The Commissioner Of Income Tax v. Rinku Chakraborthy

N. Kumar, J.

1. The Revenue has preferred these four appeals against the order passed by the Tribunal holding that the reopening of the assessment was incorrect and consequently setting aside the reassessment order.

2. Since identical issues are involved in all these appeals, they are taken up for consideration together and disposed of by this common order as has been done by the Tribunal as well as other authorities.

3. The respondent-assessees are directors in M/s DTDC Ltd., each holding more than 10 per cent of share in the said company during the previous year relevant to the asst. yr. 1995-96. The Assessees did not file their returns of income for the asst. yr. 1995-96. Proceedings were initiated under Section 158BC after a search was conducted, as the AO was satisfied that these Assessees were served with notice requiring them to furnish the returns under Clause (i) of Sub-section (1) of Section 142, setting forth their total income including undisclosed income for the block period. It is in pursuance of said notice, the Assessees filed their returns. The said returns were assessed and assessment orders came to be passed. Consequently, the Assessees paid the tax, which was found due by them.

4. On a perusal of the return of income filed by M/s DTDC Ltd., pertaining to the asst. yr. 1995-96, it was noticed by the AO that the said company had advanced an amount of Rs. 6,60,000 to each of the Assessees on 28th March, 1995 and. the same was reflected in the balance sheet of M/s DTDC Ltd., under the head "Loans and advances". In total an amount of Rs. 39,60,000 was found to be shown as advance for purchase of land under the heading "Loans and advances" which includes Rs. 6,60,000 paid to each of the Assessees/directors. Therefore, proceedings were initiated under Section 147 for reassessment of the income escaping assessment. The Assessees filed their statement of objections contending that the issue of deemed dividend was discussed in detail through the course of the block assessment and therefore, the reopening of an already concluded assessment on a mere change of opinion is not valid in law. The total amount of accumulated profits of the company was only Rs. 6,32,414 as on 31st March, 1994. Therefore, as the same was much less than the total advance of Rs. 39,60,000 to all the directors, the question of deemed dividend as contemplated under Section 2(22)(e) of the Act does not arise. After considering the aforesaid objections, the AO rejected the contentions. He held that the total accumulated profits as on 31st March, 1995 were Rs. 58,51,672, whereas Rs. 6,32,414 represented the opening balance of the accumulated profits as on 1st April, 1994. Therefore, as the accumulated profits were more than the advance given at the relevant point of time, Section 2(22)(e) was applicable. He further held, that though it is mentioned in the books of the company that the impugned advance was for the purchase of land, no such transaction of purchase of land took place. There is no document evidencing the payment of the aforesaid amount on 28th March, 1995 towards the proposed purchase of land. The agreement came into existence only on 21st Nov., 1995. Therefore, it was a simple advance which had no relation to any business needs of the company. Therefore, he proposed to reassess and tax the impugned advance of Rs. 6,60,000 as deemed dividend in the hands of each of the Assessees.

5. Aggrieved by the said order of the AO, the Assessees preferred an appeal to the CIT(A). The CIT(A), on a careful scrutiny of the entire material on record, concurred with the finding recorded by the AO and dismissed the appeal.

6. Aggrieved by the same, the Assessees preferred an appeal before the Tribunal. The Tribunal held that, when the AO in his letter dt. 5th Aug., 1999, during the course of block proceedings did wish to treat the amount as a deemed dividend and having dropped it, he would not be competent to take Up the same issue in the reopening of the assessment proceedings under Section 147. Reopening of an assessment by a mere change of opinion would not be justified. Therefore, the Tribunal allowed the appeal and held that the reopening of the assessment was incorrect and accordingly, the order of reassessment passed was set aside.

7. Aggrieved by the same, the Revenue is in appeal.

8. The learned counsel for the Appellants assailing the impugned order contended as under:

(a) There is no bar under the Act for initiation of proceedings under Section 147, after the block assessment is done.

(b) It is not a case of change of opinion by the AO. It is a case of income escaping assessment. Therefore, the case squarely falls under Section 147 and the order passed by the AO is legal and valid.

(c) Admittedly, these Assessees are directors in the company holding more than 10 per cent of the shares and therefore, any amount including the loan given to them by the company out of the accumulated profits, constitutes deemed dividend and is liable to tax.

9. Therefore the order passed by the AO as affirmed by the appellate authority is valid and legal and the Tribunal committed a serious error in interfering with the said order.

10. Per contra, the learned Counsel appearing for the Assessees, submitted that no returns had been filed initially. In pursuance of the notice issued under Section 158BC, returns were filed. Block assessment was done. It is not open to the AO to reopen the assessment under Section 147 of the Act. Secondly, he contended that in the notices issued under Section 158BC the Assessees were called upon to show-cause as to why the income in their hands should not be treated as deemed dividend. The Assessees filed their reply and produced documents. On consideration of the same, when the AO did not assess the said income, it is not open to him to reopen the assessment on the ground of income escaping assessment and in passing the impugned order. Lastly, he contended that, it is settled law that a mere change of opinion would not constitute a ground for reopening the assessment under Section 147 of the Act. Therefore he submits that the Tribunal was justified in setting aside the erroneous orders passed. As such, the said order does not call for any interference.

11. In view of the above facts and the rival contentions, the following substantial questions of law arise for our consideration in these appeals:

(1) Whether the proceedings initiated under Section 147 of the Act after block assessment is made, is valid or not ?

(2) In the facts and circumstances of these cases, whether the Tribunal was justified in holding that reopening of the assessment on the basis of change of opinion is invalid ?

Point No. 1

12. It is not in dispute that the proceedings were initiated against the Assessees under Chapter XIV-B. In pursuance to the notice issued, the Assessees filed their returns, showing the undisclosed income also. It is thereafter, the assessment orders have been passed and the tax due was paid by them. It is thereafter, proceedings were initiated Under Section 147 on the ground that the loan received by the Assessees to an extent of Rs. 6,60,000 each from the company, has escaped assessment for the asst. yr. 1995-96.

13. It is clear from Section 147 of the Act, if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, which comes to his notice subsequently in the course of the proceedings, he-may, subject to the provisions of Section 148 to Section 153, assess or reassess such income. From the language employed in the said section, it is clear that no distinction is made between an assessment done, under Chapter XIV-B or under Chapter XIV. In other words, Section 147 is attracted to an assessment made under the Act and in such an assessment, if the income chargeable to tax has escaped assessment for any assessment year, the AO is vested with the power to assess or reassess such income. There is no prohibition under the Act for reopening of an assessment done under Chapter XTV-B. Therefore, we do not find any substance in the contention of the Assessees that the proceedings Under Section 147 are not attracted to cases of assessment under Chapter XTV-B. Therefore the first substantial question of law is answered in favour of the Revenue and against the Assessees.

Point No. 2

14. The contention of the Assessees is that, when proceedings were initiated under Chapter XTV-B of the Act, in the course of the said proceedings, the Assessees were served with a notice dt. 5th Aug., 1999 wherein it was categorically stated that from the records it is seen that the Assessees have drawn money from the company and have utilised the same for personal use. Their explanation on this as to why it should not be treated as deemed dividend should reach their office within the stipulated time. Therefore, it is clear that the notice was specific in calling upon them to show-cause as to why the undisclosed income should not be treated as deemed dividend. In reply to the same, they have given the particulars and they have also specifically stated that under the agreement dt. 21st Nov., 1995 with M/s DTDC Ltd., the said company agreed to pay an advance of Rs. 39,60,000 partly towards the sale consideration and the balance as advance for letting out the balance portion of the building to be constructed. The company had agreed to the above condition and made an advance payment of Rs. 6,60,000 by cheque, to each of the Assessees aggregating to Rs. 39,60,000. In the course of the block assessment, the AO has applied his mind to this aspect of the matter, wherein it was observed that the company has paid an advance of Rs. 6,60,000 to each of the directors, totalling to Rs. 39,60,000. It was agreed that the sale consideration for the scheduled property to be sold, was to be decided mutually, after the completion of the construction. It was further agreed that the advance paid to the landowners/directors would be adjusted against the sale consideration of the property to be transferred to the company as and when the sale deed is executed. The company also agreed to take on lease the balance constructed area owned by the directors for locating its office. After adjusting the sale consideration, the balance advance given to the directors was decided to be treated as rental advance for letting out their property to the company.

15. Relying on this, it was contended that when once the AO has applied his mind to this specific aspect of the matter and did not hold that such income is liable to tax, it is not open to him to initiate proceedings Under Section 147 of the Act for reassessment on the ground of income escaping assessment, as it amounts to change of opinion. It was submitted that though the words 'change of opinion' are comitted in the present Act, after 1987, the apex Court while interpreting the amended provision has held that even though the present section does not contain those specific words, while exercising the power Under Section 147 of the Act, the AO has to keep in mind the said principle, namely, merely because he has changed his opinion, he cannot reopen an already concluded assessment. In support of his contention, he relied on the judgment of the apex Court in the case of Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited (2010) 228 CTR (SC) 488: (2010) 34 DTR (SC) 49: (2010) 2 SCC 723, where it has been held as under:

On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the AOs to make a back assessment but in Section 147 of the Act (w.e.f. 1st April, 1989), they are given a go-by and only one condition has remained viz., that where the AO has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989 power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe' falling which, we are afraid, Section 147 would give arbitrary powers to the AO to reopen assessments on the basis of 'mere change of opinion', which cannot per se be reason to reopen.

In coming to the said conclusion, the apex Court relied on the Circular No. 549, dt. 31st Oct., 1989 [(1990) 82 CTR 1] which reads as under:

7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in Section 147.--A number of representations were received against the omission of the words 'reason to believe' from Sections 147 and their substitution by the 'opinion' of the AO. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of Court's rulings in, the past and was well-settled and its omission from Section 147 would give arbitrary powers to the AO to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression 'has reason to believe' in the place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new Section 147, however, remain the same.

16. From the aforesaid judgment, it is clear that after 1st April, 1989, the AO has power to reopen, provided there is tangible material to come to the conclusion that there is escapement of income from assessment. Reasons must have a live-link with the formation of the belief. However, the concept of change of opinion as an inbuilt test to check abuse of power by the AO, has to be kept in mind. If the concept of 'change of opinion' is removed in the garb of reopening the assessment, review would take place. There is a conceptual difference between power to review and the power to reassess. It is settled law that the AO has no power to review. He only has power to reassess.

17. It is in this background, it is necessary to look into the judgment of the apex Court, where the scope of reassessment has been explained. The leading case on the point is Kalyanji Mavji & Co. v. Cit, West Bengal-Ii 1976 CTR (SC) 85: (1976) 102 ITR 287 (SC). The Supreme Court dealing with Section 34(1)(b) of 1922 Act, has held as under:

On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of Section 34(1)(b) to the following categories of cases:

(1) where the information is as to the true and correct state of the law derived from relevant judicial decisions;

(2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the ITO. This is obviously based on the principle that the taxpayer would not be allowed to lake advantage of an oversight or mistake committed by the taxing authority;

(3) where the information is derived from an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment;

(4) where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into facts or law.

If these conditions are satisfied then the ITO would have complete jurisdiction to reopen the original assessment. It is obvious that where the ITO gets no subsequent information, but merely proceeds to reopen the original assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, Section 34(1)(b) would have no application.

18. The apex Court in the case of Maharaj Kumar Kamal Singh v. CIT (1959) 35 ITR 1 (SC) dealing with the reassessment Under Section 34(1)(b), held as under:

Even if the Assessee has submitted a return of his income, cases may well occur where the whole of the income has not been assessed and such part of the income has not been assessed can well be regarded as having escaped assessment. In the present case, the rents received by the Assessee from his agricultural lands were brought to the notice of the ITO: the question as to whether the said amount can be assessed in law was considered and it was ultimately held that the relevant decision of the Patna High Court which was binding on the Department justified the Assessee's claim that the said income was not liable to be assessed to tax. There is no doubt that a part of the Assessee's income had not been assessed and, in that sense, it has clearly escaped assessment. Can it be said that because the matter was considered and decided on the merits in the light of the binding authority of the decision of the Patna High Court, no income has escaped assessment when the said Patna High Court decision has been subsequently reversed, by the Privy Council ? We see no justification for holding that cases of income escaping assessment must always be cases where income has not been assessed owing to inadvertence or oversight or owing to the fact that no return has been submitted. In our opinion, even in a case when a return has been submitted, if the ITO erroneously fails to tax a part of assessable income, it is a case where the said part of the income has escaped assessment.

19. The apex Court in the case of CIT v. Dinesh Chandra H. Shah and Ors. (1972) 3 SCC 231, interpreting Section 34(1)(b) under the old Act, held as under:

It may he mentioned that the decisions relating to Section 34(1)(b) are a legion and it may seem that divergent views have been expressed in some of the cases in the light of their peculiar facts. The Revenue has contended for the proposition which was accepted by the Madras High Court in family of V.A.M. Sankarlinga Nadar v. CIT (supra), that although a mere change of opinion regarding the chargeability of income on the part of the reassessing officer different from his own previous opinion or that of his predecessor-in-office might not justify action under Section 34(1)(b) but income which escapes assessment as a result of the lack of vigilance of the ITO or due to inadvertence or negligence or due to perfunctory performance of his duties without due care and caution could well be within the ambit of Section 34(1)(b) provided the requirements of that section are satisfied. In other words, even if the Assessee has placed the entire facts which would enable the ITO, to make a proper assessment of his income but he fails to do so for the various reasons stated earlier he can, as soon as he realizes his mistake, issue a notice under Section 34(1)(b) after completing the assessment.

20. From the aforesaid judgments it is clear that, though the word 'opinion' is deleted and is now substituted by the words 'reason to believe', the concept of change of opinion is not obliterated w.e.f. 1st April, 1989 after substitution of Section 147 of the Income Tax Act, 1961 by the Direct Tax Laws (Amendment) Act, 1987. However, where in the original assessment the income liable to tax has escaped assessment due to oversight and in advertance or a mistake committed by the ITO, the ITO has the jurisdiction to reopen the original assessment. It is not necessary that for such reopening of such assessment the information is to be derived from external source of any kind or disclosure of new and important matters subsequent to the original assessment. Even if the information is obtained from the record of the original assessment after a proper investigation from the materials on record or the facts disclosed thereby or from any enquiry or research into facts or law, reassessment is permissible. Income may escape assessment as a result of lack of vigilance of the ITO or due to perfunctory performance of his duties without due care and caution. Even in a case where a return has been submitted to the ITO who erroneously fails to tax a part of the assessable income, it is a case of the said part of the income as having escaped assessment and the AO has jurisdiction under Section 147 to reopen the assessment and bring to tax the income that has escaped assessment. A taxpayer cannot be allowed to take advantage of any of those lapses, as ultimately if such a advantage is allowed, it would be prejudicial to the interests of the Revenue and public interest.

21. In the instant case, it is no doubt true the Assessees have furnished the requisite information about the receipt of Rs. 6,60,000. from the company as loan. The AO at the time of the block assessment has taken note of the same. But, he did not form any opinion so far as the levy of tax on that income is concerned. It has escaped assessment. It is only when looking into the books of the company where the said amount was shown as loan to the Assessee, the AO has opened his eyes. He has realised the mistake committed. He was satisfied that he has not brought to tax the said income in the block assessment order passed. It is not a case of change of opinion as he had not formed any opinion on this aspect at the time of block assessment. It was a case of an omission to form an opinion. Once he realised the mistake, he has initiated proceedings under Section 147.

22. As held by the apex Court in all these cases the principle that is to be kept in mind is that the taxpayer should not be allowed to take advantage of an oversight or a mistake committed by the taxing authority. It is not in dispute that these Assessees are directors of the company holding more than 10 per cent share and therefore, in terms of Section 2(22)(e) any amount paid by the company to such directors constitutes deemed dividend and is liable to tax. In fact these directors had not filed returns. They filed returns only after the proceedings were initiated under Section 147. Though they disclosed this income in the said return, the AO did not apply his mind properly to the said income and therefore, by a mistake or by oversight, he failed to assess the said amount and impose any tax. Under law, the Assessee is liable to pay tax if the said payment is made out of the accumulated profit of the company. Therefore, in the facts of the case, we are satisfied that the AO was justified in initiating proceedings under Section 147 of the Act for reopening the assessment to bring to tax income that has escaped assessment. Therefore, the second substantial question of law is answered in favour of the Revenue and against the Assessee.

23. The payment of tax on deemed dividend would arise if the payment is made out of the accumulated profit of the company. The Assessee contends the accumulated profit of the company as on 1st April, 2004 was only Rs. 6,32,414 and therefore the payment of Rs. 39,60,000 cannot be construed as payment of a loan out of the accumulated profit, which is liable to tax. In fact, though the AO as well as the first appellate authority have held that the accumulated profit as per the books of account was Rs. 58,51,675 out of which Rs. 39,60,000 is paid, the Tribunal has not gone into the said question. In other words, the Tribunal did not decide the appeal on merits. It set aside the orders of the AO as well as that of the first appellate authority on the ground of an erroneous exercise of jurisdiction and the change of opinion, which was found fault with. It is contended that as the said loan is admittedly paid on 28th March, 1995, the account of the company had not been settled. The accumulated profit had not been declared. As per the books of accounts, as on 1st April, 2004, the accumulated profit was only Rs. 6,32,414 and therefore, it was contended that there was no liability to pay tax under Section 2(22)(b). As this question is not gone into by the Tribunal, the justice of the case demands that the Tribunal considers the appeal on merits. The matter to be remanded back to the Tribunal. Hence, we pass the following order:

(i) Appeals are allowed.

(ii) The substantial questions of law are answered in favour of the Revenue and against the Assessees.

(iii) The impugned order passed by the Tribunal is hereby set aside and the matter is remanded back to the Tribunal for consideration of the appeals on merits and in accordance with law.

24. Parties to bear their own costs.