The Commissioner Of Income Tax v. M/S. Best Wood Industries & Saw Mills

Ramachandran Nair, J.:— The question referred to us for our decision by a Division Bench of this Court in the Reference Order is whether in the course of income escaping assessment initiated under Section 147 of the I.T Act for bringing to tax an item of escaped income, which in this case is ineligible depreciation allowed in the original assessment, the assessing officer has authority to bring to tax any other income that also escaped assessment in the original assessment which in this case is unexplained trade credits. The matter happened to be referred by the Division Bench to the Full Bench because correctness of the decision of this Court relied by the assessee in their favour, which is the decision reported in Travncore Cements Ltd. v. Asst. Commissioner of Income Tax, (2006) 4 KLT 344 was doubted by the Division Bench. We have heard standing counsel appearing for the appellant and counsel appearing for the respondent assessee in the connected cases.

2. Original assessments completed in the case of respondent assessee for the assessment years 2001–02 and 2002–03 were reopened for making income escaping assessment under Section 147 of the Act for the reason that in the original assessments, assessee's claim for depreciation at 40% for goods vehicles as against admissible rate of 25% was allowed wrongly. In other words, the specific purpose for initiating income escaping assessment under Secior 147 was to disallow excess depreciation granted. However, in the course of reassessment under Section 147, the assessing officer noticed that assessee has not explained various trade credits and so much so, he brought to tax the said unexplained trade credits as income under Section 68 of the I.T Act. The assessee challenged the validity of the reassessment on the ground that the assessing officer has exceeded his jurisdiction under Section 147 inasmuch as escaped income other than the one for which notice was issued for reopening assessment was also brought to tax in the course of assessment under Section 147. In other words, according to assessee, once the assessment is reopened for the purpose of bringing to tax an Item escaped income, the assessing officer should in the reassessment proceedings restrict himself only to the said item of escaped income and no other item of income should be brought to tax in the course of income escaping assessment under Section 147. Even though the assessing officer rejected the technical objection raised by the assessee and completed the assessment, both the first appellate authority as well as the Tribunal accepted the assessee's contention and held that the re-assessments completed under Section 147, so far as the same relates to assessment of unexplained trade credits, are invalid. It is against this order of the Tribunal, the department has filed these appeals.

3. In the first place we notice that in the decision of the Supreme Court relied on by the Tribunal, that is, in Commissioner Of Income Tax v. Sun Engineering Works (P) Ltd., 1981. T.R 297, no such proposition canvassed by the assessee was laid down. Secondly Section 147 of the I.T Act has undergone various changes and the provision applicable for relevant assessment years is extracted hereunder for easy reference:

147. Income escaping assessment:

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 such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereinafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

…………………………

(emphasis supplied)

4. What is clear from the above provision is that once assessment is reopened for bringing to tax any income that escaped assessment in terms of Sections 148 to 153, then the assessing officer has to assess or reassess such income and also any other income chargeable to tax which has escaped assessment. The purpose of this provision is that if in the course of reassessment initiated under Section 147 to bring to tax any item of escaped income, it comes to the notice of the assessing officer that any other income also has escaped income, then the assessing officer should bring to tax such income also. The procedure for income escaping assessment under Section 147 is contained in Section 148 whereunder subsection (2) makes it mandatory for the assessing officer to record reasons before proceeding to issue notice. However, once assessment is reopened after recording reasons, the assessing officer has to complete the income escaping assessment by following the provisions of the Act as if the return furnished against notice under Section 148 as one filed under Section 139 of the Act This obviously means that so far as procedure to be followed is concerned, there is no difference between income escaping assessment and regular assessment because the provisions generally provide for issue of notice, hearing of the assessee and taking of evidence, etc, which are the same for regular assessment and income escaping assessment.

5. Therefore in the course of income escaping assessment if it comes to the notice of the assessing officer that any other item or items of income other than the item of escaped income for the assessment of which, assessment originally completed was reopened, also have escaped from original assessment he is bound to assess such item or items of income also in the course of reassessment under Section 147. In view of the specific provision providing for assessment of other items of income that have escaped assessment and that comes to the notice of the assessing officer in the course of income escaping assessment the reassessments made are valid and the orders of the Tribunal to the contrary are not sustainable.

6. Standing counsel for the revenue has brought to our notice decision of the Supreme Court in Asst. CIT v. Rajesh Jhaveri Stock Brothers P. Ltd., 291 ITR 500 (SC) wherein the Supreme Court has held that at the stage of issue of notice under Section 148 what is required is only reason to believe but not the established fact of escapement of income. It is specifically held by the Supreme Court as follows:

At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing officer.

7. The proposition laid down by the Supreme Court clearly goes to establish that the assessing officer is not confined to the grounds or reasons stated by him to reopen the assessment ah he can make assessment after detailed enquiry. So much so, once the assessment is reopened for any valid reason recorded under Section 148(2), then the entire assessment is open for the assessing officer to bring to tax any item of escaped income which comes to his notice in the course of such reassessment. We therefore overrule the decision of this Court in Travncore Cements Ltd. v. Asst. Commissioner of Income Tax, 2006 (4) KLT 344 and allow the appeals by reversing the orders of the Tribunal and that of the first appellate authority and remand the matter to the first appellate authority to consider the appeals on merits, that is with regard to additions made in the reassessments after issuing notice to both sides.