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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI KULDIP SINGH
Per : Kuldip Singh, Judicial Member:
The appellant, M/s. Solvex Interchem Pvt. Ltd. (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 22.10.2018 passed by Commissioner of Income Tax (Appeals), Mumbai [hereinafter referred to as the CIT(A)] qua the assessment year 2010-11 on the grounds inter-alia that :-
“1. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming proceeding u/s 148 of Income Tax Act.
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2. On the facts and circumstances of the case and law, the Ld. CIT(A) failed to considered that addition on any other ground cannot be made when addition was not made on ground mentioned in reason recorded.
3. On the facts and circumstances of the case and law, the Ld. CIT(A) erred in confirming addition of Rs.15,00,000/- under section 68. 4. Assessee craves leave to reserve right to add to, alter or amend any of the aforesaid grounds of appeal at or before the time of hearing and to produce such further evidence, documents and papers in support of claim.”
Briefly stated facts necessary for adjudication of the issues at hand are: assessee company filed its return of income for A.Y. 2010-11, the year under consideration declaring total income at Rs.34,54,910/-. Subsequently, the assessment was reopened under section 147 of the Income Tax Act, 1961 (for short ‘the Act’) after getting approval of Pr. Commissioner of Income Tax. Thereafter, on the basis of "reasons recorded” notice was issued under section 148 of the Act. From the information received from DDIT(Inv.) the Assessing Officer (AO) noticed that high value transactions by the assessee for A.Y. 2010-11 were found in the bank account of M/s. Govind Sharda & Co. and M/s. Durga Prasad & Co. (proprietor Mr. Sachin S. Gaikwad). From the bank detail it was also noticed by the AO that during 01.04.2009 to 31.03.2010 the payment credit of Rs.15,00,000/- was made by assessee to M/s. Durga Prasad & Co. (proprietor Mr. Sachin S. Gaikwad) and as such AO found reason to believe that the income to the extent of Rs.15,00,000/- has escaped assessment. Declining the contentions raised by the assessee the AO proceeded to hold that the assessee has no evidence of any genuine business transaction that could result in the transaction qua crediting of Rs.15,00,000/- to his 3 M/s. Solvex Interchem Pvt. Ltd.
account and thereby made addition thereof under section 68 of the Act. The AO framed the assessment under section 143(3) read with section 147 of the Act.
Assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the appeal. Feeling aggrieved assessee has come up before the Tribunal by way of filing present appeal.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
The Ld. A.R. for the assessee challenging the impugned reopening by the AO contended inter alia that since the AO initiated the reopening on wrong facts that the assessee has not filed return of income whereas the assessee has duly filed his return of income on 28.09.2010, assessee’s case falls under section 147B and not under section 147C and as such approval under section 151(2) of the Act is required to be taken; that the assessee has not paid any amount whatsoever to M/s. Durga Prasad & Co. which is the sole ground for reopening; that the AO has not made any addition on the basis of facts mentioned in the reasons recorded as to making payment of Rs.15,00,000/- to M/s. Durga Prasad & Co.; that reasons recorded by the AO for issuance of the notice under section 148 of the Act was to tax the payment alleged to have been made 4 M/s. Solvex Interchem Pvt. Ltd.
by the assessee to M/s. Durga Prasad & Co., whereas in the final order the AO made addition on account of Rs.15,00,000/- received from M /s. Govind Sharda & Co. which makes the entire proceedings invalid and relied upon the decision rendered by Hon’ble Bombay High Court in case of CIT vs. Jet Airways (I) Ltd. (2010) 195 taxman 117 (Bom.) and Hon’ble Gujarat High Court in case of CIT vs. Mohmed Juned Dadani (2013) 30 taxmann.com 1 (Gujarat); that reopening proceedings initiated under section 147/148 of the Act are merely on the basis of information received without applying his mind on vague and ambiguous reasons are not permissible; that since income element in this case is missing reopening under section 148 of the Act is not sustainable.
However, on the other hand, the Ld. D.R. for the Revenue in order to repel the argument addressed by the Ld. A.R. for the assessee, contended that the reopening in this case has been validly initiated which is based upon the audit report of the assessee.
At the very outset, the Ld. A.R. for the assessee contended that reopening in this case by the AO is not legally sustainable as addition has been made on the basis of some other grounds not mentioned in the reasons recorded. So first of all legal issue as to the validity of reopening is required to be decided.
Before proceeding further it is necessary to extract the reasons recorded by the AO to initiate the reopening proceedings under section 147 of the Act, which are as under: 5 M/s. Solvex Interchem Pvt. Ltd. 6 M/s. Solvex Interchem Pvt. Ltd.
Bare perusal of the reasons recorded for initiating the reopening by the AO goes to prove that the same are very vague and ambiguous reasons, not sufficient to reopen the assessment. Firstly, information was received from DDIT(Inv.) that high value transactions by M/s. Solvex Interchem Pvt. Ltd. were found in the bank account of M/s. Govind Sharda & Co. and M/s. Durga Prasad & Co. (proprietor Mr. Sachin S. Gaikwad), secondly on the perusal of bank detail it was found that during the period 01.04.2009 to 31.03.2010 the payment credit of Rs.15,00,000/- was made by the assessee to M/s. Durga Prasad & Co. (proprietor Mr. Sachin S. Gaikwad) and as such he has reason to believe that income of Rs.15,00,000/- has escaped assessment.
When we examine the assessment order particularly para 4, the AO in the notice issued under section 142(1) of the Act it is mentioned that the assessee has received Rs.15,00,000/- on 08.09.2009 from M/s. Govind Sharda & Co. which was repaid in March 2010 whereas in the reasons recorded it is categorically mentioned by the AO that during the period 01.04.2009 to 31.03.2010 assessee made payment credit of Rs.15,00,000/- to M/s. Durga Prasad & Co. and he has reason to believe that the said amount of Rs.15,00,000/- has escaped assessment.
11. When the AO has categorically come up with the reasons that the assessee has made payment of Rs.15,00,000/- to M/s. Durga Prasad & Co. but ultimately forgotten the same when notice under section 142(1) was issued rather introduced some new facts that the assessee has made payment of Rs.15,00,000/- to M/s. Govind Sharda & Co. it shows that the AO has not applied his mind 7 M/s. Solvex Interchem Pvt. Ltd.
while recording the reasons. Entire assessment order is based upon proving this fact that the assessee has received an amount of Rs.15,00,000/- on 08.09.2009 from M/s. Govind Sharda & Co.
The Ld. A.R. for the assessee drew our attention towards notice issued by the AO under section 142(1) of the Act which is available at page 27 and 28 of the paper book wherein the entire investigation has been concentrated upon the payment of Rs.15,00,000/- alleged to have been made by the assessee to M/s. Durga Prasad & Co. during 01.04.2009 to 31.03.2010. For ready perusal notice under section 142(1) of the Act is extracted as under: 8 M/s. Solvex Interchem Pvt. Ltd.
But all of sudden the AO dropped the issue as to making payment of Rs.15,00,000/- by the assessee to M/s. Durga Prasad & Co. but fastened the liability of the assessee on the basis of the fact that assessee has received sum of Rs.15,00,000/- from Mr. Sachin S. Gaikwad, proprietor of M/s. Govind Sharda & Co. The assessee has also not been given any opportunity by the AO to cross examine M/s. Govind Sharda & Co. on the basis of whose statement information was forwarded by DCIT.
Hon’ble Bombay High Court in case of CIT vs. Jet Airways (I) Ltd. (supra) decided the identical issue that “when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the AO could not make an assessment or reassessment on other issue which comes to his notice during the proceedings, by returning following findings: “The Explanation 3 to section 147 lifts the embargo inserted by judicial interpretation on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148 setting out the reasons for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of the Explanation 3 by the Finance (No. 2) Act, 2009. However, the Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or to render the substance and core nugatory. Section 147 has the effect that the Assessing Officer 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 section 148, he accepts the contention of the assessee and holds that the income for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped 9 M/s. Solvex Interchem Pvt. Ltd.
assessment, it is not open to him to independently assess some other income, and if he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee. [Para 16] Section 147(1), as it stands, postulates that upon the formation of a reason to believe that income chargeable to tax has escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income 'and also' any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment . The words 'and also' are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by the Parliament. This view has been supported by the background which led to the insertion of the Explanation 3 to section 147. The Parliament must be regarded as being aware of the interpretation placed on the words 'and also', by the Rajasthan High Court in CIT v. Shri Ram Singh [2008] 306 ITR 343. The Parliament has not taken away the basis of that decision. While it is open to the Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147(1), as they stood after the amendment of 1- 4-1989, continue to hold the field. [Para 17] The question of law would, accordingly, stand answered against the revenue and in favour of the assessee. The appeal was, accordingly, to be dismissed. [Para 18]”
Identical issue has also been decided by the Hon’ble Gujarat High Court in case of CIT vs. Mohmed Juned Dadani (supra) wherein substantial question of law was framed as under: “Whether the Income Tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the Assessing Officer in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him.”
Hon’ble Gujarat High Court decided the substantial question of law in favour of the assessee by returning following findings: “29. Above decision has been referred to and relied upon in several subsequent decisions. Above proposition being well settled, it is not necessary to refer to all such decisions. 30. We may also approach the question from a slightly different angle. It is not in dispute that once an assessment is reopened by a valid exercise of jurisdiction under Section 147 of the Act, it is open 10 M/s. Solvex Interchem Pvt. Ltd.
for the Assessing Officer to assess or reassess any income which had escaped assessment which comes to his light during the course of his assessment proceedings which was not mentioned in the reason for issuing notice under Section 148 of the Act. In a notice for reassessment which has been issued beyond a period of four years from the end of relevant assessment year, the condition that income chargeable to tax has escaped assessment for the reason of the failure on the part of the assessee to disclose truly and fully all material facts for the purpose of assessment must also be established unless ofcourse some other ground viz. non-filing of the return at all etc. is available to the Assessing Officer. If such non-disclosure of material facts is established with respect to the reason recorded for issuing notice for reopening the assessment, it would be open for the Assessing Officer to thereafter even assess other income which might have escaped assessment but which may not necessarily satisfy the requirement of non-disclosure of true and full material facts. If in such a situation, the stand of the revenue is accepted, a very incongruent situation would come about if ultimately the Assessing Officer were to drop the ground on which notice for reopening had been issued but to chase some other grounds not so mentioned for issuance of the notice. In such a situation, even if a case where notice for reopening has been issued beyond a period of four years, the assessment would continue even though on all the grounds on which the additions are being made, there was no failure on the part of the assessee to disclose true and full material facts. In such a situation an important requirement of failure on part of the assessee to disclose truly and fully all material facts would be totally circumvented.
As already noted, except for the Punjab and Haryana High Court in case of Majinder Singh Kang (supra) all courts have uniformly taken a view that Explanation 3 to Section 147 of the Act does not change the situation insofar as the present controversy is concerned. Leading decision of Bombay High Court in case of Jet Airways (I) Ltd. (supra) has been followed by different High Courts. In case of Jet Airways (I) Ltd. (supra) the High Court, in its elaborate decision considering the statutory provisions, different judicial pronouncements and the explanatory memorandum for introduction of Explanation 3 to Section 147 of the Act ruled in favour of the assessee.
Punjab and Haryana High Court in case of Majinder Singh Kang (supra) ofcourse has sounded a different note. We may, however, notice that the explanatory memorandum to Explanation 3 to Section 147 of the Act was not brought to the notice of the High Court in the said decision. The High Court gave considerable importance on such Explanation 3 to Section 147 of the Act and the language used therein.
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In the result, we answer the question in the affirmative i.e. in favour of the assessee and against the revenue. All tax appeals are dismissed.”
Similarly, Hon’ble Delhi High Court in case of Sh. Anugrah Varshney vs. ITO in order dated 05.04.2016 also decided the identical issue by interpreting explanation 3 to section 147 of the Act wherein the Ld. D.R. has tried to distinguish the fact of Jet Airways (I) Ltd. (supra) on the ground that at that point of time explanation 3 to section 147 of the Act was not in statute. However, the Hon’ble Delhi High Court by following the decision rendered by Hon’ble Bombay High Court in case of Jet Airways (I) Ltd. (supra) and Ranbaxy Laboratories decided the identical issue in favour of the assessee by returning following findings: “The Hon'ble Delhi High Court following the above decision of the Bombay High Court has also upheld this view in Ranbaxy Laboratories Ltd. Vs. CIT(2011)336ITR 136.
The argument of the Ld. DK that the ratio propounded in Jet Airways (Supra) and Ranbaxy Laboratories (Supra) does not apply since those cases related to assessment years when Explanation 3 to section 147 was not on the statute, we find has not merit since in the above mentioned decisions the Court has interpreted the provision of section 147 on first principle to hold that only if addition are made on account of income which the AO had reason to believe had escaped assessment that any other addition can be made. It is not Explanation 3 which had been interpreted in favour of the assessee in these cases. In fact we find that Explanation 3 empowers AO's to make assessment on any matter which comes to their notice during assessment proceedings. But the same alongwith section 147 has been interpreted as stated above. Therefore, the presence or absence of Explanation 3 to section 147 does not nullify the interpretation given by the courts in the above stated judgments. Further the argument of the Ld. DR that the reason is not rendered invalid merely because no addition has been made on account of incomes which the AO had reason to believe had escaped assessment, is also of no consequence, since as is evident from the order cited above, the courts have not held the reasons to be invalid in such cases and quashed the proceedings. The validity of the reasons had not been in issue in these cases, but the courts have interpreted the provisions of section 147 on 12 M/s. Solvex Interchem Pvt. Ltd. first principles and held that the AO had no power to assess any other income to tax unless addition is made of income which he had reason to believe had escaped assessment.
Respectfully following the above judgments, we hold that in the absence of any addition having been made on incomes which the AO had reason to believe had escaped assessment, no addition of any other income could have been made and that the AO had exceeded his jurisdiction in passing the impugned order u/s 147. The same is liable to be quashed. We quash accordingly.”
Apart from this the AO was not sure enough as to whether he has reason to believe if the high value transaction by the assessee in the bank account of M/s. Govind Sharda & Co., has escaped assessment (which itself is a vague proposition) or he is reopening the assessment on the basis of alleged payment credit of Rs.15,00,000/- by the assessee to M/s. Durga Prasad & Co., which fact he has completely ignored while framing the assessment.
In view of what has been discussed above, we are of the considered view that when the AO has reopened the assessment on the basis of vague and ambiguous reasons and during the assessment proceedings has dropped the core issue as to making the payment credit of Rs.15,00,000/- by the assessee to M/s. Durga Prasad & Co. alleged to have escaped assessment, the very initiation of the reopening is not sustainable in the eyes of law in view of the law laid down by Hon’ble Bombay High Court in case of Jet Airways (I) Ltd. (supra), Hon’ble Delhi High Court in case of Sh. Anugrah Varshney (supra) and Hon’ble Gujarat High Court in case of Mohmed Juned Dadani (supra). Since very initiation of reopening under section 147/148 of the Act is held to be invalid other grounds on merits has become academic and as such need not be decided. 13 M/s. Solvex Interchem Pvt. Ltd.
Resultantly, assessment framed by the AO and confirmed by the Ld. CIT(A) is hereby quashed and appeal filed by the assessee is allowed.
Order pronounced in the open court on 31.10.2022.