8.3 It cannot be disputed and it is not the case of either side that the reasons extracted herein above did not precede the issuance of notice under Section 148(1) of the Act. The requirement for recordal of reasons by the Assessing Officer before issuing a notice is provided for under sub-section (2) of Section 148 of the Act.
8.4 A perusal of the reasons would thus show that the Assessing Officer was of the view that the assessee’s income chargeable to tax had escaped assessment in the relevant assessment year by virtue of the fact that the assessee had charged to its Profit & Loss account the sum of Rs 25 lacs (approx.) which was the closing balance in its MODVAT account. The Assessing Officer was of the view that the balance in the MODVAT account at the end of the previous year, relevant for the assessment year, in issue, ought to have been carried forward and shown as “loans and advances” on the asset side of the balance sheet. This fact alone propelled the Assessing Officer to form a reason to believe that the assessee‟ s income chargeable to tax had escaped assessment by virtue of what he termed as the failure on the part of the assessee in not disclosing fully and truly all material facts.
8.5. Thus the issue which arises for consideration is firstly, what is the scope of the expression “reason to believe” in Section 147 of the Act. Secondly, where an Assessing Officer issues a notice under Section 148(1) of the Act based on one particular item which forms the basis of his reasons under sub-section (2) of Section 148, is he then empowered to bring within his net other items of income or expenditure which are totally un-connected with the item which formed the basis of issuance of notice under Section 148(1) of the Act.
8.6 In so far as the first issue is concerned we do not have to go far but to look the judgment of the Supreme Court in ACIT vs Rajesh Jhaveri Stock Brokers (P) Ltd; (2007) 291 ITR 500. The Supreme Court while enunciating the law on the width and ambit of the provision of Section 147 of the Act stated in no uncertain terms stated that the word “reason” in the phrase “reasons to believe” would mean cause or justification. In other words 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 income had escaped assessment. The Supreme Court went on to say that the expression cannot mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The Court also observed that the final outcome of the proceedings is not relevant. In other words at the initiation stage what is required is reason to believe and not an established fact of escapement of income. The test thus laid down by the Supreme Court is that at the stage of issue of notice the only aspect to be examined is whether there was relevant material before the Assessing Officer, based on which a reasonable person could have formed the requisite belief. One is not concerned at this stage whether the material would conclusively prove escapement and such a formation is within the realm of subjective satisfaction of the Assessing Officer.
8.7 Applying the aforesaid principle, it is clear that while the Supreme Court has conferred a wide discretion on the Assessing Officer for reopening the proceedings whether to assess, re-assess or to re-compute income it is predicated on a test whether a reasonable person would form a belief that there was relevant material for initiating proceedings under Section 147 of the Act. In the instant case if the test of the reasonable person is applied, it is clear that no reasonable person could have come to a conclusion that there was relevant material available with the Assessing Officer to have reason to believe that assessee‟ s income chargeable to tax had escaped assessment only by virtue of the fact that the assessee had charged to its profit and loss account the credit balance available in its MODVAT account. It is rudimentary that MODVAT is nothing but credit of duty paid by a person on input used by the assessee for manufacture of its final product. The notice under Section 148(1) could not have been based on a ground as tenuous as the one disclosed by the Revenue. If we were to accept such a ground as the one obtaining in the present case then it would virtually amount to giving power to the Assessing Officer to reopen the proceedings at his own whim and fancy. Their Lordships in Rajesh Jhaveri Stock Broker (supra) have, while giving the widest width and amplitude to the Assessing Officer to initiate proceedings under Section 147 read with Section 148 of the Act incorporated a caveat; which is as to how a reasonable man would view the articulated reasons (as prescribed under Sub-Section (2) of Section 148) which formed the basis of a notice under Section 148(1) of the Act. In our view this by itself would suffice in declaring the proceedings bad in law.
9. However, since the other issue has also been raised, that is, whether the Assessing Officer could reopen the proceedings based on a particular item and thereafter proceed to bring to tax items which are not connected with what was initially indicated in the reasons disclosed under Section 148(2) of the Act for the purposes of issuance of notice under Section 148(1) of the Act.
10. In this regard, it is important to note that the Assessing Officer, as indicated above, had proceeded to issue a notice under Section 148(1) of the Act by recording contemporaneous reasons that assessee‟ s income chargeable to tax had escaped assessment by virtue of the fact that the assessee had charged to its profit and loss account, the closing balance in the sum of Rs 25 lacs (approx.) appearing in its MODVAT account. The Assessing Officer, as noticed above, had issued a notice dated 08.01.1999 under Section 142(1) of the Act followed by a notice dated 10.03.1999. By the first notice the Assessing Officer called upon the assessee to file its return, however, by the second notice, that is, notice dated 10.03.1999 it asked the assessee to show cause as to why certain items of income and expenditure (which were unconnected to the aspect of the assessee debiting the sum of Rs 25 lacs lying in the MODVAT account to the Profit & Loss account) should not be added or disallowed. The assessee by a response dated 17.03.1999 categorically took the following stand:- (i) that it would like to know the information which was in the possession of the Department which justified reopening of its assessment; (ii) since the assessment made under Section 143(1)(a) of the Act had attained finality the Revenue could not reopen it unless it fulfilled the condition precedent as provided under Section 147 of the Act; and (iii) most importantly, since the assessment had been reopened on a specific point it could not by this methodology reopen the same in the entirety.
11. As noted above, the Assessing Officer undeterred, without dealing with any of the objections raised by the assessee, passed the impugned assessment order dated 26.03.1999. Even though, the CIT(A) partially allowed the appeal, in our view he did not examine the matter from the angle as to whether the Assessing Officer could bring to tax items or disallow expenditure which were totally unconnected with the reasons articulated under Section 148(2) of the Act at the time of issuance of notice under Section 148(1) of the Act. The Tribunal did likewise and on this aspect of the matter dismissed the appeal of the assessee. In our view a bare reading of sub-section (2) of Section 148 of the Act would show that before issuing a notice under Section 148(1) of the Act the Assessing Officer is required, under sub-section (2) of Section 148 of the Act, to record his reasons for doing so. Therefore, it is clear the recordal of reasons precede the issuance of notice under sub-section (1) of Section 148 of the Act. The proceedings under Section 147 read with Section 148 do not wipe out or set aside the original proceedings. As a matter of fact the law on the scope of Section 147 can be summarized based on the principles enunciated by the Supreme Court in the case of CIT vs Sun Engineering Works P. Ltd (1992) 198 ITR 297. A reading of the judgment would show broadly the following principles of law have been enumerated:- (i) Initiation of reassessment proceedings would not mean that the original assessment proceedings are set aside or wiped out. The decision of the Supreme Court in Jaganmohan Rao (V.) vs CIT; (1970) 75 ITR 373 is explained. (ii) The proceedings under Section 147 of the Act are for the benefit of the Revenue and not for the assessee. (iii) The assessee cannot convert reassessment proceedings into review, appeal or revisional proceedings to re-agitate in reassessment proceeding matters which are finally concluded in the original assessment proceedings and are unconnected with the escaped income.
(iv) The assessee can claim consideration of only those items which are directly connected to the under-assessed income,
(v) and lastly, under no circumstances can the reassessed income be less than income of the assessee which was originally assessed and brought to tax.
12. Applying the aforesaid principle, it is clear that the proceedings under Section 147 of the Act cannot impinge upon items which have no connection or relation with items of income and/or expenditure which form the basis of a notice under Section 148(1) of the Act. In the instant case the items referred to in the Assessing Officer‟ s notice dated 10.03.1999 had no relation with the reasons recorded on 27.03.1997. As a matter of fact the assessee was allowed by the CIT(A) the deduction of the amount of Rs 25 lacs (approx.) charged to its profit & Loss account on the basis of the provisions of Section 43B. The other items with respect to which additions and dis allowances had been made and which are discussed in the body of our judgment while discussing the orders of the authorities below had no connection with the reasons articulated on 27.03.1997 which form the basis of the notice issued under Section 148(1) of the Act. In our view the assessment order in so far as it dealt with items other than those which formed the basis of the reasons disclosed on 27.03.1997 are bad in law or stood vitiated in law.