2008 (5) TMI 200 - HC - Income Tax

Revenue's appeal dismissed as reassessment proceedings under sections 148/147 invalid due to non-existing facts

COMMISSIONER OF INCOME-TAX Versus SHRI RAM SINGH

The HC dismissed revenue's appeal, upholding the tribunal's decision that reassessment proceedings under sections 148/147 were invalid. The tribunal ... Scope and limits of the Assessing Officer's jurisdiction to initiate and continue reassessment proceedings under Sections 147 and 148 - reason to believe - income chargeable to tax has escaped assessment - HELD THAT:- From the language of Section 147, it much is clear, that the sine-qua-non for conferment of jurisdiction on the Assessing Officer, to initiate proceedings under that Section is, that he should have 'reason to believe' that 'any income chargeable to tax has escaped assessment for any assessment year' and that, being that situation, being available, i.e. the Assessing Officer having entertained a 'reason to believe', obviously on valid grounds, he acquires the jurisdiction to assess or reassess 'such income', which obviously means, the income, which was chargeable to tax, and had escaped assessment for any assessment year, according to his 'reason to believe', and while so assessing or reassessing, he can also, in addition, assess or reassess 'any other income chargeable to tax which has escaped assessment and which may come to his notice subsequently in the course of proceedings under Section 147'. It is established principle of interpretation of statutes, that the parliament is presumed to be not extravagant, in using the words, and therefore, every word used in the Section, is required to be given its due meaning. In our opinion, if in the course of proceedings under Section 147, the Assessing Officer were to come to 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. The result of the aforesaid discussion is, that the question framed, in the order dated 23.5.2006, is required to be, and is, answered in the manner, that the Tribunal was not justified in holding, that the proceedings for reassessment under Section 148/147 were initiated by the Assessing Officer, on non-existing facts, because ultimately the assessee has been able to explain the income, which was believed to have been escaped assessment, was explainable. It is further held, that the Assessing Officer was justified in initiating the proceedings under Section 147/148, but then, once he came to the conclusion, that the income, with respect to which he had entertained 'reason to believe' to have escaped assessment, was found to have been explained, his jurisdiction came to a stop at that, and he did not continue to possess jurisdiction, to put to tax, any other income, which subsequently came to his notice, in the course of the proceedings, which were found by him, to have escaped assessment. Appeal is dismissed. The core legal questions considered in this judgment revolve around the scope and limits of the Assessing Officer's jurisdiction to initiate and continue reassessment proceedings under Sections 147 and 148 of the Income Tax Act. Specifically, the issues include: (1) Whether the Assessing Officer can continue reassessment proceedings and make additions to income on grounds other than those on which the proceedings were originally initiated, after the initial reason to believe that income had escaped assessment is found to be baseless or explained; (2) The interpretation of the phrase 'such income and also any other income' in Section 147, and whether the jurisdiction to assess 'other income' depends on the continued existence of the original 'reason to believe'; and (3) The validity of reassessment proceedings initiated on facts later found to be non-existent or explained by the assessee.Regarding the first issue, the legal framework is Section 147 of the Income Tax Act, which permits the Assessing Officer to reassess income if he has 'reason to believe' that income chargeable to tax has escaped assessment. The section further permits assessing '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.' The Court examined the language of Section 147, focusing on the conjunctive word 'and' and the adverb 'also,' emphasizing that every word in a statute must be given effect. The Court reasoned that the jurisdiction to assess 'any other income' is contingent upon the existence of the original 'reason to believe' regarding the 'such income.' If the Assessing Officer, during the proceedings, concludes that the income initially suspected to have escaped assessment was in fact properly explained and not escapement of income, then the jurisdiction to continue reassessment and assess other income ceases.Precedents were extensively considered, including the Punjab and Haryana High Court decision in Atlas Cycle Industries, which held that if the grounds for reassessment do not exist, the Assessing Officer lacks jurisdiction to proceed further. The Supreme Court's decision in Bankipur Club Ltd. was cited, which similarly emphasized that the existence of material justifying reassessment is a prerequisite for jurisdiction. The Court distinguished judgments cited by the Revenue (such as Rajesh Jhaveri Stock Brokers and Jagan Nath Singhal) as primarily dealing with the sufficiency of 'reason to believe' at the initiation stage, not with the continuation of jurisdiction once the initial reason is found invalid during reassessment.In applying these principles to the facts, the Court noted that the original reason for reopening the assessment was based on an apparent discrepancy in the purchase price of a plot of land, suspected to be from undisclosed income. The assessee explained that the purchase was funded from agricultural income, which was duly accounted for and withdrawn by cheque from a firm's books. The Assessing Officer accepted this explanation and found no escapement of income on this ground. However, the Assessing Officer proceeded to make additions on a different ground-unexplained cash deposits made by the assessee in the firm's books during a short period. The Court held that since the original 'reason to believe' was negated by the explanation, the Assessing Officer's jurisdiction to reassess ceased, and he could not validly continue to assess other income discovered during the proceedings.The Court analyzed the competing arguments: the Revenue argued that Section 147 permits assessment of other income discovered during reassessment proceedings regardless of the fate of the original reason to believe, citing the literal wording and Supreme Court precedents on the scope of 'reason to believe.' The assessee contended that the jurisdiction is strictly limited to the income originally believed to have escaped assessment, and if that belief is found to be baseless, the proceedings must end. The Court sided with the assessee's interpretation, emphasizing statutory construction principles and the need to avoid rendering words like 'also' redundant.On the second issue concerning statutory interpretation, the Court undertook a detailed linguistic and purposive analysis of Section 147. It rejected the Revenue's contention that 'and' should be read as 'or' to allow assessment of other income independently. The Court explained that such reading would make 'also' redundant and distort the statutory scheme. The Court concluded that the phrase 'such income and also any other income' means that the Assessing Officer's jurisdiction to assess other income is conditional upon the continued existence of the original income which he had reason to believe had escaped assessment.Regarding the third issue, the Court found that the reassessment proceedings were initiated on a non-existing fact (the alleged undisclosed source for land purchase), which was satisfactorily explained by the assessee. The Tribunal had held that the notice under Section 148 was ab initio void, and the reassessment proceedings were illegal. The Court agreed with this conclusion insofar as the Assessing Officer's jurisdiction to continue proceedings after the initial reason to believe was negated was concerned. However, it upheld the initiation of proceedings itself as valid. The Court clarified that the Assessing Officer was justified in issuing the notice under Section 148 based on the initial material, but once the initial reason was disproved, the jurisdiction to proceed further ceased.Key holdings include the following verbatim legal reasoning: 'if in the course of proceedings under Section 147, the Assessing Officer were to come to 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.' The Court further stated that 'once it is found, that the income, regarding which he had 'reason to believe' to have escaped assessment, is not found to have escaped assessment, the Assessing Officer is required to withhold his hands, at that only.'The Court established the core principle that the Assessing Officer's jurisdiction under Section 147 is strictly tethered to the original 'reason to believe' income had escaped assessment, and cannot be extended to other income discovered after that original reason is negated. This principle preserves the statutory balance between the Revenue's power to reassess and the taxpayer's right to finality and protection from arbitrary proceedings.In conclusion, the Court dismissed the Revenue's appeal, affirming the Tribunal's decision to quash the reassessment proceedings initiated under Section 148/147 once the original reason to believe was found to be baseless, and held that the Assessing Officer lacked jurisdiction to make additions on other grounds discovered during the reassessment proceedings. The Court's interpretation of Section 147 clarifies that reassessment jurisdiction is not a free-floating power to tax any income discovered during proceedings, but a conditional power dependent on the continued existence of the original reason to believe.