TaxTMI 
TaxTMI 
2002 (2) TMI 67
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....ble interest to tax. Accordingly, the petitioner-bank filed its returns disclosing chargeable interest under the Act for the above three assessment years enclosing copies of its audited profit and loss account and balance-sheet. According to the petitioner, it had declared the full interest, which is chargeable to interest-tax in terms of charging section 5, read with section 2(7) of the Act. In the above three returns, the petitioner-bank returned the interest income accrued on the loans and advances but without including the interest on securities. The said income as declared by the assessee and as accepted by the Assessing Officer while framing the assessment is as follows: -------------------------------------------------------------------------- Assessment Interest Interest Interest-tax years income income levied returned assessed &nbs....
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.... question and the petitioner was directed to file return on the premise that the chargeable interest for the assessment years in question has escaped assessment and the petitioner-bank was called upon to file the returns. The petitioner, however, did not comply with the said notices but wrote a letter seeking withdrawal of the said notices. But the respondent without giving any reply to the letter of the petitioner dated February 24, 1998, issued notices under sections 8(1) and 8(2) of the Act. Aggrieved by the said action of the respondent, the petitioner has approached this court. According to learned counsel for the petitioner, section 4 of the Act is the charging section, while section 5 explains the scope of the chargeable interest; and section 2(7) of the Act defines the term "interest", which means only interest on loans and advances made in India and also includes commitment charges on utilised portion of any credit sanctioned as well as discount charges on promissory notes and bills of exchange drawn or made in India. Relying upon the above terms, learned counsel contended that the term "chargeable interest" does not include the interest on secuirities or investments, s....
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....d. Therefore, the popular meaning of these terms as understood by the persons engaged in the trade, commerce and business had to be applied. Learned counsel contended that even on the merits the issue of taxability of interest on securities has been decided by the Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697, in favour of the bank. Therefore, the interest on debentures, which are treated as securities cannot be considered as interest on loans and advances and therefore not liable to tax under the provisions of the Act. Learned counsel also referred to the provisions of the Banking Regulation Act, 1949, and contended that according to section 29 of the said Act and the Third Schedule to the Act, debentures should be shown under the head "Investments" but not under the head "Loans and advances". When once the debentures form part of investments, the interest earned on such debentures would not form part of the chargeable interest under the Act. Therefore, it is contended that the impugned notices are liable to be quashed. Learned counsel also relied upon the following decisions in support of his contention: Gemini Leather Stores v. ITO [197....
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....idering the rival contentions on the merits, it would be proper to refer to the relevant provisions of the Act. "2. (5) 'chargeable interest' means the total amount of interest referred to in section 5, computed in the manner laid down in section 6. 2. (7) 'interest' means interest on loans and advances made in India and includes- (a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and (b) discount on promissory notes and bills of exchange drawn or made in India, but does not include-- (i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); (ii) discount on treasury bills; 5. Subject to the provisions of this Act, the chargeable interest of any previous year of a credit institution shall be the total amount of interest (other than interest on loans and advances made to other credit institutions or to any co-operative society engaged in carrying on the business of banking) accruing or arising to the credit institution in that previous year: Provided that any interest in relation to categories of bad or doubtful debts referred to in section 43D of the Inc....
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....lly and truly all material facts necessary for his assessment, chargeable interest for that year has escaped assessment or has been underassessed or granted excessive relief, he may, at any time, serve a notice and proceed to assess or reassess the assessee. Now the Assessing Officer issued notices under section 10(a) calling upon the assessee to file the returns for the three assessment years in question. The notices issued to the assessee do not contain any reasons, as they are only pro forma notices. In fact, the notices were issued using pro forma notice, under section 148 of the Income-tax Act, 1961. But, however, in the counter, it was stated that the assessee has not disclosed fully and truly all the material facts. In particular, it was stated that the assessee had not disclosed the interest income on securities distinctly. This allegation of the Department is contested by the assessee. According to the assessee, it had disclosed fully and truly all material facts necessary for the assessments and in fact, the Assessing Officer had completed the assessment after issuing notices to the assessee under sections 8(1) and 8(2) and after verification of the records produced by....
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....disclose the interest on debentures separately. According to the Department, in the return there is a specific provision under Part III where the assessee has to disclose other sums not included in the chargeable interest and claimed to be not taxable. The assessee has to disclose under this head and can claim exemption if any interest earned by it is not taxable. Here, the assessee failed to disclose the interest earned on debentures even though it was claiming that such interest is not taxable. Hence, there was a failure on the part of the assessee to disclose fully and truly all material facts. The explanation of the assessee is that the statement of profit and loss account and balance-sheet, which were filed and prepared in accord ance with the provisions of the Banking Regulation Act amount to full disclosure by the assessee. It was also contended by learned counsel for the petitioner that there are innumerable items, which are exempt under the provisions of the Interest-tax Act and it would not be possible to enlist them in the returns. From the above, it is clear that as far as the interest on debentures is concerned, it was not specifically declared in the returns even a....
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....e ground, inter alia, that the Income-tax Officer did not have reason to believe that underassessment had occurred by reason of the omission or failure on the part of the company to disclose fully and truly all material facts necessary for assessment. The Income-tax Officer filed an affidavit in the court asserting the fact of the representation made in the course of the assessment proceeding for the year 1994-95. As the assessee was not successful. before the High Court, he went in appeal to the apex court. The apex court while negativing the contention of the Department held as under: "In every assessment proceeding, the assessing authority will, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences... Once al....
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....th respect of the sum of Rs.1,10,000 when he was in full possession of all the material facts. When the matter was carried on in appeal, the apex court while confirming the decision of the High Court held that, because the primary facts were within the knowledge of the Income-tax Officer when he completed the first reassessment, the escapement of income took place by reason of the failure of the Income-tax Officer to include the sum of Rs.1,10,000 in the assessment of the Hindu undivided family when he was in full possession of all the necessary and material facts. In such a situation, the requirements of section 34(1)(a) were not satisfied. In the case of Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603 (SC), in proceedings for assessment for the assessment year 1960-61, the appellant firm had produced its books of account and also a statement giving full names and addresses of the various creditors from whom it had borrowed on hundis during the accounting year in question. Assessment was completed after enquiry. Thereafter on June 3, 1966, the Income-tax Officer issued a notice under section 148 of the Income-tax Act, 1961, initiating reassessment proceedings for that year. ....
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....iable reason for taking action under section 34(1)(b). The apex court, however, did not find it necessary to go into the question whether an inadvertent omission in the original assessment can justify the reopening of the assessment under section 34(1)(b) on its subsequent discovery by the Income-tax Officer. In the case of Gemini Leather Stores [1975] 100 ITR 1 (SC) in proceedings for the original assessment of the appellant-firm, though the appellant did not disclose certain transactions evidenced by certain drafts, the officer himself discovered the facts relating thereto but by oversight did not bring the amounts represented by the drafts to tax as the income of the appellant. Subsequently, the Income-tax Officer issued a notice under section 147(a) of the Income-tax Act, 1961, with a view to assess the amounts as the appellant's income from undisclosed sources. On a writ petition filed by the appellant, the High Court held that the Income-tax Officer did not apply his mind to the question whether the amounts could be treated as part of the total income of the appellant and as the appellant did not disclose the source of those amounts which were not recorded in the account b....
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....ax Officer has stated that it was discovered that some of the loans shown to have taken and interest alleged to have been paid thereon by the petitioner during the relevant assessment year were not genuine. The report furnished by the Income-tax Officer to the Commissioner of Income-tax was also directed to be produced before the High Court. A Full Bench of the Calcutta High Court by majority held that the notice under section 148 was not valid and accordingly allowed the writ petition. On further appeal the apex court held that for a valid reassessment before issuance of notice under section 148, two conditions have to be satisfied, viz., (i) that the Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and (ii) he must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee (a) to make a return under section 139, or (b) to disclose fully and truly material facts necessary for the assessment. The apex court further observed that the duty, which is cast upon the assessee, is to make a true and full disclosure of the primary facts at the time of the original assess....
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....the High Court quashing the notice issued for initiating reassessment proceedings. In the case of Indian and Eastern Newspaper Society [1979] 119 ITR 996, the apex court considered the opinion of an, internal audit party of the Income-tax Department on a point of law cannot be regarded as opinion within the meaning of section 147(b) of the Income-tax Act, 1961, for the purpose of reopening the assessment. The apex court negatived the contention of the Department, after considering the contentions elaborately. But the issue considered and decided in the above decision is not relevant for the purpose of the present case as the issue in question is analogous to the issue falling under section 147(a). In the case of Jindal Photo Films Ltd. [1990] 234 ITR 170, the Delhi High Court considered the issue of reassessment. The assessee-company was engaged in the business of manufacturing of photosensitive films. Prior to the assessment year 1991-92, the assessee's claim for investment allowance under section 32A of the Income-tax Act, 1961, was disallowed on the ground that the manufacture of colour film rolls was not entitled to investment allowance, as it was included in the prohibit....
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....n the basis of the valuation report that the notice in question was issued. The formation of reasonable belief could not obviously be based on such valuation done after the assessment was completed when there was no other material to suggest that the petitioner failed to disclose the true and relevant primary facts which had bearing on the construction of the building. It was submitted that the petitioner had shown the differential cost proportionately in the declarations relating to assessment years filed under the Kar Vivad Samadhan Scheme. But the reasons recorded for reopening of the assessment did not include this information and it could not be considered by the court. The petitioner had not failed to discharge the duty of disclosing the primary facts to the Assessing Officer before the assessment was made. Accordingly, the notices under section 148 were invalid and liable to be quashed." In the case of Saradbhai M. Lakhani v. ITO [1998] 231 ITR 779, the Gujarat High Court considered the scope and validity of the notice issued under section 148 of the Income-tax Act, 1961. The assessees were partners of a firm Bharat Vijay Construction Company. They were assessed during th....
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.... that basing on the interpretation given by the Central Board of Direct Taxes (the CBDT), the UTI did not file its returns under the provisions of the Interest-tax Act. In fact the communication given by the Central Board of Direct Taxes was based on a circular issued by it, which was subsequently with drawn. The Bombay High Court held against the Department holding that the burden is on the Department to show on what basis the said communication of the Central Board of Direct Taxes dated October 11, 1991, came to be implemented by the Department for nine years and the said burden was not discharged. Therefore, the Department was estopped from raising an argument contrary to the said circular. Holding so the reassessment notices were set aside. Though the issue considered in this case relates to the Interest-tax Act, but the issue is not in any way connected with the issue in question in the present writ petition. The assessee also relied upon a decision of the Madras High Court in the case of Lakshmi Vilas Bank Ltd. [1997] 228 ITR 697 where a Division Bench of the Madras High Court had considered the issue as to the assessability of the interest on debentures under the provisio....
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....pen for the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. In other words, the existence of the belief can be challenged by the assessee but not the sufficiency of the reasons for the belief. In this case the appellant was carrying on business in jewellery, copper wire and money-lending. For the assessment year 1951-52, the appellant did not comply with the notices issued under section 22(2) or section 22(4) of the Income-tax Act. No return was filed by the appellant. The assessment was completed by the Income-tax Officer on such material as was available on February 23, 1955, and the income was assessed at Rs.36,068. Subsequently, while making assessment for the assessment year 1955-56, the appellant was asked to furnish a wealth statement, which was actually filed on June 30, 1954. From the wealth statement it was found that the appellant had made investments for Rs.39,000 during the previous year which ended on June 30, 1950, though in respect of that previous year, the appellant's income was assessed only at Rs.36,068. Therefore, a notice was issued under section 34(1) and after examining the return made the appe....
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....n the immovable property to the partnership firm was not subjected to tax although the assessee had informed the Income tax Officer by his letter about the conversion of the capital asset being his share in the immovable property into stock-in-trade and its consequential effect, in view of the query raised by the Assessing Officer. The Assessing Officer, therefore, clearly had a reason to believe that the income chargeable to tax in the form of capital gains in respect of the transfer that took place on September 19, 1990, had escaped assessment in the relevant assessment year 1991-92. The initiation of the proceedings under section 147 by notice was upheld confirming the jurisdiction of the Assessing Officer. It was further held that in cases where the Assessing Officer had overlooked something at the first assessment, there can be no question of any change of opinion, when the income which was chargeable to tax is actually taxed as it ought to have been under the law, but was not, due to an error committed at the first assessment. Though the above judgment was rendered in favour of the department, but the ratio laid down in the said decision is clearly contrary to various deci....
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....the belief by the Assessing Officer can be challenged. It was also held that production before the Assessing Officer of the account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to true disclosure contemplated by law. Apart from the above legal position, unlike in section 148(2), there is no specific provision in section 10 or in any other provisions of the Act, obliging the Assessing Officer to record reasons before issuing a notice for initiating reassessment proceedings. In the absence of such mandatory provision as was contained in the Income-tax Act, requiring the Assessing Officer to record his reasons for initiating reassessment proceedings, it could not be inferred that the Assessing Officer was obliged to record such reasons. But, however, the existence of such grounds is mandatory and it is for the Assessing Officer to satisfy the court as to the existence of those grounds when such proceedings are assailed in a court of law. If the facts of the present case are examined in the light of the above legal position, the reasons recorded by the Assessing Officer show....