M/S. BIOBUILD DEVELOPERS ,MUMBAI vs. INCOME TAX OFFICER WARD 24(1)(3), MUMBAI

Name of the above mentioned assessee was appearing in the Non-filers monitoring system of ITBA. On verification of details available in NMS, P1 category and 2 Assessment Year 2013-2014 Individual Transaction Statement, it is seen that the assessee has sold three immovable properties of Rs.40,00,000/-, 35,24,500/- and Rs.27,00,000/- respectively. But the assessee has not filed the return of income. Hence, sale of immovable properties have made escaped assessment.

Therefore, I have reason to believe that income to the extent of Rs.1,02,24,500/- chargeable to tax has escaped assessment for the year under consideration in the hands of the assessee. Accordingly, the proceeding u/s.147 of the Income Tax Act, 1961 are duly attracted in order to frame proper assessment to bring to tax appropriate income, hence this case is fit for issue of notice u/s.148 of the I.T.Act, 1961.

It is pertinent to mention here that in this case the assessee has choosen not to file return of income for the year under consideration although the total income of the assessee had exceeded the maximum amount which is not chargeable to tax as discussed above and the assessee was assessable under the Act. In view of the above, the provisions of clause (a) of Explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.

In this case more than four years have lapsed from the end of the assessment year under consideration, hence kind approval of the Pr. Commissioner of Income-Tax- 24, Mumbai is solicited u/s.151(1) to issue notice u/s.148 of the IT Act, 1961.”

After recording the above reasons, the Assessing Officer initiated reassessment proceedings in the case of the Assessee for the Assessment Year 2013-2014. The Assessee participated in the reassessment proceedings which cumulated into passing of the Assessment Order, dated 26/12/2019 under Section 143(3) read 3 Assessment Year 2013-2014 with Section 147 of the Act. By way of the aforesaid Assessment Order the Assessing Officer made an addition of INR.33,82,946/- in the hands of the Assessee holding the same to be interest income liable to tax in the hands of the Assessee.

We have considered the rival submissions and have perused the material on record.

Issue of notice where income escaped assessment. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer 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 8 Assessment Year 2013-2014 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 section 139. (2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."

It is noted in section 147 that the words 'has reason to believe and sub-section (2) of section 148 came to be inserted by way of amendments in the Act with effect from 1-4-1989. Explanation 3 to section 147 was also inserted by the Finance Act, 2009 with effect from 1-4-1989. It is seen that conditions precedent for exercise of jurisdiction under section 147 is formation of a reason to believe by the Assessing Officer that income chargeable to tax has escaped assessment.

The crux of section 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 Assessing Officer 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 section 148. Since there was confusion prevailing with regard to the powers of the Assessing Officer 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 clause (57) of memorandum explaining the provisions of Finance Bill (No. 2) of 2009 are following:- "Some Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issued 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 section 147 to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to 9 Assessment Year 2013-2014 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-section (2) of section 148. This amendment will take effect retrospectively from 1- 4-1989 and will accordingly apply in relation to assessment year 1989-90 and subsequent years."

By virtue of explanation 3 to sect 9. By virtue of explanation 3 to section 147 interpretive confusion came to be clarified and thus the decisions rendered by the Punjab & Haryana High Court in the case of Vipin Khanna v. CIT [2002] 255 ITR 220/122 Taxman 1 and Kerala High Court in the case of Travancore Cements Ltd. v. Asstt. CIT [2008] 305 ITR 170/[2009] 179 Taxman 117, no longer hold the field on the subject.

Now, after the insertion of Explanation 3, as noted above, the position is that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under section 147 though the reasons for such issue were not included in the reasons recorded in the notice under section 148(2) on the basis of which he had initiated proceedings under section 147. Similar question came for consideration before the Division Bench of Bombay High Court in CIT v. Jet Airways (I) Ltd. (2011) 331 ITR 236/[2010] 195 Taxman 117. The Court held as under- "9. The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows: (1) The Assessing Officer must have reason to 10 Assessment Year 2013-2014 believe that any income chargeable to tax has escaped assessment for any assessment year; (if) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148, (ii) The Assessing Officer 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 section 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."

The submission of learned counsel for the revenue was that when reassessment is reopened by issuance of notice under section 148, the previous assessment is set aside and the whole assessment proceedings start afresh and the Assessing Officer 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 v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 and V. Jaganmohan Rao v. CIT/CEPT [1970] 75 ITR 373. On the other hand learned counsel for the assessee submitted that the words, 'and also in section 147 signify that unless the Assessing Officer assesses the income with respect to which he has formed reason to believe within the meaning of section 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 (1) Ltd. (supra) and also CIT v. Shri Ram Singh [2008] 306 ITR 343 (Raj.) and CIT v. Dr. Devender Gupta [2008] 174 Taxman 438 (Raj.). Reliance was also placed in the case of CI. International Hotels Ltd. v. 170 being IT Appeal No. 2736/Del/2006 dated 24-10- 2008.

The Bombay High Court also discussed the cases of V. Jaganmohan Rao (supra) and Sun Engg. Works (P.) Ltd. (supra) of the Apex Court. In the case of Sun Engg. Works (P.) Ltd. (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 section 147, as they stood prior to the amendment on 1-4-1989. 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 section 147, whereas "reassess" as referring to a situation where the assessment has already been made, but the Assessing Officer has reason to believe that there is under assessment on account of the existence of any of the grounds stipulated in section 147. The Supreme Court referred to the Judgment in the case of V.Jaganmohan Rao (supra) wherein it was held that the object of section 147 enures to the benefit of the revenue and it is not open to the assessee to convert the 12 Assessment Year 2013-2014 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.

In Dr. Devender Gupta's case (supra), learned Tribunal has relied upon the judgment of the Punjab & Haryana High Court, in CIT v. Atlas Cycle Industries [1989] 180 ITR 319/46 Taxman 315, and concluded that the basic condition is, that the Assessing Officer 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 Assessing Officer, 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 sections 148 to 153, assess or reassess such income". This expression was found to be making clear, that existence of the income, for which the Assessing Officer 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 Assessing Officer 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 section 147 "no other income" coming to the notice of the Assessing Officer, during the course of the proceedings, can be roped in.

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 Shri Ram Singh (supra) while holding that the Assessing Officer was justified in initiating the proceedings under section 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.

Now, coming back to the interpretation which was given by the Bombay High Court to sections 147 and 148 in view of the precedent on the subject. The Court held as under:-

We are in complete agreement with the reasoning of the Division Bench of Bombay High Court in the case of V. Jaganmohan Roo (supra). We may also note that the heading of section 147 is "income escaping assessment" and that of section 148 "issue of notice where income escaped assessment". Section 148 is supplementary and complimentary to section 147. Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, 15 Assessment Year 2013-2014 reassess or recompute escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer 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 Explanation (3) if during the course of these proceedings the Assessing Officer 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 Assessing Officer that on assuming jurisdiction under section 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 Assessing Officer 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 section 148.

In the present case, as is noted above, the Assessing Officer 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 sections 80HH and 80-1 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 sections 80HH and 80-I and accordingly reduced the claim on these accounts.

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 Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which as per our discussion was not permissible. Had the Assessing Officer proceeded not to make disallowance 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 Explanation 3 to reduce the claim of deduction under sections 80HH and 80-1 as well.

In view of our above discussions, the Tribunal was right in 16 Assessment Year 2013-2014 holding that the Assessing Officer 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.

The present appeal is accordingly allowed.” (Emphasis Supplied) On perusal of above, it is clear that the Hon’ble High Court has held that where the Assessing Officer accepts the objection of the Assessee and does not assess or reassess the income the escapement of which formed the very basis of the notice under Section 148 of the Act, it would not be open to the Assessing Officer to assess income under some other issue independently.

During the course of hearing reliance was placed by the Revenue on 17 Assessment Year 2013-2014 Explanation 2 to Section 147 of the Act. In our view the Explanation 2 to Section 147 of the Act cannot expand the scope of Section 147(1) of the Act read with Explanation 3 thereto as interpreted by the Hon’ble High Courts in the above judgments. Explanation 2 Section 147 of the Act creates a deeming fiction by which income chargeable to tax is deemed to have escaped assessment in cases where no return of income has been filed. However, the aforesaid deeming fiction cannot be extended to give the Assessing Officer unbridled powers to initiate reassessment proceedings in cases there no return of income has been filed even without identifying any income that has escaped assessment. Clause (a) of Explanation 2 to Section 147 of the Act provides that for the purpose of Section 147 of the Act income shall be deemed to have escaped assessment where no return of income had been furnished by the Assessee although his total income (or the total income of any other person in respect of which he is assessable) exceeds the maximum amount which is not chargeable to tax. Therefore, Clause (a) Explanation 2 itself requires the Assessing Officer to initially form a belief that the Assessee had some income. The deeming fiction contained in Explanation 2 treats such income as income that has escaped assessment. Thus, we are of the considered view that the reasons recorded by the Assessing Officer in the present case cannot be read so as to include recording of deemed belief that interest income assessed in the hands of the Assessee had escaped assessment even though the reasons recorded did not make reference to such interest income (by virtue of deeming fiction contained in Explanation 2 to Section 147 of the Act). Given the facts and circumstances of the present case, the provisions contained in Explanation 2 to Section 147 of the Act are of no aid to the Revenue. In terms of the aforesaid, Ground No. 1 raised by the Assessee is allowed while Ground No. 2 & 3 raised by the Assessee are dismissed as having been rendered academic in nature.