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Case Number

Special Civil Application No. 858 of 2006

Attorney(S)

Mr. RK Patel
Mr. Manish Bhatt

Judges

Hon'ble Mr. Justice Akil Abdul Hamid Kureshi
Hon'ble Ms. Justice Harsha Devani

Acts

s. 148 of the IT Act, 1961 ("the Act" for short).
s. 148 of the IT Act, 1961.1.6
s. 147 of the IT Act, 1961.
COMPANIES ACT 1956

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Smart Summary

Judgment Summary — Akil Abdul Hamid Kureshi, J.

Factual and Procedural Background

The petitioner is a company assessed under the Income-tax Act, 1961. For the assessment year 2002-03 the petitioner filed its return of income on 28 October 2002. The Assessing Officer (AO) issued an intimation under s. 143(1) on 16 January 2003. No notice under s. 143(2) was issued within the statutory period (which expired on 1 November 2003), and the return therefore remained at the stage of an intimation under s. 143(1) and was not taken to scrutiny under s. 143(3).

The petitioner challenged an impugned notice (the petition identifies a notice dated 20 December 2004 as the principal challenge; the record also refers to an impugned notice on 28 December 2004) issued by the AO under s. 148 seeking to reopen assessment for asst. yr. 2002-03. The petitioner immediately demanded the reasons for reopening; the AO did not supply reasons immediately but later (in a communication dated 8 November 2005) supplied reasons and, on 21 October 2005, issued a notice under s. 143(2) seeking further information.

The AO's recorded reasons identified four points of alleged escapement: (1) claim of deduction under s. 80HHC (reference to a Sterling Foods Ltd. decision), (2) admissibility of bad debts written off, (3) allowance of warranty expenses allegedly not incurred in the relevant year, and (4) admissibility of royalty claimed. The petitioner objected, alleging that reasons were not recorded before issuing the s.148 notice, that s.147 could not be used to circumvent a time-barred s.143(2) scrutiny notice, and that the recorded reasons were not germane but amounted to fishing inquiries. The AO's reasons were placed on file, the CIT approved reopening (communication dated 16 February 2004), and the AO relied upon file-notes and an affidavit to assert that reasons were recorded before issuance of the notice. The petition challenged the reopening notice; the High Court heard arguments and disposed of the petition by dismissing it.

Legal Issues Presented

Whether the AO had recorded reasons before issuing the notice under s. 148 (i.e., whether the statutory requirement for recording reasons prior to reopening was satisfied).
Whether the power to reopen under s. 147 can be employed to circumvent the time-limit for issuing a s. 143(2) notice (i.e., whether reopening can be used to effect scrutiny where s. 143(2) has become time-barred).
Whether the reasons recorded by the AO were germane and sufficient (i.e., whether they showed a "reason to believe" that income chargeable to tax had escaped assessment, or whether they were mere fishing/verification inquiries insufficient to support reopening).

Arguments of the Parties

Petitioner's Arguments (Counsel: Shri R.K. Patel)

The notice is invalid because the reasons were not recorded before issuance of the s.148 notice; the petitioner immediately demanded reasons which were supplied only after delay and the reasons lacked dates.
The AO cannot use s.147 to circumvent the time-limit in the proviso to s.143(2); if the AO failed to issue s.143(2) within the permitted time, he should not be permitted to reopen under s.147 to achieve effectively the same scrutiny.
The reasons recorded were not germane: they merely stated that the AO wished to verify certain claims (bad debts, royalty, etc.), which amounts to a fishing or roving inquiry and cannot justify reopening where the return was accepted under s.143(1).
The petitioner relied on precedents (including GKN Driveshafts (India) Ltd. and Arvind Mills Ltd.) when requesting reasons and relied on other authorities to support the contention that mere verification cannot sustain reopening.

Respondent's/Revenue's Arguments (Counsel: Shri Manish Bhatt)

The AO did record reasons before issuing the notice; though the reasons lack a date, the original file and AO's note-sheet show that reasons were recorded prior to issuance and that acknowledgement of the notice was on record. The AO also sought and obtained CIT's approval for reopening.
Because the return was accepted under s.143(1) (i.e., was not a scrutiny assessment under s.143(3)), the Revenue has greater latitude to reopen; the decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. was cited to support that distinction.
The recorded reasons demonstrate that the AO had valid reasons to believe that income chargeable to tax had escaped assessment and therefore s.147 reopening is permissible.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
GKN Driveshafts (India) Ltd. vs. ITO ((2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC))	Authority relied upon by the petitioner when requesting supply of reasons for reopening.	The Court recorded that the petitioner relied on this decision in support of the request for reasons; the decision was not otherwise analysed to alter the Court's conclusion on the validity of reopening in this case.
Arvind Mills Ltd. vs. Asstt. CWT ((2004) 191 CTR (Guj) 233 : (2004) 270 ITR 467 (Guj))	Authority relied upon by the petitioner when requesting supply of reasons for reopening.	The Court noted the petitioner's reliance; the decision was not treated as dispositive of the validity of the reopening notice here.
Sterling Foods Ltd. (referred to in AO's reasons)	Authority invoked by the AO in connection with the admissibility of deduction under s.80HHC (specifically on involvement of CST and SST).	The Court observed that even if the AO had wrongly referenced a judgment, mere wrong reference would not invalidate a ground if it is otherwise valid in law; the Sterling Foods reference supported the AO's first ground but was not decisive by itself.
Dy. CIT vs. Maxima Systems Ltd. ((2010) 236 CTR (Guj) 443 : (2012) 344 ITR 204 (Guj))	Held that an assessment framed under s.143(3) pursuant to a s.143(2) notice served beyond the proviso's period was not valid.	The petitioner relied on this decision to argue that reopening cannot be used to circumvent the proviso to s.143(2). The Court acknowledged the authority but held that absence of a timely s.143(2) notice does not, by itself, statutorily preclude reopening under s.147 where there is a reason to believe.
Asstt. CIT & Anr. vs. Hotel Blue Moon ((2010) 229 CTR (SC) 219 : (2010) 321 ITR 362 (SC))	Held that a notice under s.143(2) is mandatory even in block assessment proceedings where s.143(3) is desired to be invoked.	Petitioner relied on this apex Court authority in arguing the importance of s.143(2) time-limits; the High Court treated it as supporting the proposition that s.143(2) is mandatory but held that this does not eliminate the separate statutory power under s.147 when the AO has reason to believe.
Kanubhai M. Patel (HUF) vs. Hiren Bhatt ((2011) 237 CTR (Guj) 544 : (2011) 334 ITR 25 (Guj))	Interpretation of the term "to issue" a notice in the context of ss.147, 148 and 149.	Petitioner cited this Division Bench authority on procedural points; the Court acknowledged the precedent in considering the procedural propriety of issuance of notices but relied on file material to find reasons had been recorded prior to issuance here.
Bakulbhai Ramanlal Patel vs. ITO ((2011) 56 DTR (Guj) 212)	Held that reasons which merely indicate desire to carry out detailed verification/bring assessee into tax net are not sufficient; such reopening is invalid where the return was accepted under s.143(1) without scrutiny.	The High Court agreed with this principle and applied it to the present facts in relation to two grounds (bad debts and royalty) which the AO described as requiring verification; those grounds were treated as inadequate to justify reopening.
Balkrishna Hiralal Wani vs. ITO & Ors ((2010) 230 CTR (Bom) 243 : (2010) 321 ITR 519 (Bom))	Division Bench quashed reopening of an assessment previously accepted without scrutiny on the premise that AO lacked reason to believe income had escaped assessment.	The Court cited this authority to underscore that mere acceptance under s.143(1) does not automatically permit reopening; where reasons are only for verification, reopening can be invalid. This supported the Court's rejection of AO's verification-only grounds.
Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. ((2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC))	Explains the distinction between a return accepted under s.143(1) and a scrutiny assessment under s.143(3); holds that the Revenue has greater latitude to reopen where return was accepted under s.143(1).	The High Court relied on this apex Court decision as authoritative for the proposition that reopening under s.147 is available even where returns are accepted under s.143(1) and that the scheme of ss.143(1) and 143(3) differs materially. This informed the Court's conclusion that reopening could be permissible if reason to believe existed.
CIT vs. Kelvinator of India Ltd. ((2010) 228 CTR (SC) 488 : (2010) 320 ITR 561 (SC))	Stresses the meaning and limits of "reason to believe" after amendments; requires tangible material and a "live-link" between material and the belief to prevent arbitrary reopening.	The Court invoked Kelvinator to confirm that a "reason to believe" must have tangible material and a schematic interpretation is required so that s.147 does not permit reopenings based on mere change of opinion. This standard guided the Court's assessment of the sufficiency of the AO's reasons.
Central Provinces Manganese Ore Co. Ltd. vs. ITO ((1991) 98 CTR (SC) 161 : (1991) 191 ITR 662 (SC))	Authority used for the proposition that at the initiation stage the requirement is reason to believe and not conclusive proof of escapement.	The Court relied (through citation in Rajesh Jhaveri) on this older authority to explain that at the initiation stage the AO needs relevant material that a reasonable person could rely on to form belief; final proof is not required at the notice stage.
ITO vs. Selected Dalurband Coal Co. (P) Ltd. ((1996) 132 CTR (SC) 162 : (1996) 217 ITR 597 (SC))	Supports the proposition that formation of belief by the AO is within the realm of subjective satisfaction and that reasons need not be conclusive evidence at the initiation stage.	The Court referenced this authority (as cited in Rajesh Jhaveri) to reinforce that the presence of relevant material at the time of formation of belief is the key test at the notice stage.
Raymond Woollen Mills Ltd. vs. ITO ((1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC))	Another authority cited for the principle that at the initiation stage what is required is reason to believe rather than established escapement.	Cited along with the other apex Court authorities to underline the standard applied to an AO's subjective formation of belief at the stage of issuing a reopening notice.

Court's Reasoning and Analysis

(This section summarizes the Court's step-by-step analysis, based strictly on the opinion's text.)

Requirement that reasons be recorded before issuing s.148 notice:
The Court accepted the undisputed statutory rule that reasons must be recorded before issuing a notice to reopen. The petitioner's contention that reasons were not recorded prior to issuance was examined by perusing the original file. The Court found reasons signed by the AO located on the file immediately after the notice for reopening (reasons at p.324 after notice at p.323), an acknowledgement of service of the notice dated 20 December 2004, and an internal note-sheet dated 20 December 2004 stating: "Notice under s. 148 issued after recording reasons for reopening." The AO had also sought and received approval from the CIT (communication dated 16 February 2004) for reopening. An affidavit by an Assistant Commissioner supporting that reasons were recorded before notice was on record. On this aggregate material, the Court concluded that in exercise of writ jurisdiction it would not be open to hold that reasons were not recorded before issuance of the notice.
Whether s.147 can be used to circumvent time-bar for s.143(2):
The Court recognized that the proviso to s.143(2) prescribes a time-limit and that s.143(2) is mandatory; it acknowledged authorities relied upon by the petitioner on the importance of s.143(2). However, the Court held that the mere absence or time-bar of a s.143(2) notice does not by itself statutorily preclude reopening under s.147. The statutory power in s.147 to reassess if the AO has a "reason to believe" remains available irrespective of whether a return was accepted under s.143(1) or scrutinized under s.143(3).

The Court explained the key distinction: a return accepted under s.143(1) (especially under the post-1989 scheme, where such intimation may be ministerial) is not equivalent to a scrutiny assessment under s.143(3); therefore the AO may have greater scope to reopen a return initially accepted under s.143(1), but the basic requirement of s.147 — that the AO must have reason to believe that income has escaped assessment — continues to apply.
The meaning and standard of "reason to believe":
The Court relied on apex Court authorities (notably Rajesh Jhaveri and Kelvinator) to state that the phrase "reason to believe" means cause or justification; the AO need not have finally ascertained the fact by legal evidence at the initiation stage. However, after the 1989 amendments courts require a schematic interpretation: reasons must be supported by tangible material and have a "live-link" with the formation of belief to prevent reopenings based on mere change of opinion.
Application of the standard to the AO's four recorded grounds:
The Court examined each ground recorded by the AO. Two grounds (admissibility of bad debts written off and admissibility of royalty) were characterized by the AO as matters "to be verified." The Court agreed with the petitioner's contention — supported by precedents — that mere desire to verify claims (i.e., fishing or roving inquiries) cannot justify reopening where the return was accepted under s.143(1).

The other two grounds were treated differently. Ground No.1 (deduction under s.80HHC and involvement of CST/SST in turnover/net profit) and Ground No.3 (warranty expenses: claim that part of warranty expense did not arise during the year) involved factual findings or materials upon which the AO could form a belief that income chargeable to tax had escaped. The AO had specific material (audit discrepancies, file material and references) that could support a reasoned belief. The Court held these grounds were germane and would permit reopening.
Conclusion of analysis:
Balancing the requirements that reasons be recorded before issuing the notice, that the AO must have "reason to believe" supported by tangible material, and that mere verification or fishing enquiries are insufficient, the Court concluded that while two grounds lacked sufficiency because they were framed as mere verification, two grounds were sufficiently grounded. Overall, the Court held that the notice for reopening was not invalid or without jurisdiction.

Holding and Implications

Holding: The petition is dismissed; the impugned notice for reopening the assessment under s.148/s.147 is held not to be invalid.

Direct implications and immediate effects:

The Court found that the AO had recorded reasons before issuing the notice and had obtained CIT approval for reopening, so the procedural challenge to the notice failed.
The Court accepted that s.147 may be invoked where the AO has a tangible material-based "reason to believe" income chargeable to tax has escaped, even if a s.143(2) notice could not be issued within the proviso period; however, the AO cannot use s.147 to mount a merely fishing or verification exercise.
The specific consequence for the parties is that the AO may proceed with the reassessment process based on the two grounds the Court found germane (s.80HHC deduction issue and alleged excess warranty expense not arising in the year). The two grounds framed as mere verification (bad debts and royalty) were identified as insufficient standing alone, but the overall reopening notice remains valid.
The rule nisi (if any) is discharged, the petition dismissed, and any interim relief previously granted was vacated.

Broader precedent: The Court applied and followed existing apex Court and High Court authority on the meaning of "reason to believe" and the distinction between s.143(1) and s.143(3) assessments. The opinion did not purport to lay down a new principle; it applied established tests (tangible material, live-link, and the insufficiency of mere fishing inquiries) to the facts before it.

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Inductotherm (India) Pvt. Ltd. (Formerly Inductotherm India Petitioner(S) v. M. Gopalan, Dy. Commissioner Of Income-Tax Or His Successor (S)

Akil Abdul Hamid Kureshi, J.

1. The petitioner has challenged a notice dt. 20th Dec., 2004 issued by the respondent--Dy. CIT under s. 148 of the IT Act, 1961 ("the Act" for short). The petitioner has also challenged the subsequent notices issued by the respondent under s. 143(2) of the Act. However, the principal challenge of the petitioner is to the notice dt. 20th Dec., 2004 issued by the AO seeking to reopen the assessment of the petitioner for the asst. yr. 2002-03. The petition arises in following factual background.

1.1 The petitioner is a company registered under the Companies Act, 1956 and is regularly assessed to tax under the Act. For the asst. yr. 2002-03, the petitioner filed its return of income on 28th Oct., 2002. On such return, the AO sent intimation under s. 143(1) of the Act on 16th Jan., 2003.

1.2 It is not in dispute that during the statutory period envisaged under s. 143 of the Act, the AO issued no notice under s. 143(2) of the Act. Such period expired on 1st Nov., 2003. The return of income, thus, remained at the stage of intimation under s. 143(1) of the Act and was never taken in scrutiny.

1.3 The AO, however, issued the impugned notice on 28th Dec., 2004 seeking to reopen the assessment for the asst. yr. 2002-03. In response to such notice, the petitioner issued a communication dt. 30th Dec., 2004 and besides objecting to the reopening of the assessment, also demanded that the reasons recorded by the AO may be supplied. The respondent-AO did not supply the reasons. Instead, he issued a notice dt. 21st Oct., 2005 under s. 143(2) of the Act, stating that there were certain points with respect to return of income for the asst. yr. 2002-03 on which he would like to have further information.

1.4 The petitioner thereupon wrote a letter dt. 8th Nov., 2005 and reiterated the request for supply of the reasons recorded by the AO for reopening the assessment. He referred to the decision of the apex Court in case of GKN Driveshafts (India) Ltd. vs. ITO (2003) 179 CTR (SC) 11 : (2003) 259 ITR 19 (SC). He also relied on the decision of this Court in case of Arvind Mills Ltd. vs. Asstt. CWT (2004) 191 CTR (Guj) 233 : (2004) 270 ITR 467 (Guj) in support of such a prayer.

1.5 In response to such letter, the AO supplied the reasons recorded under his communication dt. 8th Nov., 2005. Such reasons read as under:

In this case, the assessee company has filed its return of income for asst. yr. 2002-03 on 28th Oct., 2002 showing total income at Rs. 7,23,29,973. The case was processed under s. 143(1) on 16th Jan., 2003. On perusal of the case records, it is noticed that there is escapement of income chargeable to tax on the following points:

(1) The assessee company has claimed deduction under s. 80HHC at Rs. 59,86,965. The involvement of CST and SST in the total turnover and other income in the net profit should not be allowable for the purpose of deduction under s. 80HHC calculation relying on the decision in the case of Sterling Foods Ltd. (supra).

(2) Admissibility of bad debts written off at Rs. 74,73,003 is to be verified.

(3) The assessee had debited warranty expenses at Rs. 1,43,48,347 to the P & L a/c, out of which an amount of Rs. 1,05,48,633 has actually been incurred during the financial year under consideration. Therefore, the remaining amount of Rs. 37,99,714 is not allowable expenses under the IT Act.

(4) Admissibility of royalty claimed at Rs. 62,92,773 is to be verified. However, due to wrongful claim of deduction under s. 80HHC, excess claim of warranty expenses etc., income chargeable to tax has escaped assessment within the meaning of s. 147 of the IT Act, 1961. Under the circumstances, the assessment for asst. yr. 2002-03 is hereby reopened. Issue notice under s. 148 of the IT Act, 1961.

1.6 Upon receipt of such reasons, the petitioner raised detailed objections to the notice of reopening under communication dt. 16th Nov., 2005. It was contended that in absence of any material to tax the income, even in proceedings under s. 147 of the Act, it would not be open for the AO to proceed. The petitioner placed considerable reliance on the expression "reason to believe" used in s. 147 of the Act. Such objections were disposed of by an order dt. 12th Jan., 2006. At that stage, the petitioner filed the present petition and challenged the impugned notice issued by the respondent-AO.

2. Appearing for the petitioner, Shri R.K. Patel contended that the notice is invalid. The AO has assumed jurisdiction not vested in him. He, therefore, submitted that the notice be quashed. This contention the counsel sought to support on the following four arguments:

(1) That the reasons were not recorded by the AO before issuing notice. In this respect, counsel pointed out that though immediately upon receipt of notice under s. 148 of the Act, the petitioner demanded a copy of the reasons recorded by the AO, such reasons were not supplied for a long time. In the meantime, notices were issued under s. 143(2) of the Act.

(2) The counsel contended that the assessment proceedings cannot be reopened to circumvent time-limit for issuing the notice under s. 143(2) of the Act. He submitted that time-limit provided in the proviso to s. 143(2) of the Act, must be given its due weightage. If the AO for any reason failed to issue such a notice within the time-limit, he cannot proceed under s. 147 for taking such a return in scrutiny.

In support of this contention, counsel relied on the following decisions:

(a) In case of Dy. CIT vs. Maxima Systems Ltd. (2010) 236 CTR (Guj) 443 : (2010) 40 DTR (Guj) 49 : (2012) 344 ITR 204 (Guj), wherein a Division Bench of this Court observed that assessment which was framed under s. 143(3) of the Act pursuant to a notice under s. 143(2) which was served beyond the period of limitation prescribed under the proviso, was not a valid assessment.

(b) In case of Asstt. CIT & Anr. vs. Hotel Blue Moon (2010) 229 CTR (SC) 219 : (2010) 35 DTR (SC) 1 : (2010) 321 ITR 362 (SC) wherein the apex Court held that notice under s. 143(2) of the Act was mandatory even in the block assessment proceedings if the AO desired to complete such assessment under s. 143(3) of the Act.

(c) In case of Kanubhai M. Patel (HUF) vs. Hiren Bhatt or His Successors to Office & Ors. (2010) 43 DTR (Guj) 329 : (2011) 237 CTR (Guj) 544 : (2011) 334 ITR 25 (Guj), wherein a Division Bench of this Court had the occasion to interpret the term "to issue" the notice in context of the provisions contained under ss. 147, 148 and 149 of the Act.

(3) The third contention of the counsel was that the reasons recorded by the AO were not germane. Such reasons only recorded that the AO wanted to verify certain claims made by the assessee. Counsel submitted that for a fishing inquiry or for mere verification of the claims made, reopening cannot be permitted even in the assessment which was accepted under s. 143(1) of the Act.

In support of this contention, counsel relied on following decisions:

(a) In case of Bakulbhai Ramanlal Patel vs. ITO (2011) 56 DTR (Guj) 212, wherein a Division Bench of this Court finding that all reasons recorded by the AO for reopening of assessment, only provided that the AO desired to carry out a detailed investigation/verification to bring the assessee in the tax net, held that the notice for reopening the assessment was not valid. We may record that this was also a case where the return filed was accepted under s. 143(1) of the Act without any scrutiny.

(b) In case of Balkrishna Hiralal Wani vs. ITO & Ors. (2010) 230 CTR (Bom) 243 : (2010) 36 DTR (Bom) 161 : (2010) 321 ITR 519 (Bom), wherein a Division Bench of the Bombay High Court, also in relation to reopening of assessment which was previously accepted without scrutiny, quashed the notice on the premise that the AO could not have any reason to believe that the income chargeable to tax has escaped assessment.

3. On the other hand, learned counsel Shri Manish Bhatt for the Department, opposing the petition, contended as under:

(1) In the present case, the AO had recorded reasons for reopening of assessment. Such reasons were recorded before issuance of notice. He took us through the documents on record in the original file to contend that though the reasons recorded did not carry a specific date, from the record, it can be ascertained that such reasons were recorded before issuance of notice.

(2) In the present case, notice for reopening has been issued after recording proper reasons. The return of the assessee was previously not taken in scrutiny. In that view of the matter, in view of the decision of the apex Court in case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC), the Revenue would have much greater latitude for reopening the assessment.

(3) He further submitted that the reasons recorded by the AO would demonstrate that he had valid reasons to believe that the income chargeable to tax had escaped assessment.

4. Having, thus, heard the learned counsel for the parties and having perused the documents on record, we may first deal with the question of recording of the reasons before issuance of notice. It is undoubtedly true that to reopen an assessment, the AO must record his reasons before issuing notice for reopening. In that view of the matter, the question of such reasons having been recorded before issuance of notice assumes significance. As noted, counsel for the petitioner contended that such reasons were not recorded before issuance of notice. For this purpose, he highlighted that such reasons were not supplied immediately though the petitioner demanded the same. Such reasons when produced before the Court showed that they do not carry any date.

5. We have perused the original file in context of this controversy. The file reveals that the reasons recorded by the AO and signed by himself are found at p. 324 which is immediately after p. 323 which is the notice for reopening of the assessment. Immediately after the reasons recorded at p. 325, is the acknowledgement receipt of service of the notice dt. 20th Dec., 2004 issued under s. 148 of the Act. Further we find that the AO had drawn a note-sheet in which on 20th Dec, 2004, he recorded that, "Notice under s. 148 issued after recording reasons for reopening." Such note-sheet also contains reference to subsequent notice under s. 143(2) issued on 8th Nov., 2005 and other details.

6. We also notice that the audit party had brought certain discrepancies to the notice of the AO. The AO thereupon examined such issues and wrote to the CIT on 17th Oct., 2003 that in view of such issues, remedial action is required to be taken. He noted that the assessment was accepted under s. 143(1) of the Act and therefore, remedial actions available would be proceedings under s. 263 of the Act, or under s. 147 of the Act or under s. 154 of the Act. In the concluding portion of his letter, he stated thus, "Secs. 263 and 254 do not appear to be applicable to the facts of the case. Therefore, in my humble submission, the most proper remedial action to set right the audit objections appears to be recourse to s. 147. Approval may kindly be accorded."

6.1 Such approval was granted by the CIT under communication dt. 16th Feb., 2004. Thereupon, the impugned notice came to be issued.

7. In addition to above materials emerging from the original files, we also have an affidavit-in-reply filed by one Shri James Kurian, Asstt. CIT, Circle-4, Ahmedabad on behalf of the respondent in which he has stated that the reasons were recorded before issuance of notice for reopening. He pointed out that a proposal of reopening of the assessment was sent for approval of the CIT and the CIT had accorded such approval and thereafter, the notice was issued.

8. From such materials, we are of the opinion that it cannot be stated that the AO had not recorded reasons before issuance of the notice. Firstly, the reasons recorded are found on the file immediately after the original notice under s. 148 of the Act. Though such reasons are not dated, the note-sheet maintained by the AO concerned recorded that the notice is issued after recording reasons. Further, as noted, the issue arose when the audit party brought certain discrepancies to the notice of the AO. He mulled over various options available to the Revenue and suggested to the CIT that the best option would be to exercise powers under s. 147 of the Act. These factors coupled with the affidavit-in-reply filed by the respondent would convince us that in exercise of writ jurisdiction, it would not be open for us to hold that reasons were not recorded by the AO before issuance of notice.

9. This brings us to the second limb of the petitioner's challenge namely, that the power under s. 147 of the Act cannot be exercised to circumvent the proceedings under s. 143(3) of the Act because the notice under s. 143(2) of the Act has become time-barred and further that in any case, reasons recorded would not permit the AO to reopen the assessment.

10. It is undoubtedly true that proviso to s. 143(2) of the Act prescribes a time-limit within which such notice could be issued. It is equally well-settled that such notice is mandatory and in absence of notice under s. 143(2) of the Act within the time permitted, scrutiny assessment under s. 143(3) cannot be framed. However, merely because no such notice was issued, to contend that the assessment cannot be reopened, is not backed by any statutory provisions. Counsel for the petitioner did not even stretch his contention to that extent. The case of the petitioner as we understand is that in guise of reopening of an assessment, the AO cannot try to scrutinize the return. This aspect substantially overlaps with the later contention of the petitioner that the reasons recorded by the AO were not germane and were not sufficient to permit reopening.

11. We must recall that the return filed by the petitioner was not taken in scrutiny. No assessment, thus, took place. The AO without any assessment, merely issued an intimation under s. 143(1) of the Act accepting such return. In that view of the matter, it cannot be stated that the AO formed any opinion with respect to any of the aspects arising in such return. In such a case, scope for reopening such assessment under s. 147 of the Act as compared to an assessment which was previously framed under s. 143(3) of the Act, whether beyond or within four years from the end of the relevant assessment year, is substantially wider. The apex Court in case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) noticed such distinction and noted that the scheme of s. 143(1) and 143(3) of the Act is entirely different. It was noticed that after 1st April, 1989, the provisions contained in s. 143 underwent substantial changes. It was noticed that the intimation under s. 143(1) of the Act is given without prejudice to the provisions of s. 143(3) of the Act and though technically the intimation would be deemed to be demand notice under s. 156, that did not per se preclude the right of the AO to proceed under s. 143(2)(a) of the Act. The apex Court observed that the word "intimation" as substituted for assessment carried different concepts. It was observed that while making an assessment, the AO is free to make any addition after granting an opportunity to the assessee. The apex Court observed that, "It may be noted above that under the first proviso to the newly substituted s. 143(1), w.e.f. 1st June, 1999, except as provided in the provision itself, the acknowledgement of the return shall be deemed to be an intimation under s. 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgement is not done by any AO, but mostly by ministerial staff. Can it be said that any assessment is done by them? The reply is an emphatic no. The intimation under s. 143(1)(a) was deemed to be a notice of demand under s. 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under s. 143(1)(a), the question of change of opinion, as contended, does not arise."

12. Despite such difference in the scheme between a return which is accepted under s. 143(1) of the Act as compared to a return of which scrutiny assessment under s. 143(3) of the Act is framed, the basic requirement of s. 147 of the Act that the AO has reason to believe that income chargeable to tax has escaped assessment is not done away with. Sec. 147 of the Act permits the AO to assess, reassess the income or recompute the loss or depreciation if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. This power to reopen assessment is available in either case, namely, while a return has been either accepted under s. 143(1) of the Act or a scrutiny assessment has been framed under s. 143(3) of the Act. A common requirement in both of cases is that the AO should have reason to believe that any income chargeable to tax has escaped assessment.

13. The term "reason to believe" has come up for consideration in various decisions before this Court as well as the apex Court. It is not necessary to trace long line of decisions on the point. We may, however, refer to two of the recent decisions. In case of CIT vs. Kelvinator of India Ltd. (2010) 228 CTR (SC) 488 : (2010) 34 DTR (SC) 49 : (2010) 320 ITR 561 (SC), in the context of amended provision of s. 147 w.e.f. 1st April, 1989, the Court stressed on the expression "reason to believe", observing that the Court has to give a schematic interpretation to such words, failing which s. 147 would give arbitrary powers to the AO to reopen the assessments on the basis of mere change of opinion. On that basis, the apex Court concluded that even in the case of assessment which is sought to be reopened within a period of four years from the end of relevant assessment year, the concept of change of opinion is not given a go-bye. It was observed that. "Hence, after 1st April, 1989, the AO has power to reopen, provided that 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." The apex Court noticed that previously, the Parliament had introduced the expression "opinion" under s. 147 of the Act, however, on receipt of representations from various quarters, the same was substituted as was originally used to "reason to believe".

14. In case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), the apex Court observed that phrase "reason to believe" means cause or justification. If the AO has cause or justification to know or subjective satisfaction that income had escaped assessment, it can be stated to have reason to believe that income chargeable to tax had escaped assessment. It was observed as under:

Sec. 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court (sic--Supreme Court) in Central Provinces Manganese Ore Co. Ltd. vs. ITO (1991) 98 CTR (SC) 161 : (1991) 191 ITR 662 (SC), for initiation of action under s. 147(a) (as the provision stood at the relevant time) fulfilment 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 AO is within the realm of subjective satisfaction [see ITO vs. Selected Dalurband Coal Co. (P) Ltd. (1996) 132 CTR (SC) 162 : (1996) 217 ITR 597 (SC); Raymond Woollen Mills Ltd. vs. ITO (1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC)].

15. It would, thus, emerge that even in case of reopening of an assessment which was previously accepted under s. 143(1) of the Act without scrutiny, the AO would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. However, as held by the apex Court in the case of Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) and several other decisions, such reason to believe need not necessarily be a firm final decision of the AO.

16. If we accept such proposition, the petitioner's apprehension that the AO would arbitrarily exercise powers under s. 147 of the Act to circumvent the scrutiny proceedings which could not be framed in view of notice under s. 143(2) having become time-barred, would be taken care of. To reiterate, even for reopening of an assessment which was accepted previously under s. 143(1) of the Act without scrutiny, the AO should have reason to believe that income chargeable to tax has escaped assessment.

17. Reverting to the facts of the present case, we notice that in two out of four reasons recorded by the AO for reopening the assessment, he stated that he need to verify the claims. In the second ground, he had recorded that admissibility of the bad debts written off required to be verified. In the fourth ground also, he had recorded that admissibility of royalty claim was required to be verified. We are in agreement with the contention of the counsel for the petitioner that for mere verification of the claim, power for reopening of assessment could not be exercised. The AO in guise of power to reopen an assessment, cannot seek to undertake a fishing or roving inquiry and seek to verify the claims as if it were a scrutiny assessment.

18. With respect to other two grounds, however, we find that the AO had some material at his command to form a belief that income chargeable to tax had escaped assessment. Ground No. 1 pertained to the claim of deduction under s. 80HHC of the Act and the AO was of the opinion that the Central as well as the State Sales-taxes and other income in the net profit would not qualify for deduction under s. 80HHC of the Act. It may be that he referred to the decision of the apex Court in the case of Sterling Foods Ltd. (supra) however, mere wrong reference to a judgment would not invalidate the ground if otherwise was valid in law. Equally, in the third ground, the AO noted that the assessee had debited warranty expenses of Rs. 1,43,48,347 to the P & L a/c, out of which an amount of Rs. 1,05,48,633 was incurred during the financial year under consideration. He was, therefore, of the opinion that remaining amount of Rs. 37,99,714 is not allowable expenditure. We are of the opinion that such reason also would permit the AO to reopen the assessment. The AO has found that a claim not arising during the year under consideration was made. He desires to disallow such a claim. It cannot be stated that the ground was not germane. The counsel for the petitioner, however, vehemently contended that the petitioner's claim in this respect has been accepted by this Court. He drew our attention to an order dt. 27th Dec., 2011 passed in Tax Appeal No. 2087 of 2010, wherein this Court had rejected the Revenue's appeal in which one of the issues was with respect to such warranty expenditure. Counsel for the Revenue, however, pointed out that the Department has not accepted this decision of the High Court. In view of the above discussion, we do not find that the notice for reopening is invalid or lacks jurisdiction. The petition is, accordingly, dismissed. Rule is discharged. Interim relief granted earlier stands vacated.

Inductotherm (India)... v. M. Gopalan, Dy. Comm...