High Court · 2007

IN THE HIGH COURT OF JUDICATURE AT MADRASDated : 16.08.2007Coram :THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANandTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANTax Case Nos.387 and 388 of 2004The Income Tax Officer,Ward I (V), Erode.Appellantv.K.M.PachiappanRespondentTax Case Appeals filed under section 260-A of the Income Tax Act,1961 against the order of the Income Tax Appellate Tribunal 'B' Bench,Madras dated 07.12.2000 made in 564/Mds/99 & 565/Mds/99 against theorder of the commissioner of Income Tax (Appeals) Coimbatore dated17.2.1999 in ITA No.674-C/96-97 and 327-C/98-99 against the order ofIncome Tax Officer, Ward-I (5), Erode in PAN GIR No.P-5028/I/51/ERDdated 1.8.96 and 21.1.98 respectively.For Appellant:Mr.T.Ravikumar,Standing Counsel for IT Dept.For Respondent:No appearanceJUDGMENT(Judgment of the Court was deliveredby K.RAVIRAJA PANDIAN, J.)These appeals are filed by the revenue aggrieved by the order ofthe Income Tax Appellate Tribunal dated 07.12.2000, framing thefollowing questions of law :"1. Whether on the facts and circumstances of the case,the Tribunal was right in law in not considering theExplanation 2 to section 147 which provides that 'the assessingofficer can reopen the assessments even if the assessments havenot been completed under section 143 and only intimation hadbeen sent, if the conditions laid under section 147 arefulfilled?2. Whether on the facts and circumstances of the case,the Income Tax Appellate Tribunal is right in not considering https://hcservices.ecourts.gov.in/hcservices/ that the addition of incentive bonus to the total income isproper or not, in view of the decision of the Madras HighCourt in the case of CIT v. E.A.Rajendran reported in 235 ITR514 in which it has been held that no deduction except whathas been allowed under section 16, is admissible?2. The facts, as culled out from the statement of facts, are asunder :The assessee is a Development Officer of the Life InsuranceCorporation of India. He filed his return for the assessment year 1994-1995 on 28.03.1996 claiming 50% deduction, as expenditure in the totalincentive bonus. The return was processed under section 143(1) of theIncome Tax Act, 1961 and notice under section 148 of the Act was issuedon 18.06.1996. The case was taken up for scrutiny and the assessingofficer passed an order under section 143(3) read with section 147 ofthe Income Tax Act and added incentive bonus in the income of theassessee. The assessment for the year 1995-96 was also concluded undersection 143(3) read with section 147 to the same effect after issuingnotice under section 148 of the Act. Aggrieved by that order, theassessee preferred appeals before the Commissioner of Income Tax(Appeals) by contending that during the pendency of valid return,reassessment proceedings cannot be initiated. The appeals weredismissed and therefore, the assessee carried the matter to the IncomeTax Appellate Tribunal by way of second appeals by contending that thereturns were processed under section 143(1)(a) initially which wiouldnot amount to disposing of the same simply because intimation undersection 143(1)(a) was deemed to be a notice of demand under section 156of the Income Tax Act. It was further contended that the noticessubsequently issued under section 148 of the Act were not valid and theassessments were liable to be set aside. The Tribunal accepted thecontentions of the assessee and allowed the appeals by setting aside theorder of the Commissioner of Income Tax (Appeals) holding that duringthe pendency of the valid return, re-assessment proceedings could not beinitiated. The correctness of the same is now canvassed before thisCourt.3. We heard the arguments of counsel on either side and perused thematerials available on record.4. In order to resolve the first question of law, we are of theview that it is better to have the relevant provision extracted.Section 147 read as under :"S.147. Income escaping assessment.If the assessing officer has reason to believe that anyincome chargeable to tax has escaped assessment for anyassessment year, he may, subject to the provisions of sections148 to 153, assess or reassess such income and also any otherincome chargeable to tax which has escaped assessment and whichcomes to his notice subsequently in the course of theproceedings under this section, or recompute the loss or thedepreciation allowance or any other allowance, as the case maybe, for the assessment year concerned - https://hcservices.ecourts.gov.in/hcservices/ Provided that where an assessment under sub-section (3) ofsection 143 or this section has been made for the relevantassessment year, no action shall be taken under this sectionafter the expiry of four years from the end of the relevantassessment year, unless any income chageable to tax has escapedassessment for such assessment year by reason of the failure onthe part of the assessee to make a return under section 139 orin response to a notice issued under sub section (1) of section142 or section 148 or to disclose fully and truly all materialfacts necessary for his assessment, for that assessment year.Explanation I – Production before the assessing officer ofaccount books or other evidence from which material evidencecould with due diligence have been discovered by the assessingofficer will not necessarily amount to disclosure within themeaning of the foregoing proviso.Explanation 2 – For the purposes of this section, the followingshall also be deemed to be cases where income chargeable to taxhas escaped assessment, namely,(a)where no return of income has been furnished by theassessee although his total income or the total incomeof any other person in respect of which he is assessableunder this Act during the previous year exceeded themaximum amount which is not chargeable to income-tax;(b)where a return of income has been furnished by theassessee but no assessment has been made and it isnoticed by the assessing officer that the assessee hasunderstated the income or has claimed excessive loss,deduction, allowance or relief in the return;(c)where an assessment has been made, but -- i.income chargeable to tax has been under-assessed; orii.such income has been assessed at too low arate; oriii.such income has been made the subject ofexcessive relief under this Act; oriv.excessive loss or depreciation allowance orany other allowance under this Act has beencomputed.5. Section 147 authorises or empowers the assessing officer toassess or reassess any income chargeable to tax, if he has reason tobelieve that the income for the assessment year has escaped assessment.The powers so vested with the assessing officer has to be exercisedsubject to the provisions of sections 148 to 153 of the Act. Thus, thecondition precedent for proceeding under section 147 is that theassessing officer should have reason to believe that the income hasescaped assessment. It is not necessary that the assessment should havebeen completed under section 143(3) of the Act before it could bereopened. The intimation under section 143(1) though technically wasdeemed to be a demand notice under section 156, that did not precludethe assessing officer to proceed under section 143(2) and pass an orderunder section 143 of the Act. If the assessing officer has reason tobelieve that the income has escaped assessment while issuing intimationunder section 143(1) he could proceed further under sections 147/148. https://hcservices.ecourts.gov.in/hcservices/ The absence of an order under section 143(3) is not a bar. The provisoto section 147 which provides that no action shall be taken under thesection after expiry of four years from the end of relevant assessmentyear in a case where an assessment under section 143(3) has been madefor relevant assessment year indicates that section 147 can be invokednot only after an order has been passed under section 143(3) of the Act,but even otherwise before such an order is passed. Further more sub-clause (b) of Explanation 2 also makes the position amply clear thatwhere a return of income has been furnished by the assessee, but noassessment has been made and it is noticed by the assessing officer thatthe assessee has understated the income or has claimed excessive loss,deduction, allowance or relief in the return, that would deemed to be acase where income chargeable to tax has escaped assessment and becomes acause for invoking the power under section 147 of the Act. 6. This issue has been considered by various High Courts. In thecase of CIT v. Abad Fishers, (2002) 258 ITR 641, the Kerala High Courtanswering the question whether the Tribunal was right in holding thatthe reopening of the assessment is valid, in a case where the assessmenthas been reopened under section 147 of the Act, since the time to issuea notice under section 143(2) of the Act was over, referred withapproval the decision in the case of Mahanagar Telephone Nigam Ltd. v.Chairman, CBDT, (200) 246 ITR 173 wherein the Delhi High Court held thatthe intimation under section 143(1)(a) of the Act could not be treatedto be an order of assessment and that a distinction was well brought outby the statutory provisions as they stood at different points of time,that the intimation under section 143(1)(a) was deemed to be a notice ofdemand under section 156, for the apparent purpose of making machineryprovisions relating to recovery of tax applicable. By such applicationonly recovery of the amount indicated to be payable in the intimationbecame permissible. And nothing more could be inferred from the deemingprovision, the Kerala High Court held that so long as the ingredients ofsection 147 are fulfilled, the assessing officer was free to initiateproceedings under section 147 and failure to take steps under section143(3) would not render the assessing officer powerless to initiatereassessment proceedings even when intimation under section 143(1) hadbeen issued. 7. The Punjab and Haryana High Court in the case of Punjab TractorsLtd. v. Joint Commissioner of Income Tax, (2002) 254 ITR 242 held thatif the assessing officer had reason to believe that any incomechargeable to tax had escaped assessment for any assessment year, hecould proceed to assess or reassess such income. Thus, the conditionprecedent for proceeding under section 147/148 was that the assessingofficer should have reason to believe that income had escapedassessment. Nothing more. It was not necessary that assessment shouldhave been finalised under section 143(3) before it could be reopened.The intimation under section 143(1) operated as an order of assessmentunless the authority proceeded to give notice under section 143(2) andpassed an order under section 143(3). The Court further held that ifthe competent authority had reason to believe that income had escapedassessment while issuing intimation under section 143(1), it couldproceed under section 148. The absence of an order under section 143(3)is no bar. https://hcservices.ecourts.gov.in/hcservices/

8. In one another case - Metal Products of India v. CIT, (2006) 204CTR 389, the Punjab and Haryana High Court rejected a contention raisedtherein by holding that there was no weight in the arguments that oncethe returns were processed under section 143(1) of the Act, proceedingsunder section 147 of the Act could not be initiated. If the ingredientsof section 147 of the Act are satisfied, there was no bar to initiationof proceedings under section 147 of the Act. 9. The Supreme Court in the case of Assistant CIT v. Rajesh JhaveriStock Brokers P. Ltd., (2007) 291 ITR 500 after elaborately consideringthe provisions of section 143 of the Act prior to and subsequent toamendment with effect from the 1st June, 1999 and having regard to theexplanation 2 to section 147 of the Act, observed : "The scope and effect of section 147 of the Act, assubstituted with effect from April 1, 1989 as also sections 148to 152 are substantially different from the provisions as theystood prior to such substitution. Under the old provisions ofsection 147, separate clauses (a) and (b) laid down thecircumstances under which income escaping assessment for the pastassessment years could be assessed or reassessed. To conferjurisdiction under section 147(a) two conditions were required tobe satisfied : firstly, the assessing officer must have reason tobelieve that income profits or gains chargeable to income taxhave escaped assessment, and secondly he must also have reason tobelieve that such escapement has occurred by reason of eitheromission or failure on the part of the assessee to disclose fullyor truly all material facts necessary for his assessment of thatyear. Both these conditions were conditions precedent to besatisfied before the assessing officer could have jurisdiction toissue notice under section 148 read with section 147(a). Butunder the substituted section 147 existence of only the firstcondition suffices. In other words, if the assessing officer forwhatever reason has reason to believe that income has escapedassessment it confers jurisdiction to reopen theassessment. .............. So long as the ingredients of section147 are fulfilled, the assessing officer is free to initiateproceedings under section 147 and failure to take steps undersection 143(3) will not render the assessing officer powerless toinitiate reassessment proceedings even when intimation undersection 143(1) had been issued.10. For the reasons stated above and in the light of thepronouncement of the Supreme Court and the judgments of the High Courtsreferred to supra, we are of the considered view that the order of theTribunal impugned in this appeal has to be set aside and the same is setaside by allowing the appeal.11. As the Tribunal has concluded that the assessing officer couldnot proceed further under section 147/148 of the Act, when the returnsfiled pending it, did not consider the second question framed in thisappeal. Now that the order of the Tribunal is set aside by us on the https://hcservices.ecourts.gov.in/hcservices/ first question of law, the matter is remitted back to the Tribunal toconsider the second issue also afresh after giving reasonableopportunity. sd/-Asst.Registrar/true copy/Sub Asst.RegistrarmfTo1. The Assistant Registrar Income Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besand Nagar, chennai.90.2. The Commissioner of Income tax (Appeals), Coimbatore.3. The Income Tax Officer, Ward I (V), Erode.+ 1 cc to Mr.N.Muralikumaran, Advocate SR.NO.51437JSK(CO)RD 3.9.07T C Nos.387 and 388 of 2004