S.PRAVEEN KUMAR,CHENNAI vs. ITO WARD 1 (TIRUVALLUR), KANCHEEPURAM

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

Assessee in this appeal, which is directed against an order

dated 27.04.2018 of ld. Commissioner of Income Tax (Appeals)-7,

Chennai, is aggrieved that re-assessment was done on the items of

income which was not mentioned in the notice issued u/s.148 of the

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Income Tax Act, 1961 (in short ‘’the Act’’). Further, grievance of the

assessee is that addition was made for closing stock undervaluation

ignoring the method of valuation of stock, accepted in the earlier

years.

jeweller had filed his return for the impugned assessment year

disclosing income of �8,81,160/-. As per the ld. Authorised

Representative, the assessment was completed u/s.143(3) of the Act

on 27.03.2014 wherein an addition of �1,50,000/- was made for

improper maintenance of stock register. Further, to this, as per the ld.

Authorised Representative, assessee received a notice dated

01.06.2015 u/s.148 of the Act seeking a reopening of the assessment.

According to the ld. Authorised Representative, the assessee

thereupon requested the ld. Assessing Officer to provide with the

reasons for resorting to a reopening. Contention of the ld. Authorised

Representative was that in the reasons supplied to the assessee, it was

mentioned that assessee had credited �6,62,620/- as long term

capital gains in his capital account but had not admitted such sum

while computing his taxes. However, as per the ld. Authorised

Representative, during the re-assessment proceedings, explanation

given by the assessee on the long term capital gains through sale of

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shares, which was exempt and credited in the capital account was

provided by the assessee and the ld. Assessing Officer had accepted

such claim of the assessee after examining the evidence. However, as

per the ld. Authorised Representative, ld. Assessing Officer despite

finding the explanation given by the assessee to be satisfactory,

proceeded to do a reassessment on a different footing. According to

him, ld. Assessing Officer made an addition for closing stock difference

of �49,13,436/- computed by applying first in first out (FIFO) method,

whereas assessee had valued stock on average cost method.

According to the ld. Authorised Representative, assessee’s appeal

before ld. Commissioner of Income Tax (Appeals) did not meet with

any success. Contention of the ld. Authorised Representative was that

once the issue on which reopening was resorted to, was no longer

found to be valid, then a reassessment could not be made on items of

income which were not related thereto. Reliance was placed on the

judgment of Hon’ble Jurisdictional High Court in the case of Martech

Peripherals Pvt. Ltd. vs. DCIT, (2017) 394 ITR 0733.

Per contra, ld. Departmental Representative submitted that 3.

reopening done was valid since income had escaped assessment on

account of non verification of the claims of the assessee, in the

original round of assessment. According to him, assessee did not

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follow a proper method of valuation of stock and hence ld. Assessing

Officer was justified in applying FIFO method and valuing the stock.

We have considered the rival contentions and perused the 4.

orders of the authorities below. The reason why the assessment

which was completed u/s.143(3) of the Act was reopened is given at

para 3 of the assessment order. This is reproduced hereunder:-

‘’In the case, an assessment order u/s.143(3) of the I.T. Act, 1961 for A.Y. 2011-12 was passed on 27.03.2014 by making an addition of �1,50,000/- and raising demand of �65,431/-. During the course of assessment proceedings, the assessee had furnished detailed called for. It can be seen from the Balance Sheet that the assessee has credited a sum of �6,62,620/- in his capital as long term capital gain. However, the assessee has not admitted the same in computing the taxable income for the above year. This was not considered at the time of passing asst. order. Thus, the above amount of �6,62,620/- escaped assessment for the above assessment year.

The addition made in the impugned reassessment completed on

28.12.2016 appears at para 7 of the said order, which is reproduced

hereunder:-

‘’7. In the instant case and in consideration of above facts and findings as discussed above, I have no option but proceed to adopt FIFO method in valuing the closing stock as on 31.03.2011 as under:-

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Opening stock (old items) : 3,685.450 Add: Purchase (new items) : 29,612.026 --------------

Total : 33,297.476 Sales : 29,488.407 ---------------- Balance (closing stock) : 3,809.069 ----------------

Apparently, the balance stock i.e., closing stock as on 31.03.2011 is new items and cost price should be adopted at �1,978 per gram. Thus, the closing stock value as on 31.03.2011 comes to �75,34,338/- as against the assessee’s claim of closing stock value of �26,20,902/-. There is no short admission of closing stock value for an amount of �49,13,436/- and the same is brought to tax on account of difference in closing stock value. Accordingly, this is added to the income assessed u/s.143(3)’’.

With regard to the reason for which reassessment was resorted to,

ld. Assessing Officer has specifically noted at para 5 of his order, that

assessee had explained the long term capital gains with necessary

evidences. There was no addition whatsoever made for the reason

cited in the notice issued under Section 148 of the Act. In our

opinion, once the alleged escaped of income, is found not to be any

escapement at all, then an addition made for items other than on

which the reopening was attempted would not stand. This is the law

laid down by Hon’ble High Court in the case of Martech Peripherals

Pvt. Ltd. (supra). What was held in paras 14 to 26 of the judgment is

reproduced hereunder:-

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‘’14. Having heard the learned counsel for the parties and perused the records, according to me, in so far as the first submission of the petitioner is concerned, it has been conceded by the counsel for the respondents- Revenue that objections filed by the petitioner-assessee to the notice issued by respondent No. 2, for reopening of the assessment, have not been disposed of. 14.1. The mandate of law requiring the Revenue to dispose of the objections is clearly set out in the Supreme Court's judgment rendered in : GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC). 14.2. For the sake of convenience, the relevant extract is set out here inafter (page 20) : "We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under section 148 of the Income-tax Act is issued, the proper course of action for the notice is to file a return and if he so desires, to seek reasons for issuing notices. The Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the notice is entitled to file objections to issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the Assessing Officer has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years." 14.3. Thus, having regard to the observations made by the Supreme Court, it is clear that the impugned assessment order cannot be sustained, as the objections have not been disposed of. 15. Therefore, had the counsel for the petitioner-assessee not advanced the second submission, which I would deal with hereafter, I may have been inclined to set aside the assessment order on that limited ground alone. Since, the second submission has been made, which is substantive in nature, I would like to deal with the same. 16. In so far as the contention of the petitioner-assessee is concerned, that the impugned order does not seek to

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reassess its income qua the issue, which formed the basis for reopening the assessment — the respondents/ Revenue sought to rely upon Explanation 3 introduced in Finance (No. 2) Act, 2009, albeit, with retrospective effect, i.e., April 1, 1989. Besides the Explanation, reliance was also placed on the judgment of the Punjab and Haryana High Court in the matter of : Majinder Singh Kang v. CIT [2012] 344 ITR 358 (P&H) ; [2012] 25 taxmann.com 124 (P&H). 17. In order to deal with this submission, it may be relevant to refer to the relevant provisions of section 147 of the Act. "147. Income escaping assessment.—If the Assessing Officer, has reason to believe that 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 and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceed ings 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 sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub- section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub- section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year : Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year :

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Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is charge able to tax and has escaped assessment. . . . Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer 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- section (2) of section 148.". (emphasis is mine) 18. A perusal of the aforesaid extract of section 147 of the Act would show that, if, the Revenue makes an attempt to reopen the assessment, within a period of four (4) years from the date, when, the relevant assessment year ends, then, all that the Assessing Officer has to show is that, he has reason to believe that any income chargeable to tax has escaped assessment for the concerned assessment year and while doing so, he is also empowered to assess any other income, which has escaped assessment and, which comes to his notice, subsequently, albeit, during the course of the assessment proceedings. 18.1. It is only if the original assessment is made under section 143(3) or under section 147 and an attempt to reopen the assessment is made after the expiry of the four (4) years from the end of the relevant assessment year, that the first proviso to section 147 of the Act kicks in, which mandates that no reassessment proceedings can be initiated unless the escapement of income is occasioned by either the reason of failure on the part of the assessee to file a return under section 139 or, in response to notice issued under section 142(1) or section 148 or, on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for carrying out the assessment for the relevant assessment year. 18.2. Since, in the instant case, the original assessment was made under section 143(1) of the

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Act and the notice under section 148 of the Act for reopening of assessment was issued well within the period of four (4) years, the respondents-Revenue was not required to satisfy the conditions contained in the first proviso. 18.3. Having said so, the Assessing Officer even in such circumstance has to have a reason to believe that income chargeable to tax has escaped assessment, which necessarily is required to be based on the information that the Assessing Officer would have received after the completion of the assessment, and not based on a mere change of view, as that would be conferring an arbitrary power of review on the Assessing Officer, which is not contemplated under the Act. 18.4. To be noted, the power vested in the Assessing Officer under section 147 read with section 148 of the Act is a power of reassessment and not a power of review. 18.5. It is for this reason, that an amendment was made via the Amending Act of 1989, whereby, the expression "has reason to believe", was reintroduced in section 147 of the Act, after it had been substituted by the expression "for reasons to be recorded by him in writing, is of the opinion . . . ". This amendment was brought about, as, according to the Revenue, it wanted to allay the apprehensions of the assessees that reopening of assessment could be made on a mere change of opinion. (See CIT v. Kelvinator of India Ltd. [2002] 256 ITR 1 (Delhi) [FB] ; [2002] 99 DLT 221). 18.6. Thus, in other words, reassessment can only take place, if there is tangible material available in the hands of the Assessing Officer in the form of information, which was not available to him at an earlier point in time. 19. In the instant case, the reasons supplied by respondent No. 2 vide communication dated July 25, 2012 showed that the notice under section 148 of the Act to reopen the assessment was issued on account of reduction in the investments made in mutual funds (from Rs. 2,52,00,000, for the year ending March 31, 2007 to

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Rs. 2,26,21,274, for the year ending March 31, 2008), which had not been shown/offered to tax in the form of gain or loss, on account of the sale of investments made in mutual funds. This information, perhaps, was available on record, as the assessee, in his objections dated August 30, 2012, adverted to the fact that the reduction in investment was brought about consequent to redemption being made at par. Respondent No. 2 having, perhaps realised the futility of going down this path and, having, during the course of reassessment proceedings, discovered this aspect of the matter, chose to tax the forfeited share application money, on the ground that, it was a receipt, which was taxable in the hands of the petitioner-assessee under the provisions of section 28(iv) of the Act. 20. The petitioner-assessee, however, challenges this action of the respondents-Revenue, on the ground that it was not permissible for the respondents-Revenue to tax the forfeited share application money, by taking recourse to provisions of section 147 read with section 148 of the Act, unless it assesses to tax that income with reference to which the Assessing Officer had formed reason to believe (within the meaning of section 147), that it had escaped assessment. 21. To my mind, a careful reading of section 147 of the Act would show that it empowers an Assessing Officer to reopen the assessment, if, he has reason to believe, that any income chargeable to tax has escaped assessment for the relevant year, "and also bring to tax", any other income, which may attract assessment, though, it is brought to his notice, subsequently, albeit, in the course of the reassessment proceedings. 21.1. To put it plainly, the purported income discovered subsequently during the course of reassessment proceedings, can be brought to tax, only, if the escaped income, which caused, in the first instance, the issuance of notice under section 148 of the Act, is assessed to tax. 22. Explanation 3, to my mind, supports this approach, which emerges upon a plain reading of the said provision, along with the main part of section 147 of the Act. The emphasis in this behalf is on the expression "and also bring to tax" appearing in the main part of section 147 in

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relation to the right of the Revenue to assess taxable income discovered during reassessment proceedings. In my view, Explanation 3, clearly, expounds that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and such other issue, that comes to his notice subsequently, albeit, in the course of proceedings held under section 147 of the Act. In other words, if, notice for reopening of the assessment was issued on one aspect, and in the course of reassessment proceedings another aspect was discovered, the reassessment order would be valid, only if, the aspect, which led to the reopening of assessment, continues to form part of the reassessed income. 23. This view, as has been correctly submitted by the learned counsel for the petitioner-assessee, has found resonance with at least three (3) High Courts, i.e., the Bombay High Court, the Gujarat High Court and the Delhi High Court in the following cases : (i) CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom) ; (ii) CIT v. Mohmed Juned Dadani [2013] 355 ITR 172 (Guj) ; Manu/ GJ/0061/2013 ; and (iii) Oriental Bank of Commerce v. Addl. CIT Manu/DE/1935/2014. 23.1. The only High Court, which has taken a contrary view, as it were, is the Punjab and Haryana High Court in the matter of : Majinder Singh Kang v. CIT [2012] 344 ITR 358 (P&H) ; [2012] 25 taxmann.com 124 (P&H). 23.2. In my opinion, with respect, the court, in rendering the judgment in Majinder Singh Kang's case, ignored the fact that the provisions of Explanation 3 had to be read in conjunction with the main provision, and that, the said Explanation cannot override the main provision. 23.3. This aspect of the matter has also been brought to fore by the Bombay High Court in : CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom).

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23.4. The relevant observations made in this behalf are extracted hereafter (page 247) : "However, 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 render the substance and core nugatory. Section 147 has this 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 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 section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee." (emphasis is mine) 24. This takes me to the last submission made on behalf of the respondents- Revenue, which is that, there is an alternative remedy available to the petitioner and, therefore, the instant writ petition should not be entertained. 25. To my mind, it is now far too well settled that in relegating a party to an alternative remedy, the court employs self-restraint. This, however, does not exclude the power of the court to entertain a writ petition, especially, when, the challenge is raised, inter alia, on the ground of absence of jurisdiction and/or breach of the principles of natural justice. 26. In this case, that the impugned order is assailed on the ground that the concerned authority lacked jurisdiction in the matter. The fact that this charge is established is evident, upon a bare perusal of the record of the case. The foregoing discussion qua the merits of the case would show that the impugned order was passed by concerned authority, even though, the necessary

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jurisdictional facts were absent and without dealing with the objections filed by the assessee qua the notice issued to it for reopening the assessment’’. 26.1. Accordingly, the objection advanced by the Revenue, in this behalf, would have to be rejected’’.

Accordingly, we are of the opinion that reassessment done for the impugned assessment year cannot stand the test of the law. Such reassessment is set aside.

Order pronounced on Tuesday, the 11th day of December, 2018, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन)) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated: 11th December, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF