TaxTMI 
TaxTMI 
2007 (1) TMI 657
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....e No. 53 of Annex. A-9 of the seizure during search was the balance sheet of the business of the assessee. It is based on conjectures and surmises. 2.1 That, while holding as above, the CIT(A) has considered certain facts which could not be made a base as mentioned in paras 2.5 and 2.6 of his order, which has resulted in wrongly holding it as such. 2.2 That, while holding as above, the CIT(A) has ignored that there was neither any corresponding books of account to correlate the imaginary entries in this paper nor any asset found and seized during search pertaining to the year under assessment to corroborate the contemplated entries. 3. The facts of the case are that the assessee had filed return on 14th Sept., 1990 declaring therein total income of Rs. 52,019. The same was processed under Section 143(1)(a) on 31st Oct., 1990. Subsequently, the IT authorities carried out search action under Section 132(1) of the IT Act, 1961 (in short 'the Act') at the business premises and residential premises of the partners on 24th Oct., 1994 which resulted in seizure of number of incriminating documents relating to undisclosed business transactions. These seized documents also inclu....
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....ition was that the documents referred to in the reasons recorded were seized and, therefore, objection raised by the assessee was not material. He further referred to p.53 of Annex. A-9 which was a balance sheet for the assessment year under consideration and the said page indicated excess of assets over liabilities to the extent of Rs. 3,16,800. The learned CIT(A) observed that on the basis of such material and evidence, the AO rightly entertained a belief that income chargeable to tax had escaped assessment. He further observed that the objection of the assessee that assessment orders for the asst. yrs. 1992-93 and 1993-94 were quashed by the CIT(A) was without any merit because those appeals were decided in July, 1998 whereas assessment for the assessment year under consideration was reopened on 26th Feb., 1998. Thus, he upheld the action of the AO for initiating the reassessment proceedings. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us. 5. The learned Counsel for the assessee, Sh. P.N. Arora, submitted that the AO has reopened the assessment without due application of mind. He referred to p. 3 of the Departmental paper book (in short ....
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....r Singh Malik v. Chief Commissioner Of Income-Tax. [2003] 183 CTR (P&H) 237: [2004] 267 ITR 716 (P&H). The learned Counsel also submitted that the reopening of the assessment on the basis of subsequent assessment years was not valid. He relied on the following judgments: (i) Dass Friends Builders (P) Ltd. v. Dy. CIT (2006) 201 CTR (All) 447 : (2006) 153 Taxman 282 (All); (ii) Nitin P. Shah alias Modi v. Dy. CIT (2005) 194 CTR (Guj) 306 : (2005) 146 Taxman 536 (Guj); (iii) Tribunal Patna Bench (Third Member) in the case of Dy. CIT v. Narendra Mohan Bagroy (2004) 84 TTJ (Pat) (TM) 570 : (2004) 90 ITD 90 (Pat) (TM). He further submitted that recording of satisfaction before initiating the reassessment proceedings is a condition precedent for assuming jurisdiction before issue of notice under Section 148. He submitted that in the present case, the reasons recorded by the AO are vague and unspecific for the assessment year under consideration and, therefore, the reopening of the assessment was bad in law. He relied on the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Shiv Ratan Soni (2005) 194 CTR (Raj) 126 : (2005) 146 Taxman 392 (Raj). He further argued th....
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....sheet had escaped assessment. He submitted that the submission of the Authorised Representative that there was no material available with the AO to initiate the reassessment proceedings was without any merit. He further referred to p. 4 of the DPB which is a copy of letter dt. 9th/17th Feb., 1998 of the Asstt. CIT, Central Cir. 2, Jalandhar, to Dy. CIT, forwarding therewith proposal to reopen the assessment for the asst. yr. 1990-91. He submitted that in the enclosures indication of an (sic) for the asst. yr. 1991-92 is mentioned. This shows that assessment records for the asst. yr. 1990-91 had also been sent along with the proposal for reopening the assessment. Thus he submitted that the order of the CIT(A) for upholding the action of the AO to reopen the assessment does not warrant any interference. 7. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below and referred to the relevant pages of the paper book to which our attention has been drawn. The first issue that requires to be decided by this Bench ....
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....e". A perusal of the forwarding letter of the AO to Dy. CIT, shows that only the assessment record for the asst. yr. 1991-92 where pp. 48 to 53 of Annex. A-9 seized from the residence of the partners have been referred to by the AO in the reasons. The assessment order for the asst. yr. 1991-92 was passed on 16th Jan., 1998. A proposal to reopen the assessment was sent to Dy. CIT (Central) on 20th Feb., 1998. It is, therefore, clear that same was on record. A perusal of the same shows that in para 5 of the said order, the AO has referred to seized documents pp. 48 to 53 which according to him reflect the balance sheets for the asst. yrs. 1990-91 to 1994-95. In fact, these balance sheets were confronted to Sh. Vinod Kakkar whose statement was recorded on 10th Nov., 1994, where he stated that these were rough balance sheets prepared for taking carried forward from M/s Eagle Flasks Industries Ltd. There is no denial that these documents do not belong to the assessee. Item No. (vii) of para 6 refers to entries recorded on p. 53 relating to asst. yr. 1990-91 where Rs. 40,000 have been reduced from Rs. 2,00,000 to show that the balance in the account of Sh. Yash Pal at Rs. 1,60,000. It al....
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....ent, namely: (a)... (b)... (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 (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. A bare reading of the above provisions of the Act shows that the AO can initiate reassessment proceedings, if he has, 'reason to believe' that any income chargeable to tax has escaped assessment for any assessment year subject to the provisions of Sections 148 to 153 of the Act. In such a case the AO is empowered to assess or reassess such income. Such escapement of income could be due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Such escapement of income could also be without any omission or failure on the part of the assessee to disclose fully and truly all material facts. The proviso to Section 147 provides that in case the assessment completed under Section 143(3) or 147 is to be reopened after the expiry of f....
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....nt, remote and far-fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. Again this issue was considered by the Hon'ble Supreme Court in the case of Ganga Saran & Sons (P) Ltd. v. ITO ITO [1981] 22 CTR (SC) 112 : [1981] 130 ITR 1 (SC), where the apex Court observed that expression "reason to believe" was stronger than the words 'satisfied'. The belief entertained by the AO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. If there is no rational and intelligible nexus between the reasons and belief, the reopening of the assessment would be without jurisdiction and bad in law. 7.2 Now the case of the assessee also requires to be decided in the light of legal position discussed above. The first submission, of the assessee is that the AO has initiated the reassessment proceedings by invoking the provisions of Section 147(b) of the Act which did not exist in statute and, therefore, the assessment is illegal and bad in law. The learned Counsel has relied on the judgment of Hon'ble Calcutta High Court in the....
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....al assessment under Section 147(a). This means that if the conditions for reopening the assessment under Section 147(a) exist, the reopening of assessment can be considered even though the AO had initiated the proceedings under Section 147(b). Now Sub-section (b) of Section 147 did not exist in the statute. Therefore, the action of the AO can also be seen and considered in the light of provisions of Section 147 of the Act provided the conditions necessary for reopening the assessment exist. 7.3 Admittedly, Section 147(b) did not exist in the statute when the assessment was reopened. In fact, in the reasons recorded, the AO has not mentioned that the assessment was being reopened under Section 147(b) of the Act. The basis for reopening the assessment is the document at p. 53 of Annex. A-9 which showed the difference between the assets and the liabilities to the extent of Rs. 3,16,800 in the balance sheet. Admittedly, in the return of income filed, the position shown in the balance sheet was different from the same. There is a direct nexus between the information coming to the notice of AO by way of p. 53 of Annex. A-9 seized during the search and formation of belief that income of ....
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....s recorded on the seized document, the AO was prima facie justified in entertaining a belief that the difference of Rs. 3,16,800 showing excess of assets higher than the liabilities side had escaped assessment. Thus, the reopening of the assessment in the present case is not based on mere suspicion or pretence or on the basis of assessment completed for the subsequent assessment year. 7.5 Be that as it may, the issue whether the assessment could be reopened on the basis of specific information obtained by AO in the assessment proceedings of the subsequent assessment year came to be considered by the Hon'ble Supreme Court and Hon'ble Punjab & Haryana High Court in the following cases: (i) Raymond Woollen Mill's Ltd. v. ITO and Ors. [1999] 152 CTR (SC) 418 : [1999] 236 ITR 34 (SC): The case of the Revenue was that the assessee was charging to its P&L a/c, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals, etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of closing stock and understatement of profits. The AO init....
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....e sheet was found during the course of search carried out at the premises of the assessee at a much later stage in the year 1994. In the present case, the AO had not completed the original assessment under Section 143(3) and, therefore, it is not a case of change of opinion. Thus, the action of the AO for reopening the assessment by relying on such seized material found subsequently was legal and valid. Accordingly, this submission is also rejected. 7.6. The third objection of the learned Authorised Representative is that there must be a satisfaction recorded by the AO before reopening the case. The learned Counsel has relied on the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Shiv Ratan Soni (supra) (copy placed at pp. 118 to 127 of the paper book). It is settled law that the formation of belief that income chargeable to tax has escaped assessment to tax is a condition precedent for assuming jurisdiction under Section 147 of the Act. For this purpose, it is mandatory on the part of the AO to record reasons under Section 148 before initiating action under Section 147. The action of the AO as to whether the AO correctly assumed jurisdiction for issuing of noti....
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....t allowable. The AO did not refer to any other items of escaped income in the reasons recorded by him. The Hon'ble High Court observed that the validity of notice issued under Section 148 had to be examined only on the basis of reasons recorded by the AO. Now the AO as per provisions of the Act could issue notice after expiry of four years from the relevant assessment year only if the escaped assessment was likely to be more than Rs. 1 lakh. But in the case before the Hon'ble Punjab & Haryana High Court, the income escaping assessment was found to be less than Rs. 1 lakh and, therefore, the reopening of the assessment was held to be bad in law and without jurisdiction. In this context, the approval granted by the superior officer without looking into the relevant provisions of the Act was held to be bad in law. In the present case, the reopening of the assessment is not being challenged on the ground that the AO had initiated the proceedings though the income specified in the reasons was below the limit laid down in the Act for initiating such reassessment proceedings. On the contrary, there is specific reference to the difference in the balance sheet and even the amount ha....
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....ce in the balance sheet to the extent of Rs. 2,55,179 is traced to the suppression of profit shown in the regular books of account and AO has made the addition of this amount. The AO has also made separate additions on account of difference in sundry creditors, deposit in the name of Sh. Yash Pal, Delhi, old stock credit difference, sundry debtors, cash in hand etc. The basis of such additions is the same balance sheet. Thus, the difference in the balance sheet to the extent of suppressed profit is directly related to the entry of profit found recorded on the same page relied upon by the AO for the purpose of initiating the reassessment proceedings. The AO could have not made the addition twice i.e. one amounting to Rs. 3,16,800 and another of Rs. 2,55,179 when the difference to the extent of Rs. 2,55,179 in balance sheet is directly covered by this entry. Thus, it is not correct on the part of the assessee to contend that no addition was made in respect of difference in balance sheet referred to by the AO for the purpose of initiating the reassessment proceedings. Therefore, to this extent, the submission of the assessee is also without any merit. 7.9 Now the question that requir....
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....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 loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year). Provided that where an assessment under Sub-section (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. (Emphasis, italicised in print, supplied is ours) A bare reading of the aforesaid section shows that if the AO has initiated the reassessment proceedings in respect of income that has escaped assessment, he ....
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....en on this score, we do not find any merit in the submissions of the assessee and the assessment could not be quashed on this ground itself. However, this is subject to the finding to be recorded on the merits of additions after hearing both the parties. 7.11 Before parting with this issue, we wish to mention that the assessment for the asst. yr. 1991-92 was reopened by issue of notice under Section 148 on the basis of seized material found during the course of search. The said assessment was quashed by CIT(A) on the ground that the reasons recorded by the AO regarding escapement of income did not pertain to the income sought to be assessed. Pending an appeal by the Department to the Tribunal, the AO issued second notice under Section 148 dt. 9th Feb., 1999 on the basis of undisclosed capital arrived at by comparison of the balance sheet seized during the search along with its return. The assessee filed a writ petition challenging the second notice for reassessment on the ground that the AO had recorded satisfaction about escapement of income of Rs. 3,20,900 which was the same income which had been included in the reassessment framed pursuant to the first notice and that fresh pro....
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....fied in quashing the assessments by holding that no valid reasons are recorded. To my mind, there was definite opinion and valid reasons were very much there, therefore, while applying the ratio of the decision of Hon'ble Supreme Court in the case of Phool Chand Bajrang Lal and Anr. v. ITO [1993] 203 ITR 456 (SC), the order of the learned CIT(A) cannot be held to be a proper order. As such, the same is vacated. Since the learned CIT(A) has not considered the case on merits and in COs, the assessees have not only supported the orders of the CIT(A) but also taken a specific plea of not deciding the cases on merits, so I, while accepting the COs of the assessees for all the years, set aside the orders of the learned CIT(A) and restore the matter back on his file with the direction to redecide the appeals on merits. However, the assessee filed an appeal under Section 260A against the order of the Tribunal passed in ITA No. 570/Asr/1998 for the asst. yr. 1991-92 before the Hon'ble Punjab & Haryana High Court. The appeals against the order of the Tribunal for the asst. yrs. 1992-93 and 1993-94 were not filed. The Hon'ble Punjab & Haryana High Court vide its order dt. 1st May....