Biotech International Ltd. and Another vs Assistant Commissioner of Income Tax

A.K. Sikri, J.—The petitioner No. 1, M/s Biotech International Ltd., is a company incorporated on 8th Feb., 1993 under the Companies Act, 1956 and is engaged in the business of manufacturing and trading of biological pesticides and mosquito nets, running business centre and trading in other goods. On 29th Oct., 2001, the petitioner company filed its return of income u/s 139(1) of the IT Act, 1961 (hereinafter referred to as the ''Act'') for the asst. yr. 2001-02 along with a trading, P&L a/c and balance sheet, disclosing its total income at Rs. 30,43,030 after claiming deduction u/s 80-IA of the Act of Rs. 49,56,683 from its gross total income of Rs. 79,99,709. The petitioner company claimed deduction u/s 80-IA of the Act in respect of profits and gains from industrial undertaking at Agra, which is engaged in manufacturing of biological pesticides since financial year 1994-95 relevant to asst. yr. 1995-96.

However, against the returned income, the AO by an order of assessment dt. 3rd March, 2004 u/s 143(3) of the Act computed the total income of the petitioner company at Rs. 79,99,709 by disallowing the claim of deduction u/s 80-IA of the Act of Rs. 49,56,683. The petitioner company, being aggrieved, filed an appeal before the CIT(A) and challenged the disallowance of the claim of deduction of Rs. 49,56,683 u/s 80-IA. Apart from the grounds on merits, the petitioner company took additional grounds of appeal challenging that the assessment is without jurisdiction since no notice u/s 143(2)(i) of the Act was served on the petitioner company within twelve months from the end of the month of the filing return of income.

On 2nd March, 2005, the CIT(A) confirmed the disallowance made by the AO of the claim of deduction of Rs. 49,56,683 u/s 80-IA of the Act. He further refused to admit the additional grounds of appeal challenging that the assessment is without jurisdiction since no notice u/s 143(2)(i) of the Act was served within the prescribed time. Being aggrieved from the order of the CIT(A), the petitioner company filed an appeal before the Income Tax Appellate Tribunal (for short, the ''Tribunal'').

The Tribunal cancelled the assessment order dt. 3rd March, 2004 u/s 143(3) of the Act by holding that the mandatory requirement regarding service of notice u/s 143(2) of the Act within a period of one year from the date of filing the return has not been satisfied. In other words, both the orders of assessment and order of the CIT(A) stood quashed as a result of the order of the Tribunal.

After this chapter was over and the petitioner thought that matter is given a quietus, the AO issued notice u/s 148 of the Act on 19th March, 2008 thereby seeking to reopen the assessment. The petitioner requested the AO to supply the copy of reasons recorded for initiating the proceedings u/s 147 of the Act by issuing notice u/s 148 thereof. These reasons were supplied and on receipt of these reasons the petitioner filed its detailed objections. These objections are disposed of by the AO vide his order dt. 7th Nov., 2008. Thereafter, the petitioner sent another letter dt. 17th Nov., 2008 to the respondent/AO with request to grant some time for filing the objections on merits. Immediately thereafter, the present petition was filed on 26th Nov., 2008 challenging the impugned notice dt. 19th March, 2008 u/s 148 of the Act on various grounds. Basic submission is that order of the Tribunal had attained finality and, therefore, the AO could not have reopened the case again. Furthermore, notice is issued four weeks (sic - years) after the assessment order and it could be done only if there was no disclosure of ''true and full'' facts of the case. Furthermore, there was no fresh material before the AO which could occasion issuance of such notice.

Learned Counsel for the respondent/Revenue, on the other hand, submitted that distinction is to be made between ''nullity'' and, irregularity if it was a case of mere irregularity, which could always be rectified notwithstanding the judgment of the Tribunal.

We may take note of the basis for setting aside the earlier assessment made by the AO u/s 143(3) of the Act by the Tribunal. The only reason for setting aside the assessment was that the mandatory requirement regarding service of notice u/s 143(2) within a period of one year from the date of filing of the return had not been satisfied. In this backdrop, the reason for reopening was as under:

Reasons for initiating proceedings u/s 148 in the case of M/s Biotech International Ltd. for asst. yr. 2001-02.

Brief facts of the case is that the assessee company is engaged in the business of manufacturing and trading of biological pesticides, mosquito nets, etc. It filed its return of income on 29th Oct., 2001 declaring income of Rs. 30,43,030. The case was taken up in scrutiny and assessment u/s 143(3) was completed on 3rd March, 2004 at assessed income of Rs. 79,99,709. During the course of assessment proceedings the AO noted that the assessee was wrongly claiming the benefit of deduction u/s 80-IA (now Section 80-IB) for its Agra unit and the same was disallowed. The assessee went in appeal and learned CIT(A) in its order dt. 2nd March, 2005 confirmed this addition, observing that the assessee company was not fulfilling the required conditions as laid down in Section 80-IA. However, the assessee raised two additional grounds of appeal before CIT(A) wherein it was stated that the notice u/s 143(2) was not served upon the assessee within the time-limit of one year and hence the case was barred by limitation. This ground of the assessee was dismissed by the learned CIT(A) stating that the assessee never raised any such issue before the AO during the assessment proceedings which lasted for close to 16 months and the assessee has no ground to raise this issue now for the first time before the CIT(A). Aggrieved the assessee went in appeal before Tribunal. The Hon''ble Tribunal, Delhi vide its order dt. 24th Aug., 2007 cancelled the assessment order holding that the mandatory requirement regarding service of notice u/s 143(2) within a period of one year from the date of filing of return has not been satisfied. Tribunal has not given any findings on the merit of the case.

After giving effect to the order of the Hon''ble Tribunal, there is no surviving assessment in this case. The return filed by the assessee clearly indicates the wrong claim of deduction u/s 80-IA as discussed above. Considering the fact that the learned CIT(A) has upheld the order of the AO on merit, and assessee has wrongly claimed the deduction u/s 80-IA of Rs. 49,56,683 for its Agra unit in its return of income, I have reason to believe that income chargeable to tax to the extent of Rs. 49,56,683 has escaped assessment for the asst. yr. 2001-02 in the ease of M/s Biotech International Ltd. The fact on records clearing [sic] indicates that there is failure on the part of assessee to disclose material facts fully and truly for computation of income. Therefore, the proviso to Section 147 is attracted in this case.

(Dr. Prashant Khambra)

Asstt. CIT, Circle 3(1), New Delhi.

From the facts which are narrated above, it would become apparent that first and foremost issue which needs determination with regard to an assessment order made u/s 143(3) of the Act, as pointed out above. This assessment was rendered invalid and was set aside on the ground that the foundation for initiation of proceedings, namely, issuance of the notice u/s 143(2) of the Act was vitiated by law. The question that arises is as to whether such an assessment u/s 143(3) of the Act would only be irregular/illegal or it would be nullity in the eyes of law.

Learned Counsel for the respondent referred to the judgments of this Court in Commissioner of Income Tax Vs. Pawan Gupta, Ed. and (2005) 97 ITD 564 wherein it has been held that such assessments which are made violating the fundamental procedure would be nullity in law. We may point out at this stage that Mr. Aggarwal, learned Counsel for the petitioner, could not dispute that the assessment order passed u/s 143(3) of the Act would be nullity. Once we look at this aspect the course of action does not become apparent. Notice in this case has been issued u/s 147 of the Act by the AO. The petitioner has sought to take a reassessment under the proviso to the said Act and on that basis it is argued that since there was an assessment under Sub-section (3) of Section 143 of the Act and notice in question has been issued four years after the assessment. It was incumbent upon the AO to show on record that the assessee did not disclose fully and truly all material facts necessary for the assessment. His submissions was that the petitioner had, in fact, disclosed all material facts necessary for the assessment.

However, once we proceed on the basis that assessment under Sub-section (3) of Section 143 of the Act was nullity, it is irresistible that proviso to Section 147 of the Act is not applicable. This aspect is amply clarified by the Supreme Court in the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., The relevant portion of the said judgment is reproduced below:

Section 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word ''reason'' in the phrase ''reason to believe'' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an in-built idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. Vs. I.-T.O., Nagpur, , for initiation of action u/s 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is ''reason to believe'', but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction see INCOME TAX OFFICER Vs. SELECTED DALURBAND COAL CO. (P) LTD., Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others,

The scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate Clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction u/s 147(a) two conditions were required to be satisfied firstly the AO must have reason to believe that income profits or gains chargeable to Income Tax have escaped/assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the AO could have jurisdiction to issue notice u/s 148 r/w Section 147(a). But under the substituted Section 147 existence of only the first condition suffices. In other words if the AO for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The ease at hand is covered by the main provision and not the proviso.

So long as the ingredients of Section 147 are fulfilled, the AO is free to initiate proceeding u/s 147 and failure to take steps u/s 143(3) will not render the AO powerless to initiate reassessment proceedings even when intimation u/s 143(1) had been issued.

After going through the reasons, as stated, the proviso to Section 147 is attracted in this case and we feel that the AO has wrongly stated so. Since, this is a mistake in law and the facts/reasons which are otherwise given in the operative part of the order for initiating proceedings u/s 148 of the Act are sufficient to make out a case having covered under the main provision of the Section 147 of the Act. On the basis of this mistake that the case is covered by proviso of Section 147 of the Act, the initiation of proceeding cannot be rendered illegal. We are therefore, of the opinion that this is not a stage to interfere with the aforesaid notice under Article 226 of the Constitution of India. We, however, make it clear that it would be open to the petitioner to present its case before the AO in order to show that claim u/s 147 of the Act was rightly made and allowed.

We may refer to a decision of this Court, at this stage, in the case of Consolidated Photo and Finvest Ltd. Vs. Asst. Commissioner of Income Tax, wherein it is held that u/s 147 of the Act it is permissible even if AO gathered reasons to plea (believe) from the record as has been the subject-matter to complete proceedings. This judgment provides complete answer to the submissions made by learned Counsel for the petitioner that no further material fact has been noticed apart from the material already placed in the IT returns, on the basis of which impugned notice has been issued. Giving this liberty to the petitioner, the petition is dismissed.