1 IN HIGH COURT OF JUDICATURE AT MADRAS DATE : 08.06.2015 CORAM HONOURABLE MR. JUSTICE R.SUDHAKAR AND HONOURABLE MS. JUSTICE K.B.K.VASUKI T.C.A. NO. 1363 OF 2007 Commissioner of Income Tax Chennai. .. Appellant - Vs - Arvind Remedies Ltd. 190, Poonamallee High Road Chennai. .. Respondent Appeal filed under Section 260-A of Income Tax Act against order dated 19.1.07 passed by Income Tax Appellate Tribunal, Madras 'A' Bench, Chennai, made in ITA No.707/Mds/2005. For Appellant : Ms. Hema Muralikrishnan For Respondents : Mr. S.Sridhar JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) Aggrieved by order of Tribunal in allowing appeal filed by assessee, appellant/Revenue is before this Court by filing present appeal. Vide order dated 24.10.07, this Court, while admitting appeal, framed following substantial question of law for consideration :- "Whether in facts and circumstances of case, 2 Tribunal was right in holding that reopening of assessment is bad in law and setting aside reassessment proceedings?" 2. facts, in nutshell, are as hereunder :- respondent/assessee is engaged in business of manufacture and sale of drugs. assessment pertains to assessment year 1996- 1997. assessee filed return of income on 29.11.1996 admitting total income of Rs.14,45,260/=. return was subsequently selected for scrutiny and income was assessed at Rs.17,16,211/= by order dated 31.3.96. Subsequently, after expiry of four years, Section 147 proceeding was initiated by issue of notice dated 4.2.03 under Section 148 of Income Tax Act. According to department, assessee company purchased software package and expenses incurred in this regard was claimed as revenue deduction, which is contrary to Section 37 of Income Tax Act, whereas said deduction should have been allowed under Section 35D of Act. This amount, according to department, is capital in nature. Insofar as project appraisal fee paid to ITCOT is concerned, claim for revenue deduction was totally allowed, though one-tenth of expenditure alone is eligible for being claimed as revenue expenditure. On basis of this proceeding, income was determined and reassessment was ordered, which was challenged in appeal. 3 3. CIT (Appeals), vide order dated 24.12.04, dismissed appeal filed by assessee and, thereafter, matter was taken up before Tribunal by assessee. Tribunal accepted assessee's plea that there was no failure on part of assessee to disclose fully and truly all material facts necessary for his assessment and action taken under Section 147 r/w Section 148 of Act has been taken in this case after expiry of four years from end of relevant assessment year despite fact that original assessment was filed under Section 143 (3) of Act. Further, Tribunal held that it was never case of Revenue that there was failure on part of assessee to disclose fully and truly all material facts necessary for assessment for relevant assessment year. In such view of matter, Tribunal allowed appeal filed by assessee. Aggrieved by said order of Tribunal, Department has filed present appeal on above substantial question of law. 4. Learned standing counsel appearing for appellant/Revenue vehemently contended that finding of Tribunal that reopening is bad as there was no failure on part of assessee to disclose material facts at time of regular assessment is totally wrong. It is further submitted that in original assessments, Assessing Officer had no occasion to consider issue of disallowance in respect of amount paid to ITCOT towards integrated system package. Tribunal failed to appreciate that Explanation 1 to Section 147 is applicable to facts of 4 present case. On above contentions, learned standing counsel for Revenue prayed for setting aside order of Tribunal. 5. Heard learned standing counsel appearing for appellant/Revenue and learned counsel appearing for respondent/assessee and perused materials available on record. 6. Before going into merits of case, for better appreciation, we first consider scope of Section 147 and first proviso, which reads as follows:- "Income escaping assessment. 147. If Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to provisions of sections 148 to 153, 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 course of proceedings under this section, or recompute loss or depreciation allowance or any other allowance, as case may be, for assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as relevant assessment year) : Provided that where assessment under sub- section (3) of section 143 or this section has been made for relevant assessment year, no action shall be taken under this section after expiry of four years from end of relevant assessment year, unless any income chargeable to tax has escaped assessment. 5 Provided further that Assessing Officer may assess or reassess such income, other than income involving matters which are subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1. Production before Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by Assessing Officer will not necessarily amount to disclosure within meaning of foregoing proviso. Explanation 2. For purposes of this section, following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely : (a) where no return of income has been furnished by assessee although his total income or total income of any other person in respect of which he is assessable under this Act during previous year exceeded maximum amount which is not chargeable to income-tax ; (b) where return of income has been furnished by assessee but no assessment has been made and it is noticed by Assessing Officer that assessee has understated income or has claimed excessive loss, deduction, allowance or relief in return ; (c) where assessment has been made, but (i) income chargeable to tax has been underassessed ; or (ii) such income has been assessed at too low rate ; or (iii) such income has been made subject of excessive relief under this Act ; or (iv) excessive loss or depreciation allowance or any other 6 allowance under this Act has been computed." (emphasis supplied) 7. plain reading of above provision reveals that if Assessing Officer had reason to believe that income chargeable to tax had escaped assessment, in exercise of his power under Section 147 of Income Tax Act, he may pursue matter in accordance with said provision by issuing notice to assessee within period of four years. Admittedly, in present case, proceedings initiated is beyond period of four years from end of relevant assessment year. It is not case of Department that assessee has failed to file return under Section 139 or failed to respond to notice issued under Section 142 or Section 148 of Income Tax Act . only other issue is whether there was any failure on part of assessee to disclose fully and truly all material facts necessary for assessment for that assessment year. 8. cursory look at order of Tribunal reveals that Tribunal has taken into consideration all aspects surrounding invocation of proceeding under Section 147 r/w 148 of Income Tax Act and has arrived at its finding. Assuming for moment that claim in respect of those two heads has not been properly made, if at all it could be ground for Department to initiate proceeding under Section 263 of Act and not under Section 147 of Act. 7 9. Explanation (1) to Section 147 of Income Tax Act cannot be pressed into service by Department in instant case, because details of such claim has been revealed during regular assessment and complete details have been provided before Assessing Officer. If Assessing Officer has not considered same at time of passing order under Section 143(3) of Income Tax Act, assessee cannot be fastened with any liability for same. Therefore, Explanation (1) Section 147 does not get attracted to this case. In this case, we find that finding of Tribunal is that Proviso to Section 147 of Income Tax Act does not get attracted since it is clear from order of Tribunal that it was failure on part of Assessing Officer to consider material and assessee had placed all materials before Assessing Officer during regular assessment. 10. We find from order of Tribunal and also on facts as has been culled out from assessment order in question that there is no element of failure to disclose fully and truly all material facts necessary for assessment. Therefore, there was no justification for department for invocation of proceeding under Section 147 r/w 148 of Income Tax Act. 11. Our stand is further fortified by decision of this Court in TCA No.217/2015 dated 2.6.2015, wherein in similar matter, this Court has 8 held as under :- "16. Our view is fortified by decision of Full Bench of Delhi High Court in case of Commissioner of Income Tax V. Kelvinator of India Ltd. reported in [2002] 256 ITR 1 (Del), wherein, Delhi High Court held as follows: We are unable to agree with submission of Mr. Jolly to effect that impugned order of reassessment cannot be faulted as same was based on information derived from tax audit report. tax audit report had already been submitted by assessee. It is one thing to say that Assessing Officer had received information from audit report which was not before Income-tax Officer, but it is another thing to say that such information can be derived by material which had been supplied by assessee himself. We also cannot accept submission of Mr. Jolly to effect that only because in assessment order, detailed reasons have not been recorded analysis of materials on record by itself may justify Assessing Officer to initiate proceeding under section 147 of Act. said submission is fallacious. order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When regular order of assessment is passed in terms of said sub-section (3) of section 143 presumption can be raised that such order has been passed on application of mind. It is well known that presumption can also be raised to effect that in terms of clause (e) of section 114 of Indian Evidence Act judicial and official acts have been regularly performed. If it be held that order which has been passed purportedly without application of mind would itself confer jurisdiction upon Assessing Officer to reopen proceeding with out anything 9 further, same would amount to giving premium to authority exercising quasi-judicial function to take benefit of its own wrong. 17. above said decision of Full Bench of Delhi High Court was upheld by Supreme Court in decision reported in [2010] 320 ITR 561 (SC) Commissioner of Income-Tax - Vs - Kelvinator of India Ltd., wherein Supreme Court held that concept of "change of opinion" on part of Assessing Officer to reopen assessment did not stand obliterated after substitution of Section 147 of Income Tax Act. Supreme Court also held that Assessing Officer has power to reopen assessment, provided there is "tangible material" to come to conclusion that there was escapement of income from assessment. For better appreciation, relevant portion of said decision reads as follows: 6. On going through changes, quoted above, made to section 147 of Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, reopening could be done under above two conditions and fulfilment of said conditions alone conferred jurisdiction on Assessing Officer to make back assessment, but in section 147 of Act (with effect from 1st April, 1989), they are given go-by and only one condition has remained, viz., that where Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give schematic interpretation to words " reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to Assessing Officer to reopen assessments on basis of " mere change of 10 opinion", which cannot be per se reason to reopen. We must also keep in mind conceptual difference between power to review and power to reassess. Assessing Officer has no power to review ; he has power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if concept of " change of opinion" is removed, as contended on behalf of Department, then, in garb of reopening assessment, review would take place. One must treat concept of " change of opinion" as in-built test to check abuse of power by Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to reopen, provided there is " tangible material" to come to conclusion that there is escapement of income from assessment. Reasons must have live link with formation of belief. Our view gets support from changes made to section 147 of Act, as quoted hereinabove. Under Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted words " reason to believe" but also inserted word " opinion" in section 147 of Act. However, on receipt of representations from companies against omission of words " reason to believe", Parliament reintroduced said expression and deleted word " opinion" on ground that it would vest arbitrary powers in Assessing Officer. We quote hereinbelow relevant portion of Circular No. 549 dated October 31, 1989 ([1990] 182 ITR (St.) 1,29), which reads as follows : "7.2 Amendment made by Amending Act, 1989, to reintroduce expression ' reason to believe' in section 147. number of representations were received against omission of words ' reason to believe' from section 147 and their substitution by ' opinion' of 11 Assessing Officer. It was pointed out that meaning of expression, ' reason to believe' had been explained in number of court rulings in past and was well settled and its omission from section 147 would give arbitrary powers to Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, Amending Act, 1989, has again amended section 147 to reintroduce expression ' has reason to believe' in place of words ' for reasons to be recorded by him in writing, is of opinion' . Other provisions of new section 147, however, remain same." (emphasis supplied) 18. Similar view has been taken by this Court in decision reported in [2009] 309 ITR 110 (Mad) Commissioner of Income-Tax - Vs - Cholamandalam Investment and Finance Co. Ltd., wherein it was held as follows: In those circumstances, it could not be regarded that assessee had failed to disclose fully and truly all material facts relevant for assessment. As facts revealed that Assessing Officer who made original assessment order has called for all details regarding case where 100 per cent. depreciation were claimed and assessee had furnished invoices for purchase of assets on which 100 per cent. depreciation were claimed, there was no failure on part of assessee and if at all there was any failure, according to Commissioner of Income-tax (Appeals), it was on part of Assessing Officer, who made original assessment without going behind nature of transactions accepting details furnished by assessee. Tribunal also extracted that portion of order and found on fact that there was no fault on part of assessee so as to enable Department to reopen assessment as 12 proviso to section 147 of Income-tax Act would squarely apply to case of assessee. We find no infirmity in order passed by Tribunal. Hence, appeal is dismissed. 19. In identical circumstances, learned single Judge of this Court considered issue in decision reported in [2000] 241 ITR 672 (Mad) Fenner (India) Ltd. - Vs - Deputy Commissioner of Income-Tax, wherein, it was observed as follows: pre-condition for exercise of power under section 147 in cases where power is exercised within period of four years from end of relevant assessment year is belief reasonably entertained by Assessing Officer that any income chargeable to tax has escaped assessment for that assessment year. However,when power is invoked after expiry of period of four years from end of assessment year, further pre-condition for such exercise is imposed by proviso namely, that there has been failure on part of assessee to make return under section 139 or in response to notice issued under section 142 or section 148 or failure on part of assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Unless, condition in proviso is satisfied, Assessing Officer does not acquire jurisdiction to initiate any proceeding under section 147 of Act after expiry of four years from end of assessment year. Thus, in cases where initiation of proceedings is beyond period of four years from end of assessment year, Assessing Officer must necessarily record not only his reasonable belief that income has escaped assessment but also default or failure committed by assessee. Failure to do so would vitiate notice and 13 entire proceedings. relevant words in proviso are, . . . . unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on part of assessee ... . . Mere escape of income is insufficient to justify initiation of action after expiry of four years from end of assessment year. Such escapement must be by reason of failure on part of assessee either to file return referred to in proviso or to truly and fully disclose material facts necessary for assessment. Whenever notice is issued by Assessing Officer beyond period of four years from end of relevant assessment year, such notice being issued without recording reasons for his belief that income escaped assessment, it cannot be presumed in law that there is also failure on part of assessee to file returns referred to in proviso or failure to fully and truly disclose material facts. reasons referred to in main paragraph of section 147 would, in cases where proviso is attracted, include reasons referred to in proviso and it is necessary for Assessing Officer to record that any one or all circumstances referred to in proviso existed before issue of notice under section 147.... ......... duty of assessee is limited to fully and truly disclosing all material facts. assessee is not required thereafter to prepare draft assessment order. If details placed by assessee before Assessing Officer were in conformity with requirements of all applicable laws and known accounting principles, and material details had been exhibited before Assessing Officer, it is for Assessing Officer to reach such conclusions as he considered was warranted from such data and any failure on his part to do so 14 cannot be regarded as assessee s failure to furnish material facts truly and fully. Any lack of comprehension on part of Assessing Officer in understanding details placed before him cannot confer justification for reopening assessment, long after period of four years had expired. On facts of this case, it is clear that escapement of income, if any, on this account is not on account of any failure on assessee s part to disclose material facts fully and truly. notice issued by Assessing Officer in exercise of his power under section 147, therefore, cannot be sustained. As error here is one of jurisdiction it is not necessary for assessee to have recourse to remedies by way of appeal, revision, etc. It is well settled that when jurisdictional error is brought to notice of this court such errors are capable of being corrected by this court in exercise of court s powers under article 226 of Constitution of India. Supreme Court in case of CIT v. Progressive Engineering [1993] 200 ITR 231 (sic), held that when all relevant facts were before court and law is clear on subject, it is duty of High Court to interfere. That was also case where proceedings were sought to be initiated against assessee under section 147 of Act. 20. In case of ICICI Securities Ltd. V. Assistant Commissioner of Income Tax 3(2), Mumbai, Bombay High Court vide order dated 22.08.2006 in W.P.No.1919 of 2006, while dealing with issue on reopening of assessment, held as follows: "7. In facts of present case, there is nothing new which has come to notice of revenue. accounts had been furnished by Petitioner when called upon. 15 Thereafter assessment was completed under section 143(3) of Income Tax Act. Now, on mere relook, officer has come to conclusion that income has escaped assessment and he is of course justified in his analysis. In our view, this is not something which is permissible under proviso to section 147 of Income Tax Act which speaks about failure on part of assessee to make proper return. In present case, no such case is made out on record. 8. In circumstances, we allow this petition in terms of prayer (a) and quash and set aside notice dated 27th March 2006 directing reopening of assessment for year 1999-2000. 21. above-said view of Bombay High Court was affirmed by Supreme Court in Civil Appeal No.5960 of 2012. 12. In light of above, we hold that when Assessing Officer had failed to record anywhere his satisfaction or belief that income chargeable to tax had escaped assessment on account of failure of assessee to disclose truly and fully all material facts necessary for assessment. On contrary, it was Assessing Officer, who failed to consider materials placed before him at time of regular assessment for which assessee cannot be found fault with. Therefore, notice issued under Section 147 of Income Tax Act beyond period of four years was wholly without jurisdiction and cannot be sustained. Accordingly, for reasons stated above, substantial question of law is 16 answered in favour of respondent/assessee and against appellant/Revenue. 13. Accordingly, this appeal filed by appellant/Department fails and same is dismissed confirming order passed by Tribunal. In circumstances of case, there shall be no order as to costs. (R.S.J.) (K.B.K.V.J.) 08.06.2015 Index : Yes/No Internet : Yes/No GLN To 1. Commissioner of Income Tax Chennai. 2. Income Tax Appellate Tribunal Madras 'A' Bench, Chennai. 17 R.SUDHAKAR, J. AND K.B.K.VASUKI, J. GLN T.C.A. NO. 1363 OF 2007 08.06.2015 Commissioner of Income-tax Chennai v. Arvind Remedies Ltd