HEMANT GUPTA, J.

Challenge in the present writ petition is to the show cause notice dated 29.3.2011, proposing to initiate reassessment proceedings under Section 147 of the Income Tax Act, 1961 (for short ‘the Act’), inter-alia, on the ground that the basis of the notice is only a change of opinion and, thus, does not fall within the scope of reassessment.

The petitioner in its return for the Assessment Year 2006-07 capitalized interest on capital work in progress and on addition to fixed assets. Such information was submitted by the petitioner to the Assessing Officer on 28.11.2008 (Annexure P.3). Thereafter, the assessment was finalized in terms of Section 143(3) of the Act on 28.11.2008 The perusal of the Assessment order does not reflect any discussion on the capitalized interest on capital work in progress and on addition to fixed assets.

On 29.3.2011 vide Annexure P.6, the petitioner has been issued a notice under Section 147 of the Act on the ground that the income chargeable for tax for the Assessment year 2006-07, has escaped assessment. On 28.9.2011, at the request of the petitioner, the reasons for reassessment were communicated. The relevant extracts from the reasons so communicated read as under:-

“The assessee filed its original return of income for A.Y 2006-07 on 30.11.2006 showing income of Rs. 29,67,03,998/-. The return was processed u/s 143(1). Subsequently, the assessee filed revised return on 30.3.2008 at an income of Rs. 29,48,10,266/-. The assessment was completed u/s 143(3) at an income of Rs. 34,28,14,372/- vide order dated 28.11.2008

A perusal of the assessment record reveals the following:-

1. As per Balance Sheet, the assessee company has made investment in capital work in progress amounting to Rs. 1,20,92,92,905/-. The assessee company has incurred interest expenditure of Rs. 23,80,26,558/-.

The above advances/investments have been made for acquisition of capital assets which have not been put to use during the year under consideration. Provisions of Section 36(1)(iii) are applicable in this case.

Proviso to Section 36(1)(iii) has been inserted w.e.f 01.04.2003 which reads as under:-

“The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession.

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.”

The explanation 8 to sub section (1) of Section 43 is reproduced hereunder:-

“Explanation 8: For the removal of doubts it is hereby declared that where any amount is paid or payable as interest in connection with the acquisition of assets, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never have to be included, in the actual cost of such asset.”

Since the advances/investment made are for capital assets which have not been put to use during the year, proportionate interest paid @ 10% has not been incurred wholly and exclusively for the business of the assessee and is, therefore, not allowable expenditure. Therefore, income has been under assessed by Rs. 12,09,29,290/.”

The other reason disclosed is the investment of a sum of Rs. 50,38,88,268/- in equity shares of various Companies for the purpose of investment. The assessee has claimed income from such investment as exempt. It has been communicated that it was mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income, which does not form part of the total income in accordance with the method prescribed under Section 14(A) of the Act as explained by the Circular No. 14 of 2006 dated 28.12.2006 Reference is made to Rule 8(d) of the Income Tax Rules, 1962 as well.

In the objections to the reopening of the assessment, it was pointed out that these points were raised during the assessment proceedings and specific queries on these points were raised by the Assessing Officer and duly replied by the assessee. Therefore, it is a change of opinion and thus, the same is not permissible for initiating reassessment proceedings. Such objections were not accepted by the competent authority, inter-alia, on the ground that it is not merely a change of opinion, but a mistake has been detected which led to change of opinion. With the said observation, the objections were found to be unacceptable.

In the written statement, it has been asserted that the proceedings have been initiated against the petitioner not in terms of proviso to Section 147 of the Act, but in terms of the main provisions of Section 147 of the Act, according to which if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment for any assessment year, proceedings under Section 147 of the Act for that assessment year can be initiated within the statutory time limit. It was on the basis of the said grounds, the proceedings under Section 147 of the Act, for that Assessment Year have been initiated. It has been asserted that where a tax lawfully exigible has not been imposed or lesser tax than what was exigible has been imposed due to incorrect or incomplete application or interpretation of the relevant provisions of the Income Tax Act or incorrect appreciation of the facts, proceedings under Section 147 of the Act, can be initiated even if the relevant issues have been discussed in the earlier regular assessment in view of clause (c) of Explanation 2 of Section 147 of the Act.

In the present writ petition challenging the show cause notice, the petitioner has reiterated the basic arguments that the facts were disclosed to the Assessing Officer during the course of assessment and that reassessment proceedings cannot be initiated merely on account of change of opinion. Ms. Radhika Suri, learned counsel for the petitioner has referred to the large number of judgments, particularly Chhugamal Rajpal v. S.P Chaliha, 1971 (79) Income Tax Reports 603 SC; Income Tax Officer, I-Ward, Hundi Circle, Calcutta v. Madnani Engineering Works Ltd., 1979 (118) Income Tax Reports 1 SC; Phool Chand Bajrang Lal v. Income Tax Officer, 1993 (203) Income Tax Reports 456 SC and Rotary Club of Ahmedabad v. Assistant Commissioner of Income Tax, 2011 (336) ITR 585 (Guj), in support of her contention that reassessment proceedings against the petitioner cannot be initiated for the reason that the entire basis of the same is the change of opinion. The petitioner has disclosed complete facts in its return. The Assessing Officer was satisfied with the explanation submitted by the petitioner and framed assessment. Having disclosed the complete facts, the Assessing Officer will not have the jurisdiction to initiate reassessment proceedings merely on account of his opinion that the assessee should not have capitalized interest or assessee is not entitled to exemption from the income.

On the other hand, Shri Rajesh Katoch, learned counsel for the respondent, has referred to certain judgments to contend that at the stage of issuing of show cause notice, this Court should not entertain the writ petition as the petitioner has an effective alternative remedy after completion of assessment proceedings. Reference is made to Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Broken Private Limited, (2008) 14 SCC 208, to contend that the final outcome of the proceedings is not relevant at the stage of initiation of proceedings. What is required is ‘reason to believe’, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Reference was made to the following quote:-

“20. As observed by the Delhi High Court (sic the Supreme Court) in Central Provinces Manganese Ore Co. Ltd. v. I.T.O, Nagpur, (1991) 4 SCC 166 for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the assessing officer is within the realm of subjective satisfaction [see ITO v. Selected Dalurband Coal Co. (P) Ltd., (1997) 10 SCC 68; Raymond Woollen Mills Ltd. v. ITO, (2008) 14 SCC 218].

21. The scope and effect of Section 147 as substituted with effect from 1.4.1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied, firstly, the assessing officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the assessing officer could have jurisdiction to issue notice under Section 148 read with Section 147(a) but under the substituted Section 147 existence of only the first condition suffices. In other words, if the assessing officer for whatever reason has reason to believe that income has escaped assessment, it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso.

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

At this stage Section 147 of the Act needs to be extracted herein below:-

“147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess 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 recomputed the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).

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It may be noticed that present Section 147 of the Act was substituted by Direct Tax Laws (Amendment) Act, 1987 with effect from 1.4.1989 Prior to the substitution, the Assessing Officer could re-assess if he has reason to believe (i) by reason of omission or failure on the part of the assessee to make a return under Section 139 for any Assessment Year; (ii) to disclose fully and truly all material facts necessary for his assessment for that year or notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Assessing Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. After amendment, it is clause (b), which has been rephrased as sub-section (1) of Section 147, whereas rephrased clause (a) is proviso to sub-section (1) of Section 147 of the Act. The principles on which, reassessment could be initiated prior to amendment with effect from 1.4.1989 are not the same.

In Rajesh Jhaveri Stock Broken Private Limited's case (supra), the Hon'ble Supreme Court has held that only the condition that Assessing Officer must have reason to believe that income, profit and gain chargeable to income tax has escaped, confers jurisdiction to open reassessment, whereas both the conditions must be fulfilled if the case falls within the ambit of proviso to Section 147 of the Act. It was found that the case in hand was covered by the main provisions and not by the proviso and, therefore, only the first condition is required to be satisfied.

The judgments in Chhugamal Rajpal's case; Hundi Circle's case and Phool Chand Bajrang Lal's case (supra), relied upon by the learned counsel for the petitioner, pertain to the period prior to amendment with effect from 1.4.1989, whereas in the case of Rotary Club of Ahmedabad's case (supra), pertaining to the Assessment Year 2006-07, the Court referred to the judgment of the Supreme Court in Commissioner Of Income Tax, Delhi v. Kelvinator Of India Limited[2010] 320 ITR 561 (SC), pertaining to Section 147 after amendment, observed as under:-

“Thus, the following principles emerge from the aforesaid decisions of the Supreme Court, viz., the sufficiency of reasons for forming the belief, is not for the court to judge but it is open to an assessee to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that extent the court may look into the conclusion arrived at by the Assessing Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Assessing Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. The Assessing Officer has no power to review; he has power to reassess. But the reassessment must be based on fulfillment of certain pre-conditions. The concept of “change of opinion” must be treated as an inbuilt test to check abuse of power by the Assessing Officer. The Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment.”

In view of the principles of law laid down by the Hon'ble Supreme Court in Kelvinator of India's case (supra) and Rajesh Jhaveri Stock Broken Private Limited's case (supra), we find that the Assessing Officer has no power to review merely on the change of opinion and that the reasons must have a live link with the formation of a belief that the income has escape from assessment.

The argument of the learned counsel for the petitioner is based upon the fact that the capitalize interest on capital work in progress and on addition to fixed assets, was disclosed by the petitioner to the Assessing Officer vide Annexure P.3 Therefore, since the Assessing Officer has not disallowed the capitalization, thus the notice is based on merely change of opinion. We may notice that the opinion was submitted by the Assessing Officer on the same day on which the Assessment Order was finalized i.e 28.11.2008 and that there is no discussion in the entire order pertaining to accepting either the interest capitalization or declining the same. The argument of the learned counsel for the petitioner is based upon inference that having disclosed the facts, the Assessing Officer was satisfied with the explanation submitted.

We do not find that this Court in the writ petition at the stage of issuance of a show cause notice can return a finding on the basis of inference drawn by the petitioner. Since the assessment order does not deal with either allowance or disallowance of interest capitalized, therefore, it cannot be said that the Assessing Officer is seeking to re-open the assessment only on mere change of opinion.

In respect of the income from the investment in the equity shares as exempt income, the assessee has shown investment of Rs. 50,38,88,268/- in Schedule-VI of the balance sheet. The question whether the income earned from such equity shares is for the purpose of investment and not for the purpose of business is not based upon a change of opinion, but is a result of the interpretation of statute, as to whether such income is exempt from tax or part of it. Since the notice is based upon application of law, which has the effect on the total income computed by the assessee, the same cannot be said to be without jurisdiction which may warrant interference by the Writ Court at the threshold.

Consequently, we do not find any reason to quash the show cause notice at this stage. Hence, the present writ petition is dismissed. It shall be open to the assessee to raise all pleas as are raised before this Court in the proceedings for re-assessment.