TaxTMI 
TaxTMI 
TaxTMI 
2026 (2) TMI 267
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....f the draft handed in. 3. The amendments shall be carried out forthwith in front of the Associate. Re-verification is dispensed with. 4. Rule. Respondent waives service. With the consent of the Advocates for the Petitioner as well as the Respondent, the same is made returnable forthwith and heard finally. 5. The present Petition challenges the validity of a notice dated 28th March 2021 issued under Section 148 of the Income Tax Act, 1961 (for short "IT Act") for the Assessment Year 2014-15, along with a notice dated 30th July 2021 issued under Section 143(2) read with Section 147, and the order dated 9th February 2022 disposing of the objections filed against the notice under Section 148. 6. The Petitioner is an individual and earns income that is chargeable under various heads such as "Income from House Property", share in profits of partnership firms, income chargeable under the head "Profits and gains of business", "Capital gains", and "Income from other sources". The Petitioner filed his return of income for the Assessment Year 2014-15 on 29th November 2014. The total income declared in the return was Rs. 5,87,74,290/-. Income aggregating to Rs. 4,44,10,063/- was de....
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....r dated 23rd November 2016 under Section 143(3) and accepted the income declared in the return. 9. Thereafter, Respondent No. 1 issued a notice dated 15th February 2021 under Section 133(6) pointing out that "on going through the audited financial statement for the year under consideration and computation of total income furnished during the course of the assessment proceedings, it is evident that you have claimed a deduction under section 24 being interest on borrowed capital of Rs. 4,10,67,473/-. Against the rental income from property of Muttha Chambers II and in that no certificate for the same was furnished during the course of the assessment proceedings". The Petitioner was called upon to furnish a copy of the certificate for the deduction claimed under Section 24 on or before 22nd February 2021. The Petitioner's representative attended the office of Respondent No. 1 on 24th February 2021 but was unable to meet Respondent No. 1. Therefore, by an email dated 27th February 2021, the Petitioner's Chartered Accountant requested for a fresh opportunity of being heard in person. As the Petitioner had not received any response from Respondent No. 1 pursuant to the aforesaid reque....
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....n from the computation of income that the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the course of assessment proceedings. 4. Enquiries made by the AO as sequel to information collected/received: Thereafter, letter calling for information u/s 133(6) dated 15.2.2021 was issued and duly served upon the assessee after prior approval of the Pr.CIT-2, Pune. The assessee was required to furnish a copy of certificate for the deduction claimed u/s 24 of Rs. 4,10,67,473/- by 22.2.2021. The assessee has failed to furnish any submission till date even after sufficient time has elapsed. 5. Findings of the AO: On going through the audited financial statements and submissions made by the assessee during the course of assessment proceedings, it is seen from the computation of income that the assessee has claimed deduction u/s 24 being interest on borrowed capital of Rs. 4,10,67,473/- against the rental income from the property Muttha Chambers II and that no certificate for the same was furnished during the cou....
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....se fully and truly all material facts necessary for his assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above (Para 1 to 7). I have carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment/re-assessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for his assessment for the year under consideration with respect to incorrect computation of house property income to the tune of Rs. 4,10,67,473/- thereby necessitating reopening under section 147 of the Act. It is true that the assessee has filed a copy of annual report and audited P & L account A/c and Balance-Sheet along with return of income where various information/material were disclosed. However, the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced books of accounts, annual repo....
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....come into the possession of Respondent No. 1 after the completion of the original assessment proceedings that would justify the initiation of action to reassess the Petitioner's income. 14. However, Respondent No. 1 passed an order dated 9th February 2022 disposing of the Petitioner's objections and rejected the Petitioner's contentions. He noted that the availability of the deduction under Section 24 was not relevant at the stage of examining the validity of the reassessment proceedings but would have to be considered only at the time of the final assessment. He also held that there was a failure on the part of the Petitioner to disclose fully and truly all material facts without specifying which fact was not disclosed. 15. In the Affidavit in Reply that has been filed by Respondent No. 1, reliance has been placed on an audit memo issued by the Director General of Audit (Central), Mumbai, on the basis whereof it would appear that the present reassessment proceedings have been initiated. Further, it has been accepted by the Respondent that the property situated at Muttha Chambers II was let out. 16. In this factual backdrop, the learned Counsel for the Petitioner submitted....
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....ich he forms regarding the escapement of the income of the Assessee from assessment. If the link is too tenuous to provide a legally sound basis for reopening the assessment, then, it must follow that the reassessment proceedings must be quashed (see ITO vs. Lakhmani Mewal Das 103 ITR 437 SC). 19. It was submitted that the only reason on the basis of which the impugned notice has been issued is that the claim for deduction of interest was allowed without a certificate [as contemplated in Section 24(b) of the IT Act] being on record. In this regard it was submitted that the entire reasons proceed on a misunderstanding of the relevant provisions of Sections 23 and 24. It is apparent from a plain reading of the said provision that a certificate to substantiate the claim for deduction of interest was not required to be filed. The deduction for interest is allowable in terms of Section 24(b) of the IT Act which provides that income chargeable under the head "Income from house property" shall be computed after allowing a deduction for the amount of any interest payable on capital that was borrowed and was utilised for the acquisition, construction, repair, renewal or reconstruction of....
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....the Legislature has put a cap on the quantum of interest that is allowed as a deduction and, in these circumstances, a certificate from the recipient of the interest is mandatorily required to be furnished. In the present case it is an undisputed fact that the office premises situated at Muttha Chambers II were let out by the Assessee during the entirety of the previous year, and therefore, the question of the property being regarded as falling within the scope of Section 23 of the IT Act could never arise. In these circumstances it was submitted that the formation of the belief that income had escaped assessment on the basis that no certificate as contemplated under the third proviso to Section 24(b) of the IT Act, is too tenuous to provide a legally sound basis for re-opening the assessment. It was submitted that the existence of the reason to believe on the basis of this alleged default is challenged and not merely the sufficiency of the reasons. 21. It was next submitted that in any event, there was no failure on the part of the Petitioner to disclose fully and truly all material facts. It was submitted that the duty on the Assessee is to disclose fully and truly the primary....
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....mount to a failure to disclose truly and fully all material facts. However, in the present case, an alleged failure to file a certificate under Section 24(b) of the IT Act can never justify the assumption of jurisdiction. 24. Since reliance was placed by the Revenue on Explanation 1 below Section 147 to justify their allegation that there was failure on the part of the Petitioner to make a full and true disclosure, it was submitted by the Petitioner that Explanation 1 could have no relevance to the Petitioner's claim for deduction. The scope of Explanation 1 to Section 147 has been considered by this Court on several occasions. Counsel for the Petitioner initially invited our attention to a judgment in 3i Infotech Limited vs. CIT 329 ITR 257 where the Court inter alia held that the Parliament has used the word "necessarily" in Explanation 1. The expression "necessarily" means inevitably or as a matter of compelling inference. The production of accounts books or other evidence before the Assessing Officer will not therefore amount to an inference of disclosure within the meaning of the first proviso. This Court referred to, with approval, to a judgment of the Calcutta High Court ....
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....with return it cannot be said that Explanation 1 would apply to such a case. In this regard reliance was placed on a judgment of the Calcutta High Court in ITO vs. Calcutta Chromotype 97 ITR 55 as well as of this Court in Tumkur Minerals Pvt.Ltd. vs. Joint CIT 45 ITR 286. It was submitted that a failure to apply the law or the provisions of a Section to admitted facts is not covered by Explanation 1. 26. It was thereafter submitted that the Petitioner, in the course of the original assessment proceedings, has disclosed that he earned income by way of rent and the party from whom such rental income was earned in respect of Muttha Chambers II. The claim for deduction of interest under Section 24(b) was specifically made in respect of this house property and the same was allowed after due examination by Respondent No. 1. Therefore, it was submitted that Respondent No. 1 was not justified in forming his belief which was based merely on a change of opinion. 27. The Petitioner also submitted that the entire reopening was predicated on an audit objection as is brought out in the affidavit in reply, and it is now well settled if that be so, the provisions are inapplicable. In this re....
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....quiring, constructing, repairing, renewing or reconstructing the house property. The deduction is to be allowed in its entirety without any other condition to be fulfilled in terms of clause (b). The three provisos to clause (b) impose fetters on the allowability of the deduction of interest. The first two provisos put a monetary cap on the quantum of interest that can be allowed as a deduction, viz., a sum of Rs. 30,000/- in terms of the first proviso and a sum of Rs. 2 lakhs in terms of the second proviso. The third proviso imposes a further condition on the fulfilment of which the interest referred to under the second proviso can be allowed, i.e., it mandates that the Assessee claiming such interest has to furnish a certificate from the person to whom the interest is payable specifying the amount of interest payable. It is imperative to note that both the first and second provisos put the fetter only where the interest is claimed in respect of a property referred to in Section 23(2) of the IT Act. Section 23 provides for the manner of determination of the annual value. Sub-Section (1) provides that the annual value has to be determined inter alia having regard to the sum for whi....
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....or the Revenue as to whether there was any dispute as to the facts viz., that the deduction was claimed in respect of a property which was let out and whose annual value was not taken to be nil in terms of Section 23(2). The Revenue fairly did not dispute this position. If that be so we have no option but to conclude that the proceedings for re-assessment have not been validly initiated. 33. As we have struck down the notice on this ground it is strictly not necessary for us to deal with the other contentions raised by the parties. However, for the sake of completeness, we may briefly advert to other conditions. The impugned notice pertains to the Assessment Year 2014-15 and is dated 28th March 2021. In the present case an assessment was originally framed under Section 143(3) on 23rd November 2016. Therefore, this is a case to which the proviso to Section 147, as it then existed, would apply. The proviso imposed a further jurisdictional condition that the escapement of the income has to be on account of a failure to disclose fully and truly all material facts. It is well settled by a series of judgments of the Supreme Court starting with a judgment of the constitution Bench of t....
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....n a case where the Assessee may have been regarded as not having made a full and true disclosure. However, since the Petitioner's case does not fall within the second proviso, the failure to file a certificate as contemplated in the third proviso would not tantamount to a conclusion being drawn that there was a failure on the part of the Petitioner to make a full and true disclosure of the primary facts as contemplated by the first proviso to Section 147. 34. The Revenue has relied upon Explanation 1 to Section 147 to come to the conclusion that there was a failure on the part of the Petitioner to make a full and true disclosure. This contention of the Revenue, in our opinion, cannot be accepted for the reason that the sole allegation for the belief that income has escaped assessment is that the Petitioner has failed to furnish a certificate as contemplated in the third proviso to Section 24(2). If that be so, we do not understand how it could be said that the production before the Assessing Officer of accounts books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure with....
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....he proceedings must be struck down. 37. The only material which is not adverted to in the reasons, but is referred to in the Affidavit in Reply, is that there was an audit objection raised subsequent to the completion of the original assessment proceedings. We are of the view that it is now well settled by several judgments of this Court that the validity of the reopening has to be tested on the basis of the reasons recorded. We may refer only to the judgment in Hindustan Lever Limited vs. Deputy CIT 268 ITR 332 that the validity of the reasons has to be adjudicated on the basis of what is stated therein and not by relying on something stated in the affidavit. Even otherwise we are of the view that as held by the Supreme Court in the case of Indian and Eastern Express Newspaper Limited (Supra), the factual material that was pointed out by the audit department viz., the absence of a certificate, cannot give Respondent No. 1 a valid basis to exercise the re-assessment proceedings. 38. The judgment of the Delhi High Court in Honda Siel Power Products Limited (Supra) relied upon by the Revenue is wholly in apposite. One of the reasons given by the Assessing Officer in that case t....