SURESH CHAND GUPTA,JHANSI vs. DCIT-6, JHANSI

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH: AGRA

BEFORE SHRI LALIET KUMAR, JUDICIAL MEMBER,AND DR. MITHA LAL MEENA, ACCOUNTANT MEMBER

I.T.A No.284/Agra/2017 (ASSESSMENT YEAR-2010-11)

M/s Suresh Chand Gupta, Vs.. DCIT-6, New Circle 2(3)(1), Behind Shri Ram Lodge, Jhansi. Outside Khanderao Gate, Jhansi. PAN: AAFFS9843N (Appellant) (Respondent)

Appellant by Shri R.C. Tomar, ITP. Assessee by Shri Waseem Arshad, Sr. DR.

Date of Hearing 10.07.2019 Date of Pronouncement 03.09.2019

ORDER Per Dr. M. L. Meena, A.M.: This appeal emanates from the order of the ld. Commissioner of Income Tax (Appeals)-2, Agra [(in short ‘the ld. CIT(A)], dated 28.02.2017, for A.Y. 2010-11, wherein assessee has raised the following grounds: “1. The learned Commissioner of Income Tax (A)-2, Agra has erred in law and on facts in holding the re-opening of the case u/s 147 of Income Tax Act as valid without appreciating the facts of the case properly. 2. The learned Commissioner of Income Tax (A)-2, Agra has erred in law and on facts in confirming the addition of Rs.47,34,000/- being interest on FDRs ignoring that the

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appellant is a partnership firm and this interest income is duly disclosed in Audited Profit and loss A/c and Balance Sheet as also in the return of income filed in ITR-5 Part A-P & L A/c against Column (j) Rs. 47,34,000/- being other income under head (Business & Profession). Thus, there is double addition of Rs. 47,34,000/-. 3. That the learned Commissioner of Income Tax (A)-2, Agra has erred in law and on facts in not appreciating the facts of the case properly in as much as the Assessing Officer passing the original assessment order u/s 143(3) of Income tax Act, 1961 dated 26.12.2012 after lengthy discussion held “In this way, extra profit addition of Rs. 17,06,190/- (7.3% - 6.92%) on work done by self amounting to Rs. 44,74,30,030/- is made to the income returned by the assessee”. Hence computation of total income should have been (Income returned Rs. 2,73,46,630/- + Addition as discussed Rs. 17,06,190/- = Rs. 2,90,52,820/-). 4. That the appellant craves to alter, amend, add, and modify any grounds of appeal. 5. The appellate order being unjust, illegal, and arbitrary; hence deserves to be amended.” 2. Apropos Ground No. 1, the assessee has challenged validity of the re-opening of the assessment u/s 147 of Income Tax Act, on account of change of opinion. 3. The AO framed original assessment in the case of assessee u/s 143(3) by estimating profit rate after rejecting books of account. Subsequently the AO noticed that the assessee’s interest income from FDRs to the extent of Rs.47,34, has escaped assessment within the meaning of section 147 of the Act, (APB 52).Accordingly, the AO while taking due cognizance of fact that interest income from FDR of Rs.47,34,000/- had escaped assessment, he recorded his satisfaction on the escapement of the assessee’s income from other sources and reopened the assessee’s case u/s 147 of the Act by way of issue of notice u/s 148 of the Act dated 13.10.2014 to the assessee in the reassessment proceedings, and the AO has accordingly made an

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addition of Rs. 47,34,000/- under the head income from other sources against interest income from FDRs and thus assessed the total income of the assessee of Rs.3,37,86,820/- as against Rs.2,90,52,820/-. Being aggrieved from the AO’s order, the assessee went in appeal before the 4. ld. CIT(A), challenging the reopening of the case u/s 147 of the IT Act as in bad in law. 5. The ld. CIT(A) has rejected the legal ground of the assessee by observing the issue being covered in the case of the assessee of Hon’ble Apex Court in the case of ‘ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd.’ 2007 291 ITR 500 and ‘Raymond Woolen Mills Ltd. Vs. ITO’ (1999) 236 ITR 34 (SC) and Jurisdictional High Court in the case of ‘Anand Prakash Agrawal vs. CIT’ 121 DTR 227 and Hon’ble Karnataka High Court in the case of ‘CIT vs. United Racing & Blood Stock Breeders Pvt. Ltd. 131 DTR 344 where the Hon’ble High Court also held that sufficiency of correctness of the material is not a thing to be considered at the stage of reopening of proceedings u/s 147 relying on the decision of ‘ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd.’ (supra) accordingly, the ld. CIT(A) has been set aside reasons recorded by the AO and held validity of the reopening of assessment by the AO by observing vide para 4.3 to 4.5 of the impugned order as follows:

“4.3 I have considered the facts of the facts of the case, written submissions filed by the Ld. AR for the appellant and perused the order of the AO. When the appellant itself has shown the interest on FDRs as his ‘other income’ in the profit & loss account, I find the AO had arrived to his reasonable satisfaction that the other income of assessee has escaped assessment in the original assessment, wherein the assessee’s only business income of assessee was determined on basis of gross

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contractual receipts of assessee, on which net profit rate was applied by the AO. As regards the assessee’s claim, that the AO’s action is based on change of opinion. It is observed that assessee’s objection is not based on the proper appreciation of the clear cut factual and legal position of the assessee’s case wherein the AO has adequately demonstrated that assessee’s income is liable to be assessed under a separate head which is provided in the scheme of the Income Tax Act, 1961. "Therefore the assessee’s claim is without any merit or credence into it. Thus in view of me forgoing it is well borne out that the AO has undertaken the re-assessment proceedings for bringing to tax the amount that has escaped assessment earlier. Therefore, the assessee’s contention that it was a change of opinion is misconceived and without any legal force. 4.4 As per the scheme of re-assessment provisions u/s 147 of the Act, the word ‘reason’ in the phrase 'reason to believe' would mean cause or justification. If the assessing officer has a cause or justification to think or suppose that income had escaped assessment, the AO can be said to have a reason to believe that such income had escaped assessment. The words 'reason to believe' cannot mean that the AO should have finally ascertained the facts by legal evidence. It only means that the AO forms a belief from the examination he makes and information that he receives. If the AO discovers or finds or satisfies prima-facie himself/herself that the income has escaped assessment, it would amount to saying that AO has ‘reason to believe’ that such income had escaped assessment. The justification for his belief is not to be judged from the standards of proof required for coming to a final decision whether the income has escaped assessment or not. His formation of the belief is not a judicial decision, but an administrative decision. The decision to initiate the proceedings

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is not to be preceded by any judicial or quasi-judicial enquiry. At this stage, he is not squired to give hearing to the assessee or to provide the material or information in his possession to the assessee for rebuttal. Therefore, the first requisite for exercising jurisdiction under section 147 is that there must be the reasons to believe in the case of the assessee.

4.5 In fact reopening made in the case of the assessee is also covered by the decision of Hon'ble Apex Court in the case of ACIT Vs. Rajesh Jhaveri Stock 3rokers Pvt. Ltd. reported at (2007) 291 ITR 500. In this decision the scope and effect of section 147 as substituted w.e.f. 01.04.1989 with respect to the phrase reason to believe” used in this section has been further elaborated and it has been held in this decision, if the AO, for whatever reason has reason to believe that income has escaped assessment, it confers jurisdiction to reopen the assessment. While analyzing the word “reason” in the phrase “reason to believe”, it has been held in this decision that it would mean “cause” or “justification”. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that the income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. It is further clarified in this decision that at the initial stage, what is required is “reason to believe” but not the established fact of escapement of income and such formation of belief by the assessing officer is within the realm of subjective satisfaction. The Hon’ble Supreme Court in its

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another decision in the case of Raymond Woolen Mills Ltd. Vs. ITO reported at (1999) 236 ITR 34 (SC) has even held that at the time of reopening of assessment proceeding u/s 147, we have only to see whether there was prima facie material on the basis of which the Department could reopen the case. The sufficiency or correctness of material is not a thing to be considered at this stage. Further, the Hon’ble jurisdictional High Court in the case of Anand Prakash Agarwal vs. CIT reported at (121 DTR 227) and Hon’ble Karnataka High Court in the case of CIT vs. United Racing & Blood Stock Breeders Pvt. Ltd. reported at 131 DTR 344, have also held so relying on the decision of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra).” 6. Further the ld. CIT(A) after considering the facts of the case, written submissions filed by the ld. AR confirmed the addition made on account of income from other sources by observing vide para 5.2 of the impugned order: “5.2 I have considered the facts of the case, written submissions filed by the Ld.AR for the appellant and perused the order of the AO. The main contention of the Ld. AR on this issue is that the FDRs were purchased from the business funds of assessee for pledging the same with contract awarding departments for taking the contracts. However, the Ld.AR could not explain why the interest on FDRs has been shown by the assessee himself under the head ‘other income’ in the P & L Account. Also the Ld.AR could not furnished any evidence before the AO as well as in the appeal proceedings to show as to how the amounts held as FDRs could be treated as part of assessee’s business income, when the net profit rate is attracted only on the contractual receipts. Besides, no details as to whether there was any precondition to pledge the FDRs before applying for a tender, have been filed by assessee before me. Thus in view of these facts, I am of the considered view that the

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assessee’s claim to consider the interest on FDRs as his business income, is without any credence or merit in it. Therefore, in these facts and circumstances of the case, it is held that the AO has validly assessed the interest on FDRs and insurance claim as assessee’s income from other sources, and accordingly the addition of Rs.47,34,000/- made by the AO is confirmed. As a result Ground Nos. 3 & 4 taken by assessee are dismissed.” 7. The ld. Counsel for the assessee reiterated the submissions made before the ld. CIT(A). He contended that there was no escapement of income of Rs.47,34,000/- as it was shown in ITR –V; that in the absence of any fresh information, the reassessment proceedings merely based on change of opinion is illegal and arbitrary and such reopening of assessment amounts to review of the same material which has been considered by the AO while making the original assessment which is not permissible in law and hence the assessment order is bad in law. 8. The counsel for the assessee further submitted that the income from FDRs was shown by the assessee in schedule 12 under the head ‘other income’ in the profit & loss account of the audited books of account which was produced before the AO during the course of assessment proceedings. In support relied on case laws cited before the CIT(A) as per record. 9. The ld. DR heavily relied on the order of the ld. CIT(A) contending that the AO was justified in making addition of Rs.47,34,000/- being interest income from FDRs under the head other income after validly reopening assessment u/s 147 of the Act. He contended that since the AO did not examine the issue of interest from FDR’s in the original assessment so he has rightly opened the assessment.In support, he placed reliance in the following case laws besides relied by the ld. CIT(A):

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i) ‘M/s Larson & Turbo Ltd. vs. State of Jharkhand’, in Civil Appeal No.5390/2007, (S.C.). ii) ‘A.L.A. Firm vs. Commissioner of Income Tax’, 1991 SCR (1) 624, 1991 SCC (2) 558 (SC). ‘CIT vs. Popular Vehicles & Services Ltd.’, ITA No.1628/2009 iii) (Kerala) 10. Heard the rival contention, perused the material on record and the case law relied upon on the issue of validity of reopening of assessment u/s 147.The AO has recorded reason to believe u/s 147 of the IT Act 1961 as follows (APB-52). “In this case, the assessment was completed u/s 143(3) of the IT Act at total income of Rs. 2,90,52,820/- against the return income of Rs. 2,73,46,630/-. From the perusal of Balance sheet, Profit and loss account, assessment order and other documents placed on record, it is noticed that the Assessing Officer has rejected the books of accounts of the assessee u/s 145(3) of the Income Tax Act and assessed income of the assessee only on total contract receipt (on percentage basis) of work done by self and subcontract. Apart from contract receipt the assessee firm also has shown some other income in the audited Balance sheet which is as under: Interest on FDR’s : Rs. 47,34,000/-. This amount of Rs. 47,34,000/- is himself mentioned in Profit and loss account \ (Schedule 12 of Balance sheet) by the assessee as ‘Other Income’. This amount is not included in the Contract receipt by the Assessing Officer and also not added in his Income during assessment order. Therefore ‘reason to believe’ that the income of Rs. 47,34,000/- escaped assessment in the meaning of section 147 of the Income Tax Act. So, Notice u/s 148 is being issued in this case.”

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income of Rs. 47,34,000/- escaped assessment in the meaning of section 147 of the Income Tax Act. So, Notice u/s 148 is being issued in this case.” 12. In the original assessment the AO has assessed income of the assessee in the following manner (refer para 4.1 of AO’s order). Rs. 68,96,44,450/- Total turnover Less: work done through Rs. 24,22,14,420/-profit @ 2% =Rs. 48,44,288/- Subcontractor Rs. 44,74,30,030/- profit @ 7.3% =Rs. 3,26.62.392/- Work done by self Rs. 3,75,06,680/- Rs. 84,53,859/- Less: salary and interest paid to partners Rs. 2,90,52,820/- Total income

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When he subsequently became aware of the decision, he initiated proceedings under S. 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in Ramachari. This material was not considered at the time of the original assessment. Though it was a decision of 1961 and the I.T.O. could have known of it had he been diligent, the obvious fact is that he was not aware of the existence of the decision then and, when he came to know about it, he rightly initiated proceedings for assessment.”

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chargeable income has escaped assessment. In this case, the Assessing Officer on re-examination of the accounts noticed that assessee which has paid Rs 3 crores towards interest on borrowings in the accounting year relevant for the assessment year advanced above Rs 84 lakhs as interest- free loans to sister concerns and so much so the entire borrowings was not for business purposes and hence deduction of interest allowed under section 36(1)(iii) is excessive relief granted in assessment. In this context Explanation 2 to section 147 has to be referred to which exhaustively states certain cases where income chargeable to lax has escaped assessment under sub-clause (iii) of clause (c) of Explanation 2, if income has been made the subject of excessive relief under the Act, then the same is one of the circumstances of income escaping assessment. Therefore, if excessive deduction of interest is allowed under section 36(1)(iii), then certainly it is a case of income escaping squarely covered by Explanation 2 to section 147 of the Act. Even though counsel for the assessee submitted that when the claim was allowed in the original assessment any proposal for subsequent disallowance of relief granted originally in the assessment either fully or partially should be taken as on account of change of opinion, we are unable to accept the same because in the first place, the Assessing Officer has not discussed the matter in the regular assessment but allowed deduction in terms of the claim made in the returns. There is no embargo in section 147 against the Assessing Officer re-examining the assessment file and re-appreciating the evidence, and accounts in support of the claim and arriving at a conclusion which may attract section 147. There is no presumption anywhere in the provisions of the Act to the effect that every regular assessment completed is after due consideration of every claim under the provisions of the Act. On the other hand, the scope of Explanation 2 to section 147 is such that the Assessing Officer is free to re-

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examine the correctness of a regular assessment and decide whether the tax assessed, rate applied, relief and allowances granted, etc., are in terms of the provisions of the Act and if not to revise the assessment in terms of section 147 of the Act. When the scope of the section after amendment is large enough to cover situations whereby deductions have been wrongly or excessively granted, the Tribunal has no authority to restrict the powers of the Assessing Officer by holding that change of opinion is not a ground to reopen the assessment under section 147 of the Act. Even though assessee's counsel submitted that the decision of the Supreme Court referred to does not apply to this case, inasmuch as assessment involved in this case is under section 143(1), whereas the assessment involved in the Supreme Court case is regular assessment, we do not think there is any difference between the proceedings completed under section 143(1) and the regular assessment under section 143(3) of the Act, if income chargeable to tax has escaped assessment within the meaning of Explanation 2 to section 147 of the Act.”

We therefore, allow the appeal by reversing the order of the Tribunal and by restoring the departmental appeal to file of the Tribunal for decision on merits after hearing both sides. Hon’ble Apex Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. 16. Ltd., has clarified that at the initial stage, what is required is reason to believe but not to establish the fact of escapement of income and such formation of believe by the AO is within realm of subject to satisfaction the Hon’ble Apex Court in an another case of Raymond Woolen Mills (supra) held that at the time of reopening assessment proceedings u/s 147, we have only to see whether there was prima facie material on

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the basis of which the department could reopen the case. The sufficiency and correctness of the material is not a thing to be considered as this stage. The decision relied by ld. AR which justifiable on the facts are not applicable to the facts and the case as being justifiable, further the AR has not brought on record in contrary judgments in rebuttal to the contentions of the department. We hold that there is no sufficient material to establish that there was change of opinion on the part of the AO while recording reasons to believe u/s 147 of the Act. 17. We find no merit and substance in the argument of the ld. Counsel, and in the absence of corroborative evidence to substantiate the contentions of the assessee on the change of opinion of the AO, the ld. Counsel, we approve the ‘reason to believe’ that the income of Rs. 47,34,000/- escaped assessment in the meaning of section 147 of the Income Tax Act.In view of that the ld. CIT(A) was justified in confirming the reopening of the assessment. Following the Hon’ble Apex Court on the reopening of the assessment u/s 147 18. of the Act, we uphold the order of the Ld. CIT(A) that the AO has ‘reason to believe’ that the income of Rs. 47,34,000/- had escaped assessment within the meaning of section 147 of the Income Tax Act. 19. Coming to the next issue of double addition of Rs.47,34,000/- being duly disclosed in the P & L account and balance sheet in the return of income filed is concerned, we note that in the original assessment order the AO has applied net profit rate only on the contract receipts. The ld.AR has not brought on record any evidence to demonstrate either before the AO or the ld. CIT(A) or even in the appellate proceedings before us to show as to how the amount of interest income received from FDR’s could be treated as part of assessee’s business income or contract receipts when the net profit rate was applied by the AO on the contract receipts. Further the counsel has not established that whether there was a pre-condition to please the aforesaid the FDR’s to procure business before applying for determination of contract tenders by the assessee.

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Under the facts and circumstances, in our considered view, the assessee’s claim 20. to consider the interest on FDRs as part of his business income to give benefit of double taxation is not supported by a logical or cogent explanation. Accordingly, the ld. CIT(A) has rightly upheld the interest income from FDRs as other income of the assessee in the reassessment proceedings and confirmed the addition of Rs.47,34,000/- made by the AO. 21. In the above view, we find no reason to interfere in the order of the ld. CIT(A), as such the same is upheld. Assessee’s grounds of appeal are rejected. In the result, the assessee’s appeal is dismissed. 22.

Order pronounced in the open court on 03/09/2019.

Sd/- Sd/- (Laliet Kumar) (Dr. M.L. Meena) JUDICIAL MEMBER ACCOUNTANT MEMBER *AKV* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Sr. PRIVATE SECRETARY ITAT, AGRA