THAYAPPA BALAKRISHNA,BANGALORE vs THE PRINCIPAL COMMISSIONER OF INCOME TAX, BENGALURU-1, BENGALURU

Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE

Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU

For Respondent: Shri D.K. Mishra, CIT-DR

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE

BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 1027/Bang/2024 Assessment Year : 2014-15 Shri Thayappa Balakrishna, No. 987, 11th Main, The Principal 1st Block, Commissioner of 3rd Stage, Income-tax, Basaveshwaranagar, Bengaluru – 1. Vs. Bangalore – 560 079. PAN: ABDPB4893N APPELLANT RESPONDENT : Shri Ravi Shankar .S.V, Assessee by Advocate Revenue by : Shri D.K. Mishra, CIT-DR

Date of Hearing : 22-07-2024 Date of Pronouncement : 22-08-2024

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 29.03.2024 passed by PCIT, Bengaluru – 1 u/s. 263 of the act on following grounds of appeal: “1. The order of the learned Pr. Commissioner of Income Tax, Bangalore-1 passed under section 263 of the Income

Page 2 of 24 ITA No. 1027/Bang/2024 Tax Act dated 29/03/2024 for Assessment Year 2014-15 in so far as it is against the Appellant is opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the Appellant's case. 2. The learned Pr. Commissioner of Income-tax has grossly erred in revising the order passed by the learned Assessing officer without appreciating that there is no error, much less prejudicial to the interests of the Revenue to warrant a revision and therefore the order passed by the learned Pr. Commissioner of Income Tax is ultra vires to the scope of Section 263 and requires to be cancelled under the facts and circumstances of the Appellant's case. The direction to make fresh assessment amounts to ordering for making fishing and roving enquires without any material in support thereof and consequently the impugned order passed is bad in law is liable to be cancelled. 3. The learned Pr. Commissioner of Income Tax is not justified in law in setting aside assessment order passed u/ s 147 rws 144B of the Act by holding that the assessment order is erroneous and prejudicial to the interest of revenue on the facts and circumstances of the case. 4. The learned Pr. Commissioner of Income Tax erred in invoking clause (a) to Explanation - 2 to Section 263 of the Act for passing order under Section 263 of the Act on the facts and circumstances of the case. 5. The learned Pr. Commissioner of Income-tax failed to consider the entire replies dated 26.03.2024 in response to the notice issued under Section 263 of the Act and failed to adjudicate all the issues and consequently the order passed is in violation of the principles of natural justice on the facts and circumstances of the case. 6. The learned Pr. Commissioner of Income-tax failed to appreciate that the learned PCIT has granted approval for reasons recorded for reopening the assessment order after passing the order u/s 143(3) of the Act and consequently the present proceedings amounts to reviewing the view taken by the learned PCIT and the same is impermissible in law on the facts and circumstances of the case. 7. The learned Pr. Commissioner of Income-tax erred in holding that the assessment order under consideration

Page 3 of 24 ITA No. 1027/Bang/2024 without carrying out the necessary inquiry, examination/verification on the issue of cash deposit of Rs.15,81,500/- when the reassessment order was passed by considering the reasons recorded on the facts and circumstances of the case. 8. Without prejudice the learned Pr. Commissioner failed to appreciate that if at all the department ought to have initiated the proceedings under section 263 of the Act against the assessment order passed u/s 143(3) of the Act dated 21.12.2016 and the same is time barred and consequently initiating the proceedings against the assessment order passed u/s 147 rws 144B of the Act is bad in law and without jurisdiction on the facts and circumstances of the case. 9. The learned Pr. Commissioner failed to appreciate that for the impugned assessment year there was an order passed under section 143(3) of the Act dated 21.12.2016 and no addition was made in respect of the impugned cash deposits since the appellant filed replies and thereafter an order was passed under section 147 rws 144B of the Act on 29.03.2022 and in the reasons recorded for issue of notice under section 148 of the Act the issues were different and the impugned cash deposit was not the subject matter of reasons recorded for issue of notice u/s 148 and consequently the assessment order passed under section 147 rws 144B of the Act is not erroneous and not prejudicial to the interest of the revenue for invoking the provisions of section 263 of the Act on the facts and circumstances of the case. 10. The learned Pr. Commissioner of income-tax failed to appreciate that the appellant is having source for the cash deposit a sum of Rs.15,81,500/ - on the facts and circumstances of the case. 11. The appellant craves leave of this Hon'ble Tribunal, to add, alter, delete, amend, or substitute any or all of the above grounds of appeal as may be necessary at the time of hearing. 12. For these and other grounds that may be urged at the time of hearing of appeal, the appellant prays that the appeal may be allowed for the advancement of substantial cause of justice and equity.”

Page 4 of 24 ITA No. 1027/Bang/2024 2. Brief facts of the case are as under: 2.1 The assessee is an individual and filed return of income for the AY 2014-15 on 21-11-2014 declaring total income of Rs. 22,30,740/-. Subsequently, the assessee filed revised return of income on 05-02-2016 declaring total income of Rs.7,48,360/-. The case was selected for scrutiny under CASS, and accordingly assessment was completed u/s 143(3) of the Act on 21-12-2016 assessing the income at Rs. 1,17,48,360.

2.2 The case was subsequently reopened u/s 147 of the Act, based on information related to cash deposits in the assessee's account with The Saraswat Co-operative Bank Ltd. Notice u/s 148 was issued on 31.03.2021. The reassessment proceeding was concluded u/s.147 r.w.s.144B of the Act, on 29/03/2022, assessing total income at Rs. 1,58,58,360/- in the hands of the assessee.

2.3 Thereafter on perusal of the assessment records, financials and ITS details of assessee by the Ld.PCIT, it was noticed that, apart from the cash deposits in The Saraswat Co-op bank, assessee had cash deposits to the tune of Rs.15,81,500/- in an account with Lakshmi Vilas Bank, details are as under: Date of Deposit Cash book Narration Amount Being cash deposited into 27-07-2013 Rs 5,00,000 Lakshmi Vilas Bank Being cash deposited into 14-02-2014 Rs 6,16,500 Lakshmi Vilas Bank Being cash deposited into 17-03-2014 Rs 4,65,000 Lakshmi Vilas Bank Total Rs 15,81,500

Page 5 of 24 ITA No. 1027/Bang/2024 2.4 The Ld.PCIT noted that the Ld.AO during the course of reassessment proceedings did not enquire regarding the cash found to be deposited in The Lakshmi Vilas Bank and that, no evidences is placed on record explaining the sources of such cash deposited. The Ld.PCIT thus was of the opinion that, there is lack of enquiry by the Ld.AO in passing the reassessment order, without verifying and examining cash deposited to the tune of Rs.15,81,500/- in Lakshmi Vilas Bank account.

2.5. The Ld.PCIT thus issued notice u/s.263 of the act, on 18/03/2024. The assessee in response to the notice submitted various details reproduced in the impugned order. The Ld.PCIT after considering submissions of the assessee observed as under: “5. The submission of the assessee is taken on record. personal hearing as per the request has been accorded. The assessee did not appear and reiterated the written submission. However, the same is examined and not acceptable as the addition made in the order u/s 143(3) of Rs. 1,10,00,000/- and addition made in the reopened assessment u/s 147 of the Act of Rs.41,10,000/- are cash deposits which could not be explained by the assessee which form part of the transaction in the cash book. The transaction of cash deposit in the Lakshmi Vilas Bank amounting to Rs.15,81,500/- is also forming part of the cash book as submitted in reply by the assessee. As the sources of the above two additions made could not be explained, it is construed that the said transaction of Lakshmi Vilas Bank also needs to be examined and verified for the sources. The transactions though forming a part of cash book wherein sources are explained, in the assessee's case the additions in both the orders have been made on entries forming part of the cash book. The transactions in the cash book in both the assessment orders have not been accepted by the AO and hence additions have been made. In view of the same the said sources for entries of cash deposits in Lakshmi Vilas Bank also stands unexplained and unverified. As the issue has not been examined and verified by the AO, the assessment order passed is erroneous and prejudicial to the interest of

Page 6 of 24 ITA No. 1027/Bang/2024 revenue in view of clause(a) to Explanation 2 of Section 263 of the Act.”

2.6 The Ld.PCIT also relied on following decisions in order to support the invoking of provisions u/s. 263 in the present facts of the case.  M/s. Deniel Merchants P. Ltd. vs. ITO reported in (2018) 95 taxmann.com 366(SC)  CIT vs. Paville Projects (P.) Ltd. reported in (2023) 149 taxmann.com 115(SC)

Aggrieved by the order of the Ld.PCIT, the assessee is in appeal before this Tribunal.

At the outset, the Ld.AR submitted that, assessment order u/s. 143(3) was completed after making enquiries in respect of cash deposited in Lakshmi Vilas Bank account. He submitted that in the original assessment proceedings, the assessee furnished details as called for by the Ld.AO vide notice u/s. 143(2) dated 19/10/2016, a copy of which is placed at page 4 of the paper book. The same is scanned and reproduced as under:

Page 7 of 24 ITA No. 1027/Bang/2024

3.1. He submitted that the assessee furnished bank statements of account held with Lakshmi Vilas Bank and Saraswat Co- operative Bank Ltd. The Ld.AR referring to reply dated 02/12/2016 filed by the assessee before the Ld.AO during

Page 8 of 24 ITA No. 1027/Bang/2024 original assessment proceedings submitted that the cash book and the bank statements of account with Lakshmi Vilas Bank ending with account no.30 was also furnished along with the covering letter. He submitted that cash of Rs.5 lakhs was deposited in Lakshmi Vilas Bank account on 27.07.2013, Rs. 6,16,500/- deposited on 14.02.2014. Thereafter, he submitted that sum of Rs.4,65,000/- was deposited into the said bank account on 17.03.2014, the source of the same is available in the cash book.

3.2. The Ld.AR submitted that, the assessee deposited Rs.1,70,86,500/- to the bank accounts being Lakshmi Vilas Bank and Saraswath Bank. The assessment order u/s. 143(3) of the act was passed by considering the cash deposited to Rs.1,10,00,000/- in the Saraswath Co-operative Bank account and the reassessment order passed on 29.03.2022 was passed after verifying Rs. 41,10,000/- in Saraswath Bank. He referred to submission dated 13.12.2016 filed by the assessee during the original assessment proceedings, wherein all the details pertaining to the cash deposited in both the banks were filed by the assessee.

3.3. Be that as it may, the Ld.AR referring to notice issued u/s. 148 of the act, drew our attention to the reasons recorded by the Ld.AO for the purpose of reassessment. The reasons recorded revealed that, there was prima facie opinion by the Ld.AO of income having escaped assessment amounting to Rs.41,10,000/- being the cash deposited in Saraswath Bank. He submitted that

Page 9 of 24 ITA No. 1027/Bang/2024 the scope of the reopening was in respect of alleged income having escaped assessment amounting to Rs.41,10,000/- deposited in the Saraswath Bank. He placed reliance on the reasons recorded for the reopening placed at page 16 of the paper book, the same is scanned and reproduced as under:

Page 10 of 24 ITA No. 1027/Bang/2024

Page 11 of 24 ITA No. 1027/Bang/2024

3.4. The Ld.AR submitted that, the 263 notice was issued against the reassessment order, holding that, there is a lack of enquiry by the Ld.AO in respect of the cash deposits appearing in the Lakshmi Vilas Bank account held by the assesse. The Ld.AR thus submitted that the Ld.PCIT cannot invoke the provisions u/s. 263 beyond the scope of the reasons recorded. He thus submitted that, the notice issued u/s. 263 is void-ab-initio thereby the order passed u/s. 263 is bad in law.

3.5. On the contrary, the Ld.DR emphasized that there is a lack of enquiry by the Ld.AO in respect of the cash deposits appearing in the Lakshmi Vilas Bank account held by the assessee. He also placed reliance on the observations of the Ld.PCIT in the impugned order.

3.6. The Ld.DR placed reliance on Explanation 3 to section 147 of the act, inserted by the Finance (No. 2) Act of 2009 and

Page 12 of 24 ITA No. 1027/Bang/2024 submitted that, even though the notice was issued under section 148 containing the reasons for reopening the assessment that does not contain reference to a particular issue, with reference to which income has escaped assessment, the Assessing Officer may assess or reassess the income in respect of any issue which has escaped assessment, when such issue comes to his notice subsequently in the course of the proceedings. He thus vehemently argued that provisions of section 263 has been rightly initiated in the present facts of the case.

We have perused the submissions advanced by both sides in the light of records placed before us.

It is noted that in the original assessment order dated 21.12.2016, notice u/s. 143(2) was issued calling for details of cash deposited in the account held with Saraswath Bank. It is noted that, the addition made in respect of the cash deposits found in the Saraswath Co-operative Bank amounting to Rs.1,10,00,000/- in the order passed by the Ld.AO u/s. 143(3). The Ld.AR submitted that, the assessee is in appeal against this addition before the Ld.CIT(A) which is pending.

4.1. It is noted that against the order u/s.143(3), the assessment was reopened u/s.147 to verify the cash deposited in the account held with in Saraswath Bank amounting to Rs.41,10,000/-. From the reasons recorded, we note that, there was information received according to which in the account with Saraswath Co- operative Bank Rs.1.08 crores was credited through RTGS from

Page 13 of 24 ITA No. 1027/Bang/2024 Hansraj & Co., and Rs. 41,10,000/- was deposited via cash on 20.02.2014. In the reasons recorded, it is noted that, on 21.03.2014, Rs. 1,30,00,000/- was credited through RTGS by one Mr. Rajesh Kumar and Rs. 1,10,00,000/- was deposited in cash. It is further noted, that Rs.1,10,00,000/- is added as unexplained cash credit in the original assessment proceedings. Subsequently, the assessee could not explain the source of the cash deposited amounting to Rs.41,10,000/- in Saraswath Bank. The Ld.AO was of the prima facie view that income escaped assessment. On perusal of the reassessment order passed u/s. 147 r.w.s. 144B of the act, dated 29/03/2022, Rs.41,10,000/- deposited into Saraswath Bank was added as unexplained money u/s. 69A of the act.

4.2. The Ld.PCIT initiated 263 proceedings against the order passed u/s.147 r.w.s. 144B of the act for lack of enquiry regarding cash deposited in Lakshmi Vilas Bank. As the notice u/s. 263 is issued against the order passed u/s. 147 r.w.s. 143(3) of the act, the scope of verification cannot exceed the reasons recorded for reopening the assessment. The Ld.PCIT in the present facts proceeded to enquire on an issue which is not covered under the reasons recorded for reopening the assessment. It would have been different situation if the 263 was initiated against the original assessment order dated 08.12.2016, wherein the scope was wide for the Ld.PCIT to rake up the issue of lack of verification as regards to the account held by the assessee in Lakshmi Vilas Bank.

Page 14 of 24 ITA No. 1027/Bang/2024 4.3. Regarding the argument of the Ld.DR to apply Explanation 3 to section 147 of the Act, to the fcats of the present case, it is necessary to consider the reasons for insertion of Explanation 3, found in the Memorandum explaining the provisions of Finance (No. 2) Bill of 2009. The Memorandum treats this amendment to be clarificatory and contains as under: “Some courts have held that the Assessing Officer 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 section 147 to provide 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 this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub- section (2) of section 148.” 4.4. Hon’ble Bombay High Court in case of CIT vs. Jet Airways (I) Ltd., reported in (2010)195 Taxman 117 has analysed the amendment inserted by the Finance (No. 2) Act of 2009 by observing as under: “7. In order to appreciate the reasons for the amendment inserting Explanation 3, it would be necessary to advert to some of the judgments of the High Courts, prior to the amendment. The Punjab and Haryana High Court, in its decision, in Vipan Khanna v. Asstt. CIT [2002] 255 ITR 2201 dealt with the question as to whether, after initiating proceedings under section 147 on the ground that the petitioner had claimed depreciation at a higher rate, the Assessing Officer would be justified in launching an inquiry into issues which were not connected with the claim of depreciation. This question was answered in the negative. A Division Bench of the Kerala High Court held in Travancore Cements Ltd. v. CIT [2008] 305 ITR 1701 , that upon the issuance of a notice under section 148(2), when proceedings were initiated by the Assessing Officer on issues in respect of which he had formed a reason to believe that income had escaped assessment,

Page 15 of 24 ITA No. 1027/Bang/2024 it was not open to the Assessing Officer to carry out an assessment, or reassessment in respect of other issues which were totally unconnected with the proceedings that were already initiated and which came to his knowledge during the course of the proceedings. The Division Bench held that in respect of an issue which is totally unconnected to the basis on which the Assessing Officer formed a reason to believe that income escaped assessment and issued a notice under section 148, it was open to him to issue a fresh notice by following sub-section (2) of section 148 with regard to the escaped income which came to his knowledge during the course of the proceedings. The Kerala High Court held as follows : ". . .The Assessing Officer gets jurisdiction under section 148 to assess or reassess the income which has escaped assessment only after sub-section (2) of section 148 is complied with. The question is whether sub-section (2) of section 148 has to be complied with if any other income chargeable to tax has escaped assessment, or which comes to his knowledge subsequently in the course of the proceedings. In other words, when proceedings are already on in respect of one item in respect of the income for which he had already recorded reasons is it necessary that he should record reasons for assessing or reassessing any of the items which are totally unconnected with the proceedings already initiated. Suppose under two heads, income has escaped assessment and those two heads are inter-linked and connected, the proceedings initiated or notice already issued under sub-section (2) of section 148 would be sufficient if the escaped income on the second head comes to the knowledge of the officer in the course of the proceedings. But if both the items are unconnected and totally alien then the assessing authority has to follow sub-section (2) of section 148 with regard to the escaped income which comes to his knowledge during the course of the proceedings." Hence, the view of the Punjab and Haryana High Court and the Kerala High Court was that, once the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment and proceeds to issue a notice under section 148, it is not open to him to assess or, as the case may be, reassess the income under an independent or unconnected issue, which was not the basis of the notice for reopening the assessment. 8. Parliament stepped in to correct what it regarded as an incorrect interpretation of the provisions of section 147. The Memorandum explain-ing the provisions of Finance (No. 2) Bill of 2009 states in this background that some courts had held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which reasons have been recorded for reopening the assessment and that it was not open to him

Page 16 of 24 ITA No. 1027/Bang/2024 to touch upon any other issue for which no reasons have been recorded. This interpretation was regarded by Parliament as being contrary to legislative intent. Hence, Explanation 3 came to be inserted to provide 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). 9. The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) The Assessing Officer 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 Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148; (iii) 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. 10. Now the submission of the learned counsel appearing on behalf of the assessee in the present case is that the words "and also" in section 147 postulate that the Assessing Officer may assess or reassess the income which he has reason to believe has escaped assessment together with any other income chargeable to tax which has escaped assessment and which comes to his notice during the course of the proceedings. In other words, unless the Assessing Officer assesses the income with reference to which he had formed a reason to believe within the meaning of section 147, it would not be open to 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 the proceedings. On the other hand, it has been urged on behalf of the revenue that even if, during the course of assessment or, as the case may be reassessment, the Assessing Officer does not assess or reassess the income which he has reason to believe has escaped assessment and which formed the subject-matter of a notice under section 148(2), it is nonetheless open to him to assess any other income which, during the course of the

Page 17 of 24 ITA No. 1027/Bang/2024 proceedings is brought to his notice as having escaped assessment. 11. The rival submissions which have been urged on behalf of the revenue and the assessee can be dealt with, both as a matter of first principle, interpreting the section as it stands and on the basis of precedents on the subject. 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 section 147 and following the issuance of a notice under section 148, the Assessing Officer 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. The Shorter Oxford Dictionary defines the expression "also" to mean 'further, in addition, besides, too'. The word has been treated as being relative and conjunctive. Evidently, therefore, what Parliament intends by use of the words "and also" is that the Assessing Officer, upon the formation of a reason to believe under section 147 and the issuance of a notice under section 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 Assessing Officer 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 season to believe is not assessed or reassessed, it would not be open to the Assessing Officer to independently assess only that income

Page 18 of 24 ITA No. 1027/Bang/2024 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 section 148(2), the Assessing Officer 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 section 147 with effect from 1-4-1989 clearly stipulated that the Assessing Officer 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. 12. In CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 2971 , the Supreme Court dealt with the following question of law in the course of its judgment:— "Where an item unconnected with the escapement of income has been concluded finally against the assessee, how far in reassessment on an escaped item of income is it open to the assessee to seek a review of the concluded item for the purpose of computation of the escaped income?" The issue which arose before the Supreme Court was whether, in the course of a 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. The Supreme Court held that the expression "escaped assessment" includes both "non-assessment" as well as "under assessment". Income is said to have escaped assessment within the meaning of the section when it has not been charged in the hands of an assessee during the relevant assessment year. The expression "assess" refers to a situation where the assessment of the assessee for a particular year is, for the first time, made by resorting to the provisions of section 147. The expression "reassess" refers to a situation where an 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 contemplated by Explanation 1 to section 147. The Supreme Court adverted to the Judgment in V. Jaganmohan Rao v. CIT [1970] 75 ITR 373 , which held that once an assessment is validly reopened, the previous under assessment is set aside and the Income-tax Officer has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year. The Court 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 reassessment

Page 19 of 24 ITA No. 1027/Bang/2024 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. The judgment in V. Jaganmohan Rao's case (supra) dealt with the language of sections 22(2) and 34 of the Act of 1922 while the judgment in Sun Engg. Works (P.) Ltd.'s case (supra) interprets the provisions of section 147 as they stood prior to the amendment on 1-4-1989. 13. The effect of the amended provisions came to be considered in two distinct lines of precedent on the subject. The first line of authority, to which a reference has already been made earlier, adopted the principle that where the Assessing Officer has formed a reason to believe that income has escaped assessment and has issued a notice under section 148 on certain specific issues, it was not open to him during the course of the proceedings for assessment or reassessment to assess or reassess any other income, which may have escaped assessment but which did not form the subject-matter of the notice under section 148. This view was adopted in the Judgment of the Punjab and Haryana High Court in Vipan Khanna's case (supra) and in the judgment of the Kerala High Court in Travancore Cements Ltd.'s case (supra). This line of authority, would now cease to reflect the correct position in law, by virtue of the amendment which has been brought in by the insertion of Explanation 3 to section 147 by Finance (No. 2) Act of 2009. The effect of the Explanation is that once an Assessing Officer has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice under section 148, it is open to him to assess or reassess income in respect of any other issue though the reasons for such issue had not been included in the reasons recorded under section 148(2). 14. The second line of precedent is reflected in a judgment of the Rajasthan High Court in CIT v. Shri Ram Singh [2008] 306 ITR 343 . The Rajasthan High Court construed the words used by Parliament in section 147 particularly the words that the Assessing Officer 'may 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 section 147. The Rajasthan High Court held as follows : ". . . if is only when, in proceedings under section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to

Page 20 of 24 ITA No. 1027/Bang/2024 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 section 147. To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the Assessing Officer 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 Assessing Officer 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 Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147." 15. Parliament, when it enacted the Explanation (3) to section 147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions. When it effected the amendment by bringing in Explanation 3 to section 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain courts that the Assessing Officer has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise embarked upon by "Parliament in the form of Explanation 3 consequently provides that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice under section 148(2). The decisions of the Kerala High Court in Travancore Cements Ltd.'s case (supra) and of the Punjab & Haryana High Court in Vipan Khanna's case (supra) would, therefore, no longer hold the field. However, insofar as the second line of authority is concerned, which is reflected in the judgment of the Rajasthan High Court in Shri Ram Singh's case (supra), Explanation 3 as inserted by Parliament would not take away the basis of that decision. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab & Haryana High Court in CIT v. Atlas Cycle Industries [1989] 180 ITR 3191. The decision in Atlas Cycle Industries' case (supra) held that the Assessing Officer did not have jurisdiction to proceed with the reassessment, once he found that the two grounds mentioned in the notice under section 148 were incorrect or non-existent. The decisions of the Punjab &

Page 21 of 24 ITA No. 1027/Bang/2024 Haryana High Court in Atlas Cycle Industries' case (supra) and of the Rajasthan High Court in Shri Ram Singh's case (supra) would not be affected by the amendment brought in by the insertion of Explanation 3 to section 147.- 16. Explanation 3 lifts the embargo, which was 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 Explanation 3 by the Finance Act (No. 2) of 2009. 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. 17. We have approached the issue of interpretation that has arisen for decision in these appeals, both as a.matter of first principle, based on the language used in section 147(1) and on the basis of the precedent on the subject. We agree with the submission which has been urged on behalf of the assessee that 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

Page 22 of 24 ITA No. 1027/Bang/2024 Parliament. Our view has been supported by the background which led to the insertion of Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words "and also" by the Rajasthan High Court in Shri Ram Singh's case (supra). Parliament has not taken away the basis of that decision. While it is open to 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.” 4.5. We therefore based on the above interpretation by Hon’ble Bombay High Court in case of CIT vs. Jet Airways(supra), do not find any force in the argument of the Ld.DR.

4.6. We now refer to the decision of Malabar Industrial Co. Ltd. Vs. CIT reported in (2000) 243 ITR 83 Hon’ble Supreme Court inter alia laid down that, the prerequisite for the exercise of jurisdiction by the CIT under section 263 is that, the order of the AO must be erroneous in so far as it is prejudicial to the interests of Revenue. The CIT has to be satisfied of twin conditions, namely : (a) The order of the AO sought to be revised is erroneous, and (b) It is prejudicial to the interests of the Revenue. If one of them is absent i.e; if the order of the AO is erroneous, but is not prejudicial to the revenue or if it is not erroneous, but is prejudicial to the interest of the revenue, recourse cannot be had to section 263(1) of the Act. It was further held that, the provisions of section 263 cannot be invoked to correct each and every type of mistake or error committed by the AO.

Page 23 of 24 ITA No. 1027/Bang/2024 4.7. Further, in case of Jamnadas T. Mehta Vs. ITO reported in (2002) 257 ITR (AT) 90 (Pune) (TM), it was held that, the ambit of interference under section 263 is not to set aside merely unfavourable orders and bring to tax some more money to the treasury. The section is not enacted to get a sheer escapement of revenue which is taken care of in other provisions of the Act. Prejudice that is contemplated under section 263 is the prejudice to the income-tax administration as a whole. Section 263 is to be invoked not as a jurisdictional corrective or as a review of a subordinate’s order in exercise of the supervisory power, but it is to be invoked and employed only for setting right distortions and prejudices to the revenue, which is a unique conception, which is to be understood in the context of and in the interests of the revenue administration.

4.8. In view of the aforesaid legal precedents, the provisions of section 263 of the Act, could not be invoked in the present facts of the case in the order passed under section 147 of the Act, where the scope of reassessment is limited only to the reasons recorded.

4.9. The Ld.PCIT in the present facts proceeded to enquire on an issue which is not covered under the reasons recorded for reopening the assessment. We do not find any merit in the present proceedings initiated against the order u/s. 147 r.w.s. 143(3) on an issue that falls outside the scope of reasons recorded. We therefore of the opinion that the notice issued u/s. 263 dated 18.03.2024 is void-ab-initio as a consequence of which

Page 24 of 24 ITA No. 1027/Bang/2024 the order passed u/s. 263 dated 29.03.2024 has to be declared to be bad in law. Accordingly, the grounds raised by the assessee stands allowed. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 22nd August, 2024.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22nd August, 2024. /MS /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order

Assistant Registrar, ITAT, Bangalore

THAYAPPA BALAKRISHNA,BANGALORE vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX, BENGALURU-1, BENGALURU