Venkata Siva Reddy Nellore Vs ITO (ITAT Hyderabad)
Unless the return filed by the assessee is scrutinized by the assessing officer under section 143(3), we cannot come to the conclusion of any escapement, the assessing officer cannot initiate proceedings under section 147 when the time for issuance of notice 143(3) has not expired. Accordingly, we allow the first ground of the appeal of the assessee by holding that this reopening of assessment by issue of notice under section 148 dated 17-10-2007 is bad in law.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal by assessee against the order of the Commissioner (Appeals)-Tirupati, dated 30-3-2017, for the assessment year 2012-13.
2. The grounds raised by assessee are as under :–
“1. The learned Commissioner (Appeals) is not justified in rejecting the contention of the appellant that the very initiation of the proceedings under section 147 is not proper and not valid.
2. The learned Commissioner (Appeals) is not justified in rejecting the contention of the appellant that since the reason on which the proceedings under section 147 ceased to exist, the assessing officer is not justified in making additions on other issues.
3. The learned Commissioner (Appeals) is not justified in rejecting the contention of the appellant that the agricultural land includes the land and the kutcha houses/huts thereon, appurtenant to the agricultural lands and used for conducting agricultural operations, and therefore, the compensation received on such assets is not taxable.
4. The appellant reserves his right to add, amend, delete or substitute any ground or grounds during the course of hearing”.
3. Facts leading to the present appeal are that assessee is an individual and was doing small contract works for the last ten years. assessee filed his return of income for the assessment year 2012-13 on 26-7-2013 declaring an income of Rs. 2,09,110. Upon filing the return of income, the assessing officer initiated proceedings under section 147 on the reason of mismatch of turnovers and issued notice under section 148 on 12-12-2013. Assessment was completed on 31-3-2015 by the Income Tax Officer, Ward-1(1), Tirupati under section 143(3) read with section 147 of the Income Tax Act (Act) determining the total income at Rs. 13,40,580 by making the following two additions to the income returned :–
|i.||Interest on compensation treated as income from other sources :||Rs. 7,45,913|
|ii.||Compensation related to non Agrl. Land :||Rs. 3,85,555|
4. Before the learned Commissioner (Appeals) assessee filed detailed written submissions. It was contended that subsequent to the filing of return of income on 26-7-2013, the assessing officer issued a notice on 12-12-2013 under section 148 of the Income Tax Act and mentioned the reason for reopening of assessment in the said notice itself as under :–
“It is noticed from the verification of 26AS details that the gross receipts received from Commissioner, Tirupati Municipality are Rs. 8,50,179 but the assessee has admitted in the Computation of total income, gross receipts of Rs. 5,2,0162 only. Thus there is difference of gross receipts of Rs. 3,30,017 and the income @ 8% of Rs. 26,401”.
4.1. Assessee submitted that he filed a letter before the assessing officer on 2-5-2014, clearly mentioning that the wrong uploading of certain entries with the PAN of assessee has been rectified by the Contractee department and also enclosed the latest Form No. 26AS downloaded from the Income Tax Department website, which are tallying with the Gross Receipts disclosed in the return of income and objected for the reopening of assessment under section 147 of the Act, as there are no difference in Gross Receipts.
4.2. Another contention raised by assessee was that the assessing officer issued notice under section 148 of the Act on 23-12-2013 i.e., before the expiry of the time limit for the issuance of notice under section 143(2) of the Act. Hence the action of the assessing officer in reopening the assessment made by issuance of notice under section 148 of the Act before the expiry of time limit for issuance of notice under section 143(2) of the Act is legally invalid. Reliance was placed in the case of M/s. Eenadu Relief Fund v. DDIT, ITA No. 434/Hyd/2010 dt. 13-1-2011 where the ITAT, Hyderabad Bench held that :–
“Following the consistent view laid down in judicial precedents, we hold that reopening of assessment made by issuance of notice under section 148 of the Act before the expiry of time limit for issuance of notice under section 143(2) of the Act is legally invalid and the assessment order passed in consequence thereof is also unsustainable.”
Assessee also relied on the decision of ITAT, Hyderabad in the case of Mr. Nitin Kumar Shah, Hyderabad v. assessee on 19-8-2013 (ITA No. 1489/Hyd/2012).
4.3. assessee further submitted that the assessing officer has not disposed the objections-filed by him for reopening of assessment by way of speaking order. As the dictum laid by Hon’ble Supreme Court in GKN Drive Shifts (India) Ltd. v. ITO & Ors. (2003) 289 ITR 19 that pursuant to the notice issued by the assessing officer, he is bound to consider the objections of the parties and pass a speaking order.
4.4. Assessee submitted that as per the Provisions of the section 147, the assessing officer after issuance of notice under section 148 must assess or reassess, (i) such income and also (ii) any other income chargeable to tax which bas escaped assessment and which comes to his notice subsequently in the course of proceedings under the section. assessee submitted that in the leading decision of the Hon’ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. (331 ITR 236), while considering an identical situation, the Hon’ble High Court, interpreted the provisions of section 147 of the Act and has held that the situation would not be different by virtue of introduction of Explanation 3 to the said section. It has been held in the case that if upon issue of notice under section 148 of the Act, the assessing officer does not assess the income, which he had reason to believe has escaped assessment and which forms the basis for the issuance of notice under section 148 of the Act, it is not open to assessing officer to assess independently any other income, which does not form the subject matter of the notice. In the instant case, since no additions were made in relation to the grounds for which the assessment was reopened, the scope of additions cannot be enlarged to include incomes which are not within the realm of the reopening of the assessment.
4.5. On merits, assessee submitted that he received a sum of Rs. 2,15,163 as compensation for the acquisition of agricultural lands, Rs. 3,85,555 for the acquisition of temporary huts and katcha houses situated in the said agricultural lands and also Rs. 7,45,913 as interest as per the order of Lok Adalat. It was submitted that the compensation received on the acquisition of agricultural land along with ‘Katcha house/huts thereon was a composite asset and houses as such cannot be separated from the land which is undisputedly agricultural land. The houses are appurtenant to the agricultural lands. Such houses are houses for agricultural purposes for keeping agricultural produce, residence of agricultural labour/cultivators and motor pump house. For that assessee relied on definition of agriculture in WT Act and definition of agricultural income in Income Tax Act.
4.6. assessee further submitted that, in the instant case, the Katcha house/huts attached to agricultural land were made with Madras Terrace Roof, Mangalore Terrace Low Roof and Bodakottam. All these Katcha huts are meant for the residence of agricultural labour/cultivators, to keep the agricultural produce and for electrical motor pump house. The lands are situated in a remote village where not even one hundred families were there and are residing only for agricultural purposes.
4.7. assessee further submitted that both the legislature and the Ministry of Finance made it clear with the clarification made to the Ministry of Rural Development that the houses situated in rural areas are form part of the land acquisition of rural land and hence exempt from tax.
5. Ld.CIT(A) had not discussed any of the contentions, but dismissed the grounds stating as under :–
i. On the issue of reopening :–
5.1. After careful consideration it is held that assessing officer has followed due process and recorded reasons before he reopened the assessment. The assessing officer had sufficient reasons to believe that income chargeable to tax has escaped assessment and he has duly recorded the reasons before issue of the notice under section 148. As observed by assessing officer, once the case is reopened after due process of law is followed, then it is open to assessing officer the examine, assessee or re-assess any other income even if that issue not part of reopening the case. Having observed the grounds are dismissed.
ii. On the merits of addition :–
6.1. The contentions of the appellant are carefully considered. Based on facts submitted by appellant part of the compensation pertains to Katcha houses/hunts. These are residential units and by no stretch of imagination, they can be treated as agricultural lands. Residential units, even if they are located in the close vicinity of agricultural lands do not take the color of agricultural lands. The primary definition of agricultural land involves the land on which basic agricultural operations are undertaken. Residential units do not qualify and fulfil the requirements. Hence, the contentions of the appellant cannot be accepted”.
“7. Ground (6) relate to the claim of deduction under section 57(iv). Since, the compensation received is taxable under the head “income from other sources” the appellant is eligible to deduction as provided under section 57(iv). The appellant informed that assessing officer passed order under section 154 granting the deduction. Accordingly this ground is of academic value. Accordingly ground allowed for statistical purpose.
8. Ground (7) relates to claim of indexed cost of fair market value of the assets as on 1-4-1981. The compensation is assessed as income from other sources and assessing officer has already granted 50% deduction under section 57(iv). Hence, no other deduction shall be granted. Accordingly ground dismissed”.
6. It was the submission of learned Counsel that learned Commissioner (Appeals) failed to appreciate the facts and law on the issues, including Hon’ble jurisdictional High Court judgment/ITAT orders. The legal issues raised are that assessing officer has no reason to believe so as to issue a notice under section 148 of the Act after initiating proceedings under section 147, when the return of income filed by assessee was not scrutinized and notice under section 143(2) could have been issued instead of notice under section 148. It was further submitted that the assessing officer having satisfied that there is no discrepancy in turnover, the basis for reopening, should have dropped the proceedings but made addition on other counts, which according to assessee are not taxable. He reiterated the detailed submissions made before the learned Commissioner (Appeals) and placed on record the Hon’ble Jurisdictional High Court orders in the case ofCIT-III v. Swarna Andhra IJMII Integrated Township Development (P) Ltd. in ITTA No. 165 of 2014 dt. 12-3-2014 supporting the legal principles. He also made submissions on merits of the additions and referred to the orders of the acquisition and submissions before the authorities.
7. Ld.DR submitted that the return of income was filed belatedly and assessing officer has reason to believe that the income has escaped assessment. He referred to the orders of the AO/Commissioner (Appeals) to support the contentions of assessing officer.
8. After considering the orders of authorities and principles of law, I am of the opinion that the orders of assessing officer and Commissioner (Appeals) cannot be sustained. The issues contested by assessee can be categorized under the heads :–
i. Whether reopening under section 147 is correct when the time to issue a notice under section 143(2) is open?
ii. Whether the assessment made on the issue without making any addition of the so called escaped income is correct?
iii. Whether the non-disposal of assessee objections by a speaking order is correct in law?
8.1. The facts indicate that the assessee filed return of income on 26-7-2013 for assessment year 2012-13, even though belatedly as to the time prescribed under section 139(1), but within the time provided under section 139. On receipt of return, assessing officer has time to issue notice under section 143(2)/142(1) for a period of six months i.e., upto 31-1-2014. However, assessing officer choose to reopen the assessment on the reason of income escaping assessment on 12-12-2013, when the assessment proceedings have not even been started. On the issue whether the proceedings under section 147 are correct when a notice under section 143(2) could have been issued was considered by the Co-ordinate Bench. The Co-ordinate Bench in the case of M/s. Eenadu Relief Fund v. DDIT(E)-II in ITA No. 434/Hyd/2010 dt. 13-1-2011 (quoted before the learned Commissioner (Appeals) in written submissions) by assessee, held as under :–
“9.3. Return filed for the assessment years 1994-95 on 28-3-1996 and the same was processed under section 143(1). Later 148 Notice was issued on 18-6-1996 though time available for issue of notice under section 143(2) was upto 31-3-1997.
9.4. In the case of CIT v. Qatalys Software Technologies Ltd. (308 ITR 249), the Madras High Court held that reopening is improper when the time limit is available to issue notice (xi) 143(2). As seen from the above, in the case of K M Pachayappan (304 ITR 264) and Qatalys Software Technologies Ltd. (308 ITR 249) Madras HC by placing reliance on the judgment of SC in the case of Rajesh Jhaveri (supra) held that the assessing officer was barred from initiating reassessment proceedings under section 147 when the time for issuance of notice under section 143(2) had not expired. However, taken a different view in the case of ITO v. K M Pachiyappan (311 ITR 31) (Mds.) upheld that the assessing officer in initiating the proceedings under section 147 in similar circumstances. However, it appears that the important distinction in fact of these two cases namely time available for issue of notice under section 143(2) had not expired in the case of K. M.Pachiappan (311 ITR 31) has not placed before the Madras High Court. Further, the Tribunal in the case of Super Spinning Mills Ltd. v. Addl. CIT Tribunal Tax (3rd Member) (Chennai) held that :–
The department wants to interpret the expression ‘no assessment has been made’ in clause (b) of Explanation 2 to 8.147 to mean that it also includes situation where assessment under section 143(3) is till possible but not yet made. If this interpretation is to be accepted, it will set at naught the fundamental principles underlying s.147 and which principles have been followed till date. These principles are applicable even to the extended meaning given to them term ‘escaped assessment’ in the amended provision. The above clause is intended to cover the following two situations (i) where a return is filed and non action is taken either under section 143(1) or under section 143(3) and the time limit for issuing notice under section 143(2) has expired (ii) where a return is filed and is processed under section 143(1) and the time limit for issuing notice under section 143(2) has expired. It does not envisage a situation where a return is filed and the time limit for issue for issue of notice under section 143(2) has not expired. Unless the return filed by the assessee is scrutinized by the assessing officer he cannot come to the conclusion of any escapement. If the assessing officer issues notice under section 143(2), the quite obviously he would scrutinize the return and frame the assessment under section 143(3). Subsequently, he may notice escapement and issue notice under section 148 Besides this, in the above two situations also he will have to look into the return to see whether there is escapement or not. If he notices any escapement, it can be called an escapement only if it is notice after the proceedings under section 147. In that event he will have to issue notice under section 143(2). In nutshell, (a) the proceedings are said to have commenced once the return is filed, and (b) the proceedings terminate when (i) the return is processed under section 143(1) and the time to issue notice under section 143(2) is over (ii) assessment is made under section 143(3) or, (iii) the assessment is no longer possible under section 143(3). Processing under section 147 can be initiated only after the earlier proceedings have terminated as mentioned above. Order under section 147 read with section 143(3) was therefore liable to be quashed.
10. In view of the above discussions, we are inclined to hold that unless the return filed by the assessee is scrutinized by the assessing officer under section 143(3), we cannot come to the conclusion of any escapement, the assessing officer cannot initiate proceedings under section 147 when the time for issuance of notice 143(3) has not expired. The case law relied by the assessee’s counsel laid down the same proposition of law. Accordingly, we allow the first ground of the appeal of the assessee by holding that this reopening of assessment by issue of notice under section 148 dated 17-10-2007 is bad in law”.
Thus, on the facts of the case and principles of law, the reopening is ab initio void.
8.2. Explanation 3 to the provisions of section 147 of the Act, empowers assessing officer to assess or reassess such escaped income, based on the reasons on which the assessment is reopened and also any other escaped income which has come to his notice during the course of assessment proceedings. Explanation 3 to the provisions of section 147 of the Act never intend the assessing officer to continue the reassessment proceedings even though the reasons based on which the notice under section 148 has been issued ceased to exist. If the income, the escapement of which was the basis of the formation of the reason to believe is not assessed or reassessed, it would not be open to the assessing officer to independently assess only that income which comes to his notice subsequently in the course of the proceedings under that section as having escaped assessment. Hence, the action of the assessing officer in continuing the reassessment proceedings, even though the reason for which the notice issued under section 148 of the Act ceased to exist, by citing the Explanation 3 to the provisions of section 147 of the Act is not correct. Thus the assessment made under section 143(3) read with section 147 of the Act is without jurisdiction and bad in law. The reopening of the assessment, as per the reasons recorded for that purpose, was only in relation to reconciliation of receipts as per 26AS and computation of in-come and hence following the decisions of Bombay High Court in the case of Jet Airways (supra), the assessment made by the assessing officer under section 143(3) w.r.t. 147 of the Income Tax Act with reference to other issues alone is without jurisdiction. Reliance can also be placed in the case of Ranbaxy Laboratories Ltd., v. CIT 336 ITR 136 (Delhi), in the case of Assistant CIT v. Major Deepak Mehta (344 ITR 641) (Chhattisgarh).
8.3. The assessing officer having been satisfied that there is no discrepancy in gross turnovers, he could have dropped proceedings. The law on the issue is very clear. The Hon’ble jurisdictional High Court in the case of CIT-III v. Swarna Andhra IJMII Integrated Township Development (P) Ltd. (supra) has considered the similar facts and held as under :–
“It appears that the learned Tribunal has found that the reasons recorded for reopening the assessment has no nexus with the income ultimately assessed under section 147 of the Income Tax Act, 1961. The finding of the learned Tribunal is reproduced hereunder :–
“Thus, it is very much clear that the reassessment has been made for assessment of income other than the income escaping assessment as per the reasons recorded for formation of belief while initiating proceeding under section 147 of the Income Tax Act, 1961.”
Mr. B.Narasimha Sarma, learned Counsel for the appellant, says that upon reading of Explanation-3 to section 147 of the Income Tax Act, the learned Tribunal should not have concluded as aforesaid, as the Explanation-3 has got retrospective effect.
We are of the view that the Explanation-3 to section 147 of the Income Tax Act on the given facts and circumstances of the case does not apply. Moreover, in which case and when Explanation-3 would be applicable has been decided by various High Courts, namely, Bombay High Court in case of CIT v. Jet Airways (I) Ltd., (331 ITR 236); Delhi High Court in case of Ranbaxy Laboratories Ltd. v. CIT (336 ITR 136); Chhattisgarh High Court in case of ACIT v. Major Deepak Mehta (3441TR 641) and Gujarat High Court in case of CIT v. Mohmed Juned Dadani. In view of the consistent decision of these High Courts, we are not in a position to take a different view and the learned Tribunal has followed the consistent view of those High Courts. Even, we find that independent of the decision of those High Courts that the Explanation-3 will be applicable in case where live issue, which was subsisting at the time of original assessment and if such issue has escaped the determination of the assessing officer, can be a ground for reopening. Any new issue that has cropped up subsequently on new set of facts, the aforesaid Explanation has no application. We think that the Explanation-3 has not really diluted cardinal object of section 147 of the Income Tax Act for reopening. The Explanation-3 has been given a retrospective effect with an idea there are so many assessment orders, which were passed earlier without deciding the issue subsisting at the time of original assessment. This Explanation has held to be reopened in those cases”.
Thus, on this reason the assessment completed by the assessing officer on other issues has become bad-in-law.
8.4. As seen from the satisfaction recorded, the case was reopened by the assessing officer on the reason that there was a difference of Rs. 3,30,017 in the gross receipts reflected in the Form No:26AS and in the Computation of income with regard to Gross Receipts received from Commissioner, Tirupati Municipality and therefore the assessing officer was of the opinion that there was reason to believe that income, chargeable to tax has escaped assessment. Once the difference in the gross receipts from Commissioner, Tirupati Municipality was duly reconciled by furnishing the rectified Form No. 26AS downloaded from the Income Tax Dept. website, the reason to reopen ceased to exist. Further, the reasons recorded for reopening of assessment laid more stress on reconciliation of gross receipts and but not on escapement of any income and therefore there was no belief that there was any escapement of any income and hence the entire order passed under section 143(3) read with section 147 of the Act is without jurisdiction. Reliance can be placed in the case of Meheria Reid & Co v. ITO (2013) 81 DTR (Kol) (Trib) 386 wherein it has been held as under :–
“In the instant case, assessment has been reopened on the ground that there is discrepancy between professional income declared by the assessee and the professional income as per TDS Certificates and that it requires verification to find out whether any taxable income has escaped assessment. There is nothing in the reasons to indicate that there is escapement of income. A variation in these two figures does not necessarily lead to escapement of income. Mere need to verify the discrepancy does not bring the matter within the scope of the cases in which reassessment proceedings can be validly initiated. There is subtle, though significant, distinction between reason to believe and reason to suspect- while the former is good enough to hold that income has escaped assessment and initiate suitable remedial measures in respect thereof, the latter can, at best, be the ground to verify and examine the matter further. Mere fact that matter needs to be verified and examined further can never be a reason good enough to believe that income has escaped assessment and to invoke the reassessment proceedings. Therefore, the very initiation of reassessment proceedings on the facts of the instant case was devoid of legally sustainable merits–Reassessment quashed.”
Similar view was taken by the ITAT, Hyderabad in the case of M/s. Vason Electors (P) Ltd. v. assessee (ITA No. 456/Hyd/2012).
8.5. Another contention was that the assessing officer did not dispose off the objections. Without passing a separate order by considering the objections of assessee, the assessing officer has simply mentioned in the assessment order that as per the Explanation 3 of the Provisions of the section 147 of the Act are attracted. assessing officer continued the reassessment proceedings, without of disposing the objections raised by assessee by way of a speaking order. Considering the principles laid by the Hon’ble Supreme Court in GKN Drive Shifts (India) (P) Ltd. v. ITO & Ors. (2003) 259 ITR 19, the Hon’ble Gujarat High Court in the case of General Motors India (P) Ltd., v. Dy. CIT (2013) 354 ITR 244 (Guj) has held as under :–
“We hold that it was not open to the assessing officer to decide the objections to notice under section 148 by a composite assessment order. The assessing officer was required to, first decide the objections of the assessee filed under section 148 and serve a copy of the order on the assessee, and after giving some reasonable time to the assessee for challenging his order, it was open to him to pass an assessment order. This was not done by the assessing officer, therefore, the order on the objection to the notice under section 148 and the assessment order passed under the Act deserves to be quashed”.
Thus the order of assessing officer is also bad in law.
9. For the reasons stated above, both initiation of proceedings and continuation of assessment proceedings are ab initio void. Consequently, the order of AO/Commissioner (Appeals) stands set aside. learned Commissioner (Appeals) should have examined the facts and arguments and should have followed the principles of law on the issue, as interpreted by higher judicial authorities. His action in rejecting the contentions without valid consideration or examination calls for contempt proceedings, particularly, when the Hon’ble jurisdictional High Court has propounded the law as early as 12- 03-2014. It cannot be stated that learned Commissioner (Appeals) is ignorant of Hon’ble jurisdictional High Court orders, when he passed the impugned order in March, 2017. It is advised that the Commissioner (Appeals) being a judicial authority, should follow the principles laid down by the higher judicial authority, as considered by the Hon’ble jurisdictional High Court as early as April 1987 in the case of State of Andhra Pradesh v. Commercial Tax Officer & Anr., 169 ITR 564(AP), otherwise he may invite contempt proceedings..
10. Even though there is merit in assessee’s contentions that the compensation on agricultural sheds is not taxable, there is no need to discuss the same as the very assessment proceedings are held to be bad in law. Therefore, the issue on merits is not separately adjudicated.
11. In the result, grounds are to that extent are considered allowed and appeal of assessee is treated allowed.