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Case Number
Attorney(S)
  • Mr. Kiran Babu, Sr. Standing Counsel.
  • Mr. Salil Aggarwal, Advocate.
Judges
  • Justice R.V. Easwar
  • Justice Sanjiv Khanna
Acts
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Cites
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. Kiran Babu, Sr. Standing Counsel.
  • Mr. Salil Aggarwal, Advocate.
Judges
  • Justice R.V. Easwar
  • Justice Sanjiv Khanna
Acts
See more information ...
Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This appeal arises under Section 260A of the Income Tax Act, 1961 against the Income Tax Appellate Tribunal's order dated 26 September, 2008 (ITA No. 2554/D/2004) in the case of Software Consultants (India) Private Limited for assessment year 1993-94.

The assessee (a company) did not file a return for assessment year 1993-94. During assessment proceedings for 1997-98, it was noticed that a Central Bureau of Investigation search located fixed deposit receipts (FDRs) worth Rs. 20 lacs relating to AY 1993-94 in the possession of Poonam Rani Singh, a director of the assessee. Poonam Rani Singh contended that those FDRs, though in her name, belonged to the assessee; the Commissioner of Income Tax (Appeals) accepted that stand in an order dated 16 February, 2001 in her appeal.

The Assessing Officer (AO) issued a notice under Section 148 on 29 March, 2001. The assessee filed a return on 16 August, 2001 showing a loss of Rs. 1,02,756/-. By an assessment order dated 28 March, 2002, the AO accepted that the assessee had established the source and capacity for the Rs. 20 lacs and made no addition; the loss shown in the return was accepted.

The AO's order also noted an increase in share application money by Rs. 47 lacs during the year and that summons under Section 131 were issued on a random basis to some persons whose statements were recorded to verify those investments.

The Commissioner of Income Tax, by order dated 25 March, 2004 exercising powers under Section 263, directed the AO to make further enquiries regarding the Rs. 47 lacs of share application money and held that the AO had erred in determining loss after issuing the Section 148 notice.

The assessee appealed to the tribunal, which quashed the Commissioner’s Section 263 order on 26 September, 2008. This appeal challenges that tribunal order.

Legal Issues Presented

  1. Whether the tribunal was right in law in holding that the Commissioner of Income Tax had wrongly invoked jurisdiction under Section 263 of the Income Tax Act, 1961.

Arguments of the Parties

Commissioner of Income Tax's Arguments

  • The AO erred in not conducting sufficient verification and enquiries regarding share application money of Rs. 47 lacs: notices were issued on a random basis to only seven parties and not to other share applicants, and there were lacunae and defects in the statements of those seven persons and in the manner they were recorded.
  • The AO erred in determining the loss after issuance of the Section 148 notice; consequently, the AO's assessment order was claimed to be erroneous and prejudicial to the interests of the Revenue, warranting exercise of power under Section 263.

Assessee's Arguments (as reflected in the opinion)

  • The AO had accepted and recorded that the assessee had proved the source and capacity for the Rs. 20 lacs FDRs and therefore made no addition in respect thereof in the assessment dated 28 March, 2002.
  • The AO had accepted the return showing a loss of Rs. 1,02,756/-. There is no suggestion by the Revenue that the assessee sought carry forward of loss on the basis of the assessment order passed under Section 147/143(3).
  • Accordingly, even if the AO had not carried out certain verifications in respect of the Rs. 47 lacs of share application money, the assessment order could not be treated as erroneous for purposes of Section 263 because no addition was made on those reasons for reopening.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Ranbaxy Laboratories Limited v. Commissioner Of Income Tax, (2011) 336 ITR 136 (Delhi) Considered Explanation 3 to Section 147 (inserted by Finance (No. 2) Act, 2009) and the scope of reassessment powers; examined interplay of Sections 147 and 148 and limits on Assessing Officer's powers to assess items not in the recorded reasons. The Court treated Ranbaxy as addressing a similar issue and agreed with its reasoning; used it to support the principle that an AO cannot, by general inquiry, continue to make roving enquiries and assess unrelated items without proper notice.
CIT v. Jet Airways India Limited, (2011) 331 ITR 236 (Bombay High Court) Summarised the effect of Section 147 after the 2009 amendment: (i) AO must have reason to believe income has escaped assessment; (ii) such belief must be followed by service of notice under Section 148 before assessment; (iii) AO may assess income he has reason to believe escaped and any other income which comes to his notice during proceedings; (iv) absence of a particular in the Section 148 notice does not preclude assessing such income if it comes to AO's notice in proceedings. The Court expressed complete agreement with Jet Airways' reasoning and relied on it to explain that Explanation 3 does not permit blanket powers to the AO to conduct roving enquiries; for new issues a fresh Section 148 notice would be required.
CIT v. Shri Ram Singh, (2008) 306 ITR 343 (Rajasthan High Court) Held that where in proceedings under Section 147 the AO concludes that the item which formed basis of reasons to believe did not escape assessment, the AO cannot continue to use the assumed jurisdiction to tax other unrelated income discovered subsequently in those proceedings. The Court cited this decision for the proposition that a genuine reason to believe which turns out to be incorrect does not perpetuate jurisdiction to assess other unrelated items without proper initiation.
V. Jagmohan Rao v. CIT and EPT, (1970) 75 ITR 373 (Supreme Court) Earlier Supreme Court authorities on the scope of reassessment and related principles (as considered in Ranbaxy). The Court noted that Ranbaxy had considered this Supreme Court judgment; it formed part of the jurisprudential background relied upon to interpret the limits of assessment/reassessment powers.
Commissioner Of Income Tax v. Sun Engineering Works (P) Ltd., (1992) 198 ITR 297 (Supreme Court) Another Supreme Court precedent on reassessment principles referenced in Ranbaxy. The Court observed that Ranbaxy considered Sun Engineering Works; the opinion drew on the chain of authorities to support the limitation on AO's powers to make unrelated assessments without fresh notice.

Court's Reasoning and Analysis

The Court's analysis can be set out in the following steps, strictly based on the opinion:

  1. Factual findings: The AO issued a notice under Section 148 (29 March 2001) for AY 1993-94; the assessee filed a return showing a loss (16 August 2001); by assessment order dated 28 March 2002 the AO accepted that the assessee had proved the source and capacity for the Rs. 20 lacs FDRs and made no addition. The AO also noted share application money increased by Rs. 47 lacs and recorded that summons under Section 131 were issued on a random basis to some persons whose statements were recorded.
  2. Commissioner’s action under Section 263: The Commissioner, by order dated 25 March 2004, directed further enquiries in respect of Rs. 47 lacs share application money and held that the AO had erred in determining loss after issue of the Section 148 notice.
  3. Tribunal disposition: The tribunal quashed the Commissioner’s Section 263 order.
  4. Legal framework relied upon: The Court examined the statutory scheme of Sections 147 and 148 (including Explanation 3 to Section 147 as discussed in Ranbaxy and Jet Airways) and related case law (including Ranbaxy, Jet Airways, Shri Ram Singh, V. Jagmohan Rao, and Sun Engineering Works) to determine application of reassessment powers and limitations on AO’s scope of inquiry.
  5. Application of principles to facts:
    • The Court accepted the tribunal’s conclusion that the AO’s order could not be regarded as erroneous for purposes of Section 263 simply because the AO had failed to carry out certain verifications regarding the share application money: in the assessment the AO had not made any addition on account of the reasons recorded for reopening and had, in fact, held that the assessee had established the genuineness and capacity to make the investment of Rs. 20 lacs.
    • Citing the authorities and Explanation 3, the Court reasoned that while Explanation 3 permits assessment of items that come to the AO's notice during proceedings, the Legislature did not intend to confer blanket powers allowing the AO to make roving inquiries and assess unrelated items without issuing fresh notice for each new issue. If the AO's initial reason (for reopening) does not sustain an addition, that alone does not vest the AO with jurisdiction to assess other unrelated income without following statutory requirements.
    • On the second aspect (acceptance of the return showing loss), the Court held that acceptance of the return did not require exercise of revisionary powers under Section 263. It noted that carry forward of loss is available where return is filed under Section 139(1), and the Revenue did not contend that the assessee sought carry forward reliance on the assessment order under Section 147/143(3).
  6. Conclusion from analysis: Because the AO had not made any addition for the reasons recorded at the time of the Section 148 notice and the AO's assessment was not shown to be erroneous or prejudicial to Revenue's interests, the Commissioner could not validly exercise revisionary jurisdiction under Section 263.

Holding and Implications

Holding: The question of law framed was answered in the affirmative against the Revenue and in favour of the assessee. The tribunal was correct in quashing the Commissioner of Income Tax's order under Section 263.

Direct consequences: The Commissioner of Income Tax's order dated 25 March, 2004 under Section 263 directing further enquiries in respect of the Rs. 47 lacs of share application money and asserting error in the AO's determination of loss was quashed; the AO's assessment order dated 28 March, 2002 stands as not erroneous for purposes of Section 263. The Court also observed that no exercise of revision under Section 263 was required in respect of the AO's acceptance of the return showing loss.

The opinion does not elaborate broader policy implications beyond the case; it confines its ruling to the direct effect between the Revenue and the assessee. There will be no order as to costs.

Show full summary ...

    The Commissioner Of Income Tax Ii v. Software Consultants

    ORDER

    This appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) impugns the order dated 26th September, 2008 passed by the Income Tax Appellate Tribunal (tribunal, for short) in ITA No. 2554.D/2004 in the case of Software Consultants (India) Private Limited. The appeal pertains to the assessment year 1993-94.

    2. By order dated 17 October, 2011, the following substantial question of law was framed:

    “Whether the tribunal was right in law in holding that the Commissioner of Income Tax had wrongly invoked jurisdiction under Section 263 of the Income Tax Act, 1961.”

    3. The assessee is a company and for the assessment year 1993-94 did not file their return of income. During the course of assessment proceedings for the assessment year 1997-98, it was noticed that Central Bureau of Investigation had conducted search in the premises in which FDRs worth Rs. 20 lacs relating to assessment year 1993-94 were found in possession of Poonam Rani Singh, a director of the respondent company. However, Poonam Rani Singh claimed that the FDRs though in her name, actually belonged to the respondent assessee. This stand was accepted by the CIT (Appeals) in his order dated 16 February, 2001 in the appeal filed by Poonam Rani Singh.

    4. Thereafter, the Assessing Officer in the case of the respondent assessee issued notice under Section 148 of the Act on 29 March, 2001. In response to this notice, the respondent assessee on 16 August, 2001 filed a return showing loss of Rs. 1,02,756/-. By assessment order dated 28 March, 2002 the Assessing Officer accepted that the respondent assessee had established and proved the source and their capacity to invest Rs. 20 lacs and accordingly no addition was made on this account. The return filed by the assessee showing loss of Rs. 1,02,756/- was accepted. No addition was made.

    5. In this assessment order dated 28 March, 2002, the Assesssing Officer had also noted as under:-

    “Scrutiny of the P&L A/c also revealed that during the year share application money was increased by Rs. 47,00,000/-. In order to verify the geniuses of share application money summons u/s 131 of the IT Act was issued to person on random basis and statement was recorded for confirming of these investments made by them towards the assessee company.”

    6. The Commissioner of Income Tax vide order dated 25 March, 2004 under Section 263 of the Act directed the Assessing Officer to conduct further enquiries in respect of share application money of Rs. 47 lacs. He also held that the Assessing Officer had erred in determining loss after issue of notice under Section 148 of the Act.

    7. With regard to the first aspect, the Commissioner of Income Tax observed that only seven parties were issued notices on random basis and their statements were recorded, but notices were not issued to other share applicants. The Commissioner of Income Tax in his order has mentioned lacunas and defects in the statements of the seven share applicants and the manner in which they were recorded. Accordingly, he held that the Assessing Officer had failed to make necessary verification and enquiries, which were required. Direction was given to the Assessing Officer to carry out investigation and enquiries regarding receipt of share application money.

    8. The assessee preferred an appeal before the tribunal, which has been disposed of by the impugned order dated 26 September, 2008. The tribunal has quashed the order under Section 263 of the Act passed by the Commissioner of Income Tax.

    9. One of the contentions, which has been accepted by the tribunal is that the order of the Assessing Officer cannot be regarded as erroneous even if the Assessing Officer had failed to carry out necessary verification and required enquiries in respect of the share application money, as no addition has been made on account of the reasons for reopening, which were recorded before issue of notice under Section 148 of the Act. It has been held that the Assessing Officer could not have made an addition on account of share application money as no addition has been made on account of FDRs of Rs. 20 lacs. The tribunal has noticed and recorded that in the reasons for reopening it was mentioned that the assessee had made investment in form of FDRs of Rs. 20 lacs but in the assessment order passed under Section 147/143(3) of the Act it has been held that the respondent assessee had been able to show and establish the genuineness of and capacity to make the said investment.

    10. Similar issue had arisen before this Court in Ranbaxy Laboratories Limited v. Commissioner Of Income Tax, (2011) 336 ITR 136 (Delhi). In the said case, the Division Bench had also examined Explanation 3 to Section 147, which was inserted by Finance (No. 2) Act of 2009 with retrospective effect from 1st April, 1989. Reference was made to the decision of the Bombay High Court in CIT v. Jet Airways India Limited, (2011) 331 ITR 236 (Bom.) in which it has been held as under:

    “The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows: (i) the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148; (iii) the Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment 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 the section; and (iv) though the notice under section 148(2) does not include a particular, issue with respect to which income has escaped assessment, he may none the less, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section.”

    11. Thereafter, the High Court referred to the decision of the Rajasthan High Court in the case of CIT v. Shri Ram Singh, (2008) 306 ITR 343 (Raj.) in which it has been observed as under:

    “It is only when, in proceedings under section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax which has escaped assessment for any assessment year, with respect to which he had ‘reason to believe’ to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under section 147.

    To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the Assessing Officer were to come to the conclusion, that any income chargeable to tax, which, according to his ‘reason to believe’, had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the Assessing Officer entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147.”

    12. The Division Bench in Ranbaxy Laboratories Limited (supra) considered the judgment of the Supreme Court in the case of V. Jagmohan Rao v. CIT and EPT, (1970) 75 ITR 373(SC) and Commissioner Of Income Tax v. Sun Engineering Works (P) Ltd., (1992) 198 ITR 297 (SC) and has then elucidated:

    “18. We are in complete agreement with the reasoning of the Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). We may also note that the heading of section 147 is “income escaping assessment” and that of section 148 “issue of notice where income escaped assessment”. Sections 148 is supplementary and complimentary to section 147. Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148.

    19. In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding the items, viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those items of club fees, gifts and presents, etc., proceeded to make deductions under sections 80HH and 80-I and accordingly reduced the claim on these accounts.

    20. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which as per our discussion was not permissible. Had the Assessing Officer proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Explanation 3 to reduce the claim of deduction under sections 80HH and 80-I as well.”

    13. On the second aspect raised by the Commissioner of Income Tax with regard to the Assessing Officer accepting the loss return of Rs. 1,02,756/-, we are of the view that the same did not require exercise of revisionary power under Section 263 of the Act. The observations of the Assessing Officer were only to the extent of stating that he had accepted the return. Benefit of carry forward of loss can be claimed in case a return is filed under Section 139(1). It is not the case of the Revenue that the assessee had tried to claim benefit of carry forward of loss on the basis of the order passed under Section 147/143(3) of the Act.

    14. For exercise of power under Section 263 of the Act, it is mandatory that the order passed by the Assessing Officer should be erroneous and prejudicial to the interest of the Revenue. In the present case, the Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under Section 148 of the Act. This position is not disputed and disturbed by the Commissioner of Income Tax in his order under Section 263 of the Act. Sequitur is that the Assessing Officer could not have made an addition on account of share application money in the assessment proceedings under Section 147/148. Accordingly, the assessment order is not erroneous. Thus, the Commissioner of Income Tax could not have exercised jurisdiction under Section 263 of the Act.

    15. The question of law is accordingly answered in affirmative against the Revenue and in favour of the assessee. There will be no order as to costs.

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    Comments

    The Commissioner Of Income Tax Ii v. Software Consultants
    (Jan 17, 2012)