Legislature cannot be presumed to have intended to give blanket powers to the AO under section 147 for making roving enquiry

Legislature cannot be presumed to have intended to give blanket powers to the AO under section 147 for making roving enquiry

 1,255 total views

Legislature cannot be presumed to have intended to give blanket powers to the AO under section 147 for making roving enquiry

Delhi HC in the case of Ranbaxy Laboratories Ltd. vs. CIT has laid down few important principle of reassessment. The key observation by the Delhi HC were as under:
1. Reassessment Scope is often questionable if the issue is not subject-matter of notice under s. 148
2.  As per Expln. 3 to s. 147, AO may assess or reassess any income which has escaped assessment if such income comes to his notice in the course of proceedings under this section even though the said issue does not find mention in the reasons recorded and the notice issued under s. 148
3.  However, legislature cannot be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction under s. 147, he can keep on making roving enquiry and thereby including different items of income not connected or related with the reasons to believe on the basis of which he assumed jurisdiction—He would be required to issue a fresh notice under s. 148 for every new issue coming before him during the course of assessment or reassessment proceedings which he intends to take into account
4. In the instant case, very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the AO proceeded to reduce the claim of deduction under ss. 80HH and 80-I which was not permissible
5. AO had jurisdiction to reassess income other than the income in respect of which proceedings under s. 147 were initiated but he was not justified in doing so when the very reasons for initiation of those proceedings ceased to survive
6. The crux of s. 147 is the escapement of income which may be assessed or reassessed as well as any other income chargeable to tax which has escaped assessment and which comes to the notice of the AO subsequently in the course of proceedings under this section. Explanation 3 makes it clear that the AO may assess or reassess the income in respect of issue which has escaped assessment, if such issue comes to his notice in the course of proceedings under this section even though said issue did not find mention in the reasons recorded and the notice issued under s. 148. Since there was confusion prevailing with regard to the powers of the AO to assess or reassess on the issues for which no reasons were recorded, Expln. 3 came to be inserted as clarificatory. Now, after the insertion of Expln. 3, the position is that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under s. 147 though the reasons for such issue were not included in the reasons recorded in the notice under s. 148(2) on the basis of which he had initiated proceedings under s. 147.
7. Vipan Khanna vs. CIT (2002) 175 CTR (P&H) 335 : (2002) 255 ITR 220 (P&H) and Travancore Cements Ltd. vs. Asstt. CIT (2008) 219 CTR (Ker) 359 : (2008) 305 ITR 170 (Ker) held no longer good law.
8. The heading of s. 147 is “Income escaping assessment” and that of s. 148 “Issue of notice where income escaped assessment”.
9. Sec. 148 is supplementary and complimentary to s. 147. Sub-s. (2) of s. 148 mandates reasons for issuance of notice by the AO and sub-s. (1) thereof mandates service of notice to the assessee before the AO proceeds to assess, reassess or recompute escaped income. Sec. 147 mandates recording of reasons to believe by the AO that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Expln. 3 if during the course of these proceedings the AO comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the legislature could not be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction under s. 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before AO during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under s. 148.
10. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the AO proceeded to reduce the claim of deduction under ss. 80HH and 80-I which as per above discussion was not permissible. Had the AO proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of the discussion as above, he would have been justified as per Expln. 3 to reduce the claim of deduction under ss. 80HH and 80-I as well. In view of the above discussions, the Tribunal was right in holding that the AO had the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but he was not so justified when the reasons for the initiation of those proceedings ceased to survive.
11. AO had jurisdiction to reassess income other than the income in respect of which proceedings under s. 147 were initiated but he was not justified in doing so when the very reasons for initiation of those proceedings ceased to survive; legislature could not be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction under s. 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction.
 
RANBAXY LABORATORIES LTD. vs. COMMISSIONER OF INCOME TAX
HIGH COURT OF DELHI
A.K. Sikri & M.L. Mehta, JJ.
IT Appeal No. 148 of 2008
3rd June, 2011
(2011) 79 CCH 0445 DelHC
(2011) 242 CTR 0117 : (2011) 57 DTR 0281 : (2011) 336 ITR 0136 : (2011) 200 TAXMAN 0242
Legislation Referred to
Section 147, Expln. 3, 148
Case pertains to
Asst. Year –
Decision in favour of:
Assessee
Cases referred:
C.J. International Hotels Ltd. vs. ITO (ITA No. 2736/Del/2006, dt. 24th Oct., 2008)
CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H)
CIT vs. Dr. Devendra Gupta (2008) 220 CTR (Raj) 629 : (2008) 12 DTR (Raj) 235 : (2008) 174 Taxman 438 (Raj)
CIT vs. Shri Ram Singh (2008) 217 CTR (Raj) 345 : (2008) 8 DTR (Raj) 118 : (2008) 306 ITR 343 (Raj)
CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC)
V. Jaganmohan Rao & Ors. vs. CIT (1970) 75 ITR 373 (SC)
Counsel appeared:
M.S. Syali with Ms. Mahua Kalra & Ms. Husnal Syali, for the Appellant : Ms. Rashmi Chopra, for the Respondent
M.L. MEHTA, J.
JUDGMENT
The present appeal filed under s. 260A of the IT Act, 1961 (hereinafter, for short ‘the Act’) is directed against the order of the Income-tax Appellate Tribunal (hereinafter, for short ‘Tribunal’) dated May, 2007 whereby the Tribunal upheld the validity of reassessment proceedings initiated under s. 147 of the Act. The Tribunal also confirmed the order of the lower authorities in denying deduction under s. 80-IA of the Act in respect of duty drawback, profit on sale of REP licences and cash assistance.
2. The assessee, being aggrieved of the said order, is in appeal before us. The appeal was admitted on the following substantial question of law :
“Whether on facts the Tribunal was right in law in holding that the AO had jurisdiction to reassess issues other than the issues in respect of which proceedings were initiated especially when the reasons for the latter ceased to survive ?”
3. The appellant company is engaged in the business of manufacturing and trading of pharmaceuticals products. It filed return of income on 31st Oct., 1994 which was processed under s. 143(1)(a) of the Act at the returned income. Vide notice dt. 23rd Jan., 1998 issued under s. 148 of the Act, reassessment proceedings were initiated by the AO under s. 147 of the Act. The AO intimated the assessee that the items viz. club fees, gifts and presents and provision for leave encashment having escaped assessment and therefore initiated reassessment proceedings under s. 147. The assessee vide its letter dt. 15th Dec., 1998 explained that there was no escape of income on account of these items. This persuaded the AO not to make any disallowance in respect of these items. However, during the course of assessment proceedings, the AO found that deduction under ss. 80HH and 80-I was claimed on certain export incentives also like duty drawback, profit on sale of REP licences and cash assistance, etc. The AO held that since the assessment has been validly reopened under s. 147 and though no disallowance was made in respect of the items for which it was initiated, the deductions made under ss. 80HH and 80-I being not allowable and the income having escaped assessment on these accounts, proceeded to bring them to tax. He accordingly reduced the claim of deduction under ss. 80HH and 80-I in respect of some medical equipments of the assessee.
4. In appeal, the CIT(A) held that in the original assessment under s. 143(1)(a) the powers of the AO were limited to the extent of prima facie adjustment only. On merits of additions, the CIT(A) followed its order of asst. yr. 1996-97. The assessee preferred appeal before the Tribunal by challenging impugned assessment under s. 147/143(3) of the Act mainly on these grounds (i) There is no live nexus between reasons recorded and the assessment framed. The AO has travelled beyond the scope of s. 147 of the Act by making additions/disallowance, which were not the basis of initiation, but on the basis of roving and fishing enquiries conducted during the assessment proceedings; (ii) The proceedings were initiated on the basis of opinion of the audit party without forming a reasonable belief under s. 148 of the Act that income of the appellant had escaped taxation; and (iii) The reasons recorded are vague and do not reflect application of mind. Since cogent reasons are not stated, it appears, proceedings were initiated on the basis of suspicion, to conduct further enquiry and to circumvent the limitation of assessment. The Tribunal dismissed the appeal vide impugned order with the following reasons :
“As per s. 147 if the AO has reason to believe that any income chargeable to tax has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Explanation 2 to s. 147 provides that for the purpose of s. 147 even in a case where return of income has been furnished but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return it will amount to the case where income chargeable to tax had escaped assessment.
It is immaterial for validity of action under s. 147 whether the addition/disallowance proposed in the reasons recorded were ultimately made or not. Thus even if in the reassessment order various additions/disallowances have not been made, it does not affect upon assumption of jurisdiction under s. 147. Once the jurisdiction has been validly assumed the AO may reassess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section i.e., s. 147.
However, in the present case it is seen that when the jurisdiction was assumed the AO had reason to believe that income has escaped assessment due to claim and allowance of various expenses. It is only after the enquiries were made during reassessment proceedings the AO came to conclusion that no additions are required to be made in this regard. But by such subsequent action original action of assuming jurisdiction under s. 147 is not affected. Whether the assumption of jurisdiction under s. 147 is valid or not depends upon facts and circumstances of each case. In the present case it is found that the AO could validly form an opinion based on material available in his possession that due to allowance of various expenses, otherwise not allowable as such on the face of it, he was justified in issuing notice under s. 148 for the proposed reassessment under s. 147.
We accordingly hold that assumption of jurisdiction by initiating reassessment proceedings is valid and reassessment cannot be annulled. It is a separate issue that after validly assuming jurisdiction the points on which reassessment was proposed are not added/disallowed. At the same time as per s. 147 the AO can also assess such income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under s. 147.”
5. The assessee is in appeal here against the impugned order.
6. Heard learned counsel for the parties. For considering the rival submissions it would be useful to reproduce the relevant parts of ss. 147 and 148. Same are as follows :
“147. Income escaping assessment.—If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 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 ss. 148 to 153 referred to as the relevant assessment year) :
(Emphasis, italicized in print, supplied)
Explanation 2—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :
(a) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) Where an assessment has been made, but—
(i) Income chargeable to tax has been underassessed; or
(ii) Such income has been assessed at too low a rate; or
(iii) Such income has been made the subject of excessive relief under this Act; or
(iv) Excessive loss or depreciation allowance or any other allowance under this Act has been computed.
Explanation 3.—For the purpose of assessment or reassessment under this section, the AO may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-s. (2) of s. 148.
148. Issue of notice where income escaped assessment.—(1) Before making the assessment, reassessment or recomputation under s. 147, the AO shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under s. 139.
(2) The AO shall, before issuing any notice under this section, record his reasons for doing so.”
7. It is noted in s. 147 that the words ‘has reason to believe’ and sub-s. (2) of s. 148 came to be inserted by way of amendments in the Act w.e.f. 1st April, 1989. Explanation 3 to s. 147 was also inserted by the Finance Act, 2009 w.e.f. 1st April, 1989. It is seen that condition precedent for exercise of jurisdiction under s. 147 is formation of a reason to believe by the AO that income chargeable to tax has escaped assessment.
8. The crux of s. 147 of the Act is the escapement of income which may be assessed or reassessed as well as any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Explanation 3 makes it clear that the AO may assess or reassess the income in respect of issue which has escaped assessment, if such issue comes to his notice in the course of proceedings under this section even though said issue did not find mention in the reasons recorded and the notice issued under s. 148. Since there was confusion prevailing with regard to the powers of the AO to assess or reassess on the issues for which no reasons were recorded, this Explanation came to be inserted as clarificatory. The reasons for insertion of this clarificatory Explanation in cl. (57) of Memorandum Explaining the Provisions of Finance Bill (No. 2) of 2009 [(2009) 224 CTR (St) 145] are following :
“Some Courts have held that the AO has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.
With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in s. 147 to provide that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-s. (2) of s. 148.
This amendment will take effect retrospectively from 1st April, 1989 and will accordingly apply in relation to asst. yr. 1989-90 and subsequent years.”
9. By virtue of Expln. 3 to s. 147 interpretive confusion came to be clarified and thus the decisions rendered by the Punjab & Haryana High Court in the case of Vipan Khanna vs. CIT (2002) 175 CTR (P&H) 335 : (2002) 255 ITR 220 (P&H) and Kerala High Court in the case of Travancore Cements Ltd.vs. Asstt. CIT (2008) 219 CTR (Ker) 359 : (2008) 305 ITR 170 (Ker), no longer hold the field on the subject.
10. The ratio of both the aforecited cases was that upon the issuance of notice under s. 148(2), when proceedings were initiated by the AO on issues in respect of which he had formed a reason to believe that income had escaped assessment, it was not open to the AO to carry out an assessment or reassessment in respect of other issues which were totally unconnected with the proceedings that were already initiated. To put it differently, once the AO has reason to believe that income chargeable to tax has escaped assessment and proceeds to issue a notice under s. 148, it is not open to him to assess or reassess the income under an independent or unconnected issue, which was not the basis of the notice for reopening the assessment.
11. Now, after the insertion of Expln. 3, as noted above, the position is that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under s. 147 though the reasons for such issue were not included in the reasons recorded in the notice under s. 148(2) on the basis of which he had initiated proceedings under s. 147. Similar question came for consideration before the Division Bench of Bombay High Court in CIT vs. Jet Airways (I) Ltd. (2011) 239 CTR (Bom) 183 : (2011) 52 DTR (Bom) 71 : (2011) 331 ITR 236 (Bom). The Court held as under :
“9. The effect of s. 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) The AO must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the AO has to serve on the assessee a notice under sub-s. (1) of s. 148, (iii) The AO may assess or reassess such income, which he has reason to believe, has escaped assessment 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 the section; and (iv) Though the notice under s. 148(2) does not include a particular issue with respect to which income has escaped assessment, he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.”
12. The submission of learned counsel for the Revenue was that when reassessment is reopened by issuance of notice under s. 148, the previous assessment is set aside and the whole assessment proceedings start afresh and the AO has power to levy taxes on the entire income which has escaped assessment. The learned counsel relied upon the cases of Supreme Court in CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC) and V. Jaganmohan Rao & Ors. vs. CIT (1970) 75 ITR 373 (SC). On the other hand learned counsel for the assessee submitted that the words ‘and also’ in s. 147 signify that unless the AO assesses the income with respect to which he has formed reason to believe within the meaning of s. 147, it would not be open for him to assess or reassess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings. Learned counsel relied upon the case of Jet Airways (supra) and also CIT vs. Shri Ram Singh (2008) 217 CTR (Raj) 345 : (2008) 8 DTR (Raj) 118 : (2008) 306 ITR 343 (Raj) and CIT vs. Dr. Devendra Gupta (2008) 220 CTR (Raj) 629 : (2008) 12 DTR (Raj) 235 : (2008) 174 Taxman 438 (Raj). Reliance was also placed in the case of C.J. International Hotels Ltd. vs. ITO being ITA No. 2736/Del/2006 dt. 24th Oct., 2008.
13. Similar contention was raised before the Division Bench of Bombay High Court in the case of Jet Airways (supra). The Court referred to the interpretation by Rajasthan High Court in Ram Singh (supra) wherein it was observed as under :
“…. it is only when in proceedings under s. 147 the AO, assesses or reassesses any income chargeable to tax which has escaped assessment for any assessment year, with respect to which he had ‘reason to believe’ to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under s. 147.
To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under s.147, the AO were to come to the conclusion that any income chargeable to tax, which, according to his ‘reason to believe’, had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under s. 147.”
14. The Bombay High Court also discussed the cases of Jaganmohan Rao (supra) and Sun Engineering (supra) of the apex Court. In the case of Sun Engineering (supra) the issue before the Supreme Court was whether in the course of reassessment on an escaped item of income could an assessee seek a review in respect of an item which stood concluded in the original order of assessment. The Supreme Court dealt with the provisions of s. 147, as they stood prior to the amendment on 1st April, 1989. In this context, the Supreme Court held that the expression “escaped assessment” includes both “non-assessment” as well as “under-assessment”. The expression “assess” was defined as referring to a situation where the assessment is made for the first time under s. 147, whereas “reassess” as referring to a situation where the assessment has already been made, but the AO has reason to believe that there is underassessment on account of the existence of any of the grounds stipulated in s. 147. The Supreme Court referred to the judgment in the case of Jaganmohan Rao (supra) wherein it was held that the object of s. 147 enures to the benefit of the Revenue and it is not open to the assessee to convert the reassessment proceedings as an appeal or revision and thereby seek relief in respect of items which were rejected earlier or in respect of items not claimed during the course of the original assessment proceedings.
15. In Dr. Devendra Gupta’s case (supra), learned Tribunal has relied upon the judgment of the Punjab & Haryana High Court, in CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P&H), and concluded that the basic condition is that the AO has reason to believe that any income chargeable to tax has escaped assessment, for any assessment year, and it was found that the section puts no bar on the powers of the AO to put to tax any other income chargeable to tax which has escaped assessment, and which subsequently comes to his notice, in the course of the proceedings, but then, the prefixing words “and also”, which succeeded “any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 to 153, assess or reassess such income”. This expression was found to be making clear that existence of the income, for which the AO formed belief to have escaped assessment, is a precondition for including any other income chargeable to tax, escaping assessment, and coming to the notice of the AO subsequently, in the course of the proceedings. Thus, unless and until such income, as giving rise to form belief for escaping assessment, continues to exist and constitutes a subject-matter of assessment under s. 147 “no other income” coming to the notice of the AO, during the course of the proceedings, can be roped in.
16. In the case of C.J. International Hotels Ltd. (supra) before the Tribunal, the facts were almost similar as in the present case. The Tribunal relied upon the case of CIT vs. Shri Ram Singh (supra) while holding that the AO was justified in initiating the proceedings under s. 147/148 , but then, once he came to the conclusion that the income with respect to which he had entertained his jurisdiction came to a stop at that, and did not continue to possess jurisdiction, to put to tax any other income which subsequently came to his notice in the course of the proceedings, which were found by him to have escaped assessment.
17. Now, coming back to the interpretation which was given by the Bombay High Court to ss. 147 and 148 in view of the precedent on the subject. The Court held as under :
“11. . Interpreting the provision as it stands and without adding or deducting from the words used by Parliament, it is clear that upon the formation of a reason to believe under s. 147 and following the issuance of a notice under s. 148, the AO has the power to assess or reassess the income which he has reason to believe had escaped assessment and also any other income chargeable to tax. The words ‘and also’ cannot be ignored. The interpretation which the Court places on the provision should not result in diluting the effect of these words or rendering any part of the language used by Parliament otiose. Parliament having used the words ‘assess or reassess such income and also any other income chargeable to tax which has escaped assessment’, the words ‘and also’ cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard those words as being conjunctive and cumulative. It is of some significance that Parliament has not used the word ‘or’. The legislature did not rest content by merely using the word ‘and’. The words ‘and’ as well as ‘also’ have been used together and in conjunction.
…………….
Evidently, therefore, what Parliament intends by use of the words ‘and also’ is that the AO, upon the formation of a reason to believe under s. 147 and the issuance of a notice under s. 148(2) must assess or reassess : (i). ‘such income’; and also (ii) any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section. The words ‘such income’ refer to the income chargeable to tax which has escaped assessment and in respect of which the AO has formed a reason to believe that it has escaped assessment. Hence, the language which has been used by Parliament is indicative of the position that the assessment or reassessment must be in respect of the income in respect of which he has formed a reason to believe that it has escaped assessment and also in respect of any other income which comes to his notice subsequently during the course of the proceedings as having escaped assessment. 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 AO to independently assess only that income which comes to his notice subsequently in the course of the proceedings under the section as having escaped assessment. If upon the issuance of a notice under s. 148(2), the AO accepts the objections of the assessee and does not assess or reassess the income which was the basis of the notice, it would not be open to him to assess income under some other issue independently. Parliament when it enacted the provisions of s. 147 w.e.f. 1st April, 1989 clearly stipulated that the AO has to assess or reassess the income which he had reason to believe had escaped assessment and also any other income chargeable to tax which came to his notice during the proceedings. In the absence of the assessment or reassessment of the former, he cannot independently assess the latter.
Sec. 147 has this effect that the AO has to assess or reassess the income (‘such income’) which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under s. 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under s. 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee.”
18. We are in complete agreement with the reasoning of the Division Bench of Bombay High Court in the case of Jaganmohan Rao (supra) [sic—Jet Airways (I) Ltd. (supra)]. We may also note that the heading of s. 147 is “Income escaping assessment” and that of s. 148 “Issue of notice where income escaped assessment”. Sec. 148 is supplementary and complimentary to s. 147. Sub-s. (2) of s. 148 mandates reasons for issuance of notice by the AO and sub-s. (1) thereof mandates service of notice to the assessee before the AO proceeds to assess, reassess or recompute escaped income. Sec. 147 mandates recording of reasons to believe by the AO that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Expln. 3 if during the course of these proceedings the AO comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the legislature could not be presumed to have intended to give blanket powers to the AO that on assuming jurisdiction under s. 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before AO during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under s. 148.
19. In the present case, as is noted above, the AO was satisfied with the justifications given by the assessee regarding the items viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under ss. 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those items of club fees, gifts and presents, etc., proceeded to make deductions under ss. 80HH and 80-I and accordingly reduced the claim on these accounts.
20. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the AO proceeded to reduce the claim of deduction under ss. 80HH and 80-I which as per our discussion was not permissible. Had the AO proceeded not (sic) to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Expln. 3 to reduce the claim of deduction under ss. 80HH and 80-I as well.
21. In view of our above discussions, the Tribunal was right in holding that the AO had the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but he was not so justified when the reasons for the initiation of those proceedings ceased to survive. Consequently, we answer the first part of question in affirmative in favour of Revenue and the second part of the question against the Revenue.
22. The present appeal is accordingly allowed.

Leave a Comment

Your email address will not be published.

the taxtalk

online portal for tax news, update, judgment, article, circular, income tax, gst, notification Simplifying the tax and tax laws is the main motto of the team tax talk, solving