Prakash Trading Company vs DT Padia

S.R. Brahmbhatt, J.—The petitioner-Assessee, a Partnership Firm registered under the Indian Partnership Act, has approached this Court under Article 226 of the Constitution of India challenging the notice u/s 148 of the Income Tax Act, 1961 (''the Act'' for short) dated 17.6.1996 as well as letter dated 15.10.1996 purported to have been issued under the provisions of Section 142(1) of the Act as having been issued without jurisdiction, contrary to law and therefore, deserved to be quashed and set aside, though the prayer is only in respect of notice dated 17.06.1996.

The facts in brief deserve to be set out as under.

The petitioner-Assessee filed a return of income for the A.Y. 1987-88 along with audited accounts on 30.6.1987. In the said return, the petitioner claimed deduction u/s 32A of the Act in realization to Investment Allowance of Rs. 4,73,777/- consisting of the following:

(i) Investment allowance of this year Rs. 7367/- (ii) Investment allowance carried forward from previous year Rs. 466410/- ============ Rs. 473777/-

Against aforesaid claim only a deduction of Rs. 4,48,874/- was available due to the reserve having been created to that extent only. A balance investment allowance of Rs. 24,903/- was claimed to be permitted to carry forward. The petitioner firm further contended that it debited a sum of Rs. 49,200/- being export profit reserve as required u/s 80HHC of the Act and accordingly claimed deduction of equivalent amount. The concerned I.O. framed Assessment order u/s 143(1) of the Act on 30.3.1988 and accepted the returned total income.

The petitioner firm received a notice dated 9.3.1993 u/s 148 of the Act containing that the reserve of Rs. 49,200/- created for claiming deduction u/s 80HHC of the Act was required to be utilized for business purpose. The same has been withdrawn from the business. Therefore, deduction u/s 80HHC allowed, requires to be withdrawn. To that extent, the income has escaped the assessment. As per the say of the petitioner, the notice was attended and the matter listed thereafter there as no further actions were initiated on the notice dated 9.3.1993.

On 16.2.1995, the respondent issued notice u/s 154 read with Section 155(4A) of the Act. By the aforesaid notice, the respondent proposed to withdraw the investment allowance of Rs. 4,48,874/- which was allowed in A.Y. 1987-88. After hearing the representative of the petitioner on 6.3.1995, respondent passed an order u/s 154 read with Section 155(4A) of the Act on 9.3.1995 withdrawing the investment allowance to the aforesaid extent and assessing the petitioner on a total sum of Rs. 4,48,470/-.

Being aggrieved and dissatisfied with the aforesaid order, the petitioner Assessee preferred an appeal before the CIT (Appeals) II, Rajkot and the CIT (Appeals) by his order dated 19.2.1996 upheld the contention of the petitioner firm that the order u/s 154 read with Section 155(4A) was barred by limitation and accordingly the said order dated 9.3.1995 was quashed.

As submitted by the petitioner, in the meantime, the petitioner Assessee firm filed its return of income of the A.Y. 1988-89 along with audited accounts. In the said return of income unabsorbed investment allowance to the extent of Rs. 24,903/- was claimed as a deduction u/s 32A of the Act. The balance sheet for the accounting period relevant to A.Y. 1988-89 showed that export profit reserve to he extent of Rs. 49,200/- which was created in the immediately preceding year was transferred to the capital accounts of the partners. This entry was thus very clear on record. The respondent framed assessment u/s 143(3) of the Act for the A.Y. 1988-89 on 25.3.1991 and allowed the deduction of unabsorbed investment allowance to the tune of Rs. 24,903/-.

Thereafter, respondent issued notice on 9.3.1993 u/s 148 of the Act, whereby the respondent proposed to withdraw the deduction of Rs. 49,200/- granted u/s 80HHC of the Act as it was noticed on the balance sheet that the export profit reserve created in the immediately preceding year was capitalized and credited to partners capital accounts in the A.Y. 1988-89. The petitioner submitted vide his letter dated 14.3.1993 that the original return of income may be taken as having been filed in response to notice u/s 148 of the Act.

During the course of assessment proceedings, the petitioner submitted both the circulars No. 463 dated 11.7.1986 and contended that there was no prohibition and the petitioner was entitled to capitalize the reserve and credit the same to the capital account of partners. The provision of Section 80HHC did not lay down any embargo as to utilization of such serve and did not provide for any disallowance of deduction already granted. The said contention was not accepted the respondent and held that the sum of Rs. 49,200/- was income of the year and added to the income of the petitioner accordingly. The respondent also further withdraw investment allowance to the extent of Rs. 24,900/- which was allowed in the original assessment. On 10.3.1995, the assessment for the A.Y. 1988-89 was framed u/s 143(3) read with Section 147 of the Act.

The petitioner preferred Appeal before the CIT (Appeals) II, Rajkot, who by his order dated 12.3.1996 upheld the validity of reopening u/s 147(a) of the Act. However, on merits, held as under:

Even if the export profit reserve was mis utilized in this year that will not render the amount taxable in this year. The correct procedure would have been for the Assessing Officer to disallow the deduction u/s 80HHC granted in A.Y. 1987-88. The addition made of Rs. 49,200/- in this year is, therefore, deleted. However, the Assessing Officer will be at liberty to take appropriate action for the A.Y. 1987-88 in accordance with the provisions of Section 153(3)(ii) of the I.T. Act.

It appears from the record that the petitioner firm challenged the said order with regard to its observation before the Income Tax Appellate Tribunal by filing ITA No. 2057/AHD/96 and Tribunal allowed the same as Tribunal''s order dated 23.8.2002 is placed on record along with the matter.

The respondent issued fresh notice on 17.6.1996 u/s 148 of the Act for the A.Y. 1987-88 and the same has been served upon the petitioner on 8.7.1996. Thereafter on 15.10.1996 notice u/s 142(2) of the Act in the form of a letter has been issued by the respondent and served upon the petitioner on 23.10.1996.

Being aggrieved by the said notices u/s 148 of the Act for the A.Y. 1987-88 and notice in form of letter dated 15.10.1996 u/s 142(1) of the Act, the petitioner Assessee preferred present petition as stated hereinabove on the grounds mentioned in the memo of petition.

Shri Karia, learned advocate appearing for the petitioner has contended that the Proviso to Section 147 of the Act (as it exists then) did not permit any action after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax escaped assessment by reason of failure and truly all material facts necessary for his assessment for that assessment year. In the instant case, the other two requirements of making a return u/s 139 or in response to notice u/s 142(1) or 148 of the Act are ruled out for obvious reason the petitioner having already been assessed once in response to the original return. He further contended that original assessment was framed u/s 143(1) of the Act on 30.3.1988 for the A.Y. 1987-88 and accordingly the period of four years has lapsed and thus the respondent will have to show by virtue of reasons recorded u/s 148(2) of the Act that there is failure or omission on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. Advocate for the petitioner has contended that Section 148(2) of the Act stated that the Assessing Officer shall, before issuing any notice under this Section, record his reasons for doing so. The settled legal position is that there must be material available on record from which the Assessing Officer could form the requisite belief and further such material must have a rational connection or a life link for the formation of the requisite belief. The reasons that are to be recorded u/s 148(2) of the Act have to be based on such belief formed by the Assessing Officer and Supreme Court has held that the Assessing Officer acquires jurisdiction to reopen only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reason, which he must record, to believe that, by reason of omission or failure on the part of assessee to make a full and true disclosure of all material chargeable to tax has escaped assessment. The Assessing Officer may start reassessment proceedings either because the same fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which stands to expose the untruthfulness of those facts. Learned advocate for the petitioner has contended that the respondent could not have formed the requisite belief for recording reasons there being no omission or failure on the part of the petitioner to fully and truly disclose all material facts. Moreover, respondent cannot take a stand that some fresh facts which were not previously disclosed have come to light nor can it be stated by the respondent that some information with regard to the facts previously disclosed has come into his possession which stands to expose the untruthfulness of the facts already disclosed.

3.1 Learned advocate for the petitioner has submitted that the respondent has in its first notice u/s 148 of the Act dated 9.3.1993 specifically mentioned regarding the creation of reserve of Rs. 49,200/- for claiming deduction u/s 80HHC of the Act and also the fact of crediting to partners capital account on scrutiny of balance sheet for the A.Y. 1988-89. Therefore, on the same set of facts, the respondent has changed his opinion and is proposing action by the impugned notice on the basis that there is omission or failure on the part of the petitioner. Learned advocate for the petitioner has further submitted that looking to provisions of Section 80HHC of the Act, nowhere lays down any prohibition as to utilization of the reserve created under Second Proviso to Section 80HHC(1) of the Act. In the alternative, learned advocate for the petitioner submitted that crediting the amount to capital account of the partners does not violate any requirement of any provisions of the Act and the capital as reflected by the partners account is duly supported by the assets of the business and even on that count it cannot be stated that the reserve was not utilized for the purpose of business. He further submitted that the respondent had already issued one notice u/s 148 of the Act on 9.3.1993 in relation to the same subject matter and the petitioner had explained the position and no further action was taken as regards the same. Thereafter, the respondent took action u/s 148 of the Act for subsequent A.Y. 1988-89 and disallowed deduction u/s 80HHC for the very same amount and in the said Appeal against the assessment order, the petitioner''s contention was upheld by the CIT (Appeals) and the addition was deleted. Learned advocate for the petitioner has submitted that judicial and quasi-judicial decisions can be the source of information and the findings given in those decisions which are binding could be taken as ''information''. But, u/s 147(b) of the Income Tax Officer; it should be his own opinion; he may be influenced by ''information'' leading his to further investigation. The requirement of Section 147(b) is that the Income Tax Officer should have reason to believe that income has escaped assessment; this realization may be the result of the information. He submitted that while considering an appeal in respect of an assessment year, a direction regarding another assessment year does not fall within Section 153(3). The purpose of Section 153(3) is to life the bar of limitation to make an effective order of assessment, consequent upon an appellate order. Section 153(3) does not create a new power or jurisdiction. Learned advocate for the petitioner has submitted that assuming that the respondent is action in consequence of information by way of appellate order, the same is not permissible in view of the ratio laid down in case of M.K. Thakker Vs. Commissioner of Income Tax, The applicable authority is dealing with the appeal of a particular assessment year and the jurisdiction of the appellate authority extends in relation to the subject matter of appeal only in respect of the said assessment year. Under the Income Tax Act, each assessment year is separate and distinct and an authority acting under the said Act cannot be empowered to make observations, record findings or give directions in relation to an assessment year which is not in appeal before it as that would amount to traveling beyond the scope of the appeal and the attendant jurisdiction. Learned advocate for the petitioner has also contended that respondent having already once taken recourse to a specific provision under the Act dealing with withdrawal of investment allowance in specified set of circumstances and having failed due to lapse of limitation, cannot now be permitted to by pass the period of limitation by exercising the jurisdiction u/s 147 of the Act. Provisions of Section 155(4A) of the Act are specific and it is well settled law that when action is available under a specific provision of the Act it would not be permissible to act under a general provision of the Act. Learned advocate for the petitioner has also invited this Court''s attention to para-37 of the memo of petition and submitted that in view of that, the petition is required to be allowed and the impugned notices are required to be quashed and set aside.

The respondent has filed its reply. It is submitted by the respondent that the petition is filed at a pre-mature stage inasmuch as only a notice seeking to reopen the assessment has been issued. The petitioner would receive enough opportunity thereafter and if the petitioner is aggrieved by the reassessment order passed pursuant to the notice, the petitioner has alternative efficacious remedy available under the Act by way of Appeal etc for redressal of his grievance and therefore, the petition may not be maintained. Giving the brief description of the transactions of the petitioner, it was contended that the assessee has filed return of income on 30.6.1987 declaring total income of Rs. 4,48,874/- and after claiming set off of carry forward balance of investment allowance, the total income was reduced to NIL. The assessee claimed deduction u/s 32A in relation to the investment allowance for A.Y. 1987-88 and investment allowance of Rs. 4,66,410/- being carry forward balance from the previous year. The assessee created reserve to the extent of Rs. 4,48,874/- and balance of Rs. 24,903/- was claimed to be carried forward to subsequent year i.e. 1988-89. The assessee also claimed a sum of Rs. 49,200/- as deduction u/s 80HHC following the export profit reserve debited in its P&L Account during the year 1987-88. The said return was accepted u/s 143(1) on 30.3.1988. It is further contended on behalf of the respondent that it came to light that machinery in respect of which the investment allowance was eligible in the A.Y. 1985-86, was sold by the assessee during the period i.e. 31.3.1989 i.e within the period of eight years from the initial year. Thus the assessee was found to have violated the condition prescribed under the Law as a sum of Rs. 4,48,874/- on account of investment allowance was claimed and set off against the income of A.Y. 1987-88, the investment allowance granted u/s 32A required to be withdrawn. Further in so far as export profit reserve of Rs. 49,200/- is concerned, the firm did not continue the said reserve for the purpose of business but relevant sum was distributed by the firm amount the partners during the period 1988-89 and thereby the condition for grant of allowance u/s 80HHC was violated by the assessee. It was further contended on behalf of the respondent that in regard to the withdrawal of investment allowance of Rs. 4,48,470/- and withdrawal of relief u/s 80HHC of Rs. 49,200/-, a show cause notice u/s 154 read with Section 155(4A) was issued to the assessee on 16.2.1995 and relevant order was passed on 6.3.1995 withdrawing the aforesaid investment allowance and relied u/s 80HHC in A.Y. 1987-88 and the said order was assailed by the assessee before the CIT(A) II, Rajkot, who quashed and set aside the order on the ground that the period of 4 years from the date of sale of machinery already expired on 31.3.1994 and that no order could be passed thereafter. In respect of relief u/s 80HHC of the Act is concerned, the CIT(A)-II, Rajkot held that since the allowance was granted in the A.Y. 1987-88, the withdrawal was not permitted in A.Y. 1988-89, although the condition was violated during the period 1988-89. It was further contended that notice u/s 148 of the Act was issued on 9.3.1993 for the A.Y. 1987-88 specifically mentioning that the reserve of Rs. 49,200/- created for claiming deduction u/s 80HHC of the Act, was required to be utilized for business purpose. The same has been withdrawn from the business. Therefore, deduction u/s 80HHC allowed, required to be withdrawn. In view of the aforesaid, when there is specific breach on the part of the assessee in non-compliance with the provisions, the notices are absolute, just and proper and the same may not be interfered with.

This Court has heard the learned Counsel for the parties at length and perused the records. The petitioner has in fact alternative remedy available. However Let us examine the issues involved in the matter keeping the ground for alternative remedy in mind.

The facts indicate that the matters involve two proceedings arising from A.Y. 1987-1988 and 1988-1989. The two sets of proceedings might have intermingling with each other but both of them have material bearing on the controversy in question. It is required to be noted that the first Notice u/s 148 of the IT Act on 9.03.1993 came to be issued in respect of A.Y. 1987-88 on the ground that the Export Profit Reserve Rs. 49200 created claiming deduction u/s 80HHC of I.T. Act was required to be utilized for business purpose and the same had been withdrawn from the business therefore the deduction u/s 80HHC allowed was required to be withdrawn and as the said income had escaped assessment. However this notice was not thereafter acted upon.

On 16.02.1995 respondent issued another notice u/s 154 read with Section 155(4A) of the I.T. Act proposing to withdraw the investment allowance of Rs. 4,48,874 which was allowed in the A.Y. 1987-1988. An order came to be passed on 9.03.1995 u/s 154, withdrawing the said investment allowance assessing the petitioner on total sum of Rs. 4,48,470/-.

This order was carried into Appeal wherein CIT (Appeals) vide its order dated 19.02.1996 set aside it on the ground that the machinery in question were sold in the A.Y. 1990-1991 and as per Clause (C) of Section 155(4A) no such rectification order could have been passed after four years from the end of previous year in which the transfer took place.

The rest of the details have already been set out herein above and hence need no further elaboration thereon.

A moot question arises for consideration is as to how far the action of issuance of notice dated 17.06.1996 u/s 148 of the I.T. Act was proper, legal and valid in view of the facts and circumstances of the present case.

The provisions of Section 148 of the IT Act empowers the concerned authority to issue notice in case of escaped income only. Therefore, the real purpose of Section 148 is to be borne in mind while examining the contention challenging the same. The law in respect of Section 148 has now become crystallized and therefore the Court has to examine as to whether the notice u/s 148 impugned in this petition, was validly issued or not. It is required to be noted that the provisions of Section 148 of the IT Act, as it existed then, which included provision that where an assessment under Sub-section 143 or Section 147 has been made for the relevant assessment year, no action was to be taken under the said section after expiry of 4 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 u/s 139 or in response to a notice issued u/s 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclosure fully and truly necessary for assessment year. Thus, it can well be said that once an assessment is completed, no further action except in the circumstances stated hereinabove is permissible after the expiry of four years from the end of the assessment year in question. It may be noted that though there is no complete ban in reopening but the reopening being an exception to the Rule, the requirement of reopening and grounds stated there from are required close scrutiny before countenancing such action, as otherwise it would create undue hardship to the assessee as per the scheme of the legislature.

In the instant case, it is required to be noticed that no question of making return u/s 139 or in response to notice u/s 140(1) arises, as the petitioner had actually been assessed in respect of his original return. It is required to be noted that the original assessment was framed u/s 143(1) of the IT Act on 30.3.1988 for the A.Y. 1987-88 and accordingly the period of four years has elapsed and therefore, the respondents were required to establish that there was a failure or omission on the part of the petitioner fully and truly all necessary facts for assessment.

The proviso of Section 148(2) of the IT Act provides for recording reasons before issuing such notice. The officer concerned therefore before issuing notice as such has to have before him the material on record wherefrom the assessing officer could form the requisite belief and opinion and such material should have bearing upon the requisite belief and formation. The reasons therefore required to be recorded as essentially based upon such material on record. The Assessing Officer for issuing such notice has to have material and he has to record reasons based thereupon that by reason of omission or failure on the part of the assessee to make full and true disclosure, the income chargeable to tax has escaped assessment. In the instant case, the assessee is justified in contending that it did not omitted or failed in giving true and correct facts. In fact it is required to be noted that the respondent has in his first notice u/s 148 of the IT Act dated 9.3.1993 specifically mentioned regarding reserve of Rs. 49,200/- for claiming deduction u/s 80HHC of the IT Act and the fact of crediting to Partner''s Capital Account on scrutinizing of balance sheet for the A.Y. 1988-89. Therefore, on same set of facts, it can well be said that the respondent has changed his opinion for issuing notice afresh as it is impugned in this petition.

The stand of the assessee petitioner also requires consideration that provisions of Section 80HHC of the IT Act did not prohibit the utilization of the reserve created under second proviso to Section 80HHC(1) of the IT Act. It is to be noted that the said proviso existed on the statute book only for two assessment years i.e. 1987-88 and 1988-89 and from 1.4.1989 the requirement of creating a reserve u/s 80HHC for claiming deduction had been dispensed with. The Court hastened to add here that this aspect requires no further consideration as the court is more concerned with regard to the examining the basis for issuance of notice impugned in the petition.

It is required to be noted at this stage that the respondent took action u/s 148 of the IT Act for the subsequent assessment year i.e. A.Y. 1988-89 and disallowed this deduction u/s 80HHC for that very amount in the Appeal against the aforesaid assessment order, the petitioner''s contention was upheld as could be seen from the petition and CIT (Appeals) deleted the addition. The decision of the Apex Court relied upon by the counsel in case of Parashuram Pottery Works Co. Ltd. v. ITO 9106 ITR 10 -

We have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.

Thus, the petitioner is not unjustified in contending that the finality attained ought not to have been disturbed.

It is further required to be noted that the concerned Appellate Authority i.e CIT (Appeals), Rajkot, while upholding the claim of the petitioner on merits and deleting the addition of disallowance u/s 80HHC of the IT Act of Rs. 49200/- made observation with regard to the provisions of Section 153 of the IT Act and so to say, indirectly goaded the Assessment Officer to take appropriate action for the A.Y. 1987-88 in accordance with provisions of Section 153(3)(ii) of the IT Act. The impugned notice can be said to be a direct nexus to the order of the CIT (Appeals) dated 12.3.1996. Therefore also the petitioner is not unjustified in contending that the Assessing Officer was not of his own accord acting but he was acting under the observation and therefore, the basic requirement of issuance of notice u/s 148 was not fulfilled. The petitioner has relied upon the decision of the Karnataka High Court in case of M.K. Thakker Vs. Commissioner of Income Tax, on similar facts and set out the observation as under:

Judicial and quasi-judicial decisions can be the source of information and the findings given in those decisions which are binding could be taken as ''information''. But, u/s 147(b) of the Income Tax Act, 1961, the opinion to be formed is of the Income Tax Officer; it should be his own opinion; he may be influenced by ''information'' leading his to further investigation. The requirement of Section 147(b) is that the Income Tax Officer should have reason to believe that income has escaped assessment; this realization may be the result of the information.

While considering an appeal in respect of an assessment year, a direction regarding another assessment year does not fall within Section 153(3). The purpose of Section 153(3) is to lift the bar of limitation to make an appellate order. Section 153(3) does not create a new power or jurisdiction.

The contention of the respondents with regard to petitioner having efficacious remedy is not of much avail to them especially when the petitioner has challenged the very jurisdiction of the authority in issuing the impugned notice.

The facts and circumstances stated herein above go to show that the basic requirement for issuance of notice u/s 148 were not fulfilled and thus, the authority lacked jurisdiction for issuing the same. Therefore, this Court is of the view that the petition is required to be allowed and is accordingly allowed. The notice dated 17.6.1996 issued u/s 148 of the IT Act is hereby quashed and set aside. The letter dated 15.10.1996 would naturally be of no consequence in light of what is stated herein above. Rule is made absolute to the aforesaid extend. There shall be no order as to costs.