IN THE INCOME TAX APPELLATE TRIBUNAL,
AGRA BENCH, AGRA
BEFORE SHRI P.K. BANSAL, ACCOUNTANT MEMBER AND
SHRI H.S. SIDHU, JUDICIAL MEMBER
ITA No. 315 & 316/Agra/2009
Asstt. Year : 2003-04 & 2004-05
A.C.I.T. - 3, vs. Shree Maheshwari Industries, Mathura. 4, Ras Behari Sadan, Vrindavan, Mathura.
(PAN : AAHFS 7159R)
C.O. No. 01 & 02/Agra/2010
(in ITA No. 315 & 316/Agra/2009)
Asstt. Year : 2003-04 & 2004-05
Shree Maheshwari Industries, vs. A.C.I.T. - 3, 4, Ras Behari Sadan, Mathura. Vrindavan, Mathura.
(Appellant) (Respondent)
For Revenue : Shri Vinod Kumar, Jr. D.R.
For Respondent : Shri M.M. Agarwal, FCA
ORDER
Per P.K. Bansal, A.M. :
Both the appeals by Revenue and cross-objections by the assessee arising out of the
order of CIT(A) dated 14.05.2009 since involve the common issues, therefore, for the sake of
convenience, are disposed of by this common order.
2. The effective grounds taken by the Revenue in both the appeals are common except the
change in the figure. In ground No. 1(a) relating to the deletion of lump sum addition, the figure
is Rs.80,000/- in the assessment year 2003-04 while in the assessment year 2004-05, the figure is
Rs.25,000/-. The name of the parties in the assessment year 2004-05 is only Jain & Jain of 2
Jodhpur while in the assessment year 2003-04 in ground No. 1, there are five parties. Both the
leaned AR and DR agree that the ground involved are common and, therefore, they argued the
case for the assessment year 2003-04 only.
3. Ground No.3 in the cross-objections since not pressed in both the years, therefore, the
same stand dismissed in both the years.
4. The rest of the effective grounds in Revenue's appeal as well as in cross-objection for
assessment year 2003-04 read as under :
Ground in ITA No. 315/Agra/2009 (A.Y. 2003-04):
"1. That the Ld. CIT(Appeals)-1, Agra has erred in law and on the facts and circumstances of the case in deleting the additions in respect of loan credits in the names of M/s. Shri Ram Gum and Chemicals, Jodhpur, Smt. Vidhya Devi Jain, M/s. Jain & Jain, M/s. Ashish Trading co., M/s. Dhoot Gum & Chemicals of Jodhpur accepting some fresh evidences which were not produced before the AO, in violation of Rule 46A and ignoring the fact that even on remand for verification of such loans the assessee has failed to produce the books and supporting evidences for verification such loan credits.
1.a). In doing so, the CIT(A)-1, Agra has erred in law and on the facts and circumstances of the case in deleting the lump sum addition in respect of misc. claims without proper supporting documents to the extent of Rs.80,000/-.
1. b). In doing so, the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in directing the AO to treat the impugned income of rent from factor building and machinery under the head ' Income from house property' in contrary to the same held to be as business income by the AO."
Grounds in C.O. No. 01/Agra/2010 (A.Y. 2003-04):
"1. Because learned CIT(Appeals) has erred in law in not adjudicating the validity of initiation of proceedings under section 148 of the Act and in not 3
quashing the initiation of proceedings itself more particularly in view of the fact that :-
(a). The proceedings were initiated on the basis of findings recorded by the AO for assessment year 2005-06 that rental income declared by the assessee was required to be assessed as 'profits and gains of business and profession'.
(b). The said findings recorded by the AO for assessment year 2005-06 were wrong in the facts as well as under the law.
(c). The said findings were reversed by order dated 20.04.2009 passed by Hon'ble Tribunal in ITA No. 153/JU/2009, who directed the income to be assessed und3r the head 'income from house property'.
(d). In view of the findings of Hon'ble Tribunal for assessment year 2005-06, the 'reasons' for initiating proceedings under section 148 were vitiated under law and the said proceedings could not be allowed be continued.
2. Because on a due consideration of legal position, learned CIT(Appeals) has erred in not appreciating that once the addition/disallowance in respect of amount for which proceedings for assessment/re-assessment were initiated, is deleted, no other income could be assessed.
4. Because on due consideration of undisputed facts to the effect that :-
(a). There was no change in the constitution of the assessee necessitating it to file certified copy of partnership deed, which is required for the year, when there is change in the terms of partnership as per provisions contained under section 184(2) of the Act.
(b). Certified copy of partnership deed was filed by the assessee alongwith the return of income for assessment year 1999-2000.
(c). Copy of partnership deed was filed before learned CIT(Appeals) and the original thereof was available with the assessee during the course of appellate proceedings.
(d). The remuneration received by the partners was assessed in their hands and such material was produced during the course of assessment proceedings itself.
Learned CIT(Appeals) has erred on facts as well as in law in sustaining the disallowance of Rs.1,20,000/- towards remuneration payable to the partners of the assessee."
4
5. Since in the cross objection, the assessee has taken the legal ground about initiation of
proceedings u/s. 148, we, therefore, are taking ground No. 1 & 2 of the cross-objection first
before taking the revenue's appeal.
6. The learned AR vehemently contended that the proceedings u/s. 148 were initiated by the
Assessing Officer on the basis of the finding given in the assessment year 2005-06 that the rental
income declared by the assessee was to be assessed as 'profits and gains of the business or
profession'. It was pointed out that in the assessment year 2005-06, ultimately, the Tribunal vide
order dated 20.04.2009 directed the Assessing Officer to assess the income under the head
'income from house property' as was returned by the assessee. It was contended that since the
basis of the reasons itself does not remain in existence in view of the order of the Tribunal for the
assessment year 2005-06, the initiation of proceedings becomes bad in law and the proceedings
so initiated must be annulled.
7. The learned DR, on the other hand, vehemently contended that the initiation of
proceedings were valid. Referring to the reasons to believe as recorded at page 85 of the paper
book, it was pointed out that the proceedings were initiated by recording independent reasons
and the reasons nowhere speak that the proceedings were initiated on the basis of the finding in
the assessment year 2005-06. At the time of initiation of proceedings, the Assessing Officer must
have bona fide belief. Therefore, we have to see that circumstance at the time of initiation of the
proceedings and the court cannot look into the sufficiency of the reasons. 5
8. We have carefully considered the rival submissions alongwith the orders of the tax
authorities below. We noted that in this case, the Assessing Officer reopened the assessment by
recording following reasons on 29.11.2006 :-
"The assessee filed its return showing net income of Rs.1,68,640/- after set off of depreciation of Asstt. Year 2002-03, which included business income of Rs.3,00,834/- and rental income of Rs.5,12,400/-. In computation of income, the assessee has claimed standard deduction u/s. 24(a) @ 30% of the rent received shown by it to the tune of Rs.2,19,600/- inter alia previously the assessee was running its business as manufacturer in the factor premises which is let out to one M/s. Jodhpur wood Crafts Pvt. Ltd., New Delhi/Jodhpur. As per agreement between both the parties, the deed of lease was executed only for 11 months and thereafter it was renewed again for 11 months, which shows mens rea of the assessee to take over the factory as early as possible as per clause (7) of the lease deed. The lessee utilized this factory premises for commercial purpose only, not for residential, after any addition/alteration. Thus, the prop4rty never lose its nature of business. The assessee had a profit motive in its mind and made temporary arrangement to earn some profit when he was unable to run the factory business due to financial crisis. Therefore, the rent receipts shown by the assessee was net profit under the head "income from business and profession", for which it was not entitled for any deduction, whatsoever, it may be. But the assessee had claimed deduction u/s. 24(a) as stated supra, which was not allowable. Accordingly, I have reason to believe that income of the assessee has escaped assessment within the meaning of section 147 of the IT Act. Issue notice u/s. 148."
9. The reasons nowhere state that the proceedings u/s. 147 have been initiated on the basis
of the findings given in assessment year 2005-06.
10. The relevant provisions of section 147 of the Income-tax Act read as under :
"147. If the AO 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 proceedings under this section, or recompute the 6
loss or the depreciation allowance or any other allowance, as the case may be, for the a.y. concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).
Provided that where an assessment under subsection (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.
Explanation 1.- Production before the assessing officer of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2- For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment namely:-
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax.
(b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the assessing officer that the assesssee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return.
(c) Where an assessment has been made, but-
(i) income chargeable to tax has been under assessed;
or
(ii) such income has been assessed at too low a rate; or 7
(iii) such income has been made the subject of excessive relief under this act; or
(iv) excessive loss or depreciation allowance or any
other allowance under this act has been computed.
11. From the plain reading of the aforesaid section, it is clear that for applicability of section
147, the AO must have 'reason to believe'. The word 'reason' in the phrase 'reason to believe'
would mean cause or justification. If the assessing officer has a cause or justification to think or
suppose that income had escaped assessment, he can be said to have a reason to have a reason to
believe that such income had escaped assessment. The words 'reason to believe' cannot mean
that the AO should have finally ascertained the facts by legal evidence. It only means that the
AO forms a belief from the examination he makes and information that he receives. If he
discovers or finds or satisfies prima-facie himself that the taxable income has escaped
assessment, it would amount to saying that he has reason to believe that such income had
escaped assessment. The justification for his belief is not to be judged from the standards of
proof required for coming to a final decision. His formation of the belief is not a judicial
decision, but an administrative decision. The decision to initiate the proceedings is not to be
preceded by any judicial or quasi-judicial enquiry. 'Reason to believe' has been the matter of
judicial scrutiny by the apex court in several cases. In the case of Calcutta Discount Co Ltd v.
ITO 41 ITR 191 (SC), it was observed that it is the duty of the assessee to disclose all the
primary facts which have a bearing on the liability of income earned by the assessee being
subjected to tax. It is for the AO to draw inferences from the facts and apply the law determining
the liability of the assessee. The assessee cannot draw the conclusions drawn by the AO and
once the conclusion is drawn and the assessment order framed, the AO cannot at a later point of
time form a different opinion by giving a second thought to the facts disclosed by the assessee,
holding that he committed an error in computing taxable income and reopen the assessment u/s 8
147. Discovery of new and important matters or knowledge of fresh facts which were not
present at the time of original assessment would constitute a 'reason to believe' that income had
escaped assessment' within the meaning of section 147. Our aforesaid view is supported by the
following cases decided by Hon'ble apex court : -
i) Phool Chand Bajrang Lal v. ITO 203 ITR 456, 477;
ii) ALA Firm v. CIT 189 ITR 285, 298;
iii) Indian and Eastern Newspaper Society v. CIT
119 ITR 996, 1004; and
iv) ITO v. Lakhmani Mewal Dass 103 ITR 437, 445
12. The words "reason to believe" are stronger than the words "is satisfied". The belief
entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasons or in
other words, it must base on the reasons which are relevant and material. The court cannot go
into the adequacy or sufficiency of reasons which have weighed with the ITO in coming to the
belief. But the court can certainly examine whether the reasons are relevant or having bearing on
the matter, in regard to which he is required to entertain a belief before he can issue notice u/s.
148. Our this view is duly supported by the following decisions :
(i). Ganga Saran & Sons Pvt. Ltd. vs. ITO, 130 ITR 1 (SC) (ii). ITO vs. Nawab Mir Barkat Ali Khan Bahadur, 97 ITR 239 (SC) (iii). Rajendra Woollen Mills Ltd. vs. ITO, 236 ITR 34 (SC).
13. The belief must be in good faith and cannot be a pretence. The expression reason to belief
does not mean a temporary subjective satisfaction on the part of the Assessing Officer. This view
is taken by Hon'ble Supreme Court in the case of S. Narayanappa & Others vs. CIT, 63 ITR 219
(SC). The belief must be that of the honest and reasonable person based upon reasonable ground 9
and the Assessing Officer may act on direct or circumstantial evidence, but not on mere
suspicion, gossip or rumor. The Assessing Officer would be acting without jurisdiction if the
reasons for his belief that the conditions are satisfied does not exist or is not material or relevant
to the belief required by the section. The use of extraneous and irrelevant material in arriving that
conclusion would vitiate the conclusion of facts. There must be direct nexus between the
conclusion of fact arrived at by the Assessing Officer concerned and the primary facts upon
which the conclusion is based. Whether the reasons recorded by the Assessing Officer are valid,
bona fide or not that has to be looked into at the time of recording of the reasons, i.e., the validity
of the reasons have to be looked into at the time of initiation of the proceedings. If the Assessing
Officer can legitimately form an opinion that income chargeable to tax has escaped assessment
on the basis of the material gathered while recording the reasons, in our opinion, the initiation of
the proceedings u/s. 147 is valid. Subsequent decision of the court cannot affect the bona fide of
the reasons recorded at the time of initiation of the proceedings.
14. Coming to the facts of the present case, although, the learned AR vehemently argued that
the assessment has been reopened by the Assessing Officer on the basis of findings given in
assessment year 2005-06, but the reasons nowhere speak so. As is clear from the reasons, the
Assessing Officer has referred to the lease agreement between the assessee and one M/s. Jodhpur
Wood Craft Pvt. Ltd., New Delhi/Jodhpur, which was executed for 11 months and thereafter, the
same was renewed for further 11 months. It is mentioned that the assessee was running its
business as manufacturer in the factory premises which was let out by the assessee. The
Assessing Officer was of the opinion that the property is used for the business pruposes and it
did not lose its nature of business and the assessee has made temporary arrangement to earn 10
some profit by letting out the factory and, therefore, he was of the view that the income was
assessable under the head 'income from business' and the deduction u/s. 24(a) was not allowable
to the assessee. Therefore, to that extent, there is escapement of income. In our opinion, there
exists reasonable ground for the Assessing Officer to form the said belief and this itself is
sufficient to cloth him with the jurisdiction to issue notice u/s. 148. It is not a case where the
Assessing Officer does not have the belief that there had been escapement of income. What the
learned AR wants to argue is that there are no sufficient reasons for the belief. This, in our
opinion, cannot be looked into by this Court. The expression reason to believe does not mean an
arbitrary subjective satisfaction on the part of the Assessing Officer. The court can only examine
whether reasons for the formation of belief have a rational connection or not. This rational
connection has to be examined only at the time when the reasons were recorded and the
proceedings u/s. 147 were initiated. If in another year subsequently, the addition made on the
said basis, got deleted, in our opinion, will not affect the formation of the belief by the Assessing
Officer as on the date of initiation of the proceedings to be non-bona fide. Hon'ble Supreme
Court in ACIT Vs. Rajesh Jhaveri Stock Brokers P Ltd 291 ITR 500 has held that a the stage of
issue of notice under section 148 what is required is only reason to believe but no the established
fact of escapement of income. The relevant head note are reproduced here under:-
" At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable ;person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing officer."
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15. We, accordingly, uphold the proceedings, initiated u/s. 147 valid. Thus, the ground No. 1
taken in the cross objection stands dismissed.
16. Ground No. 2 in the cross-objection also relate to the legal issue. The contention of the
learned AR is that once the additions made by the Assessing Officer on the basis of which the
assessment has been re-opened, got deleted by the ITAT and if the Assessing Officer had made
the addition in respect of any other income, the re-assessment no more remains invalid. He
contended that during the assessment year 2005-06, the Tribunal has held that the income from
letting out of the factory premises has to be assessed under the head 'income from house
property' In view of this the basis of escaped income for which the reason to believe were
recorded, no more remains in existence. In this regard, he relied on the recent decision of
Hon'ble Mumbai High Court in the case of CIT vs. Jet Airways India Ltd., 331 ITR 236, which
has confirmed the decision of Rajasthan High Court in the case of CIT vs. Shri Ram Singh, 217
CTR (Raj.) 345. For this, our attention was drawn to page 122 to 139 of the paper book. Reliance
was also placed on the decision of Agra Bench in the case of ITO vs. Sanjay Goyal ITA No.
149/Agra/2008 and Sanjay Goyal vs. ITO in Cross objection No. 48/Agra/2008 and contended
that in that case, the Assessing Officer made the addition in respect of reasons recorded for the
escapement of income but that addition was deleted in appeal and the Tribunal dismissed the
appeal of the Revenue. The Bench pointed out that now with retrospective effect, Explanation 3
has been added u/s. 147 to nullify the decision of Rajasthan High Court and due to the
Explanation-III even the decision of Agra Bench gets over-ruled. But he relied on the decision of
the Mumbai High Court in the case of CIT vs. Jet Airways India Ltd. (supra). 12
17. We have carefully considered the rival submissions and have perused the orders of the
tax authorities below. As has been pointed out by us earlier while disposing of the ground No. 1
of the cross-objection, the re-assessment proceedings have been initiated by recording the
reasons that the assessee was allowed statutory allowance out of income @ 30% u/s. 34 of the IT
Act and the rental income was to be assessed under the head 'income from business'. The first
appellate authority has decided that the rental income has to be assessed in the case of assessee
under the head 'income from house property'. The Tribunal has also decided in the case of
assessee for the assessment year 2005-06 that the rental income has to be assessed under the head
'income from house property'. Thus, the income was assessed under the head 'income from
house property'. After the order of the Appellate Authority, the basis of the escaped income for
which the reasons to believe were recorded, no more remains in existence. Section 147
empowers the Assessing Officer to assess or re-assess such income for which the reasons were
recorded and other income chargeable to tax which has escaped assessment. Explanation-3,
which was inserted in section 147 by the Finance Act, 2009 w.e.f. 01.04.1989, reads as under :
"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."
18. The Hon'ble Mumbai High Court, as relied upon by the learned AR, while interpreting
this explanation in the case of CIT vs. Jet Airways India Ltd. (supra) under para 6 to 9 has held
as under :
"6. The effect of Explanation 3 which was inserted by the Finance (No.2) Act of 2009 is that even though the notice that has been issued under section 148 13
containing the reasons for reopening the assessment does not contain a 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. The reasons for the insertion of Explanation 3 are to be found in the Memorandum Explaining the Provisions of the Finance (No.2) Bill of 2009. The Memorandum treats the amendment to be clarificatory and contains the following explanation ([2009] 314 ITR (St.) 183, 206) :
"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."
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.
8. The Punjab and Haryana High Court in its decision in Vipan Khanna v. CIT [2002] 255 ITR 220 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. Asst. CIT [2008] 305 ITR 170, 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 relieve that income had escaped assessment, 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 14
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 (page 178) :
"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 pro- ceedings."
Hence, the view of the Punjab and Haryana High Court and the Kerala 10 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.
11. Parliament stepped in to correct what it regarded as an incorrect interpretation of the provisions of section 147. The Memorandum Explaining the Provisions of the 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 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).
12. 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 15
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 sec- tion 148(2) does not include a particular, issue with respect to which income has escaped assessment, he may none the less assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently to the course of the proceedings under the section."
After dealing the arguments of the assessee as well as the various case laws, cited before them
including the decision of Rajasthan High court in the case of CIT vs. Shri Ram Singh (supra)
Hon'ble High Court has held as under in para 22 :
"Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment of 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 (No.2) Act 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."
19. From the said finding of Hon'ble Mumbai High Court, it is apparent that if the Assessing
Officer accepted the contention of the assessee and did not make any addition in respect of the
income for escapement of which he has recorded the reasons and initiated the proceedings u/s. 16
147, he cannot assess any other income until and unless he issues the fresh notice u/s. 148. This
decision, in our opinion, will not be applicable to the facts of the case of the assessee. In the case
of the assessee, the Assessing Officer did not accept the contention of the assessee, but made the
addition in respect of escaped income for which he has recorded the reasons and initiated the
proceedings u/s. 147. The Assessing Officer assessed the income from letting out the factory
under the head 'income from business'. The additions so made by the Assessing Officer were
ultimately deleted by the first appellate authority. Under these facts, we cannot say that the
assessing officer did not make any addition on the basis of the reasons to believe recorded by
him. The decision of Hon'ble High Court in Jet airways (supra) will therefore, support the case
of the revenue. Recently the similar issue has arisen before Full Bench of Kerala High Court in
the case of CIT vs. Best Wood Industries and Saw Mills (2011) 331 ITR 63 (Ker)(FB) in which
it was held:
"What is clear from section 147 of the Income-tax Act, 1961 is that once assessment is reopened after recording reasons, for bringing to tax any income that has escaped assessment in terms of sections 148 to 153, the Assessing Officer has to complete the assessment by following the provisions of the Act as if the return furnished against notice under section 148 is one filed under section 139 of the Act and has to assess or reassess such income and also any other income chargeable to tax which has escaped assessment. This means that so far as the procedure to be followed is concerned, there is no difference between income escaping assessment and regular assessment because the provisions generally provide for issue of notice, hearing of the assessee and taking of evidence, etc., which are the same for regular assessment and income escaping assessment.
Original assessments completed in the case of the assessee for the assessment years 2001-02 and 2002-03 were reopened under section 147 of the Act to disallow excess depreciation granted on motor vehicles. However, in the course of reassessment under section 147, the Assessing Officer noticed that the assessee had not explained various trade credits and brought to tax the unexplained trade credits as income under section 68 of the Act. The assessee challenged the validity of the reassessment on the ground that the Assessing Officer had exceeded his jurisdiction under section 147 and both the first appellate authority as well as the Tribunal accepted the assessee's contention holding that so far as the 17
reassessments related to assessment of unexplained trade credits, they were invalid. On appeal:
Held, allowing the appeals, that the reassessments were valid and the orders of the Tribunal to the contrary were not sustainable."
Therefore, we do not agree by the learned AR and we are of the view that the Explanation 3
will equally be applicable in the case of the assessee, as the Assessing Officer made the addition
for the escaped income for which he has recorded the reasons and initiated the proceedings u/s.
147 of the Act. Thus, ground No. 2 taken by assessee in both the years stand rejected.
20. Ground No.3 in cross-objections, since not pressed, stands dismissed.
21. Ground No. 4 of the cross objection relates to the disallowance of the remuneration to the
partners. The facts relating to this ground are that the Assessing Officer while framing the
assessment, disallowed remuneration paid to the partners, as the assessee did not file the
partnership deed and stated that it has been misplaced. When the assessee went in appeal before
the CIT(A), the assessee filed copy of partnership deed before the CIT(A), but the CIT(A)
disallowed the same in the absence of original partnership deed being filed by the assessee.
22. We have heard the rival submissions and considered the same. In our opinion, when the
assessee claims deduction for any expense, the onus is on the assessee to prove the genuineness
of the expenditure. The assessee has claimed partners' remuneration at Rs.1,20,000/-. The
Assessing Officer asked for the partnership deed which was not filed and it was stated that the
partnership deed was misplaced. The copy of the partnership deed was filed before the CIT(A), 18
as appears from the submissions, reproduced at page 24 of the CIT(A)'s order. We may point out
that the remuneration to the partners is allowable u/s. 37 of the Income-tax Act being the
expenditure incurred wholly and exclusively for the purpose of business. Section 40(b) puts an
embargo and restricts the allowance of the remuneration. Sub-clause (v) of section 40(b) clearly
states that remuneration has to be allowed to a working partner authorized in accordance with the
terms of the partnership deed. It also lays down the aggregate amount to which the remuneration
will not exceed. We, therefore, in the interest of justice and far play to both the parties, set aside
the order of CIT(A) on this issue and restore this issue to the file of the Assessing Officer with
the direction that the Assessing Officer shall allow the deduction to the assessee in respect of the
remuneration paid to the partners to the extent as laid down u/s. 40(b)(v) provided the assessee
complies with the conditions given u/s. 40(b)(v). Thus, this ground is allowed in both the
assessment years for statistical purposes.
ITA No. 315 & 316/Agra/2009 (A.Y. 2003-04 & 2004-05:
23. The ground No. 1 relate to the deletion of addition by the CIT(A) in violation ofRule 46A
and ignoring the fact that even on remand for verification of such loans the assessee has failed to
produce the books and supporting evidences for verification such loan credits. The facts relating
to this ground are that the Assessing Officer made addition in respect of following cash credits in
the income of the assessee on the basis of annexure to Form 3CD, as the assessee failed to
produce any person for verification. Even though in some cases, the assessee filed the copy of
account of the respective parties. The details of such credits are as under :
For A.Y. 2003-04 :
19
Name of parties Amount Copy of a/c produced Shri Ram Gum & Chemicals, Jodhpur 2,00,000 produced
Smt. Vidhya Devi Jain, Jodhpur. 1,00,000 Copy of a/c filed Copy of bank a/c filed
M/s. Jain & Jain, Jodhpur 5,00,000 Copy of confirmation filed Copy of bank a/c not filed
M/s. Ashish Trading Co. 2,54,100 Copy of a/c in books filed Copy of bank a/c not filed.
M/s. Dhoot Gum & Chemicals, Jodhpur 2,36,156/- Copy of a/c in books filed Copy of bank a/c not filed.
For A.Y. 2004-05:
M/s. Jain & Jain, Jodhpur 1,00,000 Copy of confirmation filed Copy of bank a/c not filed
The assessee went in appeal in both the years again the additions of the said cash credit before
the CIT(A). Before the CIT(A), the assessee submitted fresh evidences in the shape of
confirmation of the parties, copy of bank accounts etc. The CIT(A) asked for the remand report
vide letter dated 04.03.2008 and reminder was sent on 15.09.2008. The Assessing Officer
submitted the remand report vide letter dated 20.10.2008 and 03.03.2009. The Assessing Officer
pointed out that the assessee has not produced the books of account and in absence of which the
evidences or explanation given by the assessee is not verifiable. The CIT(A) subsequently
deleted the addition by relying on the fresh evidence filed by the assessee without recording the
reasons for admitting the fresh evidence. The learned DR relied on the order of Bench of this
Tribunal in ITA No. 314/Agra/2009 in the case of the assessee dated 18.02.2010 and pointed out
that this issue is duly covered by the decision of this Tribunal. The facts and circumstances
involved in this case are similar to that case.
20
24. The learned AR vehemently contended that this is not the case of fresh evidence. The
assessing officer was given sufficient opportunity by the CIT(A). He called for the remand
report. If the Assessing Officer remained inactive, the assessee cannot be penalized.
25. We have carefully considered the rival submissions. We have also gone through the
decisions of this Tribunal. We noted that similar issue in the assessment year 2002-03 has come
up before this Tribunal, in which the undersigned while sitting in SMC Bench vide order dated
18.02.10 held as under :
"6. I have heard the rival submission and perused the material alongwith the order of the CIT(A). I noted that the assessee made an application under Rule 46A for admission of the fresh evidence. The CIT(A) thereon called for the report of the A.O. especially on the following points :-
(i) Admission of additional evidence u/s.46A of I.T. Rules, 1962 with regard to the unsecured loans treated as unexplained cash credits in the assessment orders for which bank statements and
confirmations have now been furnished by the appellant.
(ii) In A.Y. 2003-04 amount of Rs.2 lac added towards loan received from Shree Ram Gum & Chemicals, Jodhpur, is stated to be
advance received against sale of goods made on 28.03.2003, to the same party and hence accounted for in sales. This fact should be verified from the books of account.
(iii) In the context of certain additions on account of unsecured loans, the AO has observed that there was cash deposit in the bank account of the concerned creditors. Hence, the availability of cash in the hands of the creditors on the date of deposit should be verified.
(iv) In A.Y. 2003-04, addition of Rs.1 lac has been made on account of credit standing in the name of Smt. Vidya Devi Jain of Jodhpur. The same is stated to have been erroneously made on account of wrong narration of entries. This fact should be verified.
21
(v) Supporting evidence/material/reasons to justify the above and other additions vis-a-vais the arguments made by the appellant in detail in the paper book should be forwarded to this office.
For the above purpose, the case records for A.Y. 2002-03
to 2005-06 are returned herewith to be re-sent along with the requisite report. The paper book is also enclosed herewith. The case records should be re-sent to this office along with the requisite report by 04.02.2009."
7. In reply thereto, the A.O. submitted a report dated 03.03.2009. The relevant paragraph is reproduced below :-
"The assessee has failed again to substantiate the claims
even in the remand proceedings and to produce the books of accounts in the absence of which no evidence or explanation is verifiable. Hence, any sort of fresh evidence should not be accepted and the orders of the Assessing Officer deserve to be upheld. It is found that the AO had correctly appreciated the facts of the case and had applied the provisions of the Act in a right manner. Hence, the ground and objections raised by the assessee are misplaced and liable to be rejected."
8. The CIT(A) subsequently after giving opportunity to the assessee, deleted the addition in each of the case made under section 68 of the Act. I noted that Rule 46A(2) requires the CIT(A), before admission of the fresh evidence under rule 46A(1), to record his reasons in writing for the admission of the fresh evidence. In this case, the CIT(A) has not recorded any reasons for admitting the fresh evidence. Further, I noted that in the remand proceedings, the assessee did not produce the books of accounts as desired by the A.O. as the CIT(A) in the remand proceedings has asked the A.O. to verify certain facts. These facts, in my opinion, could have been verified only after verifying the books of accounts. Thus, I am of the view that it is a case where the CIT(A) has accepted the fresh evidence and decided the appeal on the basis of the fresh evidence without giving proper opportunity to the A.O. to examine these evidences or documents. Rule 46A(3) of the Income-tax Rules, 1962 makes it obligatory on the part of the CIT(A) to allow reasonable and proper opportunity to the A.O. to examine the evidence or documents or to cross-examine the witness produced by the assessee or to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the assessee. The A.O. in the remand proceedings has asked the assessee to produce the books of accounts but the assessee since did not produce those books, in my opinion, in the absence of non- production of the books of accounts by the assessee before the A.O. will not be 22
regarded that the A.O. had the proper opportunity to examine the evidence or document which were produced by the assessee before the CIIT(A). Natural justice demands that if the assessee produced any document or evidence before the CIT(A), the A.O. should have been given proper opportunity to examine those evidences. Even an assessment under section 143(3) has to be passed on the basis of the evidence or the books of accounts produced by the assessee. The CIT(A) has asked the A.O. to remand on the specific point as has been reproduced hereinabove. In my opinion, without verifying the books of accounts, the report could have not been given by the A.O. No doubt, the accounts of the assessee has duly been audited but neither section 142 nor section 145 nowhere provides that in case the accounts are audited by a Chartered Accountant under section 44AB, the A.O. will not have the power to examine the books of accounts under section 142 or under section 145 of the Act. Non production of the books of accounts by the assessee, in my opinion, will tantamount to that the assessee either does not have any book or the books of accounts maintained by the assessee are not correct or are not complete or the method of accounting has not been properly followed. The inference will be drawn against the assessee as the assessee failed to discharge the obligation cast on him in view of the provisions stated under section 142(1)(ii). The auditor, in my opinion, carried out the audit under section 44AB of the Act cannot enter into the shoe of the A.O. and his satisfaction of the correctness and completeness of the accounts of the assessee is not binding on the A.O. The A.O., under section 145(3) read with section 142(1)(ii) is empowered to examine the accounts of the assessee independently and has to arrive at a finding on his own satisfaction about the accounts of the assessee. Before me, there is no assertion on behalf of the assessee that it was not given fair and adequate opportunity to produce the books of accounts. Proceedings under the Income Tax Act are different from the criminal proceedings. In criminal proceedings, the oral evidence is relevant to decide whether the accused has committed any offence or not but this is not the case. In Income Tax proceedings, the income cannot be determined on the basis of the oral evidence and on some of the assessees that it has maintained regular books of accounts without producing the same before the A.O. for his examination/verification. The CIT(A) has asked for the report of the assessee why factual aspect relating to the entries in the books of accounts of the assessee in respect of certain creditors. The A.O. asked the assessee to produce the books but the assessee did not produce the books but the CIT(A) allowed the relief to the assessee without taking the cognizance that in fact the verification which was desired by him from the A.O. remains incomplete due to the non- cooperation of the assessee. Under these facts and circumstances of the case, I noted that the assessee has filed detailed evidence before the CIT(A), the copy of which is available before me to prove the identity of the creditor, genuineness of the transaction and the creditworthiness of each of the creditor but, in my opinion, no prejudice will be caused to the assessee if these evidences are verified by the A.O. as it will meet the end of natural justice. I, accordingly, set aside the order of the CIT(A) so far ground no.1 of Revenue's appeal is concerned and restore this issue to the file of the A.O. with the direction that the assessee will file all the necessary evidences which has been submitted before the CIT(A) to prove 23
the identity of the creditor, genuineness of the transaction and the creditworthiness of the creditor. The assessee is also free to produce any evidence on which he may rely so that he can discharge the onus as envisaged under section 68 of the Act to prove that all the 3 ingredients inbuilt under section 68 of the Act. Thus, this ground is allowed for statistical purposes."
26. Respectfully following the aforesaid decision in the case of the assessee for the
assessment year 2002-03, we set aside the order of CIT(Appeals) relating to ground No.1 of
Revenue's appeal and restore this issue to the file of Assessing Officer with the direction that the
assessee will file all necessary evidence which were submitted before the CIT(A) to prove the
identity, creditworthiness of the creditors and the genuineness of the transactions. The assessee is
also free to produce any evidence on which he may rely so that he could discharge the onus as
envisaged u/s. 68 of the Income-tax Act to prove that all the three ingredients inbuilt u/s. 68 of
the Act are satisfied. Thus, this ground is allowed for statistical purposes.
27. The second issue relate to the deletion of lump sum addition in respect of miscellaneous
expenses claimed. Both the leaned AR and DR agree that the similar issue has been taken in the
assessment year 2003-04 and whatever view taken in assessment year 2003-04, the same view
may be taken in the assessment year 2004-05.
28. We have carefully heard the rival submissions of both the parties and considered the
same. We noted that the similar issue has arisen in ITA No. 314/Agra/2009 for the assessment
year 2002-03. While disposing of the appeal of the Revenue, this Tribunal has, in which the
undersigned was the author while sitting in SMC Bench, vide order dated 18.02.2010, held as
under :
24
"11. I have heard the rival submissions and carefully considered the same. I am of the opinion that the assessee has submitted the details in respect of each and every expenditure. The A.O., without specifically pointing out any expenditure to which the assessee failed to prove or which has not been incurred for the purpose of business, made a lumpsum disallowance on adhoc basis for a sum of Rs.3,00,000/-. Once the assessee has submitted the details of the expenditure, in my opinion, the onus gets shifted to the Revenue to point out the specific expenditure which has not been wholly and exclusively incurred for the purpose of business. No adhoc disallowance can be made merely on the basis of suspicion and conjecture. Under these facts, I am of the view that the CIT(A) was correct in law in reducing the disallowance to Rs.50,000/- and I, accordingly, confirm the order of the CIT(A). Thus, this ground of appeal is dismissed."
Respectfully following the said order, we dismiss the ground taken by the Revenue.
29. The third issue in revenue's appeal relates to the head of income from house property.
The brief facts of the case are that the assessee has shown rent amounting to Rs.7,32,000/- from
letting out part of the factory premises under the head 'income from house property' and claimed
deduction u/s. 24(a) amounting to Rs.2,19,600/-. During the assessment year 2005-06 also, such
rental income was assessed. When the matter went before the CIT(A), the CIT(A) directed the
Assessing Officer to assess the income under the head income from house property and allow
deduction u/s. 24(a) of the Act.
30. At the time of hearing, the ld. A.R. drawn our attention towards page nos.87 to 91 of the
order of I.T.A.T., Jodhpur Bench in the case of assessee namely Shree Maheshwari Industries in
ITA No.153/Ju/2009 dated 20.04.2009 in which the Tribunal has taken the view that the rental
income in the case of the assessee will be under the head 'income from house property'. The
relevant finding of the Hon'ble Tribunal in the A.Y. 2005-06 are reproduced as under:-
"I have heard the parties and have carefully perused the material on record. The assessee's claim before the authorities below was that the factory had permanently been closed with no scope of revival and as such the property was let out and yielded income from house property. The assessing authority thus 25
has erred in bringing to tax the income as the income from business of the assessee without considering the subsequent events that establish the correctness of claim of the assessee. It is by now a well settled law by the judgement of Hon'ble Supreme Court in the case of Rabindra Kumar vs. State of West Bengal AIR 1975 SC 1409 that events or circumstances coming into existence after commencement of the proceedings which have impact on the right to relief must be considered and judged. Even otherwise the judgment rendered by Hon'ble Rajasthan High Court in the case of CIT vs. Hotel Ratanada International Pvt. Ltd. (2007) 293 ITR 557 supports the claim of the appellant for bringing to tax the income from house property. I, therefore, allow the ground in appeal raised by the assessee."
31. Respectfully following the decision of the co-ordinate Bench, we are of the view that no
interference is called for in the order of the CIT(A) in directing the A.O. to assess the rental
income by letting out a part of the premises of the assessee under the head 'income from house
property'. Thus, this ground of appeal is also dismissed.
32. In the result, both the appeals as well as cross objections are partly allowed for statistical
purposes.
Order pronounced in the open court on 25.3.11.
Sd/- Sd/- (H.S. SIDHU) (P.K. BANSAL) Judicial Member Accountant Member
Dated: 25th March, 2011
*aks/-
Copy of the order forwarded to :
1. Appellant
2. Respondent
3. CIT(A) By order
4. CIT, concerned
5. DR, ITAT, Agra
6. Guard file Assistant Registrar
True copy