Intimation u/s 143(1) cannot be disturbed subject to the reason recorded by AO

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘E’: NEW DELHI

BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER

&

SH. C.M. GARG, JUDICIAL MEMBER

ITA No. 3819/Del/2011

Assessment Year: 2007-08

Mahesh Kumar Arora,

7, Bankey Mansion,

Mailital, Nainital.

ADJPA4330P

(Appellant)

Vs.

ITO,

Nainital.

 (Respondent)

Appellant by: Shri K.V.S. Gupta, Adv.

Respondent by: Ms. Pramila Sharan, Sr. DR

O R D E R

PER S.V. MEHROTRA, A.M.

This appeal filed by the assessee is directed against the order of ld. CIT(A) dated 05/05/2011 for A.Y. 2007-08.

2. Brief facts of the case are that assessee was running a proprietary business as whole seller at Nainital. It had filed its return of income declaring total income of Rs. 1,90,000/-. The Assessing Officer, vide order sheet entry dated 19th August, 2009, recorded the following reasons before issuing notice u/s 148 of the Income Tax Act, 1961 as under: -

“The examination of ITR it is gathered that the assessee is a whole seller while, he has not submitted any details in P&L accounts as well as in Balance Sheet. He has not disclosed Bank Balance, while he claimed interest for Rs. 11909/-. Turnover of the assessee also not disclosed. Therefore, I have reason to believe that the assessee has not furnished accurate information as in ITR and this is an escapement case.”

3. Consequently notice u/s 148 was issued on 19th August, 2009 stating therein that income to the extent of Rs. 1,28,220/- has escaped assessment. The assessee filed following objections to the notice u/s 148:

“This notice says that an income of Rs. 128220/- has escaped an assessment. This is incorrect and any income amounting to Rs. 128220/- has not escaped assessment. The assessment was complete on the basis of this return on 24th September, 2008 on an income of Rs. 128220/- and the extra tax of Rs. 378/- demanded vide your intimation u/s 143(1) dated 24/09/2008 DCR No. 3509/2008-09 was also paid. There has been no escapement of any income, much less of the income of Rs. 128220/- mentioned in your notice under reply. Under the circumstances year notice u/s 148 dated 19/08/2009 needs to be cancelled/withdrawn.”

4. The assessment was completed at a total income of Rs. 6,39,291/-.

5. Ld. CIT(A) while confirming the AO’s action, inter-alia, observed that though assessee had not specifically challenged the action u/s 148 but still the same needs to be decided and after considering the findings of AO confirmed the action u/s 148. Before us ld. Counsel has taken following additional grounds of appeal:

1. On the facts and circumstances of the case the ld. CIT(A)’s erred in on both facts and in law in not holding that the AO erred in reopening the assessment bases on Scanty & Vague reasons with no tangible material to form the reason to believe that income escaped assessment & therefore the reassessment framed consequent thereto is liable to annulled/Set aside as not sustainable in law.

2. The action of the ld. CIT(A)’s in confirming the action of the ld. AO in framing the reassessment without supplying the reasons for reopening before the completion of reassessment is illegal arbitrary unwarranted uncalled for & against the facts and circumstances of the case.”

6. Ld. Counsel submitted that these grounds are on pure question of law and do not require any fresh investigation into the facts.

7. Ld. DR submitted that assessee had not challenged action u/s 148 before ld. CIT(A).

8. We have considered the submissions of both the parties and have perused the record of the case.

9. As noted earlier, ld. CIT(A) has decided the validity of action u/s 148. Therefore, even if assessee had not challenged the action before ld. CIT(A), the issue relating to validity of proceedings u/s 148 does arise out of ld. CIT(A)’s order. Therefore, even if assessee had taken these additional grounds still this issue needs to be decided in view of ground no. 1 to 3 raised by assessee before us. Under such circumstances, the additional grounds raised by assessee has to be admitted.

10. We, therefore, now proceed to decide the legality of proceedings u/s 148. Ld. Counsel referred to the reasons recorded by AO, noted earlier, and pointed out that the same are vague as they do not refer to income which had escaped assessment. He referred to page 5 of the paper book, wherein the copy of notice u/s 148 is contained in which AO had mentioned that income to the extent of Rs. 1,28,220/- had escaped assessment.

11. Ld. Counsel submitted that assessment was completed at Rs. 1,28,220/- after allowing deduction u/s 80C and the extra tax of Rs. 378/- demanded by AO was also paid. In support of its contention, ld. Counsel referred to page 7 of paper book, wherein the acknowledgment of return for A.Y. 2007-08 is contained in which assessee had declared total income of Rs. 1,28,222/-. Ld. Counsel relied on the decision of Hon’ble Delhi High Court in the case of CIT vs. Orient Craft Ltd. for the proposition that an intimation u/s 143(1) cannot be disturbed unless there is reason to believe that the income chargeable to tax has escaped assessment. In this regard ld. Counsel has relied on following observations of Hon’ble Delhi High Court:

“This judgment, contrary to what the Revenue would have us believe, does not give a carte blanche to the Assessing Officer to disturb the finality of the intimation u/s 143(1) at his whims and caprice; he must have reason to believe within the meaning of the Section.

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The fact that the intimation issued u/s 143(1) cannot be equated to an “assessment”, a position which has been elaborated by the Supreme Court in the judgment cited above, cannot in our opinion lead to the conclusion that the requirements of sec. 147 can be dispensed with when the finality of an intimation u/s 143(1) is sought to be disturbed. We are at pains to point out this position, which seems fairly obvious to us, because of the argument frequently advanced before us on behalf of the Revenue in other cases as well, under the misconception, if we may say so with respect, that an intimation u/s 143(1) can be disturbed on any ground which appeals to the Assessing Officer. The consequence of countenancing such an argument could be grave

……………………………….

When section 147 was recast with effect from 1^st April, 1989, the legislature sought to replace the expression “reason to believe” with the expression “for reasons to be recorded by him in writing”

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Having regard to the judicial interpretation placed upon the expression “reason to believe”, and the continued use of that expression right from 1948 till date, we have to understand the meaning of the expression in exactly the same manner in which it has been understood by the courts. The assumption of the Revenue that somehow the words “reason to believe” have to be understood in a liberal manner where the finality of an intimation u/s 143(1) is sought to be disturbed is erroneous and misconceived. As pointed out earlier, there is no warrant for such an assumption because of the language employed in sec. 147; it makes no distinction between an order passed u/s 143(3) and the intimation issued u/s 143(1). Therefore, it is permissible to adopt different standards while interpreting the words “reason to believe” vis-à-vis sec. 143(1) and sec. 143(3). We are unable to appreciate what permits the Revenue to assume that somehow the same rigorous standards which are applicable in the interpretation of the expression when it is applied to the reopening of an assessment earlier made u/s 143(3) cannot apply where only an intimation was issued earlier u/s 143(1). It would in effect place an assessee in whose case the return was processed u/s 143(1) in a more vulnerable position than an assesse in whose case there was a full-fledged scrutiny assessment made u/s 143(3).

Whether the return is put to scrutiny or is accepted without demur is not a matter which is within the control of assessee; he has no choice in the matter. The other consequence, which is somewhat graver, would be that the entire rigorous procedure involved in reopening an assessment and the burden of proving valid reasons to believe could be circumvented by first accepting the return u/s 143(1) and thereafter issue notices to reopen the assessment. An interpretation which makes a distinction between the meaning and content of the expression “reason to believe” in cases where assessments were framed earlier u/s 143(1) may well lead to such an unintended mischief. It would be discriminatory too. An interpretation that leads to absurd results or mischief is to be eschewed

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In the present case the reasons disclose that the AO reached the belief that there was escapement of income “on going through the return of income” filed by the assesee after he accepted the return u/s 143(1) without scrutiny, and nothing more. This is nothing but a review of the earlier proceedings and an abuse of power by the AO, both strongly deprecated by the Supreme Court in CIT vs. Kelvinator (supra). The reasons recorded by the AO in the present case do confirm our apprehension about the harm that a less strict interpretation of the words “reason to believe” vis-à-vis an intimation issued u/s 143(1) can cause to the tax regime. There is no whisper in the reasons recorded, of any tangible material which came to the possession of the AO subsequent to the issue of the intimation. It reflects an arbitrary exercise of the power conferred u/s 147.”

12. We have considered the submissions of both the parties and have perused the record of the case. It is evident from the reasons recorded by Assessing Officer on 19th August, 2009, as reproduced earlier, that he had not specifically pointed out the income which had escaped assessment. The AO has not recorded any concrete reasons regarding escapement of income. There is no correlation between the reasons recorded and notice issued u/s 148. From the reasons it cannot be inferred that a sum of Rs. 1,28,220/- escaped assessment as mentioned in notice u/s 148. It is not clear as to how AO reached a conclusion that income to the tune of Rs. 1,28,220/- escaped assessment as mentioned in notice u/s 148 of I.T. Act, 1961. This is not in conformity with the reasons recorded. Admittedly, assessment had been completed at a total income of Rs. 1,28,220/- and, therefore, this, in any case, could not be the escaped income. Thus, reasons recorded are clearly vague and the entire endeavour of the AO was to make fresh enquiries on the basis of mere suspicion. It has been elaborately explained by the Hon’ble Delhi High Court in Orient Craft Ltd. (supra) that an intimation u/s 143(1) cannot be disturbed on any ground which appeals to the AO. He has to have reason to believe, in consequence to some tangible material, which has come into his possession after issuing intimation, that income has escaped assessment. The intimation u/s 143(1) has to be evaluated on the same footing on which an assessment order u/s 143(3). The AO has referred to, in the reasons, various details regarding bank account, turnover etc. being not on record. If that was so, nothing prevented the AO to issue notice u/s 143(2). He could have called for all the details. But on this basis he could not reach a conclusion regarding escapement of income to the extent it was originally returned by assessee. Thus, reasons recorded are vague and the proceedings have been initiated only with an intent to make fresh enquiries, which is not permissible. We, therefore, are of the opinion that the notice issued u/s 148 is bad in law and, accordingly, quash the proceedings initiated in consequence to the said notice.

13. In the result, the assessee’s appeal is allowed.

Order pronounced in the open court on 22/03/2013

Sd/- Sd/-

(C.M. GARG) (S.V. MEHROTRA)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 22.03.2013

*Kavita

Copy to:

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT, New Delhi.

TRUE COPY

By Order

ASSISTANT REGISTRAR