2000 (7) TMI 2 - HC - Income Tax

Petitioner's 50% depreciation claim reduced to admissible 40%; s.147 reopening limited to escaped assessment, unrelated inquiries vacated

Vipin Khanna Versus Commissioner of Income Tax And Others.

Petitioner's claim of 50% depreciation (admissible 40%) justified initiation of proceedings under s.147; petitioner could not make a fresh depreciation ... Claim of depreciation worked out to an amount higher than what was claimed in the return - initiated proceedings under section 147 - escaped assessment due to excessive claim of depreciation by issuing notices under section 148 - HELD THAT:- From the facts already noticed it is absolutely clear that the petitioner has claimed depreciation in the returns at the rate of 50 per cent. and he has nowhere disputed the fact that the admissible rate of depreciation to him was 40 per cent. This fact alone was sufficient for the Income-tax Officer to initiate proceedings under section 147 of the Act as has been done in the present case. It is interesting to note that on the one hand the petitioner maintains that he is entitled to higher depreciation yet on the other hand while filing the returns in response to the notices under section 148 of the Act, he has once again claimed the same amount of depreciation as claimed in the original return. Even otherwise the petitioner could not possibly be allowed to make a fresh claim of depreciation in the proceedings under section 147 of the Act as has been held by the Supreme Court in the case of Sun Engineering Works (P.) Ltd.'s case [1992 (9) TMI 1 - SUPREME COURT]. Thus, no fault can be found in the action of the Income-tax Officer in initiating proceedings under section 147 of the Act. Whether after initiating the proceedings under section 147 of the Act on the ground that the petitioner had claimed depreciation at a higher rate, the Assessing Officer would be justified in launching inquiry into the issues which were not connected with the claim of the depreciation - HELD THAT:- During the course of arguments, the petitioner has time and again emphasised that the original assessments for the assessment years 1992-93 and 1993-94 had been framed under section 143(1)(a) of the Act on March 31, 1994 and May 5, 1994, respectively. At the outset we may mention that under the new procedure of assessment introduced with effect from April 1, 1989, the processing of a return under section 143(1)(a) of the Act cannot be equated with framing of an assessment. Prior to the amendment, the Assessing Officer could frame an assessment under section 143(1) of the Act without requiring the presence of the assessee. Alternatively, he could issue a notice under sub-section (2) of section 143 of the Act and require the assessee to produce his books of account and other evidence in support of the return filed by him and thereafter frame an assessment under sub-section (3) of section 143 of the Act. Therefore, it was necessary that an assessment order either under sub-section (1) or under sub-section (3) of section 143 of the Act had to be passed. However, after the amendment made with effect from April 1, 1989, the position has materially changed. Thus, it is evident that the Board itself concedes that if the assessee after furnishing the return of income does not receive a notice under section 143(2) of the Act within the stipulated period he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return. Here it needs to be clarified that in the Board's circular the stipulated period has been referred to as six months as it was the period specified originally when the new provision was introduced with effect from April 1, 1989. However, vide amendment made by the Finance (No. 2) Act, 1991, this period was enhanced to twelve months with effect from October 1, 1991. In the present case it is an admitted position that no notice under section 143(2) of the Act had been served to the petitioner within the stipulated period and as such his return had become final. Examine the validity of the letter dated July 30, 1998 (annexure P-5), issued by the Assistant Cornmissioner which has been upheld by the Deputy Commissioner vide his order dated October 26, 1998 (annexure P-7) - amendment made in section 147 of the Act with effect from April 1, 1989 - HELD THAT:- We are satisfied that the letter dated July 30, 1998, issued by the Assessing Officer in so far as it relates to matters unconnected with the issue of depreciation as also the directions issued by the Deputy Commissioner under section 144A of the Act dated October 26, 1998, cannot be sustained. The same are hereby vacated. The Assessing Officer will now proceed with the assessment under section 147 of the Act in accordance with law. For the sake of clarification, we may repeat that nothing observed by us in this case would debar the Assessing Officer to bring to tax any other item of income which may have escaped assessment and which comes to his notice during the course of the proceedings under section 147 of the Act. However, for this purpose, he cannot be allowed to make fishing inquiries to probe if any other income had escaped assessment or not. Such inquiries can only be permitted if in the first instance some material comes to his notice to suggest that some other item of income may have escaped assessment or had been underassessed. In that event, he would be perfectly justified in requiring the petitioner to furnish the requisite information on such other issue as well. The writ petition is, therefore, allowed in the above terms Issues Involved:1. Validity of proceedings initiated u/s 147 of the Income-tax Act.2. Scope of inquiry permissible in proceedings u/s 147.3. Applicability of Supreme Court decisions in the context of amended sections 143 and 147.Summary:1. Validity of proceedings initiated u/s 147 of the Income-tax Act:The petitioner, proprietor of Khanna Engineers, Pathankot, was assessed to income-tax by the ITO, Pathankot. For the assessment years 1992-93 and 1993-94, the petitioner claimed depreciation on trucks at 50% instead of the admissible 40%. The ITO issued notices u/s 148 to rectify this, initiating proceedings u/s 147 on December 31, 1996, for both years. The court held that the ITO was justified in initiating proceedings u/s 147 as the petitioner had claimed excessive depreciation, which constituted a valid reason for believing that income had escaped assessment.2. Scope of inquiry permissible in proceedings u/s 147:The petitioner contended that inquiries in proceedings u/s 147 should be confined to the issue of excessive depreciation and not extend to other unrelated matters. The court noted that after the amendment of section 147 effective April 1, 1989, the Assessing Officer can assess not only the escaped income but also any other income that comes to notice during the proceedings. However, the court emphasized that such inquiries must be based on material suggesting escapement of income and should not be general fishing inquiries. The court vacated the Assistant Commissioner's letter dated July 30, 1998, and the Deputy Commissioner's directions dated October 26, 1998, as they related to matters unconnected with the depreciation issue.3. Applicability of Supreme Court decisions in the context of amended sections 143 and 147:The petitioner relied on the Supreme Court decision in CIT v. Sun Engineering Works Pvt. Ltd. [1992] 198 ITR 297, arguing that the scope of proceedings u/s 147 should be limited to the issue of escaped income. The Deputy Commissioner, however, relied on V. Jaganmohan Rao v. CIT [1970] 75 ITR 373, interpreting it to mean that the entire assessment could be reopened. The court clarified that the Supreme Court in Sun Engineering Works Pvt. Ltd.'s case had explained that reassessment proceedings are confined to the escaped income and do not reopen the entire assessment. The court held that the amendments to sections 143 and 147 did not negate this principle.Conclusion:The court allowed the writ petition, vacating the impugned letter and directions, and directed the Assessing Officer to proceed with the assessment u/s 147 in accordance with law, limiting inquiries to issues connected with the escaped income unless material suggesting other escapements comes to notice.