Ita/795/2009 Of Sri C M Mahadeva v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 24 DAY OF AUGUST, 2015. PRESENT THE HON'BLE MR. JUSTICE VINEET SARAN AND THE HON’BLE MR. JUSTICE B.MANOHAR| ITA NO. 795/2009 BETWEEN SRI C.M.MAHADBEBV»/O SRI MANCHE GOWDACHAMALAPURA, KEELARA POST,|MANDYA DISTRICT. _. APPKBLLANT (BY SRI. G. VENKATESH, ADV. FOR K.S.HANUMANTHA RAO,ADV..,) AND THERE COMMISSIONER OF [INCOME T09/1, SHILPASHREEVIDYARANYA COMPLEX,VISHWESHWARANAGAR,|MYSORK.. . RESPONDENT (BY SRI E.I.SANMATHI, ADV..,) THIS [TA IS FILED UNDER SEHKC.260-A OF INCOME TAACT 1961, ARISING OUT OF ORDER DATED: 31.07.2009|PASSED IN ITA NO.1357/BNG/2008 FOR THE ASSESSMENT)YEAR 2005-06, PRAYING TO ALLOW THE APPEAL AND SETASIDE THR ORDER PASSBD BY THR ITAT BANGALORE IN ITA!NO.1357/BNG/2008 DATED 31.07.2009 AND CONFIRM THE.ORDER DATED 29.8.2008 PASSED IN ITA NO.161/MYS/CIT(A)-V/O/7-08 BY THE COMMISSIONER OF INCOME TAX (APPEALS),MYSORE. THIS ITA COMING ON FOR HEARING THIS DAY, VINEET SARAN J.DELIVERED THE FOLLOWING: JUDGMENT This is an appeal filed by the assessee, who is anindividual, whereby the order of the Tribunal, relating tothe reopening of assessment under Section 148/147 ofthe Income Tax Act, 1961 (for short ‘the Act’), for theassessment year 2004-05 is under challenge. — 2 |For the said assessment year 2004-05, theassessee had filed his return of income on 21.03.2005. —The return was processed under Section 143(1) and theassessment for the year in question stood concluded, asno further regular assessment order was passed. On.the basis of some survey conducted on 27.01.2006 inthe premises of one M.L.Venkatesh, certain papers withregard to the purchase of some property by the assesseefor a sum oft Rs.10 lacs on 25.07.2003 were found.Pursuant thereto, a notice under Section 148 of the Act was issued on 28.09.2006, for which reasons had been|recorded by the Assessing Officer on 15.09.2006. In.response to the said notice, the assessee-appellantrequested the Assessing Officer to treat the return filedon 21.03.2005 under Section 139 of the Act, to be thereturn filed by the assessee in response to the noticeunder Section 148 of the Act. He further stated that|the investment for purchase of the property was fromthe funds of HUF. However, after holding that thenotice under Section 148 of the Act was validly issued,the Assessing Officer made certain additions of incomeunder Section 69 of the Act. Challenging the said order,the appellant filed an appeal before the Commissioner ofIncome-Tax (Appeals), which was partly allowed onmerits, but the reopening under Sections 148/147 ofthe Act was held to be valid. Challenging the same, therevenue filed an appeal before the Tribunal, in whichthe assessee filed cross-objections and challenged thereopening of the case under Section 147/148 of the Act. After holding that the reopening of assessmentwas valid, the Tribunal partly allowed the appeal andmade certain additions in the taxable income of the'assessee, and at the same time dismissed the cross-objections of the assessee. Aggrieved by the said order,this appeal has been filed by the assessee on merits, as"well as on the legal question with regard to the validityof the reopening of assessment under Section 147/148.of the Act. 3.|This appeal was ADMITTED by a Division Bench of this Court, on the following questions of law: “1)WhetherOnthe|factsandcircumstances of the case the Reassessment|made u/s 147 of the Act 1961 on 10.12.2007|for the Asst. year 2004-2005 was valid when.the original Return of income involuntarlly|filed on 21.3.2007 remained undisposed of,when the proceedings u/s 147 were initiated|on 27.9.2006?P 2)|Whether on the facts and in the|circumstances of the case and in law, the|Tribunal was right in travelling beyond what|was actually recorded by the AO as reasons|for issue of the notice u/s 148, when the AO’ 3.|This appeal was ADMITTED by a Division Bench of this Court, on the following questions of law: “1)WhetherOnthe|factsandcircumstances of the case the Reassessment|made u/s 147 of the Act 1961 on 10.12.2007|for the Asst. year 2004-2005 was valid when.the original Return of income involuntarlly|filed on 21.3.2007 remained undisposed of,when the proceedings u/s 147 were initiated|on 27.9.2006?P 2)|Whether on the facts and in the|circumstances of the case and in law, the|Tribunal was right in travelling beyond what|was actually recorded by the AO as reasons|for issue of the notice u/s 148, when the AO’ had categorically admitted in the assessment|order u/s 147 that notice under Section 148was issued for reopening the assessment in|order to verify the source of investment? 3)Whether on the facts and in the|circumstances of the case in law, the Tribunal|was right in foreclosing consideration of the|actual reasons recorded by the AO, instead ofexercising its power under Section 255(6), as|the reasons recorded go to the root of|jurisdiction?” 4We have heard Sri G.Venkatesh along with sri K.S.Hanumantha Rao, Advocate, learned counsel for| the appellant; as well as Sri E.I.Sanmathi, learnedcounsel for the respondent, and perused the record. 5Questions No.1 and 2 relate to the reopening of the assessment under Section 147 of the Act, byissuance of notice under Section 148 of the Act, which)shall be dealt with first. | 6.|The contention ot learned counsel for the'appellant is that the reopening of the assessment for theyear in question was made merely for the purpose of further investigation, which could not be said to be avalid reason for reopening; and that the AssessingOfficer had no substance on the basis of which he couldhave had ‘reason to believe’ that income chargeable totax had escaped assessment for the assessment year inquestion. It is contended that Section 147 of the Actdoes not contemplate reopening of an already concludedassessment by merely narrating certain facts andwithout recording any ‘reason to believe’ for the suchreopening. His submission, thus, is that without therebeing any live link or close nexus between the materialbefore the Assessing Officer and the belief which he has—with regard to escapement of income of the assessee,the reopening of an already concluded assessmentcannot be made on the basis of surmises and=conjecture. ToOn the other hand,sri. E.I.Sanmathi,learnedcounsel]forthe|respondent-Revenuehas submitted that, in the facts of the present case, readingof the first paragraph of the reasons recorded on15.09.2006, along with its second and third paragraphs,would make it clear that there was a vast gap betweenthe income of the assessee in the year in question, andthe investment made by the assessee by way ofpurchase of the property. It is contended that from thesame it can be clearly gathered that there wasescapement of income chargeable to tax, and would bethe reason for which reopening had been made. Hethus submitted that, in the facts of this case, there wassufficient reason for the Assessing Officer to believe thatthere had been escapement of income of the assesseefor the relevant assessment year and, as such, thereopening of the assessment was fully justified in law. 8.|Learned counsel for the parties have relied|on certain case laws which shall be dealt with while|considering their submissions. OQ For proper perusal of these questions, we arereproducing below the reason recorded by the AssessingOfficer on 15.09.2006 (filed as Annexure-"D’ to theappeal) for issuance of notice under Section 148 of theAct: 8.|Learned counsel for the parties have relied|on certain case laws which shall be dealt with while|considering their submissions. OQ For proper perusal of these questions, we arereproducing below the reason recorded by the AssessingOfficer on 15.09.2006 (filed as Annexure-"D’ to theappeal) for issuance of notice under Section 148 of theAct: “TheasSSCSSCEhasfiledR/IforA. Y.2004-05 on 21.3.05 declaring Taxableincome|of|Rs. 75,397/ and|Agriculturalincome of Rs.50,000/-. The assessee has|purchasedFTresidentialhouseforRs. 10,00,000/- consideration and in additionhe|has|spentRs. 10,270/-towardsregistration of the document on 25.7.2003. To|examine the sources of investment, summons|were issued. The assessee by mistake had|stated that the date of purchase was in the.year 2004-05. As such, notice u/s 143(2)was issued for scrutinizing the documents. |The assessee produced copy of Registered|Deed, where in it was noticed that date ofpurchase is 25.7.2003. This. transactionrelates to Asst. Year 2004-05. Hence asst. for|2005-06 is completed accepting R/I afterverifyingthedetatllsand.documentsproduced. — This transaction relates to Asst. Year2004-05. The assessee has produced selfpreparedStatementstoshowthattheinvestments is out of HUF funds.As furtherinvestigation are required, proceedings haveto commence for A. Y.200OS. Considering the details filed by theassessee I have reason for believe thatsources of investment for the purchase of theproperty is not acceptable,and __ furtinvestigations are necessary,2T have reasonsto believe that in income subject to tax has|escaped from Asst. for A. Y.2004-05 within themeaning of Sec. 147. Issue notice u/s 148 for A. Y.2004-05.” (emphasis supplied) LQ.|From a bare perusal of the aforesaid reasonsrecorded for reopening the concluded assessment forthe assessment year 2004-05, what we notice is that theAssessing Officer was of the opinion that furtherinvestigation was required for proceeding to commencefor the assessment year 2004-05, and on such basis heopined that he had reason to believe that source ofinvestment of purchase of property was not acceptable,and for which further investigation was necessary. AS.such, the Assessing Officer concluded that he had‘reason to believe’ that income subject to tax hadescaped assessment within the meaning of Section 147. of the Act. While forming such opinion, in the first paragraph the Assessing Officer has given details of theincome of the assessee for the relevant assessment year,in which he had made a purchase of a residential housefor Rs.10 lacs. | 11.)In response to the summons issued, the.assessee had informed that the source of investment|was from the HUF funds. The Assessing Officer doesnot state that such explanation was not correct, nordoes he give reasons for not accepting such explanationgiven by the assessee in response to the summonsissued. As such, it cannot be inferred, that what hasbeen stated in the first paragraph of the reasonsrecorded on 15.09.2006 can be correlated with the thirdparagraph, because in the second as well as in the thirdparagraphs the main thrust is that further investigationwas required. 12.section 147/148 of the Act is not meant for|reopening an already concluded assessment by first issuing notice and then proceeding to investigate andfind out if there was any lacuna in the accounts. Ifsuch further investigation, by reopening a concludedassessment, is permitted, it would give rise to fishingand rowing enquiries, because, in every case, theAssessing Officer can then issue notice for the purposeof investigation, and thus reopen any concludedassessment. 13.)An assessment which has attained finalitycan be reopened only on cogent grounds when theAssessing Officer has, on the basis of some evidence,‘reason to believe’ that income assessable to tax has|escaped assessment for the year in question. The|purpose of the said section is not to reopen theassessment for the purpose of investigation, and thenfind out the grounds or reasons for reassessment. 14,The Apex Court, in.Chhugamal Rajpal -vs- 13.)An assessment which has attained finalitycan be reopened only on cogent grounds when theAssessing Officer has, on the basis of some evidence,‘reason to believe’ that income assessable to tax has|escaped assessment for the year in question. The|purpose of the said section is not to reopen theassessment for the purpose of investigation, and thenfind out the grounds or reasons for reassessment. 14,The Apex Court, in.Chhugamal Rajpal -vs- S.P.Chaltha /[(1971) 79 ITR 603],considered a case| where notice under Section 148 was issued atter' recording the reasons in the form of a report of the Income-Tax Officer, which is reproduced below: “Report in Connection with the starting ofproceeding" under|Section 147of the Income-tax Act, 195] Name of DistrictWard ot CircleA Ward, Muzattarpur|G. I.R. No.303-C.. 1. Name and address of the assessee S. Chugamal Rajpal, Muzaffarpur. 2. Status R.F. 3. Assessment year for which noticewnders. 1481s proposed to be issued 1960-61. 4 Whether it is a new case or one in)which re-assessment (or recomputation) | has to be made. Re-assessment 5. If a case otf reassessment (or recomputation) the income(or loss or depreciation allowance) originally assessed / determined. Rs. 73,604/- — 6. Whether the case falls under ~ cl. (a) or (b) ofSs. [47147(a) 7. Brief reasons for starting proceedings Under |s 147(indicate the items which Kindly see overleaf are believed to have escaped assessment Sd/- 5S. P. Chaliha. | 1.7.0. 30-4-66 A-Ward, Muzaffarpur.8.Whether the Commissioner is satistiedthat it is a fit case tor the issue of notice undersection 148. Yes (Sd.) K.Narain 13-5-66 Commissioner of Income-tax, _ Bihar and Orissa, Patna QOWhether the Board is satistied that it is afit case for the issue of notice under s.148. Secretary, Board of Revenue During the year the assessee has shown tohave taken loans from various parties of Calcutta.|From D.I.s Inv. No. A/P/ Misc.(5)D.1./ 63-647 562dated August 15, 1965, forwarded to this office under|C.LT. Bihar and Orissa, Patna's letter No. Inv.|(Inv.J15/ 65-667 1953-2017 dated Patna September 24, 1965, it appears that these persons are name-lenders and the transactions are bogus. Hence, proper|investigation regarding these loans is necessary. The|names of some of the persons from whom money itsalleged to have taken on loan on Hundis are: 1. Seth Bhagwan Singh Sricharan. 2. Lakha Singh Lal Singh. 3. Radhakissen Shyam Sunder. The amount of escapement involved amounts to |Rs. 100,000/7.-. sd/- 8S. P. Chalitha, 30-4-66. Income-tax Officer, A-Ward, Muzaffarpur." On considering the aforesaid report/reasons, theSupreme Court was of the view that the Income TaxOfficer did not set out any reason for coming to theconclusion that it was a fit case for issuance of notice|under Section 148 of the Act and further held that|“71his report he vaguely refers to certain communications|received by him from the C.LT., Bihar and Orissa. He|doesnotmentionthe|factscontained|In|thosecommunications. All that he says is that from thosecommunications “it appears that these persons (alleged|creditors) are name lenders and the transactions arebogus". He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine|transactions. He appears to have had only a vague|feeling that they may be bogus transactions” On considering the aforesaid report/reasons, theSupreme Court was of the view that the Income TaxOfficer did not set out any reason for coming to theconclusion that it was a fit case for issuance of notice|under Section 148 of the Act and further held that|“71his report he vaguely refers to certain communications|received by him from the C.LT., Bihar and Orissa. He|doesnotmentionthe|factscontained|In|thosecommunications. All that he says is that from thosecommunications “it appears that these persons (alleged|creditors) are name lenders and the transactions arebogus". He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine|transactions. He appears to have had only a vague|feeling that they may be bogus transactions” 15.The Apex Court further observed that the|Assessing Officer must give reasons for issuing noticeunder Section 148 of the Act i.e, he must have primafacie grounds before him for issuing notice undersection 148, which is not for the purpose of holding anyfurther proper investigation. It further held thatfIhother words his conclusion is that there is a case forinvestigating as to the truth of the alleged transactions.|That is not the same thing as saying that there are|reasons to issue notice undeT- Ss14. Before issuing a|notice under s.148, the Income-tax Officer must have|either reasons to believe that by reason of the omission orfailure on the part of these assessee to make a returnundeT- Ss. for any assessment year to the Income-tax|Officer or to disclose fully and truly all material facts|necessary for his assessment for that year, income| chargeable to tax has escaped assessment for that yearor alternatively notwithstanding that there has been no.omission or failure as mentioned above on the part of theassessee, the Income-tax Officer has in consequence of.information in his possession reason to believe thatincome chargeable to tax has escaped assessment forany assessment year.” 16.|The facts of the aforesaid case are quitesimilar to the one on hand. In the present case alsothe reason for reopening is for further investigation tofind out the source of investment for the purchase of theproperty, which is not permissible in law. 17.Further in the case ofIncome-Tax Officer - vs- Lakhmant Mewal Das reported itn (1976) 103 ITR 439,the Apex Court has held that“the reasons for the|formation of the belief must have a rational connectionwith or relevant bearing on the formation of the belief. |Rational connection postulates that there must be a direct nexus or live link between the material coming to the|notice of the Income-Tax Officer and the formation of his|belief that there has been escapement of the income ofthe assessee from assessment in the particular year|because of his failure to disclose fully and truly allmaterial facts.” 1S.|In the present case, what we find is thatthere is no nexus or live link between the material|which had come to the notice of the Assessing Officer,and the formation of his beliet that there was/escapement of income by the assessee which may beassessable to tax. Merely by mentioning the income oftheASSES SEE1nNthe.assessment(yCal,andthe|investment made by him for the purchase of residentialproperty, it cannot be concluded that the differencewould automatically be the income which had escapedassessment. nexus or live link between the material coming to the|notice of the Income-Tax Officer and the formation of his|belief that there has been escapement of the income ofthe assessee from assessment in the particular year|because of his failure to disclose fully and truly allmaterial facts.” 1S.|In the present case, what we find is thatthere is no nexus or live link between the material|which had come to the notice of the Assessing Officer,and the formation of his beliet that there was/escapement of income by the assessee which may beassessable to tax. Merely by mentioning the income oftheASSES SEE1nNthe.assessment(yCal,andthe|investment made by him for the purchase of residentialproperty, it cannot be concluded that the differencewould automatically be the income which had escapedassessment. 19.|The submission oft learned counsel for therespondent-Revenue, that reading of the first paragraphof the reasons recorded along with the third paragraph,would amount to the Assessing Officer concluding thatthe difference between the purchase price of theproperty and income of the assessee in that year wasthe reason for which re-assessment notice was given, isnot worthy of acceptance. Definite and specific reasons.have to be recorded by the Assessing Officer before theisSuance of notice under Section 148 of the Act, as replyhas to be given by the assessee to such reasons whichare recorded in the notice. Nothing can be left for theparty to conjecture and then presume that such couldbe a reason for the Assessing Officer to believe thatthere has been escapement of income from assessmentTo Tax. 20.The submission of Sri E.I.Sanmathi, learnedcounsel for the respondent-Revenue is that the difference between the investment made by the assesseeand his income during the year in question, would bethe income which had escaped assessment from tax, is —also not worthy of acceptance. Investment is notnecessarily to be made from the income derived duringone particular year in question. An investment topurchase a residential house or a capital asset, canalways be made from the savings in the past years, aswell as the savings from the year in question. It couldalso be from gifts or loans taken from friends andrelatives. It was only if there was any definiteinformation that the asessee had some additional|income, which was not disclosed by him and wasinvested in purchase of property, then alone the noticeunder Section 148 of the Act could have been issued,and that also after recording the basis on which theAssessing Officer had formed his opinion that he had‘reason to believe’ that any such income had escaped assessment. The same is totally lacking in the presentCase. YA1-The Apex Court in the case ofGanga Saranand Sons P. Ltd. -vs- ITO (1981) 130 ITR 1hasinterpreted the scope of Section 147 of the Act for thepurpose of reopening of assessment. The relevant)paragraph of the aforesaid judgment of the Supreme Court is reproduced below: “It is well settled as a result of severaldecisions of this court that two _ distincconditions must be_ satisfied before theIncome Tax Officer can assume Jurisdiction toissue notice under_s.147(a}. First, he musthave reason to believe that the income of the|assessee has escaped assessment and,secondly, he must have reason to believe thatsuch escapement is by reason of the omissionor failure on the part of the assessee to|disclose fully and truly all material facts|necessary for his assessment. If either of|these conditions is not fulfilled, the notice|issued by the Income Tax Officer would be|without jurisdiction. The important words|undeTS.14/7(a)1 are ‘has reason to believe’ andthese words are stronger than the words ‘1s|satisfied’. The belief entertained by theIncome Tax Officer must not be arbitrary orirrational. It must be reasonable or in other words it must be based on reasons which are|relevant and material. The court, of course,|cannot investigate into the adequacy or|Sufficiency|of|the|TeCaSOT?whichhaveweighed with the Income Tax Officer in|coming to the belief, but the court can|certainly examine whether the reasons are|relevant and have a bearing on the matters in|regard to which he is required to entertain the|belief before he can issue notice unders.147(a}. If there is no rational and intelligiblenexus between the reasons and the beltef, so|that, on such reasons, no one_ properlyinstructed on facts and law could reasonably|entertain the belief, the conclusion would be|inescapable that the Income Tax Officer could|not have reason to believe that any part of the|income|of|theaSsSSCS Shadescapedassessment and such escapement was by|reason of the omission orfailure on the part ofthe assessee to disclose fully and truly all|material facts and the notice issued by him|would be liable to be struck down as invalid." DP? In the present case, we find that the beliefentertained by the Assessing Officer was arbitrary andirrational, as the same is neither reasonable nor is)based on any relevant material, having a bearing on thematter in regard to which the Assessing Officer hasentertained the belief. 23Learned counsel for the respondent-Revenuehas also placed reliance on the Judgment of the DelhiHigh Court in the case of|Rajat Export Import IndiaPout. Ltd. -vs- Income Tax Officer (2012) 341 ITR135.In the said case, the reasons recorded by the.Assessing Officer before issuing notice under Section148 of the Act were definite reasons 1.e., the assessee|therein had taken certain accommodation entries from|particular persons, details which had been given in the‘reason to believe’, wherein it had been recorded that adefinite sum of Rs.3 lacs chargeable to tax had escapedassessment, which was to be brought to tax undersection 147/148 of the Act and thus, notice undersection 148 of the Act was issued. In our view, the facts |of the present case are totally different, and as such theratio of the judgment in the case ofRajat Export.Import India Put. Ltd. (supra)|would not apply to thefacts of the present case. 24. In the present case, there is no allegation ofthe assessee not having made full and final disclosurein his return of income for the relevant assessment|year. Much emphasis has been laid on the tact thatdisclosure of the purchase of the property was not madein his return of income for the relevant assessment|year. On being asked, Sri E.Il.Sanmathi, learnedcounsel for the respondent-Revenue, could not placebefore the Court any provision of law which required theassessee, in the assessment year 2004-05, to discloseabout the fact of having made the actual investment inhis return of income. In the absence of any legal|Obligation on the assessee to disclose about thepurchase of property in his return of income, it cannotbe said that the assessee had concealed any income,even though when there is no dispute about the factthat he had disclosed his agricultural as well as |non-agricultural income during the assessment year inquestion, and there is no finding as to income from which other source had been concealed by the assessee. —Learned counsel for the respondent-Revenue has alsosubmitted, that since there was investigation requiredwith regard to the investment made by the assessee forpurchase of property for the assessment year inquestion, and time for issuance of notice under Section143(2) of the Act had expired, issuance of notice underSection 148 of the Act was necessitated. 5.|In our view, the same cannot be a ground forinitiating proceedings under Section 148 of the Act. Itwas for the Assessing Officer to take proper steps earlierby issuing notice under Section 143(2), and if the lawdoes not now permit issuance of any such notice, theninvoking some other provision, which would not beapplicable, is not the correct mode. 26.In view of the aforesaid, we are of the opinion that the issuance of notice under Section 148 for' 5.|In our view, the same cannot be a ground forinitiating proceedings under Section 148 of the Act. Itwas for the Assessing Officer to take proper steps earlierby issuing notice under Section 143(2), and if the lawdoes not now permit issuance of any such notice, theninvoking some other provision, which would not beapplicable, is not the correct mode. 26.In view of the aforesaid, we are of the opinion that the issuance of notice under Section 148 for' assessment or re-assessment under Section 147 of the!Act, was not be valid in the facts of the present case. OT|As such, the first two questions of law areanswered in favour of the assessee and against theTEVENUE. 28 ~In view of the answers given to the first twoquestions, we are of opinion that the answer to the thirdquestion would be academic in nature and, thus, we do not propose to answer the same. In view of the aforesaid,|the appeal standsallowed.However, there shall be no order as to costs. TL Sd/- JUDGE Sd/-. JUDGE.