1 A.F.R. Court No. - 35 Case :- WRIT TAX No. - 812 of 2016 Petitioner :- M/S Kanpur Texel(P) Limited Respondent :- Deputy Commissioner Of Income Tax- 4,Kanpur And Another Counsel for Petitioner :- Suyash Agarwal Counsel for Respondent :- Csc(It),Praveen Kumar Hon'ble Bharati Sapru,J. Hon'ble Saumitra Dayal Singh,J. (Delivered by Hon'ble Saumitra Dayal Singh, J.) Heard Shri Rakesh Ranjan Agrawal, learned Senior Advocate assisted by Shri Suyash Agrawal, learned counsel for petitioner and Shri Praveen Kumar, learned counsel for department. This writ petition has been filed against initiation of reassessment proceedings for Assessment Year 2009-10 under Income Tax Act, 1961 (hereinafter referred to as 'Act'), vide notice dated 23.03.2016. petitioner is company. It is 100 percent Export Oriented Unit engaged in manufacture of textile narrow woven fabrics, cords, laces, yarn etc. It also has unit engaged in dyeing and processing yarn, narrow woven fabrics etc., on job work basis. For assessment year 2009-10, petitioner filed its e-return of income disclosing total income Rs.24,18,597/-. Upon scrutiny assessment being made under Section 143 (3) of Act, income of petitioner was assessed at Rs. 25,94,450, vide 2 assessment order dated 28.12.2011. During those assessment proceedings, various queries were made to assessee amongst others with respect to investment made in shares amounting to Rs.1.45 crores made through broker Motilal Dhulichand (P) Ltd. and another investment made in construction of building at plot no. 12B Dada Nagar Kanpur amounting to Rs.55,42,976/-. exact nature of queries is borne out from order-sheet entries copies of which have been annexed along with supplementary affidavit filed in these proceedings. Thus, vide order sheet entry dated 18.11.2011 petitioner had been asked to reply and justify investment in construction of factory at 12 B Dada Nagar, Kanpur as also to produce purchase deed of said plot. Further, petitioner had been required to file evidence to justify investment in share capital amounting to Rs.1.45 crores. In reply to aforesaid queries, petitioner appears to have filed at least two replies dated 25.11.2011 and 30.11.2011. perusal of those replies annexed to writ petition brings out fact that assessee had explained to its Assessing Officer that it had made investment of Rs. 55,42,926/- in construction of factory building at 12 B Dada Nagar, Kanpur . He had further furnished details of dates on which said investment was made and different heads (such as architect's fees, payment to contractors, 3 expenditure made on purchase of various construction material etc) against which such payment had been made. Further, item wise details were also furnished of expenditure so made. copy of sale deed of land in question was also attached to that reply. Then, it was further explained that petitioner had one bank account with Canara Bank bearing number 1673261010373. All payments above described were stated to have been made from that account and were also stated to be verifiable from bills and bank statement of that bank account. Further, as to investment in share capital of Rs.1.45 crores, it was explained that said investment had been made from aforesaid bank account of petitioner at Canara Bank. In its reply dated 30.11.2011 petitioner further clarified that it had surplus available with it from profits earned in present year as also earlier years, in excess of Rs. 3.00 crores, which were sufficient to cover amount of investment of Rs.1.45 crores in shape capital. It then appears that assessing officer did not make further queries in that regard and also he did not make any mention of aforesaid queries and their replies in assessment order dated 26.12.2011 for assessment year 2009-10. Also, he did not make any 4 addition to income of petitioner on that count. However, certain other additions were made. Those are not subject-matter of present writ petition. Thereafter, internal audit party of income tax department appears to have raised some objection/s with reference to assessment order dated 26.12.2011 whereafter, reassessment notice was issued to petitioner on 23.03.2016, to initiate re-assessment proceedings against it for Assessment Year 2009-10. In reasons to believe supplied to petitioner it is stated that subsequent to completion of assessment it came to notice of assessing authority that assessee had made investment of Rs.1.45 crores in shares through M/s Motilal Dulichand (P) Ltd. and that such investment had been made from loan taken by it from Canara Bank. Similarly, it has been alleged that assessee had invested amount of Rs. 55,42,976/- in building at 12B Dada Nagar Kanpur from funds drawn from aforesaid bank loan and that building had been used for non-business purpose. Apparently, because petitioner did not claim depreciation thereon it has been reasoned that petitioner has not treated it as business asset. Thereafter, it has been further noted that total outstanding loan from Canara Bank, as on 31st March 2009 stood at Rs. 2,13,94,853/- as against opening balance of Rs.1,57,43409/-. Therefore, reason to 5 believe has been recorded that income had escaped assessment to extent of business expenditure has been allowed by way of interest paid to Canara Bank on business loan (to extent of amounts of Rs.1,45,00,000/- and Rs. 55,42,976/-). petitioner had raised objection to aforesaid 'reasons to believe'. Those have also been rejected by assessing officer vide order dated 08.11.2016. Hence this writ petition. At present, petitioner has raised three grounds of challenge. In first place, learned Senior Counsel Shri Rakesh Ranjan Agrawal, assisted by Shri Suyash Agrawal submits that during assessment proceedings under section 143(3) of Act for A.Y. 2009-10, petitioner had made full and true disclosure of all material facts relevant to 'reason to believe' subsequently recorded. reassessment notice first issued on 23.03.2016 falls outside four years from end of Assessment Year 2009-10. Therefore, reassessment proceedings are barred under first proviso of Section 147 of Act. In his submission, once entire primary and material facts were before assessing officer with respect to issue of utilization of business funds and surplus funds available to petitioner as also expenditure made by him, condition precedent for application of bar under proviso under Section 147 6 was satisfied. He relies on judgment of this Court in case of M/S Aci Oils Pvt. Ltd. Vs. Dy. CIT and another passed in Writ Tax No.576 of 2014 dated 29.10.2014 wherein it has been held as below:- In present case, reopening of assessment has taken place beyond period of four years of end of relevant assessment year, A.Y. 2007-08. notice under Section 148 was issued on 31 March 2014. Under proviso to Section 147, jurisdictional requirement is that where reopening of assessment takes place beyond period of four years after expiry of relevant assessment year, there should have been failure on part of assessee to disclose fully and truly all material facts necessary for assessment, for that assessment year. In present case, there is merit in submission which has been urged on behalf of petitioner that reasons which have been disclosed, in fact, would indicate that it is from perusal of assessment records that Assessing Officer formed opinion that income had escaped assessment. (emphasis supplied) Then, it has further been submitted that bare perusal of order sheet entry and reply furnished by petitioner during scrutiny of assessment proceedings also make it clear that not only primary and material facts had been fully and truly disclosed by petitioner in those proceedings, but assessing officer had also applied his mind to same. He first questioned allowability of both investments i.e. Rs.1.45 crores in share capital as also investment made in construction of building. petitioner had given full and complete reply wherein, amongst 7 others, it had also stated that investment - be it in share capital or in construction was made only though one/same bank account held with Canara Bank bearing account number 1673261010373. petitioner had also shown it had sufficient business surplus available with it. In this background it has been submitted that no new or other material has come on record before assessing officer after completion of regular assessment proceedings that may lead to formation of reason to believe that any part of non-business investment has been made by petitioner from its interest-bearing loans advanced by Canara Bank. assessing officer has merely looked into self-same assessment record to reach different belief occasioned solely by audit objection raised by internal audit party of income tax department. Thus, it has been submitted that there is no information or material on record that may result in reason to believe that any income had escaped assessment at its hands. In this regard, reliance has been placed on decision of Division Bench of this Court in case of Arun Gupta Vs. Union of India reported in (2015) 371 ITR 394 (Allahabad), wherein in re-assessment proceedings arising under Act, it had been held that for valid reasons to believe to arrive there must exist some material on basis of which reasonable belief 8 may arise. If there is no material for formation of belief, jurisdiction to reassess may not arise. Para 20 of judgment relied upon in this regard is quoted below:- "It is settled law that Assessing Officer having reasons to believe that there had been some omission or failure to disclose fully or truly all material facts necessary for assessment must be based on some material facts which according to Assessing Officer is based on some reasonable belief and which would have material bearing on question of under assessment. If there is no material for formation of any belief or where purported belief was nothing but mere change of opinion, in that case, Assessing Officer would have no jurisdiction to initiate proceedings u/s 147 and 148 of Act. Assessing Officer has power to reopen assessment where he has reasons to believe that income chargeable to tax has escaped assessment but such re-assessment cannot be initiated on mere change of opinion to merely re-examine issue on basis of information or material which was already available to Assessing Officer at time of completion of original assessment. Consequently, before taking any action, Assessing Officer is required to substantiate his satisfaction with reasons recorded by him. (emphasis supplied) Then, reliance has also been placed on judgment of Bombay High Court in Idea Cellular Ltd. V. Dy. CIT reported in [2008] 301 ITR 407 (Bombay) wherein it has been held that merely because assessing officer may not express any opinion regarding any matter in original assessment order, it cannot be said that he had not applied his mind through entire material was placed by petitioner before 9 assessing officer. relevant portion of that judgment relied upon by petitioner is quoted below: "It was also sought to be contended that since Assessing Officer had not expressed any opinion regarding this matter in his original assessment order, it could not be said that there was any change of opinion in this case. In our view, once all material was before Assessing Officer and he chose not to deal with several contentions raised by petitioner in his final assessment order, it cannot be said that he had not applied his mind when all material was placed by petitioner before him." (emphasis supplied) Responding to above submissions, Shri Praveen Kumar, learned counsel for department submits that bar of proviso of Section 147 would not apply because petitioner had not made full and true disclosure during assessment proceedings. In this regard, he has taken us through reply as furnished by petitioner in regular assessment proceedings to submit that at no stage in regular assessment proceedings did petitioner submit that investment in construction of building was made from surplus available with him. However, he does not deny that in it's reply petitioner had stated that investment in share capital (Rs. 1.45 crores) had been made from such surplus. objection raised by learned counsel for revenue is that specific reply had not been given by assessee of having made investment in construction 10 of building from such surplus and therefore, full and true disclosure had not been made by it. Therefore, it his submission that non-business investments had been made by petitioner from loans received by petitioner from Canara Bank. Therefore, interest payment on such business loan proportionate to or referable to amounts spent on such investments is liable to be disallowed. same has escaped assessment and assessee is liable to tax thereon. Having considered arguments so advanced, we observe, it is first necessary to examine nature and extent of disclosure made by petitioner in regular assessment proceedings with respect to subject matter of 'reasons to believe' formed by assessing authority to initiate reassessment proceedings. In this regard we notice, in it's replies dated 25.11.2011 and 30.11.2011 assessee had categorically stated therein that (i) it had operated only one bank account with Canara Bank and that it had no other bank account with any bank (ii) entire investment made in construction of property was from aforesaid bank account with Canara bank (iii) thereafter, as part of same reply, petitioner had also stated that it had made investment of Rs.1.45 crores in share capital from that bank account. If petitioner had left its reply at that, without giving details of surplus, it may have been 11 arguable issue whether disclosure of facts was full and true though even in that case effect of figures of business surplus available to petitioner duly reflected in its books of account and audited results as also reflected in income tax return would remain to be seen. However, in facts of this case, besides disclosure of facts contained in its books of account and audited results that itself amounted to disclosure of facts, petitioner had also been queried in this regard and it had specifically replied and stated as below: "That assessee has earned profits of Rs.1,20,01,834/- during year, and has also shown profit of Rs.1,01,63,293/- and 90,00,897/- for assessment year 2008-09 which is indirectly credited in credit account, as assessee has no other Bank account." Thus, we find petitioner had given details of surplus available being in excess of Rs.3 crores. It had also disclosed source of that surplus being business profit for previous years relevant to Assessment Years 2009-10, 2008-09 and 2007-08. Reading reply thus furnished by petitioner in it's entirety, it is unambiguously clear that primary and material facts disclosed by petitioner at stage of regular assessment proceedings were to effect that it had surplus far in excess of amount invested either by way of share capital or by way of investment in construction of building. While recording 'reason to believe' petitioner's assessing authority did not doubt 12 correctness of those facts or disclosures as either untrue or incomplete. Thus, merely, because petitioner did not specifically state that it had made investment in property from such surplus, though at same time it had stated that it had only one bank account and that it made all investments from same bank account and that it had sufficient funds (in excess of Rs. 3 crores) available with it, much in excess of total investment so made (Rs. 2 crores approximately), objection raised by learned counsel for revenue loses its relevance. Once petitioner had disclosed availability of sufficient own funds to cover investment amount, allegation of utilization of business funds to make investments could not arise or survive. In any case, for first proviso to Section 147 to apply, it was sufficient that petitioner had made disclosure of availability of sufficient own funds during regular assessment proceedings. correctness of that disclosure has not been doubted even at stage of reason being recorded by assessing authority to initiate reassessment proceedings inasmuch as it is not case of revenue that after completion of regular assessment proceedings under section 143(3) of Act, assessing authority has come in possession of any material or information that petitioner's stand as to amount of business surplus contained in its replies filed 13 at original assessment stage was wrong or false. correctness or completeness of that disclosure was not in doubt by assessing authority at stage of reason being recorded by him. In this light, we find all facts and material on which 'reason to believe' have now been recorded existed before assessing authority during regular assessment proceedings under section 143(3) of Act. Thus 'true' disclosure of all necessary primary and material facts had been made by petitioner during those assessment proceedings. Then as to completeness of disclosure of such facts, we find, in its reply dated 30.11.2011, assessee had made plain fact of it having operated only one bank account, of having sufficient credit balances in excess of Rs. 3.00 crore and; of having made all investments (especially investment in share capital) from that bank account. Thus, to our mind, disclosure (of material facts pertaining to two investments) made by petitioner during regular assessment proceedings was both full and true. It was thereafter up to assessing officer to form his view on such facts for purpose of making assessment. This Court in case of Foramer France Vs. CIT reported in (2001) 247 ITR 436 (AII) has upheld as follows:- In our opinion, we have to see law prevailing on date of issue of notice under Section 148, i.e., November 20, 1998. Admittedly, by that date, new 14 Section 147 has come into force and, hence, in our opinion, it is new Section 147 which will apply to facts of present case. In present case, there was admittedly no failure on part of assessee to make return or to disclose fully and truly all material facts necessary for assessment. Hence, proviso to new Section 147 squarely applies, and impugned notices were barred by limitation mentioned in proviso. (emphasis supplied) aforesaid judgment was affirmed by Supreme Court in CIT Vs. Foramer France reported in (2003) 264 ITR 566. To same effect is latter decision of this Court in case of M/S Aci Oils Pvt. Ltd. Vs. Dy. C.I.T. and Another referred to above. In that view of admitted fact and law as laid down by this Court noted above, we conclude reassessment proceedings initiated against petitioner for Assessment Year 2009-10 vide notice dated 23.03.2016 is wholly barred under proviso to Section 147 of Act. Then, it also cannot be lost sight that not only did petitioner make full and true disclosure of primary facts in course of regular assessment proceedings but that disclosure had been made in response to specific queries made by assessing officer, in essence, doubting genuineness of claim of investment made by petitioner in share capital and also construction of building. He specifically required petitioner to substantiate claim and disclose 15 source of that investment. To that extent, petitioner's assessing authority was cognizant of and had applied his mind to issue. Then, on its part, petitioner not only gave break up investment so made but also gave further details of same with date wise schedule of investment made as also channel through which those investments were made - being its solitary bank account with Canara Bank together with disclosure of funds/surplus available to cover investment made by it. Admittedly, no other material exists nor has any new material being brought on record by department to doubt correctness of claim so made by assessee during assessment proceedings. assessing officer was required to record his 'reason to believe' on basis of material already existing on record. That requirement necessarily involved both, existence of 'reason' required to be recorded in writing as to 'belief' entertained that certain income had escaped assessment. It may be worthwhile to revisit law relevant to this issue arising in present case. As early as 1961 Supreme Court had in case of Calcutta Discount Co. Ltd. Vs. ITO reported in (1961) 91 ITR 91 (SC) held that duty of assessee extended to disclosure of primary and material facts and that duty did not extend to disclosure of inferential fact. This principle enunciated almost six decades ago has withstood test of time and 16 remains relevant and applicable despite repeated legislative changes to Act. Then as to meaning to be given to phrase 'reason to believe' appearing in section 147 of Act, it is seen, same was examined in similar context by Supreme Court in Ganga Saran and Sons (P) Ltd. Vs. ITO (1981) reported in 130 ITR 1 (SC) wherein it was held as below:- "It is well settled as result of several decisions of this Court that two distinct conditions must be satisfied before Income Tax Officer can assume jurisdiction to issue notice under Section 147 (a). First, he must have reason to believe that income of assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of omission or failure on part of assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, notice issued by Income Tax Officer would be without jurisdiction. important words under Section 147 (a) are "has reason to believe" and these words are stronger than words "is satisfied". belief entertained by Income Tax Officer 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. Court, of course, cannot investigate adequacy or sufficiency of reasons which have weighed with Income Tax Officer in coming to belief, but Court can certainly examine whether reasons are relevant and have bearing on matters in regard to which he is required to entertain belief before he can issue notice under Section 147 (a). It there is no rational and intelligible nexus between reasons and belief, so that, for such reasons, no one properly instructed on facts and law could reasonably entertain belief, conclusion would be inescapable that Income Tax Officer could not have reason to believe that any part of income of assessee had escaped assessment and such 17 escapement was by reason of omission or failure on part of assessee to disclose fully and truly all material facts and notice issued by him would be liable to he struck down as invalid. (emphasis supplied) Also, as to nature of belief required to pre-exist to vest jurisdiction in assessing authority, Supreme Court in case of Sheo Nath Singh Vs. Appellate Assistant CIT reported in (1971) 82 ITR 147 (SC) held below:- "In our judgment, law laid down by this court in above case is fully applicable to facts of present case. There can be no manner of doubt that words "reason to believe" suggests that belief must be that of honest and reasonable person based upon reasonable grounds and that Income- tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumor. Income-tax Officer would be acting without jurisdiction if reason for his belief that conditions are satisfied does not exist or is not material or relevant to belief required by section. court can always examine this aspect though declaration or sufficiency of reasons for belief cannot be investigated by court." (emphasis supplied) Then in CIT Vs. Kelvinator of India reported in (2010) 320 ITR 561 (SC), in context of similar reassessment proceedings, Supreme Court while upholding full bench decision of Delhi High Court held as below:- On going through changes, quoted above, made to Section 147 of Act, we find that, prior to Direct Tax Laws (Amendment) Act, 1987, re-opening could be done under above two conditions and fulfillment of 18 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., where Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to re- open assessment. Therefore, post-1st April, 1989, power to re-open 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 re-open assessments on basis of "mere change of opinion", which cannot be per se reason to re-open. We must also keep in mind conceptual difference between power to review and power to re-assess. Assessing Officer has no power to review; he has power to re-assess. But re-assessment has to be based on fulfillment of certain pre-condition and if concept of "change of opinion" is removed, as contended on behalf of Department, then, in garb of re-opening 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 re-open, 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. (emphasis supplied) In instant case, we find that though it is not case of change of opinion, yet, in first place, Assessing Officer has initiated reassessment proceedings on basis of self-same material that he had examined during regular assessment proceedings under section 143(3) of Act. Second, he has merely recorded his belief that income had escaped assessment - solely on basis of his observation that 19 there was outstanding business loan against petitioner with Canara Bank. However, said belief has been entertained in ignorance of other fact existing on same record as to existence of surplus of nearly Rupees three crores arising from petitioner's business operations. assessee had disclosed that investment in question had been made from such business surplus. There is neither any material nor any reason to doubt existence of this fact, assessing officer could not have closed his eyes to same and only looked at business loan outstanding against him. belief thus drawn cannot be held to be founded or based or supported with reason. In such case, as held by earlier division bench of this Court in case of Arun Gupta (supra) material must be shown to be something concrete on basis of which reason to believe may arise. We find, in instant case, there does not appear to exist any tangible material acting which petitioner's assessing authority may have treated as 'direct or circumstantial' evidence to form bona fide 'reason' relevant to 'belief' of any income having escaped assessment at hands of petitioner. Besides fact that material that has been relied upon by petitioner's assessing authority had already been examined in course of regular 20 assessment proceedings, even if same material were to be looked into again same had to be looked into in entirety. petitioner's assessing authority could not have taken blinkered view of same and he could not have chosen to overlook part of that material to draw 'belief' or to 'reason' that some income had escaped assessment. He ought to have examined reply of assessee submitted in course of regular assessment proceedings also, wherein it had specifically stated that petitioner had operated only one bank account and that it had sufficient profits available to it to justify investments made by it. Had that part of reply been also taken note of, petitioner's assessing authority could not have formed 'reason' in support of 'belief' that income had escaped assessment at hands of petitioner because there is no 'tangible material' existing to doubt or disprove petitioner's reply that it made investments from its profits and not from loan taken by it from Canara Bank. In absence of such 'tangible material' no 'reason to believe' could arise of escapement on that count. Then, apparently, audit objection was raised as to procedure followed in assessment proceedings. nature of audit objection itself has not been spelled out by revenue either in 'reason to believe' or in counter affidavit filed in this petition. 21 Nevertheless, assuming same to be objection with respect to matter on which 'reason to believe' had eventually been recorded, same cannot substitute requirement of law that assessing officer must record his 'reason to believe' that any income has escaped assessment at hands of petitioner. Lastly, learned counsel for revenue has sought to place reliance on contents of paragraph 9 of counter affidavit wherein certain figures have been referred too, to allege that surplus as claimed by petitioner did not exist. Neither such figures have been mentioned nor they have been considered for 'reason to believe' recorded by Assessing Officer. revenue, therefore, cannot be allowed to improve its case by adverting to material which was not before Assessing Officer at stage of recording reasons to believe and which that officer had not considered by choosing to rely on same in counter affidavit. Therefore, for aforesaid reasons we find that reassessment proceedings initiated against petitioner for Assessment Year 2009-10 are barred on two counts i.e. for non-compliance of first proviso of Section 147; also no tangible material exists in support of belief recorded by Assessing Officer that income had escaped assessment. Consequently, 'reason' (to be formed by assessing authority) that is sine-qua-non as to 'belief' of escapement has also to be held to be 22 lacking or non-existent as unless there exists 'tangible material' no 'reason' may arise at all. Therefore, jurisdictional requirement of section 147 has not been shown to exist or established. reassessment proceedings initiated against petitioner for Assessment Year 2009-10 vide notice dated 23.03.2016 are quashed. writ petition is accordingly allowed. No order as to costs. Order Date:- 23.11.2017 Lbm/- Kanpur Texel(P) Limited v. Deputy Commissioner of Income-tax- 4, Kanpur and Another