Vildirect: IncomeTax-caselaws-1999-VIL-248-PAT-DT

1999-VIL-248-PAT-DT

Equivalent Citation: [1999] 240 ITR 728, 162 CTR 232

PATNA HIGH COURT

Date: 26.08.1999

USHA BELTRON LTD AND ANOTHER

JOINT COMMISSIONER OF INCOME-TAX AND ANOTHER

BENCH

Judge(s) : CHOUDHARY S. N. MISHRA., ANIL KUMAR SINHA

JUDGMENT

After having heard learned counsel for the parties and going through the pleadings filed on their behalf, this writ application is being disposed of at the admission stage itself. The petitioners challenged the notice, dated June 16, 1999, issued under section 148 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), by the joint Commissioner of Income-tax, Special Range, Ranchi, relating to the assessment year 1995-96. A copy of the said notice is made annexure-7 to this writ application.

The relevant facts for disposal of this writ application are that on November 30, 1995, the petitioners filed a return for the assessment year 1995-96 showing an income of Rs. 24,84,96,370. The petitioners separately showed the income received from three separate businesses, namely, from selling cables, computer software and also profits and gains from the leasing business. The petitioners, pursuant to the notice issued under section 143(3) of the Act appeared before the Assessing Officer and produced all the relevant papers. The Assessing Officer, after having been fully satisfied, by his order, dated November 13, 1996, made the assessment under section 143 of the Act whereby, he computed the total income of the petitioners at Rs. 24,86,96,370 as against the income of Rs. 24,84,96,370 as shown in the return. Ultimately, the Assessing Officer determined a sum of Rs. 4,51,405 refundable to the petitioner, the advance tax deducted at source. The order passed in terms of section 145(3) of the Act was later on amended by order dated February 28, 1997, whereby the petitioners were, granted credit for certain deductions at source. By a subsequent notice, dated June 24, 1997, the assessing authority wanted to rectify the assessment order in respect of depreciation allowed on the leased out machinery mainly on the ground that the plant and machinery, which were purchased at a cost less than Rs. 5,000 and were used for a period less than 180 days were entitled to 50 per cent. of depreciation instead of 100 per cent. claimed and allowed in the said assessment year. The assessing authority, after having considered the show cause filed by the petitioners pursuant to the notice aforesaid, dropped the proceeding in terms of section 154 of the Act by his order dated January 20, 1998.

The petitioners, thereafter received a notice dated June 16, 1999, issued under section 148 of the Act. The said notice was issued on the ground that the assessing authority has reasons to believe that taxable income in the assessment year 1995-96, has escaped assessment within the meaning of section 147 of the Act and directed the petitioners to file the return within thirty days from the date of receipt of the said notice, which is under challenge in this writ application. Pursuant to the notice, aforesaid, the petitioners sent a letter to the assessing authority stating inter alia, that no income had ever escaped assessment and, as such, the condition precedent for issuing such notice in terms of section 147 of the Act is not satisfied and further requested the assessing authority to let the petitioners know the reason for issuing such notice.

In this case, a counter-affidavit has been filed on behalf of the Revenue wherein, inter alia, it is stated that the petitioners filed the return for their income in the assessment year 1995-96, disclosing a total income of Rs. 24,84,96,370. The assessment for the said assessment year was completed under section 143(3) of the Act on a total income of Rs. 24,86,96,370, after having given proper opportunity of being heard to the petitioners. The petitioners, thereafter, filed a petition claiming tax deducted at source for which an indemnity was filed and on the basis thereof an order under section 143(5)/154 of the Act was passed at the instance of the petitioners on February 28, 1997, allowing further refund to the petitioner-company. It was subsequently found and detected that excess amount of depreciation was allowed to the assessee for the aforesaid assessment year in relation to the purchase of assets worth Rs. 3,13,93,050. The said assets were used for less than 180 days and, accordingly, the rate of depreciation in such cases is at the rate of 50 per cent ; whereas, as per the claim of the assessee, the depreciation was allowed at the rate of 100 per cent., which is totally against the established principle of law. When the mistake was detected, a notice under section 154 of the Act was issued to the petitioners and after giving an opportunity of being heard, the Assessing Officer, by his order dated January 20, 1998/February 3, 1998, has dropped the proceeding. Subsequently, another notice in terms of section 154 of the Act was issued alleging therein that the assessee was erroneously allowed full depreciation for the item for which the claim was lodged by the assessee, which was a mistake apparent on the face of the record. Accordingly, a proceeding under section 154 of the Act was initiated. The respondent Commissioner of Income-tax, before the matter could be decided by the Assessing Officer, issued a notice under section 263 of the Act on January 12, 1999. The respondent authority, after giving proper opportunity of being heard to the petitioners and after proper enquiry, passed an order withdrawing the depreciation, which was allowed earlier. It is further alleged that from the record, it was found that the assessee had shown the "written down value" (in short "WDV") on flameless furnace by Rs. 2,78,61,000 but at the same time, the depreciation chart for the assessment year 1994-95 for the same business showed that no assets of the WDV was left to be carried over to the next assessment year 1995-96, which is again a mistake apparent on the face of the record and, hence, a fresh notice under the Act was duly issued and served upon the petitioner company. In the meantime, a communication was received from the Additional Director of Income-tax (Investigation), Ranchi, vide his letter, dated June 20, 1999, along with several enclosures including letters from the Additional Director of Income-tax, Ludhiana. Over and above, several confidential and secret documents were also received in the Ranchi office of the respondent authority.

Mr. Debi Pal, learned senior counsel, appearing on behalf of the petitioners, had challenged the notice mainly on the ground that before issuing such notice under section 148 of the Act, the assessing authority must have reasons to believe that the income of the assessee chargeable to tax has escaped assessment due to any omission and/or failure on the part of the petitioners in disclosing the true facts, while filing the return, necessary for the purpose of assessment of a particular assessment year. In sum and substance, the submission of learned counsel is that the condition precedent for initiating such proceeding is not satisfied before issuing such notice and, as such, the proceeding initiated by the respondent authority is liable to be quashed. While developing his argument, learned counsel for the petitioners submits that reason to believe is not merely a formality and/or purely a subjective satisfaction of the assessing authority but it is an objective one and must be based upon the materials having reasonable nexus and the belief. According to learned counsel, the belief of the assessing authority should be an honest and reasonable one and must be in good faith, but not a mere pretence to make a fishing enquiry. The pith and substance of the contention of Mr. Pal is that the condition precedent for assumption of jurisdiction under section 147 of the Act has not been satisfied and, hence, the impugned notice including all the subsequent steps taken thereunder are wholly illegal, arbitrary and without jurisdiction.

In opposition, however, Mr. Jhunjhunwala, learned counsel, appearing on behalf of the Revenue, submits that the assessing authority has issued the impugned notice, after having duly recorded the reasons as envisaged under the Act and a copy of the said recorded reasons has already been given to the petitioners on July 19, 1999. It is further submitted that after receipt and perusal of the communication of the Additional Director of Income-tax (Investigation), the assessing authority was fully satisfied, has initiated a proceeding under section 147 of the Act. According to Mr. Jhunjhunwala, the materials on record as well as the subsequent materials received after completion of all the earlier orders, the assessing authority has issued the impugned notice after duly recording the reasons.

Mr. Debi Pal, learned counsel for the petitioners, in support of his contention, has relied upon the following decisions :

Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) ; ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC) ; CIT v. Agarwalla Brothers [1991] 189 ITR 786 (Patna) and Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC).

Now, coming to the facts of this case, Mr. Jhunjhunwala, learned counsel, appearing on behalf of the Revenue, submits that the petitioner company has mentioned the address of Prakash Industries Limited for lease of equipment as at 15 K. M. Stone, Delhi Road, Hissar, Haryana ; whereas, in the insurance policy, insuring the equipment, namely, flameless furnace, the address mentioned is as Padma Tower, FS Rajendar Place, New Delhi. Mr. Jhunjhunwala further submits that altogether a different address was mentioned while making correspondences at the Calcutta office. According to Mr. Jhunjhunwala, all the fictitious addresses were mentioned in order to escape the liability of tax. Mr. Jhunjhunwala has produced the entire communications received from the Ludhiana office including various annexures attached thereto in a sealed cover in the course of hearing. It was objected to by Mr. Debi Pal inasmuch as, it was submitted that unless copies of the said documents are served upon the petitioners, neither the respondent authority nor this court could rely upon such alleged confidential documents. With the consent of Mr. Jhunjhunwala, the entire report, which was submitted during the course of hearing, was served upon the petitioners, after taking a photostat thereof in the presence of counsel appearing on behalf of the parties, and, accordingly, the case was adjourned for hearing today.

A supplementary affidavit was filed challenging the aforesaid report including the annexures appended thereto on the ground that those documents have no nexus for initiating the aforesaid proceeding under section 147 of the Act. According to Mr. Pal, the entire report of the Deputy Director of Income-tax (Investigation), Ludhiana, relates to an investigation in connection with the assessment of Reliance Capital Limited with respect to an air pollution control equipment purchased from Prakash Industries Limited. According to learned counsel, the said report does not mention the name of the petitioner company and/or the purchase made of flameless furnace from Saheb Engineering Works. From the report, it appears that Saheb Engineering Works was not in existence. According to Mr. Pal, the other documents attached with the report have no relevance whatsoever with reference to the transaction, which the petitioner company had with Saheb Engineering Works. According to the petitioners, the said flameless furnace was purchased by the petitioner company from the said Saheb Engineering Works vide invoice, dated February 7, 1994, but on enquiry, it was found that the said Saheb Engineering Works was non-existent on the given address. Mr. Pal, however, submits that the said enquiry was made in November, 1994, and, as such, it cannot be presumed that Saheb Engineering Works was not in existence when the said flameless furnace was purchased in August, 1994. The Deputy Director of Income-tax, Ludhiana, conducted the investigation in relation to the transactions made by Prakash Industries Ltd. with other limited concerns. According to Mr. Debi Pal, learned counsel for the petitioners, Saheb Engineering Works was very much in existence when the said equipment was purchased by the petitioner company in the year 1994. The said flameless furnace was purchased from the said Saheb Engineering Works and was leased out to Prakash Industries Ltd. From the report of the Deputy Director of Income-tax (Investigation), Bhopal, preliminary enquiry made in the factory premises of Prakash Industries Limited, reveals that such machinery was not installed in the said premises. The report further discloses the fact that the purchases made by Reliance Capital Limited from Saheb Engineering Works through Prakash Industries Limited, and the said machinery was leased out to Prakash Industries Limited but the assessing authorities ultimately found that no such party lived there. The address of Saheb Engineering Works given by Prakash Industries Limited was entirely different from what has been brought on the record. The report further indicates that the parties in whose names the bank account was opened and the sale proceeds of the machinery are altogether different from the parties in whose names the VDIS is made. On going through the report, Mr. Pal submits that there is absolutely no material on the basis of which any honest and/or reasonable person can form any belief that any income in the assessment year 1995-96 ever escaped in the assessment within the meaning of section 147 of the Act.

In the course of hearing of this writ application, we have gone through the reports submitted by the Director of Income-tax (investigation) where from it appears that the petitioners claimed to have purchased one set of flameless furnace from Saheb Engineering Works, G. T. Road, Mandi, Gobindgarh, Punjab, at the cost of Rs. 2,78,61,000 under invoice issued by the said firm. The said flameless furnace is alleged to have been leased out to one Prakash Industries Limited, having its factory at Champa, in the district of Bilaspur (Madhya Pradesh). The petitioner was allowed depreciation of Rs, 2,78,61,000 in relation to the assessment year 1995-96 in respect of the non-existent asset. From the investigation carried out by the Director of Income-tax (Investigation), Ludhiana, it transpires that Saheb Engineering Works is non-existent on the given address. The invoice alleged to have been issued by Saheb Engineering Works relates to A. S. Forging with a different address, who has denied any connection with Saheb Engineering Works. It further emerges from the investigation that the machinery was transported on mopeds and scooters. Further Saheb Engineering Works has made VDIS declaration before the Commissioner of Income-tax, Ludhiana, in which it has given its address as shop No. 11, Super Complex, Dhuri Phatak, Ludhiana. The report further discloses, on enquiry, that even the identity of such declarant was not established. The said shop No. 11 belongs to one Mrs. Baljeet Kaur who, on affidavit, has made a statement to the effect that she has never given her shop to anyone either on rent or lease. In the facts aforesaid, the question that falls for consideration is whether the Assessing Officer is justified in issuing notice in terms of section 148(1) of the Act. Section 147 of the Act of 1961, as amended, under which the assessment was completed under section 147 of the Act, reads as follows :

"147. If the Assessing Officer, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the 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 the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 145 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Explanation 1.---Production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.---For the purposes of this section, the 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 the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;

(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;

(i) income chargeable to tax has been underassessed; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act ; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed."

In this case, we are concerned with clauses (b) and (c) as quoted above and if those clauses do not apply, in that event, the issuance of notice for reopening of the assessment already made for the year 1995-96 fails. On scrutiny of the aforesaid provisions, the conditions precedent for the exercise of power to initiate a proceeding for reassessment in terms of section 147 of the Act are that the assessing authority has a reason to believe the income, profits or gains have been underassessed and the said underassessment is by reason of omission or failure to make a return correctly or by reason of failure to disclose the true and material facts necessary for assessment for any particular year. On any of the aforesaid requirements, the assessing authority will serve a notice within four years from the end of the assessment year in terms of section 148 of the Act, which reads as follows :

"148. (1) Before making the assessment, reassessment or recomputation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed ; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

(2) The Assessing Officer shall, before issuing any notice under this section, record his reasons for doing so."

The notice is issued by the Income-tax Officer in the case in hand before the expiry of four years of the end of the relevant year of assessment and the reasons recorded and the Commissioner having been satisfied that it is a fit case for issuance of notice in terms of section 147 of the Act. The dispute in the instant case, merely relates to the fulfilment of the conditions aforesaid, which raises the question regarding the true interpretation "has reason to believe", as envisaged in section 147 of the Act. The income-tax authority, on the materials and/or the information at his disposal comes to a conclusion that income and profits of a particular year have been underassessed on account of failure on the part of the assessee to disclose all material facts for the purpose of assessment. Such reason or information must be based on a relevant record. As stated above, the reasons recorded by the assessing authority have been communicated to the assessee after having been approved by the Commissioner. The reasons to believe recorded in the notice cannot be said to have been recorded on mere suspicion, but on the proved facts, which have been found during investigation by the different investigating authorities details whereof have already been quoted hereinabove. On facts, as stated above, it is apparent that there had been a failure on the part of the assessee to disclose the relevant facts for the relevant assessment year, which resulted in the issuance of the instant notice. The investigation discloses that the petitioner company has not placed the true and material facts at the time of assessment of the relevant year, which goes to show that those facts have been brought to the notice of the assessing authority subsequently and on such facts, the Income-tax Officer has reason to believe that underassessment has been made for the assessment year, in question. On consideration of the materials, which was brought during the investigation, we are of the view that there were materials before the Income-tax Officer, for a reason to believe that due to the failure of the assessee-company to disclose the material facts, its income was grossly underassessed. This court, sitting in its writ jurisdiction is not supposed to examine the inadequacy of the materials if the assessing authority on such materials has reason to believe such failure on the part of the assessee to disclose the material facts. It has not been brought to the notice of the court that such facts were ever brought and/or disclosed before the assessing authority in the course of the proceedings in relation to the assessment of the assessment year, in question. The submission of Mr. Pal that all the relevant facts, which have been disclosed at the time of assessment having been accepted by the authority, and cannot be disbelieved only for the purpose of issuing notice in terms of section 147 of the Act. One of the dominant purposes of section 147 is that the assessee cannot go scot free by making a false and untrue disclosure of fact at the time of assessment. The apex court, in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 has held :

"We have to look to the purpose and intent of the provisions. One of the purposes of section 147 appears to us to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say 'you accepted my lie, now your hands are tied and you can do nothing'. It would be a travesty of justice to allow the assessee that latitude".

and, accordingly, it has been held that the Income-tax Officer has rightly initiated a reassessment proceeding on the basis of the subsequent information, which was relevant and reliable.

The first decision in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191 (SC) relied upon by Mr. Debi Pal will not help him, firstly, on the ground that the said decision relates to the preamended period and, secondly, that the facts of that case are entirely different from that of the present one. The decision in ITO v. Madnani Engineering Works Ltd. [1979] 118 ITR 1 (SC) will also not come to the rescue of the petitioner, inasmuch as in that case, notice was issued after the lapse of four years. Further, the affidavit filed in the writ proceeding, the Income-tax Officer did not disclose the fact which had weighed with him in coming to the conclusion that the income of the respondent had escaped assessment by reason of failure to disclose fully and truly all material facts only on the ground that such failure will cause prejudice to the interests of the Revenue. In this case, as stated above, apart from disclosing the material facts in the affidavit, the entire investigation report including the various annexures appended thereto have been produced with a copy to the other side, which clearly go to indicate that the Income-tax Officer has reason to believe that on account of failure on the part of the petitioner-assessee to disclose the true and full facts, which resulted in underassessment. The decision in CIT v. Agarwalla Bros. [1991] 189 ITR 786 (Patna) which has been relied upon by Mr. Debi Pal, has been considered by their Lordships in Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 (SC), as mentioned above. Ganga Saran and Sons P. Ltd. v. ITO [1981] 130 ITR 1 (SC) wherein the facts of that case are entirely different. However, it has been held on the facts of that case that though the court cannot investigate the adequacy and sufficiency of the reasons, yet the court can certainly examine whether the reasons recorded are relevant and have a bearing on the matters in regard to which the authority is required to entertain the belief before issuance of notice under section 147. As stated above, on going through the materials on record including the reasons disclosed in the counter affidavit, we are of the view that the Income-tax Officer has reason to believe that on account of failure on the part of the assessee underassessment has been made for the assessment year, in question. In our view, therefore, this decision will not help the petitioners, in any way. In this connection, reference may be made to a decision in the case of ITO v. Purushottam Das Bangur [1997] 224 ITR 362 (SC). The facts of the case were that the Income-tax Officer completed the assessment after accepting the claim of the assessee in terms of section 143(3) of the Act. Subsequently, the Income-tax Officer received a letter from the Deputy Director (Investigation) on March 21, 1974, stating therein that on information obtained from the Bombay Stock Exchange Directory, the book value per equity share of the company rose from Rs. 318.55 in the year ending December 31, 1965, to Rs. 401 in the year ending December 31, 1970, and the earning per share rose from Rs. 8.37 per share to Rs. 44 per share, during the period, but the quotations of the shares on the Calcutta Stock Exchange fell from Rs. 168 to Rs. 85 per share during the period, and, accordingly, it was held that the quotations were the results of certain manipulated transactions and could not be said to have reflected the fair market value of the share, in question. The Deputy Director along with the said letter has enclosed the information, which he had received on the basis of the Bombay Stock Exchange Directory and other information. Pursuant to the letter received from the Deputy Director, the Income-tax Officer issued notice in terms of section 147(b) of the Act. The said notice was challenged before the High Court in a writ application. The Rajasthan High Court allowed the writ application on the ground that from the facts disclosed by the Deputy Director, it could not be said that the Income-tax Officer had reason to believe that there had been an underassessment on failure to disclose the true and material facts at the time of assessment. The decision of the Rajasthan High Court has been reversed on the ground that from the letter of the Deputy Director and the documents annexed thereto, the Income-tax Officer had undoubtedly reason to believe that the fair market value of the share was far more from the Calcutta Stock Association shown by the assessee at the time of assessment were manipulated, as a result the income chargeable to tax had escaped the assessment. Their Lordships have further held that the information received from the Deputy Director was a definite information and relying upon that information, the Income-tax Officer acted under section 147 of the Act. Consequently, the issuance of notice under section 147 of the Act was held to be valid. Lastly, Mr. Pal has relied upon a Division Bench decision in the case of Saurabh Kumar Pandey v. CIT [1999] 235 ITR 150 (Patna). We are of the view that the law laid down in the aforesaid decision virtually supports the Revenue, which is apparent from the fact that a similar notice was issued for reassessment on the ground that the income chargeable to tax for the assessment year 1988-89 had escaped assessment within the meaning of section 147 of the Act. The contention of the writ petitioner before the High Court was that the assessment of the petitioner for the year 1988-89 had been completed on the basis of the returns disclosing all material facts, as envisaged under section 143(1) of the Act and, as such, there was no justification for the Assessing Officer to reopen the assessment. In the said case, the Assistant Commissioner of Income-tax directed the Income-tax Officer to initiate a proceeding under section 263 of the Act, but the Income-tax Officer instead of taking such action, issued notice under section 148 of the Act. In opposition, however, it was submitted that the proposed notice was issued as per the direction of the Commissioner of Income-tax. The said direction of the Commissioner was held to be an information within the meaning of section 147(b) of the Act, as has been held in the case of Kumar Engineers v. CIT [1997] 223 ITR 18 (P & H) and ITO v. Purushottam Das Bangur [1997] 224 ITR 362 (SC). After having heard the parties, it has been held that the case falls within the ambit of section 147(b) of the Act, and the proposed reassessment proceedings pursuant to the notice is quite legal and valid.

On consideration of the materials on record including the decisions cited at the Bar, we are of the view that the assessing authority has rightly issued such notice for initiating a reassessment proceeding and, accordingly, we are not inclined to interfere with the same. In the result, this application is dismissed.

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