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Judgment
Manindra Mohan Shrivastava, J.—This order shall govern disposal of the aforementioned appeals, as common issues of law, based on similar facts, arise for consideration. Brief and relevant facts necessary for decision of the three tax appeals, as reflected from the records, are that the respondent assessee/respondent derived income from manufacturing and trading of iron and steel items i.e. M.S. Rods, angles, channels and M.S. Tar etc. under the trade name of M/s Tara Re-rolling Mill, Tedesara. Information was received from Asstt. Commr., Central Excise Tax, Bhilai that the assessee effected huge business transactions during the relevant accounting period, relevant assessment years being 1993-94, 1994-95 and 1995-96. According to sales-tax assessment orders, the turnover/sales during various assessment years were as below :
Asst. yr.
Turnover/''Sales
1993-94
11,25,81,857
1994-95
15,04,03,280
1995-96
17,80,00,000
In respect of the aforesaid three assessment years, assessee did not file IT return. Upon receipt of such information and sales-tax assessment orders regarding huge turnover, the AO invoked jurisdiction under s. 147 of the IT Act, 1961 (hereinafter referred to as "the Act") and notices under ss. 148 of the Act were issued to the assessee by recording satisfaction vide order dt. 24th March, 2000, recorded separately in each of the cases. Later on, for the purpose of making regular assessment, statutory notices were issued and the AO passed an order of assessment under s. 143(3) of the Act on 15th March, 2002 in all the three appeals pertaining to asst. yrs. 1993-94, 1994-95 and 1995-96. In respect of relevant assessment years, the total income of the assessee was computed as below :
Asst yrs.
Total income
1993-94
5,62,910
1994-95
7,52,160
1995-96
8,90,000
The AO also initiated penalty proceedings under ss. 271(1)(b), 271(1)(c), 271A and 271B of the Act. In addition, interest was also charged under ss. 234A/234B/234C of the Act.
Aggrieved by the orders of assessment and computation of income and initiation of penalty proceedings, the assessee filed separate appeals in each of the cases, containing similar grounds of appeal based on similar facts. The three appeals were dismissed by Commissioner of income tax (Appeals) Raipur [in short "CIT (A)"]. Detailed order was passed in appeals arising out of orders of assessment of asst. yrs. 1993-94 on 10th July, 2003 and the appeals pertaining to asst. yrs. 1994-95 and 1995-96 were also dismissed recording that on similar grounds, appeals pertaining to asst. yr. 1993-94 has been dismissed.
The assessee thereafter preferred appeal before the income tax Appellate Tribunal (in short "the Tribunal"). The assessee for the first time raised an issue with regard to legality and validity of the order of the AO in invoking jurisdiction and power under s. 147 of the Act, in addition to other grounds raised in the appeal.
The three appeals were decided by a common order, which is impugned in these appeals. Though the Tribunal noted as many as five grounds raised by the assessee in the appeals, the Tribunal came to the conclusion that the action of AO in reopening the case under s. 147 of the Act was not justified. Based on such conclusion, the orders of assessment and order passed in appeals were set aside in all the cases. The Tribunal did not take up other issue raised in the appeal in view of the conclusion that the very reopening of the case by the AO in purported exercise of power under s. 147 of the Act was not justified.
In the three appeals, which have been preferred by the assessee [sic-Revenue) against the common order, governing all the three appeals, following questions of law were framed by this Court in Tax Appeal No. 27 of 2008.
Whether, the Tribunal was right in law holding that the provisions of s. 147 of the IT Act, 1961 were wrongly invoked by the AO in spite of the fact the assessee had originally not filed any returns of income for the asst. yr. 1993-94 ?
Whether, the Tribunal was right in law in holding that information received from the Central Excise Department was not sufficient evidence to warrant the invoking of provisions of s. 147 of the IT Act, 1961 ?
In other two cases also, the questions of law framed are the same, except that they pertain to different assessment years.
Learned counsel for the appellant, assailing the legality and validity of the orders passed by the Tribunal in three cases, submitted that the AO was fully justified in reopening the case of the assessee in respect of the three asst. yrs. 1993-94, 1994-95 and 1995-96 upon receipt of authentic information by the Asstt. Commr., Central Excise, Bhilai. He submitted that the sales-tax assessment orders, which have not been disputed by the assessee, disclosed huge turnover/sales during the three assessment years. The assessee had not filed income return in respect of any of the aforesaid three years. Upon receipt of such information in respect of three assessment years, the AO recorded specific reason in its order dt. 24th March, 2000 in each of the cases, for his belief that the income chargeable to tax has escaped assessment. Thereafter, notices under s. 148 of the Act were issued to assessee followed by regular assessment and based on his best judgment assessment, income in respect of each of the assessment years was duly computed and tax demanded, in addition to initiation of penalty proceedings and charging interest. Learned counsel further submitted that at the stage of recording reason to believe so as to invoke power under s. 147 of the Act, the AO is not required to make a detail assessment like a regular assessment and actually determine by computing income, but, all that is required is bona fide reason based on relevant material information that income has escaped assessment. He submits that once there is such a material, to record reason for belief, the assessment is then to be made in the manner prescribed under the law. It is contended that the material which was considered by the AO to record reason for his belief regarding income having escaped assessment was neither extraneous nor irrelevant. He submits that during three assessment years, the assessee had declared his turnover/sales which showed that the turnover were very huge and not small or negligible. He submits that such a material was sufficient to invoke jurisdiction under s. 147 of the Act.
On the other hand, learned counsel for the assessee-respondent submitted that the reopening of the case under s. 147 of the Act, is wholly unjustified. Learned counsel submits that such an information regarding turnover of sale under sales-tax assessment year, by itself, without there being any evidence of earning income, could not at all be made a basis to invoke jurisdiction under s. 147 of the Act. He urged that bald statements of earning huge profits made by Asstt. Commr., Central Excise, were without any basis. Such observations were not based on any evidence and, therefore, on such obscure and vague statement, assessment could not be reopened. He further submits that sales-tax assessment never gave any detail of income earned in a given course. Therefore, only on that basis, the AO was not justified in reopening the case. Learned counsel for the respondent-assessee further contended that while invoking power under s. 147 of the Act, the AO has completely ignored the statutory scheme under s. 147 of the Act in case where no return has been filed. It is argued that in order to invoke provision under s. 147 of the Act, the AO is not only required to record that no return of income was furnished, but also that 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. In the present case, the AO failed to see that the net profit of assessee, carrying on similar trade or business in the area, was not based on income from sale of the products, but profit was because of income from other sources. It is contended that this relevant aspect was completely overlooked by the AO and CIT(A) and, therefore, the computation of income by assuming minimum average net profit @ 0.5 per cent could not be applied. In support of his contention, learned counsel for the respondent-assessee relied upon the decisions of Smt. Mira Ananta Naik and Others Vs. Deputy Commissioner of Income Tax (Investigation) and Others, , Jogat Mohan Kapur vs. WTO & Ors. (1995) 125 CTR (Cal) 428 , Sitaram Jindal Vs. Income Tax Officer, "E" Ward and Others, and Commissioner of Income Tax Vs. Shree Rajasthan Syntex Limited,
We have considered the rival submissions made by learned counsel for the parties and perused the records.
It is not in dispute that in the three appeals in respect of asst. yrs. 1993-94, 1994-95 and 1995-96, the assessee had not filed any return. It is also not in dispute that in respect of period relevant to the asst. yrs. 1993-94, 1994-95 and 1995-96, the AO received information from the Asstt. Commr., Central Excise, Bhilai regarding earning of huge profit. The respondent-assessee has not disputed the figures of turnover/sales stated in various orders passed by the AO, CIT(A) and the Tribunal. The order passed by the AO in the three cases shows that basis for invoking jurisdiction under s. 147 of the Act was an information of Asstt. Commr., Central Excise, Bhilai and the AO had also taken into consideration the sales-tax assessment orders obtained from the Sales-tax Department in respect of the three assessment years. For the asst. yr. 1993-94 turnover/sales was Rs. 11,25,81,857. Similarly the AO also noted for the years 1994-95 and 1995-96 the sales-tax assessment orders obtained from the Sales-tax Department, which disclosed turnover/sales as Rs. 15,04,03,280 and Rs. 17,80,00,000 respectively. The AO kept in view the net profit shown by the assessee in the same line of business in the area in those relevant years. The fact that the assessee had not filed income return during the three assessment years was also noted. The aforesaid material constituted reason to believe that income chargeable to tax has escaped assessment during the relevant assessment years, with which we are concerned in these three cases. It was only after separately recording detailed reason vide order dt. 24th March, 2000 in each of the cases, that the AO proceeded to invoke his power under s. 147 of the Act.
In order to decide the questions formulated in these three appeals, it is apposite to refer to the provision contained in s. 147 of the Act, which is extracted hereinbelow :
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 ss. 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 (hereinafter in this section and in ss. 148 to 153, referred to as the relevant assessment year.
Provided that where an assessment under sub-s. (3) of s. 143 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 s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1.--Production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO 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 AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but-
(i) income chargeable to tax has been under assessed; or
(ii) such income has been assessed at too low a rate; or
(ii) 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.
The provision contained in s. 147 of the Act invest the AO with the power to assess or reassess any income chargeable to tax which has escaped assessment for any assessment year. It has been provided that if the AO has reason to believe that any income chargeable to tax has escaped for any assessment year then he may, subject to provision of s. 148 to 153, assess or reassess such income. The AO has also been invested with the power to assess or reassess any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under s. 147 of the Act. The main provision as it existed during relevant period is followed by a proviso and two Explanations. It may be clarified that second proviso was inserted subsequently by the Finance Act, 2008 w.e.f. 1st April, 2008, with which we are not concerned in the present case. Expln. 2 provides that certain cases specified in cls. (a), (b) and (c) shall be deemed to be cases where income chargeable, to tax has escaped assessment. Clause (a) provides that 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. Therefore, merely because no return of income has been filed, deeming fiction would not be attracted, unless it is also found that the total income during the previous year exceeded the maximum amount which is not chargeable to income tax. In other words, in order to attract deeming fiction under cl. (a) of Expln. 2, two conditions are required to be satisfied. One is that no return of income has been furnished by the assessee. Second is that 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. Unless the aforesaid two conditions are satisfied, it will not be permissible to apply the deeming fiction as provided in Expln. 2.
The provision contained in s. 147 of the Act came up for consideration before the Supreme Court in the case of Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others, and it was held as under :
We have only to see whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage.
In a subsequent decision in the case of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., 30 the Supreme Court considered the scope, meaning and import more elaborately, as below :
Sec. 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 inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court [sic--Supreme Court) in Central Provinces Manganese Ore Co. Ltd. Vs. I.-T.O., Nagpur, for initiation of action under 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 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., and Raymond Woollen Mills Ltd. Vs. Income Tax Officer and Others,
Therefore, if the AO has cause or justification to know or even suppose that in fact it escaped assessment, it can be said to have reason to believe that income had escaped assessment. In order to invoke jurisdiction under s. 147 of the Act, that much of satisfaction would be sufficient. That is not a stage where the AO is required to finally ascertain the fact by legal evidence by a long drawn process of meticulous examination. The final outcome of the proceeding is not relevant. That is the stage of initiation and not final determination. To say, therefore, that the AO should have finally ascertained by established legal evidence to conclude that particular income chargeable to tax has escaped assessment is not the intention of law. At the stage of issue of a notice by invoking provision of s. 147 of the Act, all that is required to be seen 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. In substance, the formation of belief by the AO is only within the realm of subjective satisfaction.
In the light of the aforesaid decision of the Supreme Court and import of provision under s. 147 of the Act, the order passed by the AO in cases in hand is required to be examined.
What constituted "reason to believe", was receipt of a definite information from the office of Asstt. Commr., Central Excise, Bhilai, regarding earning of huge profit. The AO in three orders passed separately in each of the cases in hand, incidentally on 24th March, 2000, took into consideration the order of assessment by the STO relating to the relevant years. The AO found that the assessee had huge turnover/sale of the manufacturing products. For the asst. yr. 1993-94 turnover/sales was Rs. 11,25,81,857. Similarly the AO also noted in the year 1994-95 and 1995-96, the sales assessment order obtained from the Sales-tax Department which disclosed turnover/sales as Rs. 15,04,03,280 and Rs. 17,80,00,000 respectivley. The figures of turnover are not small. This was coupled with the fact that for the relevant assessment years, the assessee did not file IT return. The AO also took into consideration that assessees who were in similar business had earned profit. In the considered opinion of this Court, receipt of information and disclosure of aforesaid fact in each of the three cases definitely constituted reasons for belief that income chargeable to tax had escaped assessment. Present is not a case where the assessee had disclosed such information regarding turnover and gave details which were subjected to assessment. Therefore, the subjective satisfaction of the assessee (sic--AO) was based on relevant material and cannot be said to be mere ipse dixit. As has already been discussed and held hereinabove that what is required to invoke jurisdiction under s. 147 of the Act is cause or justification and not final ascertainment upon examination of evidence. The material taken into consideration by the AO in the matter of exercise of power under s. 147 of the Act, constituted sufficient "cause or justification". At that stage, no more exercise was required to be undertaken by the AO. Applying the test which has been laid down by the Supreme Court in the case of Rajesh Jhaveri (supra), we have no hesitation to hold that in each of the three cases, the AO was justified in invoking provision under s. 147 of the Act. It is not a case where the AO sought to exercise power under s. 147 of the Act only on one circumstance i.e. non-filing of return, so as to say that deeming provision in cl. (a) of Expln. 2 could not be attracted in the absence of there being any consideration as to whether total income during the previous year exceeded the maximum amount which is not chargeable to income tax. The order of the AO does not show that the only operative cause or justification to invoke power under s. 147 of the Act was non-filing of the return. In fact, the AO has taken into consideration the receipt of information from the Asstt. Commr., Central Excise, sales-tax assessment orders of the relevant years. Not only this, the turnover/sales figures were also found to be very high. Non-filing of the return in the relevant assessment years was in addition to the aforesaid circumstances which were noticed and taken into consideration by the AO to invoke power under s. 147 of the Act.
Present is not a case where the power under s. 147 of the Act has been invoked under deeming provision contained in cl. (a) of Expln. 2, Therefore, the submission of learned counsel for the respondent-assessee that the AO was not justified in reopening the case only on the ground of non-filing of return, on facts, is not acceptable and has to be rejected. The Tribunal fell into grave error of law in unduly restricting the scope of power and jurisdiction under s. 147 of the Act by holding that there is no evidence on record that the assessee earned income on huge transactions and that assessees in similar line of business incurred loss before income from other sources during the relevant year. The approach of the Tribunal as adopted is clearly erroneous in law because that would amount to first finally ascertain on established legal evidence regarding precise income having escaped assessment as a condition precedent for exercise of power under s. 147 of the Act. That is not the object behind the conferment of power under s. 147 of the Act. The condition precedent for exercise of statutory power under s. 147 of the Act is "reason to believe" and not actual and final assessment on definite material. The exercise, therefore, at the initial stage is actuated by reason to believe and not that AO should have finally ascertained the fact by legal evidence or conclusion. In the words of the Supreme Court in the case of Rajesh Jhaveri (supra)--"the function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers".
Learned counsel for the respondent-assessee sought to impress upon the fact that the AO and CIT(A) were not correct in coming to conclusion that assessees in the similar line of business in the relevant years had earned profit, because the profit was not because of the business, but, on account of income from other sources. That is something which is in the realm of actual assessment after having invoked power under s. 147 of the Act and that by itself would not vitiate the exercise of power under s. 147 of the Act. There were other cause or justification which constituted "reason to believe" in the present case. That was not the only reason for the AO to form belief that income has escaped assessment. Presently we are not concerned as to whether in ultimate analysis after assessment made, the assessee had earned income in those years. Our considerations are confined only to the questions of law, which have been framed.
In view of the decision of the Supreme Court in the case of Rajesh Jhaveri (supra) and discussions and conclusion as above, none of the decisions cited by learned counsel for the respondent come to the aid of the assessee, because in each of those cases, on different factual premises, conclusion was arrived at with regard to existence of "reason to believe".
The upshot of aforesaid discussions and conclusion we have drawn after examining the statutory scheme of s. 147 of the Act and judgment of the Supreme Court, the orders passed by the Tribunal in each of the cases cannot be sustained in law and has to be set aside. We accordingly set aside the order passed by the Tribunal in each of the appeals before us in three cases. We noticed that only on the issue as to whether AO was justified in reopening the case under s. 147, the Tribunal upset the orders of the AO and CIT(A), without going into other issues framed by it. Once it is held that AO was justified in reopening the case under s. 147 of the Act, the other issues relating to actual assessment of income, determination of tax followed by penalty, interest etc., would be matters for consideration with which we are not concerned, because the Tribunal has not gone into those aspects raised before it by the assessee. Therefore, we remit all the three cases to the Tribunal for consideration of issues framed by it, except the aspect relating to reopening of case under s. 147 of the Act. The Tribunal shall decide all other issues in accordance with law. The three tax cases (income tax Appeals) are accordingly allowed.