dated 17-10-1997 amounting to Rs. 5,00,000 during the year relevant to the assessment year 1998-99. I have reason to believe that the income to the extent of Rs. 5,00,000 has escaped assessment. As such, after obtaining the approval of CIT(C)-II to reopen the case, notice under section 148 of the Income-tax Act is issued to the assessee.
Sd/29-3-2004
ACIT, CC-18, New Delhi”
At this juncture, it would be relevant to point out that the present case is one in which the notice under section 148 of the said Act has been issued beyond four years from the end of the relevant assessment year, i.e., 1998-99. Thus, it is an admitted position that the proviso to section 147 would be applicable. As would be discussed in greater detail later in this judgment, action under section 147 can be taken after the expiry of four years from the end of the relevant year only if any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to:-
(a) Make a return under section 139 or in response to a notice under sub-section (1) of section 142 or section 148; or
(b) to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
It is an admitted position that condition (a) referred to above, does not come into play in the present petition inasmuch as the assessee had made a return originally as well as in response to the section 148 notice. What is necessary for an action under section 147 in the present case is to not only show that income had escaped assessment but also that the assessee had failed to disclose fully and truly all material facts necessary for its assessment for that assessment year. A plain reading of the reasons indicated above, show that there is no allegation against the petitioner of failing to disclose fully and truly all material facts necessary for its assessment for the assessment year 1998-99. This aspect has been dwelt upon at length by the learned counsel for the petitioner and, therefore, it was necessary to mention the same at this juncture.
5. Returning to the chronology of events, after the said reasons were supplied to the petitioner, the petitioner submitted its objections through its letter dated 9-11-2004. The first objection taken by the petitioner was that the allegation that the petitioner had received an accommodation entry of Rs. 5,00,000 from Hallmark Healthcare Limited was factually wrong. The petitioner stated that it had received a cheque bearing No. 201845 dated 17-10-1997 for Rs. 5,00,000 from Hallmark Healthcare Limited but this was not an accommodation entry and that it had been received as share application money for issuance of shares of the petitioner company. It was also pointed out that the petitioner company had recorded all the facts of receipt of share application money and allotment of shares etc., in its books of account which were regularly maintained in the normal course of business and were duly audited by qualified, independent auditors.
6. The next objection was that the assessment had been completed under section 143(3) of the said Act by virtue of the assessment order dated 7-3-2001 and that during the course of assessment proceedings all the relevant documents, such as share application money, confirmation from the applicant and bank statement regarding receipt of the said cheque No. 201845 dated 17-10-1997 from Hallmark Healthcare Limited, had been furnished to the Assessing Officer. It was submitted that it was only after considering all the facts that the Assessing Officer completed the assessment under section 143(3) of the said Act. According to the petitioner, the genuineness of the transaction was, therefore, accepted by the Assessing Officer while completing the assessment under section 143(3) of the said Act. In this context, it was submitted that the issuance of the notice under section 148 on the basis of the reasons recorded on 29-3-2004 was nothing but a mere change of opinion, which was not permissible under law. Another objection taken by the petitioner was that, in any event, all material facts had been truly and fully disclosed during the course of the assessment and there was no failure on the part of the assessee and as such the notice under section 148 could not have been issued beyond the period of four years from the end of the relevant assessment year, i.e., 1998-99. It was further submitted that the reasons recorded on 29-3-2004 and supplied to the petitioner did not contain any allegation that there was any failure on the part of the assessee to disclose all the material facts truly and fully. It was contended that in the absence of any such allegation, the issuance of the notice under section 148 beyond the period of four years, which expired on 31-3-2003, was wholly without jurisdiction. There were other objections taken with which we need not concern ourselves. The petitioner, therefore, requested that the proceedings initiated under section 148 be dropped.
7. The Assistant Commissioner of Income-tax passed the impugned speaking order dated 2-3-2005. It is noteworthy that in the said order it is specifically mentioned as under:-
“During the course of assessment proceedings, you have filed details in respect of share application money of Rs. 5 lakhs in the name of M/s. Hallmark Healthcare Ltd. during the course of assessment proceedings, photostat copies of letter head of M/s. Hallmark Healthcare Ltd. for application for equity share was filed. The copy of your bank account with Indian Bank is available which do not indicate that verification has been done in this regard. The facts as presented by you had been accepted in the normal course of assessment proceedings.”
Thereafter, the objections of the petitioner were rejected in the following manner:-
“The fact regarding bogus share application came to the notice of the department on survey conducted under section 131 of the Income-tax Act at the office premises of Sh. Sanjay Rastogi, 210 Wakil Chamber, A-115 Shakarpur, Delhi. Sh. Sanjay Rastogi was working as a conduit for providing accommodating credit entries in the shape of bogus loan, deposits, share application money etc. On the basis of details provided by him it is found that you had taken bogus accommodation entry in the form of share capital. During the course of survey in the statement of Sh. Sanjay Rastogi, it came to the notice of the department that several companies including M/s. Hallmark Healthcare Ltd. have taken accommodation entry. It was stated by him that after receipt of cheques by companies seeking accommodation entry or bogus entry, money was taken from the bank account by the Director/employee on (sic) the companies or routed through other companies for final withdrawal in cash. Sh. Sanjay Rastogi admitted that his companies were doing bogus transaction. The fact of seeking bogus entry by your company was not available with the Assessing Officer at the time of completing the assessment under section 143 (3) of the Income-tax Act. The reasons recorded for issuance of notice under section 148 of the Income-tax Act are sufficient to proceed with assessment proceedings of income escaped assessment.”
8. The requirement of supplying reasons for initiating proceedings under section 147 and the requirement of passing a speaking order on objections to such reasons has been spelt out by the Supreme Court in GKN Driveshafts (India) Ltd. Vs. ITO [2003] 259 ITR 19, wherein the Supreme Court directed as under:-
“…However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing 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. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”
With regard to these directions given by the Supreme Court as to the proper course of action when a notice under section 148 of the said Act is issued, two points need to be kept in mind. The first point is that the noticee has to file a return and the second is that, where the noticee seeks reasons for the issuance of the notice, the Assessing Officer is bound to supply the reasons within a reasonable time. Thereafter, the noticee is entitled to file objections and the Assessing Officer is bound to dispose of the same by a speaking order. In the present case, the notice under section 148 was issued on 29-3-2004 and the petitioner submitted its reply dated 11-5-2004 stating that the return filed earlier be treated as the return filed pursuant to the notice.
The petitioner also sought the reasons which had been recorded. However, the reasons were supplied sometime in September 2004 and on 9-11-2004 the petitioner filed its objections. Without first disposing of the objections by a speaking order as directed by the Supreme Court in GKN Driveshafts (India) Ltd.’s case, the Assessing Officer issued a notice under section 143(2) of the said Act on 11-1-2005 fixing the hearing of the case on 19-1-2005. Thereafter, some other proceedings took place before the petitioner filed a writ petition [WP(C) 3195/2005] on 21-2-2005 challenging the very issuance of notice under section 148 of the said Act. This Court issued notice on the petition and stayed further proceedings. In the meanwhile, the impugned order dated 2-3-2005 rejecting the objections of the petitioner came to be passed. By an order dated 2-5-2007 the earlier writ petition [WP(C) 3195/2005] was permitted to be withdrawn with liberty to challenge the notice dated 29-3-2004 under section 148 of the said Act as also the impugned order dated 2-3-2005 by a separate petition. It is pursuant to the said order and liberty, that present writ petition has been filed.
9. Before us, the learned counsel for the petitioner contended that all material facts had been disclosed during the original assessment including the details of the share application money received from Hallmark Healthcare Limited. The learned counsel submitted that this fact also stands admitted in the impugned order itself as indicated-above. He submitted with reference to the decision of the Supreme Court in ITO Vs. Madnani Engineering Works Ltd. [1979] 118 ITR 1 that the assessee was not at fault and it was for the Assessing Officer to have made a further investigation. In the said decision of the Supreme Court it was noted that the assessee had produced all the hundis on the strength of which it had obtained leans from the creditors as also the entries in the books of account showing payment of interest and that it was for the Income-tax Officer to investigate and determine whether these documents were genuine or not. The Supreme Court noted that the respondent/assessee could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the Income-tax Officer that the hundis and the entries in the books of account produced by the respondent/assessee were bogus. The Supreme Court held that there was no failure on the part of the respondent therein to disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of section 147 (a) [as it stood at that time] was not satisfied. The Supreme Court also held that its earlier decision in the case of CIT Vs. Burlop Dealers Ltd. [1971] 79 ITR 609 fully applied even though the same had been rendered in the context of section 34(1)(a) of the Indian Income-tax Act, 1922.
10. The learned counsel for the petitioner also submitted that the reasons which had been supplied to the petitioner did not contain any allegation that material facts had not been truly and fully disclosed by the assessee at the time of assessment. Reliance was placed on the decision of the Punjab and Haryana High Court in the case of Duli Chand Singhania Vs. Asstt. CIT [2004] 269 ITR 192. In that decision the High Court of Punjab and Haryana had noted that the sine qua non for assuming jurisdiction under section 147 of the Act, in a case falling under the proviso thereto, was that there must be an allegation that the escapement of income had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. When there is no such allegation in the reasons supplied to the petitioner, the initiation of proceedings under the proviso to section 147 would be without jurisdiction. The learned counsel for the petitioner also placed reliance on Fenner (India) Ltd. Vs. Dy. CIT [2000] 241 ITR 672 (Mad.); Bhor Industries Ltd. Vs. Asstt. CIT [2004] 267 ITR 161 (Bom.); CIT Vs. Indian Sugar & Gen. Ind. Ex. [2008] 303 ITR 155 (Delhi) and lastly on a recent decision of this Court in the case of Wel Intertrade (P.) Ltd. Vs. ITO [WP(C) 7722 of 2007 dated 11-8-2008].
11. It was next contended on behalf of the petitioner that even in the impugned order it is not mentioned that the petitioner had taken an accommodation entry. All that had been stated was that as per the statement of Sh. Sanjay Rastogi it had come to the notice of the Department that several companies including Hallmark Healthcare Limited had taken accommodation entries.
12. Lastly, it was contended that in the counter-affidavit filed by the respondents the reasons which had been indicated for initiation of proceedings under section 147 were entirely different to the reasons which had been supplied to the petitioner. The attention of this Court was drawn to paragraph 5(d) of the counter-affidavit wherein it is stated that the true copy of the reasons recorded by the Assessing Officer and the approval granted by the Commissioner of Income-tax is enclosed as Annexure-A. Annexure-A purports to be a form for recording the reasons for initiating proceedings under section 148 and for obtaining approval of the Commissioner of Income-tax. Serial No. 11 of the form pertains to ‘reasons for the belief that income has escaped assessment’. Under this heading the following is recorded:-
“Reasons for the belief that income has escaped assessment.
Original assessment in this case was completed on 7-3-2001 under section 143(3). There was failure on the part of the assessee to disclose fully and truly all material facts relating to accommodation entries raised from the one of the companies of Sh. Sanjay Rastogi to the extent of Rs. 5 lakhs. Therefore, I have reasons to believe that income to the extent of Rs. 5 lakhs has escaped assessment.
(Satpal Singh)
Asstt. Commissioner of Income-tax
Central Circle-18, New Delhi.”
It is apparent by comparing these purported reasons with the reasons extracted earlier and which had been supplied to the petitioner that the two are different. While in the reasons supplied to the petitioner there is no mention of the allegation that there was a failure on the part of the assessee to disclose fully and truly all material facts, in the reasons shown in the said form in Annexure-A to the counter-affidavit, there is a specific allegation that there was failure on the part of the assessee to disclose fully and truly all material facts relating to accommodation entries raised from one of the companies of Sh. Sanjay Rastogi to the extent of Rs. 5,00,000. In this context, the learned counsel for the petitioner submitted that the entire proceedings are vitiated inasmuch as the reasons which were supplied to the petitioner were different from what, according to the respondents, were the ‘true’ reasons. Therefore, what was supplied to the petitioner cannot be regarded as the reasons and the entire process of filing of objections to those purported reasons and the impugned order dated 2-3-2005 would be in respect of something which, even as per the respondents, were not the true reasons. Consequently, the entire proceedings leading up to the passing of the impugned order dated 2-3-2005 have to be set aside.
13. Mrs. Bansal, appearing on behalf of the respondents, supported the issuance of the notice under section 148 as well as the speaking order dated 2-3-2005 disposing of the petitioner’s objections. She submitted that the decision of the Supreme Court in the case of Phool Chand Bajrang Lal Vs. ITO [1993] 203 ITR 456 squarely applied to the present case. Mrs. Bansal contended that in this decision the Supreme Court made it clear that the observations in the Burlop Dealers Ltd.’s case were not of universal application but were limited to the fact situation in that case. In the Burlop Dealers Ltd.’s case, the Supreme Court had observed as under:-
“The assessee had disclosed his books of account and evidence from which material facts could be discovered: it was under no obligation to inform the Income-tax Officer about the possible inferences which may be raised against him. It was for the Income-tax officer to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under section 34(1)(a).”
The Supreme Court noted that in the Burlop Dealers Ltd.’s case, apart from the Income-tax Officer holding, during the assessment proceedings of the same assessee for a subsequent year, that the alleged agreement between the assessee and one Ratiram was bogus, there was no other information or material from any other external source which came to the notice of the Income-tax Officer after the assessment proceedings, which could enable the Income-tax Officer to form a reasonable belief that the income of the assessee had escaped assessment in the earlier year. And that, as a matter of fact, after the conclusion of the original assessment proceedings, there was no fresh material at all available with the Income-tax Officer which could have enabled the Income-tax Officer to entertain any reason to believe that the income of the assessee had escaped assessment for the relevant assessment year. In Phool Chand Bajrang Lal’s case it was, further observed in the context of the Burlop Dealers Ltd.’s case that an assessment order for the subsequent year could not by itself lead to any inference, much less to the formation of a reasonable belief that income chargeable to tax had escaped assessment in the previous year, on account of the failure on the part of the assessee to make a true and full disclosure of the primary facts during the proceedings of the concluded assessment. In this background, the Supreme Court observed:-
“…The judgment in Burlop Dealers’ case cannot be understood as laying down any such proposition that even where the Income-tax Officer gets some fresh information which was not available at the time of the original assessment, subsequent to the conclusion of the original assessment proceedings, which enables him to form a reasonable belief that the income of the assessee had escaped assessment because of the omission or failure of the assessee to disclose true and full facts during the assessment proceedings, he cannot reopen the assessment. The observations in Burlop’s case, noticed above, were made in the peculiar fact-situation of that case and cannot be construed to be of universal application irrespective of the facts and circumstances of the particular case.”
Mrs. Bansal placed heavy reliance on the above observations as also on the following:-
“…Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of the original assessment is different from drawing a fresh inference from the same facts and material which were available with the Income-tax Officer at the time of the original assessment proceedings. The two situations are distinct and different. Thus, where the transaction itself, on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings cannot be said to be a disclosure of the ‘true’ and ‘full’ facts in the case and the Income-tax Officer would have the jurisdiction to reopen the concluded assessment in such a case. It is correct that the assessing authority could have deferred the completion of the original assessment proceedings for further enquiry and investigation into the genuineness of the loan transaction but, in our opinion, his failure to do so and complete the original assessment proceedings would not take away his jurisdiction to act under section 147 of the Act, on receipt of the information subsequently. The subsequent information on the basis of which the Income-tax Officer acquired reasons to believe that income chargeable to tax had escaped assessment on account of the omission of the assessee to make a full and true disclosure of the primary facts was relevant, reliable and specific. It was not at all vague or non-specific.
From a combined review of the judgments of this court, it follows that an Income-tax Officer acquires jurisdiction to reopen an assessment under section 147(a) read with section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start re-assessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to exp0se the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income- tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. It would be immaterial whether the Income-tax Officer, at the time of making the original assessment, could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in section 147(a) of the Act, that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and, therefore, income chargeable to tax had escaped assessment.”
14. At this juncture, it should be emphasized that the Burlop Dealers Ltd.’s case related to the provisions of section 34(1)(a) of the Indian Income-tax Act, 1922 which were similar to the provisions of section 147(a) of the said Act, prior to the amendment of 1989. The decision in Phool Chand Bajrang Lal’s case was in the context of section 147(a)(1) of the said Act as it stood prior to the amendment of 1989. However, in the present case which relates to assessment year 1998-99, the provisions of section 147 after the amendment in 1989 would apply. The provisions of section 147 (so much as are relevant) as applicable to the present case are as under:
“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 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.”
It is evident that the provisions of section 147, pre and post the 1989 amendment are different. Whether anything turns upon this difference, is discussed later in this judgment.
15. It was further contended on behalf of the respondents that though the assessee had disclosed the factum of the share application money of Rs. 5,00,000 received from Hallmark Healthcare Ltd., the same was not ‘truly’ declared and, therefore, the Assessing Officer had validly invoked the provisions of section 147 and had correctly issued the notice under section 148 of the said Act.
16. Mrs. Bansal also submitted that this was not a case of mere change of opinion. She submitted that the expression ‘change of opinion’ presupposes an opinion already formed by the Assessing Officer at the time of the assessment proceedings. She contended that the facts regarding the accommodation entries were not within the knowledge of the Assessing Officer at the time of the original assessment proceedings. The information was received by him only after completing the assessment under section 143(3) of the said Act. Therefore, the factum of the share application money was not even considered by the Assessing Officer from this standpoint. It was submitted that there is nothing in the original assessment order to show that the Assessing Officer had applied his mind to the said share application money received from Hallmark Healthcare Ltd. and, therefore, the question of change of opinion did not arise.
17. Let us now examine the provisions of section 147 as applicable to the present case. It has been pointed out above that the present case, being a case of re-opening of an assessment after four years (but before six years) from the end of the assessment year in question, would be governed by the proviso to section 147. Before we examine the proviso, it would be instructive to examine the scope and function of a proviso. In CIT Vs. Indo Mercantile Bank Ltd. [1959] 36 ITR 1, the Supreme Court held:-
“…The proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. ‘It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as a proviso.’ Therefore it is to be construed harmoniously with the main enactment. (Per Das, CJ.) in Abdul Jabar Butt Vs. State of Jammu and Kashmir [1957] SCR 51, 59. Bhagwati, J., in Ram Narain Sons Ltd. Vs. Assistant Commissioner of Sales Tax [1955] 2 SCR 483, 493 said:
‘It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.’
Lord Macmillan in Madras and Southern Maharatta Railway Co. Vs. Bezwada Municipality [1944] LR 71 IA 113, 122 laid down the sphere of a proviso as follows:
‘The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms.’
The territory of a proviso therefore is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has to operate in the same field and if the language of the main enactment is clear it cannot be used for the purpose of interpreting the main enactment or to exclude by implication what the enactment clearly says unless the words of the proviso are such that that is its necessary effect. (Vide also Corporation of City of Toronto Vs. Attorney-General for Canada [1946] AC 32, 37.”
In Ali M.K. Vs. State of Kerala [2003] AIR SC 4006/11 SCC 632, the Supreme Court made similar observations:-
“10. The normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which but for the proviso would be within the purview of the enactment. As was stated in Mullins Vs. Treasurer of Surrey [1880] 5 QBD 170 : 42 LT 128 (referred to in Shah Bhojraj Kuverji Oil Mills and Ginning Factory Vs. Subhash Chandra Yograj Sinha AIR 1961 SC 1596 and Calcutta Tramways Co. Ltd. Vs. Corpn. of Calcutta AIR 1965 SC 1728), when one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject-matter of the proviso. The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment and its effect is confined to that case. It is a qualification of the preceding enactment which is expressed in terms too general to be quite accurate. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment and ordinarily, a proviso is not interpreted as stating a general rule…”
18. Viewed in this light, the proviso to section 147 of the said Act, carves out an exception from the main provisions of section 147. If a case were to fall within the proviso, whether or not it was covered under the main provisions of section 147 of the said Act would not be material. Once the exception carved out by the proviso came into play, the case would fall outside the ambit of section 147.
19. Examining the proviso [set out above], we find that no action can be taken under section 147 after the expiry of four years from the end of the relevant assessment year if the following conditions are satisfied:
(a) an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year; and
(b) unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee:
(i) 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
(ii) to disclose fully and truly all material facts necessary for his assessment for that assessment year. Condition (a) is admittedly satisfied inasmuch as the original assessment was completed under section 143(3) of the said Act. Condition (b) deals with a special kind of escapement of income chargeable to tax. The escapement must arise out 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. This is clearly not the case here because the petitioner did file the return. Since there was no failure to make the return, the escapement of income cannot be attributed to such failure. This leaves us with the escapement of income chargeable to tax which arises out of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. If it is also found that the petitioner had disclosed fully and truly all material facts necessary for its assessment, then no action under section 147 could have been taken after the four year period indicated above. So, the key question is whether or not the petitioner had made a full and true disclosure of all material facts.
20. In the reasons supplied to the petitioner, there is no whisper, what to speak of any allegation, that the petitioner had failed to disclose fully and truly all material facts necessary for assessment and that because of this failure there has been an escapement of income chargeable to tax. Merely having a reason to believe that income had escaped assessment, is not sufficient to reopen assessments beyond the four year period indicated above. The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose material facts, fully and truly. This is a necessary condition for overcoming the bar set up by the proviso to section 147. If this condition is not satisfied, the bar would operate and no action under section 147 could be taken. We have already mentioned above that the reasons supplied to the petitioner does not contain any such allegation. Consequently, one of the conditions precedent for removing the bar against taking action after the said four year period remains unfulfilled. In our recent decision in Wel Intertrade (P.) Ltd.’s we had agreed with the view taken by the Punjab and Haryana High Court in the case of Duli Chand Singhania that, in the absence of an allegation in the reasons recorded that the escapement of income had occurred by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, any action taken by the Assessing Officer under section 147 beyond the four year period would be wholly without jurisdiction. Reiterating our viewpoint, we hold that the notice dated 29-3-2004 under section 148 based on the recorded reasons as supplied to the petitioner as well as the consequent order dated 2-3-2005 are without jurisdiction as no action under section 147 could be taken beyond the four year period in the circumstances narrated above.
21. The matter, however, does not end here. We have mentioned above that the stand taken by the respondents in their counter-affidavit before this court is that the ‘actual’ reasons recorded are those recorded in the Form for recording reasons, a copy of which has been filed as Annexure A to the said counter-affidavit. It was urged on behalf of the respondents that the ‘reasons for the belief that income has escaped assessment’ at serial No. 11 of the said form clearly carries the allegation that ‘there was failure on the part of the assessee to disclose fully and truly all material facts relating to accommodation entries’. This being the case, it was submitted, the bar of taking action within four years would not apply and, consequently, the notice under section 148 was valid.
22. This argument suffers from several infirmities. First of all, the respondents cannot be permitted to gloss over the fact that the reasons which were supplied to the petitioner were different from the reasons purportedly recorded in the said form on which they now seek to rely. If the reasons in the said form were the ‘actual’ reasons, why were they not communicated to the petitioner? Why was nothing said about these reasons (noted in the form) when the petitioner filed its objections to the reasons which were supplied to it? It must be remembered that in its objections, the petitioner took the specific plea that in the absence of any allegation that the petitioner had failed to disclose fully and truly all material facts necessary for assessment, the Assessing Officer had no jurisdiction to issue the notice under section 148 and initiate action under section 147 after four years from the end of the relevant assessment year. Despite this precise objection, there is no mention of the reasons noted in the said form in the impugned order dated 2-3-2005. If the respondents had regarded the reasons noted in the said form to be the ‘actual’ reasons, it would have been very easy for the Assessing Officer to have countered this objection by simply referring to the reasons noted in the form and saying that the allegation of failure to disclose is very much there. It is obvious that the reasons noted in the said form were never regarded as the reasons for initiating action under section 147 of the said Act. Thus, the respondents cannot now be permitted to fall back on those purported reasons noted in the said form.
23. Secondly, let us assume for the sake of argument that the ‘actual’ reasons were those as noted in the said form. Then why did the Assessing Officer communicate a different set of reasons to the petitioner? Did he think that the supplying of reasons and the inviting of objections were mere charades? Did he think that it was a mere pretence or a formality which had to be gotten over with? At this point, it would be well to remember that the Supreme Court in GKN Driveshafts (India) Ltd.’s case had specifically directed that when a notice under section 148 of the said Act is issued and the noticee files a return and seeks reasons for the issuance of the notice, the Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of the reasons, the noticee is entitled to file objections to the issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. These are specific directions given by the Supreme Court in all cases where notices under section 148 of the said Act are issued. Surely, the Assessing Officer could not have construed these specific directions to be a mere empty formalities or dead letters? There is a strong logic and purpose behind the directions issued by the Supreme Court and that is to prevent high-handedness on the part of Assessing Officers and to temper any action contemplated under section 147 of the said Act by reason and substance. In fact, even section 148 (2) stipulates that the Assessing Officer shall, before issuing any notice under the said section, record his reasons for doing so. The Supreme Court has only carried forward this mandatory requirement by directing that the reasons which are recorded be communicated to the assessee within a reasonable period of time so that at that stage itself the assessee may point out any objections that he may have with regard to the initiation of action under section 147 of the said Act. The requirement of recording the reasons, communicating the same to the assessee, enabling the assessee to file objections and the requirement of passing a speaking order are all designed to ensure that the Assessing Officer does not reopen assessments which have been finalized on his mere whim or fancy and that he does so only on the basis of lawful reasons. These steps are also designed to ensure complete transparency and adherence to the principles of natural justice. Thus, a deviation from these directions would entail the nullifying of the proceedings. Assuming as we have done that the ‘actual’ reasons were those as noted in the said form, it is obvious that the reasons were never communicated to the petitioner and it is only for the first time in the course of the present writ petition that those ‘reasons’ have surfaced. Therefore, if he proceeded on the assumption that the ‘actual’ reasons were those as noted in the said form, the proper course of action as directed by the Supreme Court in GKN Driveshafts (India) Ltd.’s case, has not been followed. It would mean that the reasons which were supplied to the petitioner were not the actual reasons and the objections which were taken by the petitioner were not to the actual reasons and the speaking order dated 2-3-2005 which was passed was also neither on the basis of the actual reasons nor the objections to the actual reasons. The entire process would be a sham and would amount to making a mockery of the law as settled by the Supreme Court. Therefore, for this reason also, the notice under section 148 as well as all proceedings subsequent thereto as also the order dated 2-3-2005 are liable to be quashed.
24. Thirdly, it could be argued that the reasons supplied to the petitioner in September, 2004 be disregarded so also the objections filed by it as also the impugned order dated 2-3-2005 and the reasons noted in the said form be now taken as the reasons for the issuance of the notice under section 148 and the petitioner may now prefer his objections, if any, and thereupon the Assessing Officer be directed to pass a speaking order. In other words, such an argument requires us to sweep all the proceedings emanating from the supply of reasons in September 2004 and culminating in the passing of the order dated 2-3-2005 ‘under the carpet’, as it were. And, starting the process as per the directions given in GKN Driveshafts (India) Ltd.’s case afresh considering the reasons noted in the said form to be the actual reasons for the issuance of the notice under section 148. If we were to accept this argument, we would have to ignore the directions given by the Supreme Court in GKN Driveshafts (India) Ltd.’s case that the Assessing Officer is bound to furnish reasons within a reasonable time. The notice under section 148 was issued on 29-3-2004. The petitioner filed the return and sought reasons by its letter dated 11-5-2004. If the date of filing of the counter-affidavit in this writ petition is taken as the date of communication of the reasons which forms part of the said form, a copy of which is Annexure-A to the counter-affidavit, then the date of supply of reasons, based on this argument, would be 5-11-2007. This immediately makes it clear that the Assessing Officer, who was bound to furnish his reasons within a reasonable time, did not do so. The period which elapsed between 11-5-2004, when the petitioner made the request for communicating the reasons, and 5-11-2007, the date when the counter-affidavit was filed, can certainly not be regarded as a reasonable period of time. Apart from this, we must not forget the provisions of section 149 which prescribes the time-limit for a notice under section 148. Section 149(1)(b) stipulates the outer limit of six years from the end of the relevant assessment year where the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees one lakh or more for that year. This means that a notice under section 148, in the present case, could not, in any event, have been issued after six years from the end of the assessment year 1998-99, i.e., after 31-3-2005. In whichever way we look at it, a notice under section 148 without the communication of the reasons therefor is meaningless inasmuch as the Assessing Officer is bound to furnish the reasons within a reasonable time. In a case, where the notice has been issued within the said period of six years, but the reasons have not been furnished within that period, in our view, any proceedings pursuant thereto would be hit by the bar of limitation inasmuch as the issuance of the notice and the communication and furnishing of reasons go hand-in-hand. The expression ‘within a reasonable period of time’ as used by the Supreme Court in GKN Driveshafts (India) Ltd.’s case cannot be stretched to such an extent that it extends even beyond the six years stipulated in section 149. For this reason also, even assuming that we overlook all that has happened between 11-5-2004, when the petitioner sought the reasons, and 5-11-2007, when the said form annexed to the counter-affidavit was filed in this court, the validity of the notices under section 148 issued on 29-3-2004 and any proceedings pursuant thereto cannot be upheld.
25. We shall now discuss whether the petitioner had failed to disclose fully and truly all material facts necessary for his assessment. We would like to reiterate that the decision of the Supreme Court in the case of Bajrang Lal Phool Chand was in the context of section 147 of the said Act prior to the amendment introduced with effect from 1-4-1989. In Phool Chand Bajrang Lal’s case, the Supreme Court noted that an Assessing Officer may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the truthfulness of those facts. The Supreme Court observed that in such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available, but, one of acting on fresh information. These observations were made in the context of section 147 as it stood prior to the amendment of 1-4-1989. Both the provisions, prior to and after the 1989 amendment, have already been extracted above. Clause (a) of section 147 as it stood prior to the said amendment, empowered the Income-tax Officer to initiate reassessment proceedings provided he had reason to believe that by reason of omission or failure on the part of an assessee to make a return under section 139 for any assessment year or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax had escaped assessment for that year. On the other hand, clause (b) of section 147 provided that notwithstanding that there had been no omission of failure as mentioned in clause (a) on the part of the assessee, if the Income-tax Officer had in consequence of information in his possession, reason to believe that income chargeable to tax had escaped assessment, he could initiate reassessment proceedings. Thus, reassessment proceedings could be initiated if the conditions specified in either clause (a) or clause (b) were satisfied. It must also be noted that prior to 1989, the time-limit for issuance of notice under section 149 was also different. In cases falling under clause (a) of section 147, the limitation was eight years from the end of the relevant assessment year unless the income chargeable to tax, which had escaped assessment, amounted to or was likely to amount to Rs. 50,000 or more for that year, in which case the period was 16 years. In respect of cases falling under clause (b) of section 147, the period of limitation for issuing a notice under section 148 was four years from the end of the relevant assessment year. Thus, the time-limit for issuing a notice under section 148 where the Income-tax Officer merely had information in his possession to believe that income chargeable to tax had escaped assessment was four years from the end of the relevant assessment year. On the other hand where the Income-tax Officer had reason to believe that income chargeable to tax had escaped assessment for any year and that such reason to believe was occasioned by the omission or failure on the part of an assessee to either file a return or to disclose fully and truly all material facts necessary for his assessment for that year, the period of limitation was either eight years or 16 years depending on whether the income said to have escaped assessment was less or more than Rs. 50,000 for that year. But, if a notice under section 148 was contemplated within the period of four years from the end of the relevant assessment year, then it could have been issued on the ground of provisions of clause (a) or (b) of section 147 as it then stood.
When a notice issued within this period was under contemplation, then despite there being no failure to disclose fully and truly all material facts, the Income-tax Officer would still have had the power to initiate action under section 147 if he had reason to believe that income chargeable to tax had escaped assessment for any assessment year ‘in consequence of information in his possession’. It is necessary to understand the decision of the Supreme Court in Phool Chand Bajrang Lal’s case in the light of these provisions. In Phool Chand Bajrang Lal’s case, the question of information or subsequent information and the question of full and true disclosure have been intermingled inasmuch as the question of limitation was not at all in consideration. Clause (b) of section 147 was non obstante the requirements of clause (a) thereof which is triggered, inter alia, by failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. Therefore, when the notice under section 148 is contemplated within the period of four years, notwithstanding the non-applicability of clause (a) of section 147, clause (b) could apply if the Income-tax Officer has information in his possession leading to give him reason to believe that income chargeable to tax had escaped assessment for the assessment year 1998-99. Explanation I to section 147 also makes it clear that mere 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 said proviso. This Explanation, however, does not mean that production of account books and other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not ‘in any event’ amount to disclosure within the meaning of the said proviso. The said Explanation only stipulates that such evidence will not necessarily ‘amount to disclosure’ within the meaning of the said proviso. However, we need not labour on this aspect any further inasmuch as we find that in this case, the Assessing Officer had made specific queries, inter alia, with regard to the share application money of Rs. 5 lakhs received from Hallmark Healthcare Limited. The petitioner had supplied, in the course of the original assessment proceedings all the relevant documents such as the share application money form, confirmation from the applicant and the bank statement relating to the receipt of the cheque No. 201845 dated 17-10-1997 from Hallmark Healthcare Limited. It is only thereafter that the assessment was completed by the Assessing Officer on 7-3-2001. We have already noted above that in the assessment order itself, the Assessing Officer has recorded that the details as required were filed and verified. This in itself indicates that the Assessing Officer had applied his mind to the issue of the share application money and had accepted the assessee’s claim after due verification. Furthermore, in the impugned order dated 2-3-2005 itself, the Assessing Officer has indicated that during the course of assessment proceedings, the petitioner had filed details in respect of share application money of Rs. 5 lakhs in the name Hallmarks Healthcare Limited. However, the Assessing Officer has now sought to wriggle out of his remarks in the assessment order by stating that only photocopies for the application for equity shares were filed and that the copy of the bank account with the Indian Bank which was available did not indicate that verification had been done incorrectly and that the facts as presented by the petitioner had been accepted in the normal course of assessment proceedings. The Assessing Officer cannot be permitted to retract from the position that he did ask for specific information and that the information was supplied by the petitioner. And, more importantly, that the Assessing Officer had examined and verified the information before finalizing the assessment under section 143(3) of the said Act. In this background also, we feel that the petitioner had not failed to disclose fully and truly all material facts necessary for its assessment in respect of the assessment year 1998-99.
26. For all the above reasons, we allow the writ petition. The impugned notice dated 29-3-2004 under section 148 of the said Act as also the impugned order dated 2-3-2005 are set aside. All proceedings pursuant to the said notice are also set aside. The parties shall bear their own costs. This writ petition and all pending applications stand disposed of.
