RANCHI HANDLOOM EMPORIUM v. COMMISSIONER OF INCOME TAX & ANR.
Civil Writ Jurisdiction Case No. 2169 of 1992, decided on August 18, 1998.
HIGH COURT OF PATNA
K. N. Jain, H. P. Mody & B. K. Jalan, for the Petitioner : Devi Prasad & K. K. Jhunjhunwala, for the Respondent
SACHCHIDANAND JHA, J. :
The petitioner seeks quashing of the notice dt. 20th March, 1992, issued under section 148 of the IT Act, 1961 (for short “the Act”). A copy of the impugned notice has been marked Annexure-3 to the writ petition.
2. The petitioner is a registered firm carrying on wholesale business in cloth. For the accounting year 9th July, 1986, to 27th June, 1987, relevant to the asst. yr. 1988-89, it submitted the return of its income showing a total income of Rs.95,670 on 27th July, 1988. Along with the return it filed a statement showing computation of total income, audited trading, P&L a/c, balance sheet and the tax audit report in the prescribed form as well as details of the loan accounts verified and confirmed by the concerned creditors. The return was accepted by the Dy. CIT (Asst.), Special Range, Ranchi, respondent No. 2, after scrutiny and the assessment order was passed on 17th November, 1989. On 31st March, 1992, however, the impugned notice, dt. 20th March, 1992, under section 148 of the Act was served on the petitioner alleging that respondent No. 2 had reasons to believe that income chargeable to tax had escaped assessment within the meaning of section 147 and he proposed to reassess the same and, accordingly, requiring the petitioner to submit the return in the prescribed form within 30 days of the service of notice. The petitioner made an application requesting respondent No. 2 to furnish the reasons leading to formation of his opinion within the meaning of section 147 of the Act and, later, also requested him to treat the original return filed on 27th July, 1988, as the return (under protest) in compliance with the impugned notice under section 148 and, ultimately, getting no response from the respondent, filed the present writ petition in this Court.
3. The case of the petitioner, briefly indicated, is that in order to confer jurisdiction on the AO for issuing show-cause notice under section 148 of the Act, the following pre-conditions must be satisfied :
(a) there must be escapement of chargeable income of the relevant assessment year;
(b) the AO must have reasons to believe (and not suspect) that such escapement is due to failure of the assessee to file return for that year, or due to his failure to disclose fully or truly all material facts necessary for the assessment of that year; or
(c) if there is no such failure, the AO has, in consequence of some information in his possession, reasons to believe that there has been escapement of income.
According to the petitioner, the return of income for the asst. yr. 1988-89 having been admittedly filed, all material facts necessary for assessment having been duly disclosed supported by documents, viz., audited accounts, tax audit reports, details of bank accounts duly verified and confirmed by the respective creditors giving their respective income-tax file numbers and the assessment having been completed on 17th Nov., 1989, after due consideration of those materials, there was neither any failure on the part of the assessee nor there was any new information on record within the meaning of section 147 of the Act to justify issuance of the notice. In these premises, the petitioner seeks quashing of the notice as being arbitrary, illegal and without jurisdiction.
4. The respondents have filed a counter-affidavit in which copy of the order of the AO dt. 20th March, 1992, containing the reasons leading to the belief regarding escaped assessment has been quoted. It would be useful to extract the relevant part of the said order as follows :
“The assessment for the asst. yr. 1988-89 was completed under section 143(1) without examining the genuineness of the ic cash credits appearing for the first time in the books of account. To examine the correctness of payment of interest on the loans introduced in the immediately preceding assessment year, the alleged creditors were issued notices under section 131 calling upon them to produce their respective books of account and statement of accounts, i.e., profit P&L a/c and balance sheet.
In the course of examination of genuineness of loans it was found that none of the alleged creditors as aforesaid had required creditworthiness to extend the loans of the magnitude that have been attributed to them. In most of the cases, the nature of income are shown as ‘miscellaneous gifts for which no details available’. The returns of income filed by the aforesaid alleged creditors are barely above taxable limit which proves they do not possess necessary creditworthiness for extending such loans as claimed. It is clear from aforesaid discussion that the capital has been built up on paper in the names of alleged creditors and after sufficient accumulation of funds on paper without having actually earned the income and real savings, the loans have been extended. In most cases cash has been deposited in the bank account before issue of the cheque. Hence, the credits appearing in the name of the aforesaid persons in the books of account of the assessee-firm are unexplained cash credits which were required to be treated as deemed income under section 68 for the asst. yr. 1988-89 in the hands of the assessee-firm. I have, therefore, reasons to believe that due to the failure of the assessee-firm to disclose the material facts truly and fully, the taxable income escaped assessment for asst. yr. 1988-89.”
5. Mr. K. N. Jain, learned counsel for the petitioner, submitted that all material facts having been disclosed by the petitioner, it must be held that it had discharged its obligations under law; thereafter it was for the AO to investigate into the correctness or otherwise of those facts and accept or reject the same; it was none of the obligation of the petitioner to disclose his own inference emanating from those facts. Mr. Jain contended that from a bare perusal of the “reasons” which are the basis of the so-called belief of the AO, it is clear that the so-called reasons are nothing more than lurking suspicion in his mind. However, it is well-settled, suspicion howsoever strong cannot take the place of belief and it falls outside the scope of section 148 of the Act to make a roving enquiry into er the matter. Mere change of opinion, it was contended, on the same set of facts could not justify action under section 148. Mr. Jain, in support of his contentions, pointed out the distinction between the unamended provisions of section 147 as they stood prior to 1st April, 1989, i.e., prior to the asst. yr. 1988-89 (to which the present case relates), and the amended provisions of that section as substituted by the Direct Tax Laws (Amendment) Act, 1987, which came into effect from 1st April, 1989.
6. Mr. Debi Prasad, learned counsel appearing for the respondents, on the other hand, contended that in a proceeding under Art. 226 of the Constitution of India arising from notice under section 148 of the Act, all that this ru Court should see is whether the AO had reasons to believe that some income had escaped assessment; neither the sufficiency of reasons nor the reasonableness of the belief can be gone into. As the respondents had reason to believe that some income had escaped assessment, the impugned notice cannot be said to be arbitrary. The petitioner should, therefore, participate in the reassessment proceeding for which he has already filed the return. Mr. Debi Prasad also contended that as at the time of issuance of notice under section 148, it is the amended provisions of section 147 which were in force, the present case would be governed by the amended provisions.
7. The submission that the present case will be governed by the amended provisions of section 147 of the Act is completely ic misconceived. Having regard to the fact that the amended provisions, as substituted by the Direct Tax Laws (Amendment) Act, 1987, came into force from 1st April, 1989, and the present case relates to the asst. yr. 1988-89, the relevant accounting year being 9th July, 1986, to 27th June, 1987, I have no doubt in my mind that it would be the unamended provisions which would govern the case. If a particular act does not constitute any offence or does not involve any consequence, the person committing such act cannot be held liable if the same very act becomes an offence and liable to penal consequence by virtue of some subsequent law. He cannot be punished for committing that act merely because some penalty is prescribed later for the same.
8. In order to find out the distinction between the unamended provisions of section 147 and the provisions as they ic stand after 1st April, 1989, and their effect, it would be appropriate to quote the two sets of provisions, so far as relevant as hereunder :
Sec. 147 as it stood prior to 1st April, 1989 : as “If –
(a) the AO has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the AO or to disclose fully or truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in cl. (a) on the part of the assessee, the AO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,
He may, subject to the provisions of section 148 to section 153, ic assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in section 148 to section 153 ic referred to as the relevant assessment year).”
Sec. 147 as amended :
“If the AO, has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of section 148 to section 153, ic 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 section 148 to section 153 referred to as the relevant ic assessment year) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant ic 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.”
9. The distinction between the two sets of the provisions was noticed by the Delhi High Court in Rakesh Aggarwal vs. Asstt. CIT (1997) 142 CTR (Del) 272 : (1997) 225 ITR 496 (Del) : TC S51.4080 in these words :
“The new section not only merges cls. (a) and (b) of the preamended section 147 but also brings about a significant change in the preliminary requirement of certain mandatory conditions before reassessment proceedings could be initiated under the old section. Under the old section 147(a), the AO could initiate reassessment proceedings if he had reason to believe that income chargeable to tax had escaped assessment by reason of : (a) omission or failure on the part of an assessee to make a return under section 139 for any assessment year, or (b) to disclose fully and truly all material facts necessary for his assessment for that year. As is evident from the amended section, in contradistinction to the original unamended section, requiring fulfilment of twin conditions spelt out in cl. (a) of section 147 or in cl. (b) of the said section, as conditions precedent for issuing notice under section 148 of the IT Act, it is not so in the amended section and the only condition for action now is that the AO should have reason to believe that income has escaped assessment which belief can be reached in any manner, and is not qualified by the pre-condition of full and true disclosure of material facts by an assessee, as contemplated under the old section 147(a) of the IT Act. An AO can now legitimately reopen the assessment in respect of an income which has escaped assessment. Undoubtedly, under the new section, power to reopen assessment is much wider and can be exercised even if an assessee had disclosed fully and truly all material facts.”
10. The point for consideration is whether the present case falls within the mischief of the provisions of section 147 as they stood at the relevant time, i.e., prior to 1st April, 1989. Mr. K. N. Jain, learned counsel for the petitioner-assessee, has placed reliance on Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC 51R.779, CIT vs. Simon Carves Ltd. 1976 CTR (SC) 418 : (1976) 105 ITR 212 (SC) : TC 51R.1541, ITO vs. Madnani Engg. Works Ltd. (1979) 12 CTR (SC) 144 : (1979) 118 ITR 1 (SC) : TC 51R.725; Basantaram Kedarnath vs. ITO (1986) 56 CTR (Cal) 344 : (1987) 165 ITR 777 (Cal) : TC 51R.1064 and Sarogi Credit Corporation vs. CIT 1975 CTR (Pat) 1 : (1976) 103 ITR 344 (Pat) : TC 42R.1194. Mr. Debi Prasad, learned counsel for the respondents, on the other hand, has relied on Phool Chand Bajrang Lal vs. ITO (1993) 113 CTR (SC) 436 : (1993) 203 ITR 456 (SC) : TC 51R.825, IAC vs. VIP Industries Ltd. (1992) 102 CTR (SC) 1 : (1991) 191 ITR 661 (SC) : TC 51R.823 and Rakesh Aggarwal vs. Asstt. CIT (1997) 142 CTR (Del) 272 : (1997) 225 ITR 496 (Del) : TC S51.4080.
11. In the case of Calcutta Discount Co. Ltd. (supra), the point for consideration before the ITO was whether the sales of shares were by way of changing the investments or by way of trading in shares. The Supreme Court observed that the question had to be decided on a consideration of different circumstances including the frequency of the sales, the nature of the shares sold, the price received as compared with the cost price and several other relevant facts. After the assessee had disclosed all the relevant facts in this regard it was for the ITO to decide as to whether the sales should be treated as trading transactions and the profits derived therefrom were liable to tax. Dwelling upon the scope of section 34 of the Indian IT Act, 1922 (corresponding to section 147 of the IT Act, 1961, the Supreme Court held that ru the ITO who issued the notice must have some material before him to believe that there had been material non-disclosure by reason of which an under assessment had taken place. The Court observed that so far as primary facts are concerned it is the duty of the assessee to disclose all of them, the duty however does not extend beyond full and truthful disclosure of all primary facts. Once all the primary facts are placed before the AO it is for him to decide what inference of fact could be reasonably drawn. It is not for anybody else, far less the assessee, to tell the AO what inference, whether of facts or law, should be drawn. The Court further observed that after the assessment has been completed there should be some prima facie grounds for thinking that there has been some non-disclosure of material facts.
12. In the case of Simon Carves Ltd. (supra), r. 33 of the IT Rules, 1922, permitted assessment of a non-resident company carrying on business as construction engineers in one of the three modes as mentioned in the rule. The ITO computed the income applying one such mode which resulted in lower tax liability. Subsequently, the assessment was reopened and applying a different mode of assessment, which also was permissible, the ITO determined a higher income. On a reference the High Court held that this was not a case of income escaping assessment. The Supreme Court affirmed the decision of the High Court. It held that r. 33 vested discretion in the ITO to select one of the three modes for determining the taxable income and the mere fact that the mode of computation had resulted in lower tax liability is not sufficient for holding that the discretion was not exercised in a proper and judicious manner, especially when it was not suggested that the ITO, was actuated by some oblique motive. The Supreme Court in this connection observed that the taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which was legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that the scales are weighted against the assessee. The ITO, it was further observed, ordering reassessment does not sit as a Court of appeal over the ITO making the original assessment. Nor is it open to him to substitute his own opinion and order reassessment.
13. In the case of Madnani Engineering Works Ltd. (supra), the assessee had submitted a return showing payment of interest to certain creditors from whom it claimed to have borrowed money on “hundis”. The return was accepted and the assessee was assessed accordingly. Later, notice was issued for reopening of the assessment on the ground that transactions of loan represented by the hundis were bogus and no interest had in fact been paid by the assessee to any of the creditors and, therefore, interest had wrongly been allowed. The notice was challenged in the High Court by way of writ petition. The High Court allowed the writ petition and quashed the notice. On appeal the Supreme Court held that the assessee had produced in the original assessment proceedings all the hundis on the strength of which it claimed to have obtained loans from the creditors as also the books of account containing entries showing payment of interest. It was for the ITO to investigate and determine whether these documents were genuine or not. The assessee is not supposed to confess before the ITO that the hundis and the entries in the books of account were bogus and, therefore, cannot be said to have failed to make a true and full disclosure of the material facts by not making any such confession. The decision of the High Court was accordingly upheld.
14. In the case of Basanta Ram Kedarnath vs. ITO (supra), while dealing with a similar case of hundi loans where the names of the creditors and the details regarding loans had been disclosed, the assessment was sought to be reopened in view of a finding in the course of assessment in the subsequent year that the particular loan was not genuine. The Calcutta High Court held that there was no failure to disclose material facts for the relevant assessment year and the reassessment proceedings were not in accordance with law. Their Lordships observed that in order to bring a case within the ambit of section 147 of the Act it is for the Revenue to establish that the assessee has failed to disclose a fact or material correctly or truly which has resulted in under-assessment of the income. As long as the material facts with contemporaneous records and documents are placed before the ITO, at the time of original assessment, the assessee can be said to have done his duty. Thereafter it is for the ITO to investigate and then to accept or reject the case of the assessee. The assessee is not supposed to confess that his return, as filed, is not true or correct or that he had concealed material facts or has made untrue statements, and invite rejection from the ITO.
15. In the case of Sarogi Credit Corporation vs. CIT (supra), while interpreting the provisions of section 68 of the Act, this Court held that once the identity of the third party-creditor is established before the ITO and prima facie evidence is placed before him pointing out to the fact that the entry is not fictitious, the initial burden lying on the assessee stands discharged. It is thereafter not for the assessee to explain further as to how or in what circumstances the third party obtained the money or how or why he came to make an advance of the money as loan to the assessee. Once such identity is established and the creditors stand by the case of the assessee that they have advanced money in question to him, the burden shifts on to the Department to show as to why the assessee’s case should not be accepted.
16. The law on the point is thus well settled that the obligation of the assessee is to disclose all material facts fully and truly; he is, however, not expected to also tell the AO that his conclusions are not correct. In fact, he is not supposed to disclose his own conclusion and inferences to the AO. It is for the AO to draw his inference and conclusion on the basis of such facts. He may for this purpose make such investigation as he considers necessary and also, in this regard, call upon the assessee to place such further evidence or materials as may be considered necessary. After having completed the assessment and accepted the return, as originally filed or with alterations, it is not open to him to take recourse to the provisions of section 148 r/w section 147. He can do so only on the basis of any material or piece of information. However, he is not supposed to make a roving or fishing enquiry for this purpose. While it is open to him to collect evidence or new materials by himself through his own agencies, at that stage he cannot compel the assessee to associate himself with any such roving or fishing enquiry. It is only after he comes to form a reasonable belief, distinct from suspicion or doubt, on the basis of some fresh material or evidence that he can issue notice under section 148 and start reassessment proceedings. Where two views of matter are possible and the AO takes one view, later he or the successor-AO cannot start reassessment proceedings merely because he seeks to take another view of the same matter and on the same materials.
17. The facts of the present case, in my opinion, bear close resemblance with those of Madnani Engineering Works Ltd. (supra), Basantaram Kedarnath (supra) and Sarogi Credit Corporation (supra). The petitioner had disclosed the names of the creditors and produced documents in support of its claim of taking loan from them. There is nothing on record to show that the creditors did not stand by the case of the petitioner. In fact, even at the stage of proposed reassessment proceedings, pursuant to notice they appeared and vouchsafed the correctness of the petitioner’s case. The finding of the AO, to the effect that their “creditworthiness” was doubtful pertains to his “opinion” with respect to the same transaction and on the basis of the very same materials. The petitioner, it can be said in view of the decision in Sarogi Credit Corporation (supra) had discharged the onus and it was for the AO to investigate the correctness or otherwise of the petitioner’s case, to accept or reject the same at the time of original assessment. Merely because the AO now seems to doubt the “creditworthiness” of the alleged creditors, it cannot be a ground for reassessment proceedings. The prima facie opinion as expressed in his order dt. 20th March, 1992, is nothing more than suspicion; however, it is well settled the suspicion cannot take the place of belief, howsoever strong it may be. “Reason to believe is not the same thing as reason to suspect” [Indian Oil Corporation vs. ITO (1986) 58 CTR (SC) 83 : (1986) 159 ITR 956 (SC) : TC 51R.811].
18. The decisions cited by Mr. Debi Prasad, learned counsel for the respondents, are clearly distinguishable. In the case of Phool Chand Bajrang Lal (supra), the assessee claimed to have borrowed a loan of Rs. 50,000 from Calcutta company on 19th May, 1962. Entry to that effect was made in the books of account on 25th May, 1962. The loan was shown to have been raised in cash and returned in cash in 1968. However, the interest thereon had been paid during the asst. yrs. 1963-64 to 1968-69 by cheque or bank draft. The appellant produced a confirmatory letter from the company which had allegedly lent money to it. The ITO, Azamgarh, completed the assessment accepting the genuineness of the loan and allowing deduction of the interest. Thereafter, upon enquiry, he learnt from the ITO, Calcutta, that the managing director of the company in question had made a confession to him to the effect that the company was only a name lender and it had never advanced any loans to any person and this was accepted in the assessment of that company for the assessment years in question. On receipt of the aforesaid letter, the ITO, Azamgarh, issued notice for proposed reassessment. The Supreme Court held that as the ITO came to possess fresh materials which showed prima facie that the claim of the assessee was bogus, he was entitled to start reassessment proceedings. It was observed that where the transaction itself, on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of the original proceedings could not be said to be a disclosure of “true” and “full” facts. The AO in such a case has therefore jurisdiction to reopen the concluded assessment.
19. The report of the decision in the case of VIP Industries Ltd. (supra), does not set out the necessary facts nor indicate the reasons. The Supreme Court without disclosing any reasons or grounds set aside the order of the Bombay High Court observing that it appears that facts had subsequently come to the notice of the IT Department that the facts disclosed in the return were not true and correct declaration of facts. I have looked into the decision of the Bombay High Court in VIP Industries Ltd. vs. IAC (supra), giving rise to the aforesaid case in the Supreme Court, from which it appears that the reassessment proceedings were sought to be initiated under section 147(a) of the Act on the ground that payment of commission allegedly made to the agent was bogus and that the purchases were also partly bogus. The Bombay High Court quashed the notice holding that when the ITO concluded the assessment the necessary materials were before him. As stated above, the Supreme Court without disclosing reasons or grounds by a short order set aside the order of the High Court and remanded the case to the ITO for decision in accordance with law. Inasmuch as the order of the Supreme Court does not set out reasons or grounds, it must be held that the order was passed, in the facts and circumstances of the case, for doing complete justice between the parties within the meaning of Art. 142 of the Constitution of India and, therefore, cannot be cited as binding precedent.
20. The decision in the case of Rakesh Aggarwal (supra), related to the asst. yr. 1989-90 and rendered on the basis of the amended provisions and, therefore, can be of no avail to the respondents.
In the facts and circumstances of the case and reasons stated above, I am inclined to hold that notice under section 148 of the Act has not been issued in accordance with law and the same is liable to be quashed.
21. In the result, the impugned notice dt. 20th March, 1992, contained in Annexure-3 is quashed and the writ petition is allowed but without any order as to costs.
AFTAB ALAM, J. :