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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI INTURI RAMA RAO & SHRI S. S. VISWANETHRA RAVI
This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals) in National Faceless Appeal Centre (NFAC), Delhi dated 15-09-2023 u/s. 250 of the Income Tax Act, 1961 (‘the Act’)for the Assessment Year 2011-12.
Briefly, the facts of the case are that the appellant is an individual. Return of income for the A.Y. 2011-12 was filed on 01-03-2012 declaring total income of Rs.1,53,010/-. The said return of income was processed u/s.143(1) of the Act. Subsequently, the AO had come to know that the appellant earned profit of Rs.72,47,912/- in the commodity transactions made through Star Commodities and also incurring loss of Rs.72,32,027/- in the commodity transactions made through J.K. Enterprises of Kolhapur.
Thus, the profit Rs.15,884/- earned from the commodity transaction was not shown in the return of income. Therefore, notice u/s.148 was issued on 19-05-2016 after recording the following reasons which are extracted below :
“1. The assessee is a salaried person and had filed return of income for A.Y. 2011-12 on 01/03/2012 declaring total income of Rs.1,53,010/-. However, as per the information received from DIT (I&CI), Mumbai it is seen that the assessee has earned profit from trading in NMCE through Star Agri Commodities. In this connection on further verification it is noticed that there is also loss to the assessee from trading in NMCE through J.K. Enterprises.
2. The profit earned by assessee in respect of trading through Star Commodities is Rs.72,47,912 (74,65,083 – 2,71,171) whereas loss in respect of trading through J.K. Enterprises is Rs.72,32,027/-. Thus, resultantly there is profit of Rs.15,884/- (72,47,912 – 72,32,027) which is not disclosed by the assessee in the return of income filed for A.Y. 2011-2. Hence, income of Rs.15,884/- has escaped the assessment for A.Y. 2011-12 within the provisions of section 147 of the Income Tax Act, 1961.
3. I, therefore, consider it to be a fit case for initiating proceedings u/s.147 of the Income Tax Act, 1961, and, as such, the said proceedings are initiated.
Issue Notice u/s.148 of the I.T. Act, 1961 for A.Y. 2011-12.”
3. Against the said return of income, the assessment was completed by the AO vide order dated 28-12-2016 passed u/s.143(3) r.w.s.147 of the Act at a total income of Rs.74,00,922/-.
While doing so, the AO made addition of Rs.72,47,912/- u/s.69 of the Act by holding that the commodity transactions done through Star Commodities and J.K. Enterprises are dubious. The profit is nothing but an accommodation entry provided by the said entities to the asessee, drawing support from the Investigation carried out by the Forward Market Commission (FMC), Mumbai.
4. An appeal was filed before the CIT(A) who vide impugned order confirmed the findings of the AO.
Being aggrieved, the appellant is in appeal before us in the present appeal.
Before us, the ld. AR submitted that the AO had no jurisdiction to make addition of Rs.72,47,912/- as the AO had chosen not to make addition of Rs.15,884/-, being the profit earned from the commodity transactions, which formed the basis to believe that income escaped assessment of tax. In this regard, the ld. AR placed reliance on the following judgments :
CIT Vs. Jet Airways(I) Ltd. (2011) 331 ITR 236 (Bombay).
2. Bharati Vidyapeeth Vs. ACIT (2013) 33 taxmann.com 576 (Pune-Trib).
PCIT Vs. Alag Securities (P) Ltd. (2020) 425 ITR 658 (Bombay). 4. M.s, Laukik Paper Industries Ltd. Vs. DCIT – to 510/PUN/2020 and ITA Nos. 301 to 303/PUN/2021, dt. 24-04-2023
On the other hand, the ld. Sr.DR contends that the argument of the ld. AR cannot be accepted that the profit element of Rs.15,884/- for which notice u/s.148 was issued after recording the reasons is embedded in the addition of Rs.72,47,912/-. Thus, he contends that the ratio of the judgment of the Hon’ble Bombay High Court in the case of CIT Vs. Jet Airways(I) Ltd. (supra) has no application to the facts of the present case.
We heard the rival submissions and perused the material on record. The solitary issue in the present appeal is whether the AO had jurisdiction to make addition of Rs.72,47,912/- in the reassessment proceedings. From the reasons recorded for issuance of notice u/s.148, it is apparent that the AO sought to reopen the assessment in order to make addition of Rs.15,884/- being the amount of profit earned by the appellant from the commodity transaction. From the reading of the assessment order, it is evident that the AO had chosen not to make addition in respect of that item, however, proceeded to make addition of Rs.72,47,912/- by holding that the commodity transactions entered into by the appellant are dubious and fictitious, undertaken to bring the unaccounted income into the books of account. Without entering into the merits of the addition, we proceed to first adjudicate the jurisdictional issue, i.e. :
“Whether the AO had jurisdiction to make addition in respect of the item which does not form basis for forming opinion that income escaped assessment of tax especially, in view of the fact that no addition was made in respect of item for which the reasons were issued for by issuance notice u/s.148 of the Act. This issue is no longer res integra by virtue of the judgment of the Hon’ble Jurisdictional High Court in the Hon’ble Bombay High Court in the case of CIT vs. Jet Airways (I) Ltd., 331 ITR 236 (Bom.), the Hon’ble Delhi High Court in the case of Ranbaxy Laboratories Ltd. vs. CIT, 336 ITR 136 (Delhi) and the Hon’ble Rajasthan High Court in the case of CIT vs. Shri Ram Singh, 306 ITR 343 (Rajasthan), wherein it is held that it is not permissible for the Assessing Officer to make any other addition, if no addition is made in respect of items of which reasons were recorded for issuance of notice u/s.148.
We find it relevant to extract the operative portion of the judgment in the case of CIT Vs. Jet Airways (I) Ltd. (supra) which reads as under :
“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).
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 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."
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 & 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.
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 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.
In that view of the matter and for the reasons that we have indicated, we do not regard the decision of the Tribunal in the present case as being in error. The question of law shall, accordingly, stand answered against the revenue and in favour of the assessee. The appeal is, accordingly, dismissed. There shall be no order as to costs.”
Thus, law is settled to the extent that it is not permissible for the AO to make any other addition, if the AO had chosen not to make addition in respect of items for which reasons were recorded by issuing notice u/s.148. As discussed above, since the AO had chosen not to make addition in respect of the profit of Rs.15,884/- earned from the commodity transaction made through Star Commodities, the AO had no jurisdiction to make addition of Rs.72,47,912/- u/s.69 of the Act. The contention of the ld. Sr. DR that the addition of Rs.15,884/- is embedded in the addition of Rs.72,47,912/- made by the AO cannot be accepted. From the reading of reasons recorded in the notice u/s.148, it is evident that the AO sought to reopen the assessment in order to make addition of the profit earned from the commodity transaction amounting to Rs.15,884/-. There is not even a whisper as to the genuineness of the transaction. The very fact that the AO had sought make addition of Rs.15,884/- on the commodity transaction shows that the AO had no doubts about the genuineness of transaction. The addition of profit of Rs.15,884/- is separate and independent of addition of Rs.72,47,912/- made by the AO u/s.69 of the Act. Thus, ratio of decision in the case of Jet Airways(I) Ltd. (supra) is squarely applicable to the facts of present case. Therefore, the AO had no jurisdiction to make addition of Rs.72,47,912/-. We, therefore, direct the AO to delete the addition of Rs.72,47,912/- and the appeal filed by the assessee stands allowed.
In the result, the appeal of the assessee is allowed. Order pronounced on this 21st day of February, 2024.