TaxTMI 
TaxTMI 
TaxTMI 
2009 (4) TMI 12
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Mr R. Santhanam as well as the learned counsel for the Revenue Mr R.D. Jolly we had indicated to them that a substantial question of law as formulated below would arise for consideration of this Court and that with their consent, after framing a question of law we would proceed to a final disposal of the present appeal. The submissions in the matter were heard, keeping the above in mind. In accordance thereto we have framed the following question of law for our consideration:- "Whether the Tribunal misdirected itself in law in upholding as valid the initiation of reassessment proceedings and the consequent assessment order dated 26.03.1999 passed by the Assessing Officer in exercise of his powers under Section 147 read with section 148 and 143 of the Income Tax Act, 1961." 2. In order to deal with the present appeal the following facts need to be noticed: 2.1 The assessee is engaged in the business of production of parts and moulds which are used in the manufacture of automobile cars. On 31.12.1993 the assessee filed its return of income whereby it declared an income of Rs 5,35,250/-. The said return of income was processed under Section 143(1)(a) of the Act whereupon the Ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct in the year in which the said tax was actually paid by the assessee. The only impediment being that the said amounts should not have been allowed as a deduction in any earlier year. 2.6 The assessee, however, it seems as a measure of abundant caution filed a revised return, even though under protest, under a cover of its letter dated 19.02.1999. The point to be noted at this stage is that the revised return was identical to the original return filed by the assessee. 2.7 No sooner had the assessee filed the return on 23.02.1999, the Assessing Officer issued a notice calling upon the assessee to attend his office on 05.03.1999 at 11.00 a.m. for furnishing further information in connection with the return submitted by the assessee. The aforesaid was followed by yet another notice dated 10.03.1999 calling upon the assessee to show cause with respect to various other items of income and expenditure, apart from the issue with respect to, the sum of Rs 25 lacs (approx.) which was shown as a balance in the MODVAT account of the assessee and had been debited to the Profit & Loss account and which verily had formed the basis of the initiation of reassessment proceedings. 2.8 The asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. On merits the CIT(A), however, disallowed the addition of Rs 25,75,000/- on account of MODVAT paid. The CIT(A) agreed with the assessee that it was entitled to deduction under Section 43B of the Act as it was nothing but duty paid during the assessment year under consideration. In respect of disallowance of Rs 1,11,292/- on account of canteen equipment, the CIT(A) partially sustained the order of the Assessing Officer. The CIT(A) out of the aforesaid sum sustained a disallowance of Rs 27,912/- which was an expense which the assessee had incurred for purchasing a vertical de-freezer. The CIT(A) agreed with the view of the Assessing Officer that this was in the nature of a capital expenditure. The CIT(A), accordingly, while sustaining the disallowance directed that the assessee would be entitled to depreciation on the said equipment as permissible under law. The CIT(A) also deleted the disallowance of a sum of Rs 10,000/- incurred by the assessee as general expenses by holding that it was supported by relevant vouchers and bills and that none of the items represented non-business expenditure. As regards expenses on the visit of the Managing Director of the assessee to the Switzerl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee that a perusal of the reasons would show that the Assessing Officer initiated proceedings under Section 147 read with Section 148 of the Act on the ground that the credit balance lying in the MODVAT account of the assessee had been debited to the Profit & Loss account. The learned counsel submitted that a bare perusal of the reasons disclosed would show that a credit balance in the MODVAT account and its consequent debit in the Profit & Loss account could never ever have formed a basis for reason to believe that the assessee's income had escaped assessment. In order to buttress his submission the learned counsel relied upon the judgment of the Supreme Court in CIT vs Indo Nippon Chemicals Co Ltd; (2003) 261 ITR 275 to the effect that the balance MODVAT credit would never amount to income amenable to tax under the Act. 7.1 In addition to above the learned counsel forcefully con ` tended that the initiation of reassessment proceedings would not give a carte-blanche to the Assessing Officer to reopen the assessment proceedings on ground "A" then proceed to make additions to income or disallowances of expenditure in respect of other grounds which did not form the basis for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt was charged into P&L A/c. By this method, the assessee reduced it profit in the A.Y. 93-94 by Rs 25 lakhs. The balance in the MODVAT account at the end of PY relevant for AY 93-94 should have been carried forward and shown as loans and advances on the asset side of the balance sheet. I have reasons to believe that the above said income chargeable to tax has escaped assessment for AY 93-94 by reasons of the failure on the part of the assessee for not disclosing fully and truly all material facts necessary for his assessment for AY 93-94. This case is reopened u/s 147 of the I.T. Act. Issue notice u/s 148." 8.3 It cannot be disputed and it is not the case of either side that the reasons extracted hereinabove did not precede the issuance of notice under Section 148(1) of the Act. The requirement for recordal of reasons by the Assessing Officer before issuing a notice is provided for under sub-section (2) of Section 148 of the Act. 8.4 A perusal of the reasons would thus show that the Assessing Officer was of the view that the assessee's income chargeable to tax had escaped assessment in the relevant assessment year by virtue of the fact that the assessee had charged to its Profi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... could have formed the requisite belief. One is not concerned at this stage whether the material would conclusively prove escapement and such a formation is within the realm of subjective satisfaction of the Assessing Officer. 8.7 Applying the aforesaid principle, it is clear that while the Supreme Court has conferred a wide discretion on the Assessing Officer for reopening the proceedings whether to assess, re-assess or to re-compute income it is predicated on a test whether a reasonable person would form a belief that there was relevant material for initiating proceedings under Section 147 of the Act. In the instant case if the test of the reasonable person is applied, it is clear that no reasonable person could have come to a conclusion that there was relevant material available with the Assessing Officer to have reason to believe that assessee's income chargeable to tax had escaped assessment only by virtue of the fact that the assessee had charged to its profit and loss account the credit balance available in its MODVAT account. It is rudimentary that MODVAT is nothing but credit of duty paid by a person on input used by the assessee for manufacture of its final product. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g of its assessment; (ii) since the assessment made under Section 143(1)(a) of the Act had attained finality the Revenue could not reopen it unless it fulfilled the condition precedent as provided under Section 147 of the Act; and (iii) most importantly, since the assessment had been reopened on a specific point it could not by this methodology reopen the same in the entirety. 11. As noted above, the Assessing Officer undeterred, without dealing with any of the objections raised by the assessee, passed the impugned assessment order dated 26.03.1999. Even though, the CIT(A) partially allowed the appeal, in our view he did not examine the matter from the angle as to whether the Assessing Officer could bring to tax items or disallow expenditure which were totally unconnected with the reasons articulated under Section 148(2) of the Act at the time of issuance of notice under Section 148(1) of the Act. The Tribunal did likewise and on this aspect of the matter dismissed the appeal of the assessee. In our view a bare reading of sub-ection (2) of Section 148 of the Act would show that before issuing a notice under Section 148(1) of the Act the Assessing Officer is required, under sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder Section 148(1) of the Act. In our view the assessment order in so far as it dealt with items other than those which formed the basis of the reasons disclosed on 27.03.1997 are bad in law or stood vitiated in law. 13. The Division Bench of the Kerala High Court in the case of Travancore Cements Ltd vs ACIT; (2008) 219 CTR 359 came to the same conclusion. The observations of the Division Bench in paragraphs 8 to 11 at pages 366 - 367 being apposite are extracted hereinbelow:- "It is trite law that the provisions in a taxing statute have to be construed in accordance with the clear intention of the legislature which is to make the charge levied effective. Validity of Exts.P6, P7, P8 and P12 is to be adjudged in the light of Sections 147 and 148 read with Section 143 of the Act. At the outset we may point out that we find no infirmity in the Department issuing Ext.P3 under Section 148 or Ext.P6 communication disclosing reasons for reopening the assessment. ExtP3 is a notice issued under Section 148 of the Act proposing to reassess the income of the petitioner for the assessment year 2000-01. But no reasons were recorded in Ext.P3 notice as required Sub-section (2) of Section 148....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his reasons for issuing such notice. Recording of reasons before issuing notice is a mandatory requirement. Assessing officer is also empowered under Section 147 to assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under Section 147. 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 interlinked and connected, the proceedings initiated or notic....