TCA.Nos.66 & 67 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON : 17.03.2020 DELIVERED ON : 07 .05.2020 CORAM: HON'BLE MR. JUSTICE M.SATHYANARAYANAN AND HON'BLE MR.JUSTICE ABDUL QUDDHOSE TCA.Nos.66&67/2018 Principal Commissioner of Income Tax-6, No.121, Nungambakkam High Road Chennai-34. .. Appellant in both Appeals Vs. M/s.SKI Retail Capital Ltd No.4, Mookambika Complex Lady Desika Road, Mylapore, Chennai 600 004. .. Respondent in both Appeals Common Prayer: Tax Case Appeals preferred under Section 260A of Income Tax Act, 1961, against order of Income Tax Appellate Tribunal, Madras ''C'' Bench, dated 10.08.2017 in ITA Nos.2276/Mds/2016 and in C.O.No.129/Mds/2016 in ITA.No.2276/Mds/2016. For Appellant in both Appeals : Mr.J.Narayanaswamy, Senior Standing Counsel For Respondent in both Appeals : Mr.R.Sivaraman http://www.judis.nic.in 1 TCA.Nos.66 & 67 of 2018 COMMON JUDGMENT M.SATHYANARAYANAN, J. Tax Case Appeals are preferred against common order dated 10.08.2017 made in ITA.No.2276/Mds/2016 and C.O.No.129/Mds/2016 pertains to Assessment Year 2007-2008, by Revenue. 2. Facts in brief relevant and necessary for disposal of these appeals are as follows: 2.1. Income Tax Officer, Company Ward VI(1), Chennai / Assessing Officer, vide Assessment Order dated 25.11.2011 pertains to Assessment Year 2007-08, dealt with Return of Income filed by respondent Company on 31.10.2007 in and by which total income of Rs.23,92,140/- was admitted. return of income was processed under Section 143(1) of Income Tax Act, 1961 [in short IT Act ] on 06.03.2009. 2.2. case was reopened under Section 148 of IT Act on 26.08.2010 by issuance of notice and in response to same, respondent/assessee has sent letter dated 14.09.2010 stating that Return of Income already filed by him be treated as Return filed by him in http://www.judis.nic.in 2 TCA.Nos.66 & 67 of 2018 compliance of Notice issued under Section 147 of IT Act dated 26.08.2010. 2.3. Personal hearing was afforded and details were also called for from time to time. Assessing Officer finalized assessment under Section 143(3) r/w. Section 147 of IT Act as follows: Total Income Computation: Rs. Total Income admitted 23,92,137 Add:1.Disallowance u/s 14A 14,602 2.Depreciation 10,979 3.Donation 100 25,681 ----------------------------------- Total Income determined 24,17,818 ----------- Tax, S.C. & E.C. 8,13,837 Less : TDS 16,16,214 ------------ Refund 8,02,377 Add: 244-A Interest 96,285 ------------ Total Refund 8,98,662 Less: Refund already issued 9,08,420 ------------ Balance Payable 9,758 ------------ 2.4. Assessing Officer subsequently had noticed certain income chargeable to tax has escaped assessment for Assessment Year 2007- 2008 and accordingly, said assessment was reopened with approval http://www.judis.nic.in 3 TCA.Nos.66 & 67 of 2018 of Commissioner of Income Tax [CIT]- VI and notice under Section 148 of IT Act was issued on 31.03.2014. respondent/assessee, in response to said notice, filed Return of Income on 18.04.2014 and it was followed by notice under Section 143(2) of IT Act and that apart, details concerning assessment were also called for. 2.5. Authorized Representative / one of officials of respondent company appeared and furnished information called for and Books of Accounts and Bank Account Statements were produced and verified. Assessing Officer, after taking note of materials as well as explanation offered by Assessee, had found that Road Safety Club Private Limited (RSC) is sister concern of assessee company and they were doing services to respondent company / SKI Retail Capital Ltd., in terms of Insurance Marketing etc., and advances were paid by RSC to SKI towards cost of services. 2.6. Assessing Officer also noted by looking into share holding pattern of both companies and found that one Mr.V.Rajagopalan is holding substantial interest in both companies by holding 28% and 29.996% of shares and as such, found that provisions of Section 2(22)(e) http://www.judis.nic.in 4 TCA.Nos.66 & 67 of 2018 of IT Act is squarely applicable in respect of transactions involving both companies. 2.7. assessee / respondent's authorized representative was asked to show cause as to why loan amount of Rs.10,70,01,891/- received by assessee from RSC should not be treated as deemed dividend to extent of accumulated profits in books of RSC or else treat loans as income of assessee / respondent company? Authorized Representative of respondent company has submitted written representation dated 27.03.2015. Assessing Officer, after considering and scrutinizing materials, had treated credit balance as on 31.03.2007 amounting to Rs.5,30,99,960/- as deemed dividend in hands of respondent/company and completed scrutiny assessment, vide order dated 31.03.2015 and it is relevant to extract same: Total Income as per Order dt.25.11.2011 Rs. 24,17,818.00 Add: Deemed Dividend U/s.2(22)(e) Rs.2,29,00,539.00 ---------------------- Assessed Total Income Rs.2,53,18,357.00 Balance Tax Payable Rs.1,09,30,440.00 2.8. respondent/assessee, aggrieved by said Assessment http://www.judis.nic.in 5 TCA.Nos.66 & 67 of 2018 Order, filed appeal in ITA.No.55/CIT(A)-15/15-16 dated 25.05.2016 before Commissioner of Income Tax (Appeals) -15, Chennai-600 034. appellant/assessee before CIT (Appeals) contended among other things that notice under Section 148 of IT Act was issued after 4 years from Assessment Order despite fact that there was no failure on part of assessee to furnish truly and fully all material facts necessary for assessment. appellant/assessee also took stand that reopening of assessment is purely on account of audit objections for which Assessing Officer himself sent reply that there is no justification for raising objections and assessment can be reopened only if Assessing Officer is in possession of tangible materials/facts on basis of which, he had reason to believe that income had escaped assessment. appellant/assessee also contended as to sustainability of addition of Rs.2,29,00,539/- as deemed dividend under Section 2(22)(e) of IT Act and that apart, also took stand that credit balance in accounts of RSC cannot be treated as deemed dividend under Section 2(22)(e) of IT Act. Appellate Authority had allowed appeal partly, vide order dated 25.05.2016 by directing deletion of Rs.2,29,00,530/- towards deemed dividend. http://www.judis.nic.in 6 TCA.Nos.66 & 67 of 2018 2.9. Revenue, aggrieved by order of CIT in partly allowing appeal filed by assessee and dismissal of their grounds pertaining to assessment, filed ITA No.2276/Mds/2016 before Income Tax Appellate Tribunal 'C' Bench, Chennai [ITAT], wherein assessee/respondent filed cross objection in C.O.No.129/Mds/2016. ITAT, Chennai, vide impugned common order dated 10.08.2017, taking note of fact that there is audit objection, for which Assessing Officer, vide response dated 04.03.2014, had given reasons for dropping audit objections and therefore, it is obvious that Assessing Officer, after applying his mind, found that there is no escapement of income to assessment and subsequently, issued notice under Section 148 of IT Act for reopening of assessment. 2.10. Tribunal had recorded finding that Assessing Officer has not independently satisfied himself about escapement of income and further found that in absence of any material, is of considered opinion that reopening of assessment is not justified and accordingly, quashed order of Assessing Officer. Tribunal, in light of decision taken in cross-objection filed by assessee, found that it is http://www.judis.nic.in 7 TCA.Nos.66 & 67 of 2018 not necessary to go into merits of appeal filed by Revenue. 2.11. Revenue, aggrieved by dismissal of appeal filed by them and allowing of cross-objection filed by assessee, vide common order dated 10.08.2017 made in ITA.No.2276/Mds/2016 and C.O.No.129/Mds/2016, has filed these appeals. 3. Tax Case Appeals were admitted on 20.03.2018 on following Common Substantial Question of Law:- ''Whether assessment can be reopened under Section 147 of Income Tax Act, 1961, on basis of audit objection pointing out factual omissions in original assessment order?'' 4. Mr.J.Narayanaswamy, learned Senior Standing Counsel assisted by Mr.T.R.Senthil Kumar, learned counsel appearing for Revenue made following submissions: In audit objection, it was pointed out that assessee debited only expenditure incurred such as Salary etc., without any profit / http://www.judis.nic.in 8 TCA.Nos.66 & 67 of 2018 commission and it was only system/colourable device adopted by assessee to reduce tax liability, for which balance amount of Rs.6,01,84,164/- is to be treated as Net Profit and it had to be taxed under Section 69 of IT Act. Audit Party has also considered reply submitted by Assessing Officer and found that RSC is making reimbursement for expenses incurred by assessee company year after year and if that is so, RSC would have reimbursed exact expenses incurred by respondent/assessee and not any additional amount year after year and that apart, RSC did not make payment for rendering services and entire amount was required to be brought to tax and therefore, balance amount of Rs.6,01,84,164/- is required to be brought to tax and reiterated said fact. Assessing Officer had submitted his response dated 04.03.2014 reiterating their earlier stand for which there was communication dated 20.03.2014 from Deputy Director (DT) to Officer of CIT, Chennai (VI), vide letter dated 03.04.2014. Assessing Officer, has submitted his response dated 10.04.2014 stating among http://www.judis.nic.in 9 TCA.Nos.66 & 67 of 2018 other things that assumption that there is no agreement between assessee company and RSC is not correct and it will not be possible to tax advance received as revenue receipt even without service having been rendered. Deputy Director, DTI has sent reply for which Mr.K.Krishna Kumar, Income Tax Officer, Corporate Ward -6(3), Chennai-34, has sent his response dated 30.01.2015 through proper channel stating among other things as to justification of Assessment Order and requested for dropping of audit objection for all Assessment Years viz., 2007-08 to 2010-11. In Assessment Order dated 31.03.2015, Assessing Officer, on independent application of mind, had given cogent reasons as to credit balance of Rs.5,30,00,960/- in account of RSC as on 31.03.2007 as deemed income and audit objections pointed out did not dealt with said issue at all and as such, reopening of case on factual error pointed out by Audit Party is also permissible under law. http://www.judis.nic.in 10 TCA.Nos.66 & 67 of 2018 In sum and substance, it is submission of learned Senior Standing Counsel appearing for appellant that in light of points urged, Substantial Question of Law raised in this appeal is to be answered positively in favour of appellant. learned Senior Standing Counsel appearing for appellant, in support of his submissions, has placed reliance upon judgment rendered by Hon'ble Apex Court in Commissioner of Income-Tax v. P.V.S.Beedies (P). Ltd.[(1999) 237 ITR 13 (SC)]. 5. Per contra, Mr.R.Sivaraman, learned counsel appearing for respondent/assessee/company made following submissions: Assessing Officer, in response to audit objections, reiterated grounds for completing assessment and in fact, response to audit objections dated 30.01.2015 was submitted by Mr.S.Krishna Kumar, ITO, Corporate Ward -6(3), Chennai-34, but quite contrary to said stand had passed re-assessment order dated 31.03.2015 under Section 143(3) read with 147 of IT Act for Assessment http://www.judis.nic.in Year 2007-2007 and it virtually amounts to change of opinion and it 11 TCA.Nos.66 & 67 of 2018 is totally impermissible under Law. It is not even case of Assessing Officer that respondent/assessee had failed to disclose truly and fully materials facts necessary for assessment and in absence of any such reason, notice for reopening of assessment under Section 143(3) r/w. 147 of IT Act cannot be recorded as valid material. Admittedly, notice under Section 148 of IT Act came to be issued after 4 years from end of Assessment Year and Assessing Officer has also failed to furnish reasons for issuance of notice under Section 148 and only after representation was submitted, reasons were furnished that too after completion of assessment. As regards deemed dividend, credit balance in account of RSC cannot be treated as deemed dividend under Section 2(22)(e) of IT Act for reason that RSC had enlisted services of assessee for purpose of selling road safety equipments which are basically insurance products to promote road safety and said http://www.judis.nic.in 12 TCA.Nos.66 & 67 of 2018 amount has been advanced to assessee without any interest and debited to RSC account and said arrangement was supported by agreement dated 01.04.2005 and since it is in nature of fresh advance for purpose of commercial transaction, said advance do not attract Section 2(22)(e) of said Act and said aspect was also considered by CIT (Appeals) and direction was given to delete said addition. learned counsel appearing for respondent/assessee, in support of his submissions, has placed reliance upon following decisions: (i) Judgment dated 21.03.2017 made in Civil Appeal No.5390 of 2007 [M/s.Larsen & Toubro Ltd. v. State of Jharkhand and Ors.] ; (ii) ICICI Home Finance co. Ltd. v. Assistant Commissioner of Income Tax [(2012) 25 taxmann.com 241 (Bom.)] (iii) Adani Infrastructure & Developers (P.) Ltd. v. Assistant Commissioner of Income Tax [(2019) 101 taxmann.com 256 (Gujarat)] Attention of this Court was also invited to Instruction No.9/2006 dated 07.11.2006 issued by Central Board of Direct Taxes (CBDT), New Delhi and modification of instructions No.9/2009 dated 17.03.2016 http://www.judis.nic.in 13 TCA.Nos.66 & 67 of 2018 issued by CBDT, New Delhi and Circular No.19/2017 issued by CBDT in F.No.279/Misc./140/2015/ITJ dated 12.06.2017. 6. This Court has carefully considered arguments advanced on either side and also perused and considered materials placed as well as decisions relied on either side. 7. In Income-Tax Officer, I Ward, Distt. VI, Calcutta and Others v. Lakshmani Mewal Das [(1976) Vol. 103 ITR 437 (SC)], quashment of notice issued under Section 148 of IT Act came up for consideration and perusal of said judgment would disclose that respondent/assessee made challenge to notice issued under Section 148 of IT Act before Calcutta High Court and it was referred to Full Bench of Calcutta High Court reported in VI [1975] 99 ITR 296 [FB], which had quashed said notice and therefore, Revenue preferred Special Leave Petition, which was entertained and converted as Civil Appeal. Hon'ble Supreme Court of India, having taken note of Sections 147 and 148 of IT Act, 1961 and Section 34(1)(a) and (b) of Income Tax Act, 1922, observed in Paragraph 445 as follows: http://www.judis.nic.in It would appear from perusal of provisions 14 TCA.Nos.66 & 67 of 2018 reproduced above that two conditions have to be satisfied before Income-tax Officer acquires jurisdiction to issue notice under section 148 in respect of assessment beyond period of four years but within period of eight years from end of relevant year, viz., [1] Income-tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and [2] he must have reason to believe that such income has escaped assessment by reason of omission or failure on part of assessee [a] to make return under section 139 for assessment year to Income- tax Officer, or [b] to disclose fully and truly material facts necessary for his assessment for that year. Both these conditions must co-exist in order to confer jurisdiction on Income-tax Officer. It is also imperative for Income-tax Officer to record his reasons before initiating proceedings as required by section 148[2]. Another requirement is that before notice is issued after expiry of four years from end of relevant assessment years, Commissioner should be satisfied on reasons recorded by Income-tax Officer that it is fit case for issue of such notice. We may add that duty which is cast upon assessee is to make true and full disclosure of primary facts at time of original assessment. Production before Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by Income- tax Officer will not necessarily amount to disclosure contemplated by law. duty of assessee in any case does not extend beyond making true and full disclosure of primary facts. Once he has done that his duty ends. It is for Income-tax Officer to draw correct inference from primary facts. It is no responsibility of assessee to advise Income-tax Officer with regard to inference which he should drawn from primary facts. If Income-tax Officer draws inference which appears subsequently to be erroneous, mere change of opinion with regard to that inference would not justify initiation of action for reopening assessment. grounds or reasons which lead to formation of belief contemplated by section 147[a] of Act must http://www.judis.nic.in have material bearing on question of escapement of 15 TCA.Nos.66 & 67 of 2018 income of assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for Income-tax Officer to form above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether grounds are adequate or not is not matter for Court to investigate. sufficiency of grounds which induce Income-tax Officer to act is, therefore, not justifiable issue. It is, of course, open to assessee to contend that Income-tax Officer did not hold belief that there had been such non- disclosure. existence of belief can be challenged by assessee but not sufficiency of reasons for belief. expression ''reason to believe'' does not mean purely subjective satisfaction on part of Income-tax Officer. reasons must be held in good faith. It cannot be merely pretence. It is open to court to examine whether reasons for formation of belief have rational connection with or relevant bearing on formation of belief and are not extraneous or irrelevant for purpose of section. To this limited extent, action of Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in court of law. [See observations of this Court in cases of Calcutta Discount Co.Ltd Vs. Income-tax Officer [1961] 41 ITR 191 [SC] and S.Narayanappa V. Commissioner of Income Tax [1967] 63 ITR 219 [SC], while dealing with corresponding provisions of Indian Income Tax Act, 1922]. 8. In New Excelsior Theatre Pvt. Ltd. v. M.B.Naik, Income Tax Officer and Others [1990 Vol.185 ITR 159 (Bom.)], Writ Court while quashing notice issued under Section 147(a) of IT Act has held that condition for reopening of assessment was that formation of belief that income had escaped assessment must be by reason of either assessee's http://www.judis.nic.in 16 TCA.Nos.66 & 67 of 2018 omission to file return of income or non-disclosure of full and material facts necessary for assessment and having taken note of fact that assessee had furnished full particulars, had quashed notice. 9. In Commissioner of Income-Tax v. Akbarali Jummabhai [1992 Vol.198 ITR 69], Gujarat High Court had considered reference made by ITAT under Section 256(2) of IT Act for answering following Questions of Law: 1. Whether, on facts and in circumstances of case, Income Tax Appellate Tribunal was justified in law in holding that reopening of assessment under Section 147(a) of Income Tax Act, 1961, was not justified? 2. Whether, on facts and in circumstances of case, it can be said that assessee had disclosed fully and truly all material necessary for assessment and, therefore, reassessment under Section 147(a) of Income Tax Act, 1961, was not justified? Assessing Officer therein had passed Assessment Order and thereby, notice under Section 148 was issued on assessee for reason that income returned was understated compared to assets held by http://www.judis.nic.in 17 TCA.Nos.66 & 67 of 2018 assessee and it was overruled and passed revised order of assessment and assessee therein filed appeal and Appellate Assistant Commissioner allowed appeal of assessee holding that Income Tax Officer was not within his power and jurisdiction to invoke Section 147A of IT Act and appeal filed by revenue before ITAT had ended in dismissal. It is relevant to extract observations made in Page No.75 of said judgment: ''...Two distinct conditions precedent are required to be fulfilled before Assessing Officer can exercise jurisdiction under clause [a] of section 147, namely, [i] he must have reason to believe that income has escaped assessment, and [ii] he must have reason to believe that such escapement is by reason of omission or failure on part of assessee to make return or to disclose fully and truly all material facts necessary for his assessment for relevant years. next question which is required to be examined in order to arrive at proper determination of questions referred to us is question as to what is meant by expression ''material facts'' which it is duty of assessee to disclose before Income Tax Officer at time of assessment. In case of Calcutta Discount Co.Ltd V. ITO [1961] 41 ITR 191, Supreme Court had occasion to consider this very provision. As per said decision of Supreme Court, ''material facts'' which are required to be disclosed by assessee at time of his assessment are ''primary facts'' mainly necessary for purpose of his assessment. duty of assessee is to disclose only primary facts and it is for Assessing Officer to decide what inferences of facts http://www.judis.nic.in can be reasonably drawn from primary facts, and 18 TCA.Nos.66 & 67 of 2018 what legal inferences must ultimately be drawn from primary facts and other facts inferred from them. assessee is not bound to tell assessing authority what inferences, whether of fact or law, should be drawn and his failure to communicate to assessing authority proper and correct inferences to be drawn from primary facts cannot be regarded as failure to disclose ''material facts''. assessee is required to disclose only primary facts and primary facts to be disclosed by him must be material or relevant to decision of question before assessing authority so that non-disclosure of such facts would have material bearing on question of escapement of income from assessment. If assessee has disclosed primary facts which are material and necessary for purpose of his assessment, his assessment cannot be reopened by Income-tax Officer by resorting to section 147[a], but, if there is omission or failure on part of assessee to disclose any material or relevant primary facts and, in consequence, there is escapement of income from assessment, such income can be got taxed by Revenue by reopening assessment under section 147[a]. ...... From aforesaid observations in case before Supreme Court, it becomes clear that to confer jurisdiction under section 147[a] to issue notice in respect of assessment beyond period of four years from end of relevant year, two conditions have to be satisfied. first is that Income Tax Officer must have reason to believe that income chargeable to tax has escaped assessment, and second is that he must also have reason to believe that such escapement has taken place by reason of either [i]omission or failure on part of assessee to make return of his income under section 139, or [ii] omission on part of assessee to disclose fully and truly all material facts necessary for his http://www.judis.nic.in assessment for that year. Both these conditions are 19 TCA.Nos.66 & 67 of 2018 conditions precedent to be fulfilled for Income Tax officer to have jurisdiction to issue notice for assessment or reassessment beyond period of four years from end of assessment year.'' High Court of Gujarat had found that Tribunal as well as Appellate Tribunal were justified in holding that Assessing Officer was not justified in exercising powers under Section 147(a) of IT Act and accordingly, answered Questions of Law in favour of assessee and against Revenue. 10. In United Electrical Co. P. Ltd. v. Commissioner of Income-Tax and Others [2002 Vol.258 ITR 317 (Delhi)], writ petition was filed before Delhi High Court challenging notice dated 30.04.2002 issued under Section 148 of IT Act. Hon'ble Mr.Justice D.K.Jain [As Hon'ble Judge then was] had spoken for Bench and it is relevant to extract following: 11. Section 147 of Act authorises Assessing Officer to assess or re-assess income chargeable to tax, if he has reason to believe that said income for any assessment year has escaped assessment. power conferred under said section, particularly after 1st April, 1989, is no doubt very wide but it cannot be said to be plenary. True, amended provisions of Section 147 are contextually different from http://www.judis.nic.in pre-1989 provision, inasmuch as cumulative conditions 20 TCA.Nos.66 & 67 of 2018 spelt out in Clause (a) of old Section 147 namely, that income chargeable to tax had escaped assessment by reason of: (i) omission or failure on part of assessee to make return of his income under Section 139 of Act for any assessment year or (ii) failure to disclose fully and truly all material facts necessary for his assessment for that year, are not present in new main section but crucial expression reason to believe still exists in new provision. amended Section 147 provides that where Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may apply provisions of Sections 148 to 153 and assess or re-assess income which has escaped assessment. For present purpose, only Sections 148 and 151 are relevant. Cub-section (2) of Section 148 of Act mandates that before issuing notice to assessee under Subsection (1), for filing return, Assessing Officer shall record his reasons for doing so. Therefore, formation of reason to believe and recording of reasons are imperative before Assessing Officer can re-open completed assessment. Proviso to Sub-section (1) of Section 151 of Act provides that after expiry of four years from end of relevant assessment year, notice under Section 148 shall not be issued unless Chief Commissioner or Commissioner, as case may be, is satisfied, on reasons recorded by Assessing Officer concerned, that it is fit case for issue of such notice. These are some in-built safeguards to prevent arbitrary exercise of power by Assessing Officer to fiddle with completed assessment. 12. In Bawa Abhai Singh v. Deputy Commissioner of Income-tax, (2002) 253 ITR 83, Division Bench of this Court, speaking through Chief Justice Arijit Pasayat (as his Lordship then was), has said that crucial expression reason to believe predicates that Assessing Officer must hold belief .by existence of reasons for holding such belief. In other words, it contemplates existence of reasons on which belief is founded and not merely belief in existence of reasons, including belief. Such belief may not be based merely on reasons but it must be founded on information. 13. In Ganga Saran & Sons P. Ltd. v. Income Tax http://www.judis.nic.in Officer, (1981) 1.30 ITR 1 SC, their Lordships of Supreme 21 TCA.Nos.66 & 67 of 2018 Court, inter alia, observed that expression reason to believe is stronger than expression is satisfied . belief entertained by Assessing Officer should not be irrational or arbitrary. Alternatively put, it must be reasonable and must be based on reasons which are material. 14. Thus, existence of tangible material, for formation of opinion is prerequisite for initiation of action under Section 147 of Act. Therefore, what Section 147 of Act postulates is that Assessing Officer must have reason to believe that income has escaped assessment. There should be facts before hi??? that reasonably give rise to belief, but facts on basis of which he entertains belief need not at this stage be rebuttably conclusive to support his tentative conclusion. In case of challenge, it is open to Court to examine whether there was material before Assessing Officer, having rational connection or relevant bearing to formation of belief that is claimed to have been held at time when he issued notice. But Court cannot for purpose of ascertaining validity of notice examine sufficiency of reasons for belief (See: S. Narayanappa v. Commissioner of Income-tax, Bangalore, (1967) 63 ITR 219). 15. Explaining scope of expression information , in background of Section 132 of Act, which logic is equally applicable to case under Section 147 of Act, in L.R. Gupta v. Union of India, (1992) 194 ITR 32, Division Bench of this Court observed thus: expression information must be something more than mere rumour or gossip or hunch. There must be some material which can be regarded as information which must exist on file on basis of which authorising officer can have reason to believe that action under Section 132 is called for any of reasons mentioned in Clauses (a), (b) or (c). When action of issuance of authorisation under Section 132 is challenged in Court, it will be open to petitioner to contend that on facts or information disclosed, no reasonable person could have come to conclusion that action under Section 132 was called for. opinion which has to be formed is subjective and, therefore, jurisdiction of Court to interfere is very limited. Court will not act as Appellate Authority and examine meticulously information in order to decide for itself as to whether action under Section 132 is called for. But Court would be acting within its jurisdiction in seeing whether act of http://www.judis.nic.in issuance of authorisation under Section 132 is arbitrary or mala fide or 22 TCA.Nos.66 & 67 of 2018 whether satisfaction which is recorded is such which shows lack of application of mind of Appropriate Authority. reason to believe must be tangible in law and if information or reason has no nexus with belief or there is no material or tangible information for formation of belief, then, in such case, action taken under Section 132 would be regarded as bad in law. 16. It is thus, trite that when challenge is made to action under section 147 of Act what court is required to examine is whether some material exists on record for Assessing Officer to form requisite belief and reasons for belief have rational nexus or relevant bearing to formation of such belief and are not extraneous or irrelevant for purpose of said section. But sufficiency of grounds, which induced Assessing Officer, to act under said section is not section is not justiciable issue.'' 11. In Commissioner of Income Tax and Another v. Foramer France [2003 Vol.264 ITR 567], issue relating to notice of assessment issued beyond 7 years as well as re-assessment notice especially for failure on part of assessee to disclose true and full particular necessary for assessment came up for consideration. Hon'ble Apex Court had dealt with said issues in appeal filed by Revenue, challenging order of Allahabad High Court reported in Foramer v. CIT [(201) 247 ITR 436] and dismissed civil appeals with costs. It is relevant to extract above cited decision of Allahabad High Court which came to be confirmed by above cited decision of Apex Court as under: From decision of High Court [see (2001) 247 ITR 436] that (i) section 147 substituted in Income Tax Act, http://www.judis.nic.in 23 TCA.Nos.66 & 67 of 2018 1961 by Direct Tax Laws (Amendment) Act, 1987, had made radical departure from original Section 147, inasmuch as clauses (a) and (b) had been deleted and under proviso thereto notice for reassessment would be illegal if issued more than four years after end of assessment year, if original assessment were made under Section 143(3); (ii) section 153 related to passing of order of assessment and not to issuing of reassessment notice under Section 147/148 (iii) direction or finding contemplated by Section 153(3)(iii) had to be finding in relation to particular assessee and particular year and to be finding it had to be directly involved in disposal of case; (iv) on facts, notices issued under Section 148 on November 20, 1998; to assessee for reopening original assessments for assessment years 1988-89, 1989-90 and 1990-91, on basis of Appellate Tribunal's decision rendered in case of Boudier Christian relating to assessee's technicians deputed to India, income of assessee was to be treated as fee for assessments for those assessment years, were without jurisdiction as they were barred by limitation in view of proviso to section 147, as amended by Direct Tax Laws (Amendment) Act, 1987, as that was provision that was applicable on November 20, 1998, when reassessment notices were issued, and admittedly there was no failure on part of assessee to disclose fully and truly all material facts for assessment ; (v) on facts, notices were bad as they were only on basis of change of opinion and law that assessment could not be reopened on change of opinion was 1987, of Section 147, and (vi) as notices were without jurisdiction, assessee should not be relegated to alternative remedy, Department preferred appeals to Supreme Court. Supreme Court saw no reason to differ and dismissed appeals. 12. In Commissioner of Income-Tax v. A.V.Thomas Exports Ltd. [(2008) 296 ITR 603 (Mad)], Division Bench of this Court had considered http://www.judis.nic.in 24 TCA.Nos.66 & 67 of 2018 challenge made to notice issued after 4 years viz-a-viz Sections 147 and 148 of IT Act. Division Bench of this Court has also considered decision in CIT v. Foramer France [(2003) 264 ITR 566 (SC)] (cited supra) as well as CIT v. Elgi Finance Ltd. [(2006) 286 ITR 674 (Mad)] and during course of arguments, had also extracted relevant portion of judgment in CIT v. Elgi Finance Ltd. [(2006) 2876 ITR 674] as under: 5. Heard counsel. original assessment was completed under section 143(3) of Act. Assessing Officer applied his mind and completed said original assessment. There is no finding by Assessing Officer that there is any failure on part of assessee resulting in escapement of income. Assessing Officer must give categorical finding for purpose of initiating reassessment under proviso to section 147 of Act. In this case reassessment proceedings were initiated after March 31, 1995, and hence proceedings initiated by issue of notice under section 148 is ab initio barred by limitation. In this case, initiation of proceedings is after period of four years and finding given by Tribunal is that no income has escaped assessment by reason of failure on part of assessee. Hence, there is no jurisdiction to reopen assessment under proviso of section 147 of Act. scope of said provision has been considered by this court in case of CIT v. Elgi Finance Ltd., [2006] 286 ITR 674, and same reads as follows (page 678): law relating to reassessment has undergone change from April 1, 1989. change was brought in by Direct Tax Laws (Amendment) Act, 1987. Two sets of provisions were available under section 147 in clause (a) and clause (b). This distinction has now been taken away by Amendment Act. Previously, line of distinction was http://www.judis.nic.in 25 TCA.Nos.66 & 67 of 2018 limitation period of four years and limitation period exceeding four years. Assessing Officer would reopen back assessment within period of four years as long as he had reason to believe in consequence of any information, that income has been underassessed or income has escaped assessment. In case of limitation, providing for period exceeding four years, there should have been failure on part of assessee to disclose fully and truly all material facts leading to escapement of income. But as result of amendment brought with effect from April 1, 1989, above distinction had been obliterated and Assessing Officer could reassess income as long as he had reason to believe that income chargeable had escaped assessment. new law has inserted proviso to section 147 in following words: 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 for such assessment year by reason of failure on part of assessee to make return under section 139 or in response to notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. In addition to time-limits provided for under section 149, law has provided another limitation of four years under proviso to section 147. As far as above proviso to section 147 is concerned, law prescribes period of four years to initiate reassessment proceedings, unless income alleged to have escaped assessment was made out as result of failure on part of assessee to disclose fully and truly all material facts necessary for assessment. In said judgment, Division Bench of this Court has dealt with issue relating to mere change of opinion and relied upon decision http://www.judis.nic.in 26 TCA.Nos.66 & 67 of 2018 rendered by Division Bench of this Court in CIT v. Annamalai Finance Ltd. [(2005) 275 ITR 451 (Mad)], wherein it was held that section 147 of Act does not postulate conferment of power upon Assessing Officer to initiate reassessment proceedings upon mere change of opinion. It is incumbent on Assessing Officer to prove that there was failure to disclose material facts necessary for assessment for issuance of notice beyond period of four years. 13. Let this Court considers decisions cited by learned counsel appearing for contesting party/Assessee. 14. In Commissioner of Income Tax v. P.V.S.Beedies (P.) Ltd. [(1999) 237 ITR 13(SC)], it was held that reopening of case on factual errors pointed out by audit party is permissible in law and therefore, reopening of case under Section 147(b) of IT Act, in facts and circumstances of case, found to be justified. 15. said issue was also considered in judgment in M/s.Larsen & Toubro Ltd. v. State of Jharkhand and Ors. [Judgment dated 21.03.2017 made in Civil Appeal No.5390 of 2007] (cited supra) and http://www.judis.nic.in 27 TCA.Nos.66 & 67 of 2018 Hon'ble Apex Court after taking into consideration Para 23 of P.V. Beedies case (cited supra) and its earlier decisions, observed as follows in Para 27 : 27.The expression 'information' means instruction or knowledge derived from external source concerning facts or parties or as to law relating to and/or after hearing on assessment. We are of clear view that on basis of information received and if assessing officer is satisfied that reasonable ground exists to believe, then in that case power of assessing authority extends to re-opening of assessment, if for any reason, whole or any part of turnover of business of dealer has escaped assessment or has been under assessed and assessment in such case would be valid even if materials, on basis of which earlier assessing authority passed order and successor accessing authority proceeded, were same. question still is as to whether in present case, assessing authority was satisfied or not. It was also observed from materials that Assessing Officer had to issue notice on ground of directions issued by audit party and not on his personal satisfaction which is not permissible under law and accordingly, allowed appeal filed by assessee. 16. In ICICI Home Finance Co. Ltd. v. Assistant Commissioner of Income-tax, 10(1) [(2012) 25 taxmann.com 241(Bom.)], order passed by Assessing Officer under Section 143(3) of IT Act as well as scope http://www.judis.nic.in 28 TCA.Nos.66 & 67 of 2018 of Section 147 of IT Act came up for consideration and on facts found that reasons for reopening of assessment are identical to objections raised by audit party and in para 7 had dealt with law on said subject and it is relevant to extract same: 7. However, as submissions were made on other issues also we are examining them also. It is settled position in law that where assessment sought to be reopened is before expiry of four years from end of relevant assessment year, then in such cases power to reopen assessment is very wide. However, even though such power is very wide yet such power would not justify review of assessment order already passed. Supreme Court in matter of Commissioner of Income Tax v. Kelvinator (India) Ltd, reported in 320 ITR page 561 has observed that power to reassess is conceptually different from power to review. Assessing Officer under said Act has only power to reassess on fulfillment of certain precondition namely, he must SNC 15/20 WP 430-12.doc have reason to believe that income has escaped assessment and that there must be tangible material to come to conclusion that there is escapement of income from assessment. Apex Court cautioned that in garb of reopening assessment review should not take place. This court following Apex Court in matter of Cartini India Ltd. v. Addl. C.I.T. reported in 314 ITR 275 has also held that even where reassessment is sought to be done within four years from end of relevant assessment year, there must be reason to believe that income has escaped assessment and such reason to believe should not be on account of mere change of opinion. Therefore, where facts have been viewed during original proceeding and assessment order has been passed then in such cases, reopening of assessment on same facts without anything more would be review and not permitted under garb of reassessment. This would be mere http://www.judis.nic.in change of opinion in absence of any tangible material and is 29 TCA.Nos.66 & 67 of 2018 not sufficient to assume jurisdiction to issue SNC 16/20 WP 430-12.doc impugned notice. In fact, our court in matter of Idea Cellular Ltd v. Deputy Commissioner of Income tax reported in 301 ITR 407 has held that once all material with regard to particular issue is before Assessing Officer and he chooses not to deal with same, it cannot be said that he had not applied his mind to all material before him. Further, as observed by Full Bench of Delhi High Court in matter of C.I.T. v. Kelvinator of India Ltd. Reported in 256 ITR 1, when entire material is placed before Assessing Officer at time of original assessment and he passes assessment order under Section 143(3) of Act presumption can be raised that he applied his mind to all facts involved in assessment. appeal filed by assessee was allowed by Bombay High Court in said decision. 17. In Fis Global Business Solutions India Pvt. Ltd. v. Principal Commissioner of Income Tax-3 [(2018) 409 ITR 560], Division Bench of Delhi High Court, after taking note of above quoted judgment of Hon'ble Apex Court in Commissioner of Income Tax v. Kelvinator of India Ltd. [320 ITR 561] wherein it was held that review of completed scrutiny can be done only if tangible material is made available to Revenue and on facts of case found that reassessment notice is solely based on audit opinion and accordingly, allowed appeal filed by assessee. http://www.judis.nic.in 30 TCA.Nos.66 & 67 of 2018 18. In decision in Commissioner of Income Tax-17, Mumbai v. Shri Rajan N.Aswani [(2018) 403 ITR 30], appeal filed by Revenue was dismissed on ground that reopening of assessment was solely based upon audit objections. 19. decision in Adani Infrastructure & Developers (P.) Ltd. v. Assistant Commissioner of Income Tax [(2019) 101 taxmann.com 256 (Gujarat)] relied on by learned counsel appearing for respondent/assessee, it was held that re-opening of assessment merely upon audit objection and was not based upon satisfaction of Assessing Officer is unsustainable. 20. CBDT, New Delhi had issued Instruction No.9/2006 dated 07.11.2006 pertaining to Instruction on Receipt / Revenue Audit Objections and in para 4 had dealt with remedial action and in Modification of Instruction 9/2006, CBDT, New Delhi had issued Circular No.8/2016 dated 17.03.2016 and it is relevant to extract same: Instruction 9 of 2006 lays down guidelines and procedure for attending to Revenue Audit Objections. Instruction inter-alia mandates initiation of remedial action http://www.judis.nic.in in case Revenue Audit Objection is not accepted by 31 TCA.Nos.66 & 67 of 2018 Department. Board has considered effect of such remedial action and its ultimate fate in appeal. Accordingly, to mitigate effects of Instruction, para 4 and para 5 of Instruction are deleted with immediate effect and replaced by following: 4.Remedial Action: (i) Audit Objection should be accepted and remedial action should be taken in case where audit objection relating to error of facts or issue of law is found to be correct. (ii) Appropriate remedial action should invariable be initiated within two months of receipt of Local Audit Report, and necessary orders should be passed within six months thereafter. (iii) Where PCIT/CIT does not accept Audit Objection, he may record his reasons for doing so and inform AG accordingly within two months from date of receipt of LAR. No remedial action needs to be taken in such cases. 21. It is submission of learned Senior Standing Counsel appearing for Revenue by inviting attention of this Court to sub-para No.3 to Para 4 of Circular No.8/2016 dated 17.03.2016 that such exercise was contemplated by Principal Commissioner of Income Tax / Commissioner of Income Tax and whereas order for reopening of assessment was passed by Assessing Officer / Income Tax Officer and as such, said instructions will not apply to facts of this case. http://www.judis.nic.in 32 TCA.Nos.66 & 67 of 2018 22. It is also pointed out by learned Senior Standing Counsel appearing for Revenue that Assessing Officer, after reopening of assessment, had recorded categorical finding that credit balance as on 31.03.2007 amounting to Rs.5,30,99,960/- is treated as deemed dividend in hands of respondent/assessee and it is independent finding recorded dehors contents of audit objections and Tribunal, in impugned common order, had failed to deal with said issue and merely recorded finding that Assessing Officer did not apply his mind as to income escaping assessment. Assessing Officer, after application of mind, found that there was no escapement of income and also requested Audit Wing to dropping proceedings did change his mind and said finding is per se unsustainable. 23. Income Tax Officer, Company Ward-VI(1), Chennai-600 034 had issued notice dated 31.03.2014 stating that she had reason to believe that income chargeable to tax for Assessment Year 2007-2008 had escaped assessment within meaning of Section 147 of Income Tax Act, 1961 and respondent/assessee, in response to said notice, sent reply dated 19.04.2014, enclosing copy of Profit & Loss Account, http://www.judis.nic.in 33 TCA.Nos.66 & 67 of 2018 Balance Sheet and Statement of Computation of Income and requested reasons for issuance of notice under Section 148 of IT Act dated 31.03.2014 and since it was not furnished, respondent/assessee invoked provisions of Right to Information Act and vide communication dated 30.06.2015, Assessing Officer, namely Mr.S.Krishna Kumar, Income Tax Officer, Corporate Ward-6(3), Chennai-34 had furnished audit objections in Para No.6/IIA. contents of audit objections has already been dealt with in earlier paragraphs. 24. Income Tax Officer, Company Ward VI(1), Chennai, namely Ms.R.Bhooma, vide communication dated 31.03.2014 had responded to audit objections dated 04.03.2014 and after referring to Balance Sheet of RSC observed that entire work of RSC carried out by assessee is not correct and along with said communication had enclosed Income Statement filed by RSC for Assessment Years 2007-2008 and 2010- 2011 and copy of Balance Sheet of RSC. 25. Deputy Director (DT), vide communication dated 4.3.2014 had called for certain particulars for which Ms.R.Bhooma, ITO, Company Ward VI, Chennai has responded through proper channel dated http://www.judis.nic.in 34 TCA.Nos.66 & 67 of 2018 10.04.2014. Deputy Director (DT) has sent his response dated 24.04.2015, for which Mr.S.Krishna Kumar, ITO, Corporate Ward -6(3), Chennai has passed order of assessment dated 31.03.2015 and for reasons stated, requested for dropping of audit objections for all Assessment Years 2007-2008 and 2010 2011. very same official, as already pointed out, has passed order of assessment dated 31.03.2015 under Section 143(3) r/w. 147 of IT Act holding that credit balance as on 31.03.2007 of Rs.5,30,99,960/- is treated as deemed dividend in hands of respondent/assessee and calculated balance tax payable as Rs.1,09,30,440/-. 26. It is very pertinent to point out at this juncture that Income Tax Officer, namely S.Krishna Kumar, in his response dated 31.01.2015 to audit objections would also state that after examining details of expenses incurred by respondent and RSC during financial year 2006-07 and it is relevant to extract same: balance amount for this year amounting to Rs.2,39,16,129/- and opening credit balance amounting to Rs.2,91,83,830/- together amounting to Rs.5,30,99,959/- is shown as creditor for services in books of SKI Retail Capital Limited. [Schedule G is Rs.5,30,99,959/- + other creditors amounting to Rs.6,01,84,164/- copy of relevance materials enclosed]. - D http://www.judis.nic.in 35 TCA.Nos.66 & 67 of 2018 very same official, in above cited order dated 30.01.2015, had concluded that amount in Schedule G of Rs.5,30,99,959/- [Rounded off to Rs.5,39,99,960/- in said order of assessment should be treated as deemed dividend. 27. primordial submission of learned Senior Standing Counsel appearing for Revenue is that reasons recorded by ITO, in order dated 30.01.2015 as to treating of amount of Rs.5,30,99,960/- as on 31.03.2007 came into being on independent application of mind to materials placed and he did not refer to audit objections which pertain to some other issue and though it is obligatory on part of ITAT to deal with merits of appeal also, did not go in merits at all and prays for remanding of matter. 28. respondent/assessee, in case on hand, did not burke/suppress any material and whatever materials in their possession, had submitted same by enclosing in their reply dated 19.04.2014, in response to notice under Section 148 of IT Act dated 31.03.2014. ITO has http://www.judis.nic.in 36 TCA.Nos.66 & 67 of 2018 passed order of assessment dated 31.03.2015 and had also drawn attention of Deputy Director of Revenue Audit as to said material, especially referring to amount of Rs.5,39,99,960/- in Schedule G and prayed for dropping of audit objections in respect of Assessment Year from 2007-2008. In light of materials available, it is obligatory on part of Assessing Officer to record reasons for purpose of believing that income had escaped assessment and in light of judgment rendered by Division Bench of Delhi High Court in United Electrical Co. P.Ltd. v. Commissioner of Income Tax and Others [2002 Vol.258 ITR 317], it is open to Court to examine whether there was some material available for Assessing Officer to form requisite belief and further recorded finding that even Additional Commissioner had accorded approval for action under Section 147 of IT Act mechanically. 29. Hon'ble Apex Court, in decision in Commissioner of Income Tax and Another v. Foramer France [2003 Vol.264 ITR 566], while dismissing appeal filed by Revenue and thereby confirming judgment of Allahabad High Court, recorded reasons as to non- failure on part of assessee to disclose fully and truly all material facts for assessment and further found that notices were bad as they were only on http://www.judis.nic.in 37 TCA.Nos.66 & 67 of 2018 basis of change of opinion and law that assessment could not be reopened on change of opinion was same before and after amendment by Direct Tax Laws (Amendment) Act, 19867 of Section 147. 30. In decision in Commissioner of Income Tax v.A.V.Thomas Exports Ltd. [(2008) 296 ITR 603 (Mad)], which pertains to Assessment Year 1990-1991, Division Bench of this Court, while dealing with appeal filed by Revenue, had observed that initiation of proceedings was after period of four years by reason of failure on part of assessee and as such, there was no jurisdiction to reopen assessment under provision of Section 147 of IT Act. 31. In considered opinion of Court, reasons recorded in notice dated 31.03.2014 as to income escaping assessment and order of assessment dated 31.03.2015 passed under Section 143(3) r/w. Section 147 of IT Act are unsustainable on facts as well on law. 32. CIT (Appeals), in order dated 25.05.2016 in ITA No.55/CIT(A)-15 has also ordered deletion of Rs.2,29,00,539/- on ground that provision of Sec.2(22)(e) of IT Act do not apply and http://www.judis.nic.in 38 TCA.Nos.66 & 67 of 2018 reasons for arriving such conclusion is sustainable in law. 33. findings recorded by ITAT, in impugned common order as to non-application of mind on part of Assessing Officer to apply his mind independently for purpose of reopening of assessment is also sustainable for reason that very same official, namely Mr.S.Krishna Kumar, in response to audit objection dated 31.01.2015, had taken into consideration all materials placed and requested for dropping of audit objection and therefore, passing of second order of assessment dated 31.03.2015 by him amounts to change of opinion on very same set of facts. 34. This Court, on independent application of mind and on thorough consideration of material aspects and legal position, is of considered view that there is no error or infirmity in reasons assigned by ITAT in dismissing appeal filed by Revenue and allowing of cross objection filed by assessee. 35. Therefore, Substantial Question of Law is answered in negative and against appellant/Revenue. http://www.judis.nic.in 39 TCA.Nos.66 & 67 of 2018 36. In result, Tax Case Appeals are dismissed. No costs. [M.S.N., J.,] [A.Q., J.] 07.05.2020 Index : No Internet : Yes Jvm M.SATHYANARAYANAN, J., and ABDUL QUDDHOSE, J. Jvm To Principal Commissioner of Income Tax-6 No.121, Nungambakkam High Road, Chennai-34. Common Judgment in TCA.Nos.66 & 67 of 2018 http://www.judis.nic.in 40 TCA.Nos.66 & 67 of 2018 07.05.2020 http://www.judis.nic.in 41 Principal Commissioner of Income-tax-6, Chennai v. SKI Retail Capital Ltd