Principal Commissioner Of Income Tax-6 v. M/S.ski Retail Capital Ltdno

IN THE HIGH COURT OF JUDICATURE AT MADRASRESERVED ON : 17.03.2020DELIVERED ON : 07.05.2020 CORAM: THE HON'BLE MR. JUSTICE M.SATHYANARAYANANAND THE HON'BLE MR.JUSTICE ABDUL QUDDHOSE TCA.Nos.66&67/2018 Principal Commissioner of Income Tax-6,No.121, Nungambakkam High RoadChennai-34...Appellant/Appellant inboth the Appeals Vs. M/s.SKI Retail Capital LtdNo.4, Mookambika ComplexLady Desika Road, Mylapore, Chennai 600 004. .. Respondent/Respondent in both the Appeals Common Prayer: Tax Case Appeals preferred under Section 260A ofthe Income Tax Act, 1961, against the order of the Income TaxAppellate Tribunal, Madras ''C'' Bench, dated 10.08.2017 in ITANos.2276/Mds/2016andinC.O.No.129/Mds/2016inITA.No.2276/Mds/2016. TCA No.66/2017: Against the order of the Commissioner of IncomeTax (Appeals)-15 Chennai 34, dated 25/5/2016 in ITA No.55(IT(A)15/15-16 against the order of the Income Tax Officer CompanyWard 6(3) Chennai-34, dated 31-03-2015 made in GIR/PANNo.AAGCS0825C in the Assessment year 2007-2008, against theorder of the Income Tax Officer Company Ward 6(1), Chennai-34,dated 25-11-2011 made in PAN No.AAGCS825C in the Assessment year2007-2008. For Appellant inboth the Appeals: Mr.J.Narayanaswamy, Senior Standing Counsel for Mr.T.R.Senthil For Respondent inboth the Appeals: Mr.R.Sivaraman https://hcservices.ecourts.gov.in/hcservices/ M.SATHYANARAYANAN, J. The Tax Case Appeals are preferred against the common orderdated10.08.2017madeinITA.No.2276/Mds/2016andC.O.No.129/Mds/2016 pertains to the Assessment Year 2007-2008,by the Revenue. 2. Facts in brief relevant and necessary for the disposalof these appeals are as follows: 2.1. Income Tax Officer, Company Ward VI(1), Chennai /Assessing Officer, vide Assessment Order dated 25.11.2011pertains to the Assessment Year 2007-08, dealt with the Returnof Income filed by the respondent Company on 31.10.2007 in andby which total income of Rs.23,92,140/- was admitted. Thereturn of income was processed under Section 143(1) of theIncome Tax Act, 1961 [in short “IT Act”] on 06.03.2009. 2.2. The case was reopened under Section 148 of the IT Acton 26.08.2010 by issuance of notice and in response to the same,the respondent/assessee has sent a letter dated 14.09.2010stating that the Return of Income already filed by him betreated as Return filed by him in compliance of Notice issuedunder Section 147 of the IT Act dated 26.08.2010. 2.3. Personal hearing was afforded and details were alsocalled for from time to time. The Assessing Officer finalizedthe assessment under Section 143(3) r/w. Section 147 of IT Actas follows: Total Income Computation:Rs.Total Income admitted23,92,137Add:1.Disallowance u/s 14A14,602 2.Depreciation10,979 3.Donation 100 25,681 2.4. The Assessing Officer subsequently had noticed certainincome chargeable to tax has escaped assessment for theAssessment Year 2007-2008 and accordingly, the said assessmenthttps://hcservices.ecourts.gov.in/hcservices/was reopened with the approval of the Commissioner of Income Tax - VI and notice under Section 148 of IT Act was issued on31.03.2014. The respondent/assessee, in response to the saidnotice, filed Return of Income on 18.04.2014 and it was followedby a notice under Section 143(2) of the IT Act and that apart,the details concerning the assessment were also called for. 2.5. Authorized Representative / one of the officials ofthe respondent company appeared and furnished the informationcalled for and the Books of Accounts and Bank Account Statementswere produced and verified. The Assessing Officer, after takingnote of the materials as well as the explanation offered by theAssessee, had found that Road Safety Club Private Limited (RSC)is a sister concern of the assessee company and they were doingservices to the respondent company / SKI Retail Capital Ltd., interms of Insurance Marketing etc., and advances were paid by RSCto SKI towards cost of services. 2.5. Authorized Representative / one of the officials ofthe respondent company appeared and furnished the informationcalled for and the Books of Accounts and Bank Account Statementswere produced and verified. The Assessing Officer, after takingnote of the materials as well as the explanation offered by theAssessee, had found that Road Safety Club Private Limited (RSC)is a sister concern of the assessee company and they were doingservices to the respondent company / SKI Retail Capital Ltd., interms of Insurance Marketing etc., and advances were paid by RSCto SKI towards cost of services. 2.6. The Assessing Officer also noted by looking into theshare holding pattern of both the companies and found that oneMr.V.Rajagopalan is holding substantial interest in both thecompanies by holding 28% and 29.996% of shares and as such,found that the provisions of Section 2(22)(e) of the IT Act issquarely applicable in respect of transactions involving boththe companies. 2.7. The assessee / respondent's authorized representativewas asked to show cause as to why the loan amount ofRs.10,70,01,891/- received by the assessee from RSC should notbe treated as deemed dividend to the extent of accumulatedprofits in the books of RSC or else treat the loans as income ofthe assessee / respondent company? The Authorized Representativeof the respondent company has submitted a written representationdated 27.03.2015. The Assessing Officer, after considering andscrutinizing the materials, had treated the credit balance as on31.03.2007 amounting to Rs.5,30,99,960/- as deemed dividend inthe hands of the respondent/company and completed the scrutinyassessment, vide order dated 31.03.2015 and it is relevant toextract the same: Total Income as per Order dt.25.11.2011 Rs. 24,17,818.00Add: Deemed Dividend U/s.2(22)(e)Rs.2,29,00,539.00----------------------Assessed Total IncomeRs.2,53,18,357.00Balance Tax PayableRs.1,09,30,440.00 2.8. The respondent/assessee, aggrieved by the saidAssessment Order, filed an appeal in ITA.No.55/CIT(A)-15/15-16dated 25.05.2016 before the Commissioner of Income Tax (Appeals)-15, Chennai-600 034. The appellant/assessee before the CIT(Appeals) contended among other things that the notice underSection 148 of the IT Act was issued after 4 years from theAssessment Order despite the fact that there was no failure onhttps://hcservices.ecourts.gov.in/hcservices/the part of the assessee to furnish truly and fully all material facts necessary for assessment. The appellant/assessee alsotook a stand that reopening of the assessment is purely onaccount of audit objections for which the Assessing Officerhimself sent a reply that there is no justification for raisingobjections and the assessment can be reopened only if theAssessing Officer is in possession of tangible materials/factson the basis of which, he had reason to believe that income hadescaped assessment. The appellant/assessee also contended as tothe sustainability of addition of Rs.2,29,00,539/- as deemeddividend under Section 2(22)(e) of IT Act and that apart, alsotook a stand that the credit balance in the accounts of RSCcannot be treated as deemed dividend under Section 2(22)(e) ofIT Act. The Appellate Authority had allowed the appeal partly,vide order dated 25.05.2016 by directing the deletion ofRs.2,29,00,530/- towards deemed dividend. 2.9. The Revenue, aggrieved by the order of CIT in partlyallowing the appeal filed by the assessee and dismissal of theirgrounds pertaining to the assessment, filed ITA No.2276/Mds/2016before the Income Tax Appellate Tribunal 'C' Bench, Chennai , wherein the assessee/respondent filed cross objection inC.O.No.129/Mds/2016. ITAT, Chennai, vide impugned commonorder dated 10.08.2017, taking note of the fact that there is anaudit objection, for which the Assessing Officer, vide responsedated 04.03.2014, had given reasons for dropping auditobjections and therefore, it is obvious that the AssessingOfficer, after applying his mind, found that there is noescapement of income to assessment and subsequently, issued thenotice under Section 148 of IT Act for reopening of assessment. 2.10. The Tribunal had recorded a finding that theAssessing Officer has not independently satisfied himself aboutthe escapement of income and further found that in the absenceof any material, is of the considered opinion that the reopeningof assessment is not justified and accordingly, quashed theorder of the Assessing Officer. The Tribunal, in the light ofthe decision taken in the cross-objection filed by the assessee,found that it is not necessary to go into the merits of theappeal filed by the Revenue. 2.11. The Revenue, aggrieved by the dismissal of the appealfiled by them and allowing of the cross-objection filed by theassessee, vide common order dated 10.08.2017 made inITA.No.2276/Mds/2016 and C.O.No.129/Mds/2016, has filed theseappeals. 3. The Tax Case Appeals were admitted on 20.03.2018 on thefollowing Common Substantial Question of Law:-''Whether assessment can be reopened underSection 147 of the Income Tax Act, 1961, on thebasis of audit objection pointing out factualomissions in the original assessment order?'' https://hcservices.ecourts.gov.in/hcservices/ 4. Mr.J.Narayanaswamy, learned Senior Standing Counselassisted by Mr.T.R.Senthil Kumar, learned counsel appearing forthe Revenue made the following submissions: ➔In the audit objection, it was pointed out that theassessee debited only the expenditure incurred such asSalary etc., without any profit / commission and it wasonly a system/colourable device adopted by the assessee toreduce the tax liability, for which the balance amount ofRs.6,01,84,164/- is to be treated as Net Profit and it hadto be taxed under Section 69 of the IT Act. ➔The Audit Party has also considered the reply submitted bythe Assessing Officer and found that RSC is makingreimbursement for expenses incurred by the assessee companyyear after year and if that is so, RSC would havereimbursed the exact expenses incurred by therespondent/assessee and not any additional amount yearafter year and that apart, RSC did not make payment forrendering services and the entire amount was required to bebrought to tax and therefore, the balance amount ofRs.6,01,84,164/- is required to be brought to tax andreiterated the said fact. ➔The Assessing Officer had submitted his response dated04.03.2014 reiterating their earlier stand for which therewas a communication dated 20.03.2014 from the DeputyDirector (DT) to the Officer of the CIT, Chennai (VI), videletter dated 03.04.2014. The Assessing Officer, hassubmitted his response dated 10.04.2014 stating among otherthings that the assumption that there is no agreementbetween the assessee company and RSC is not correct and itwill not be possible to tax the advance received as arevenue receipt even without the service having beenrendered. ➔The Assessing Officer had submitted his response dated04.03.2014 reiterating their earlier stand for which therewas a communication dated 20.03.2014 from the DeputyDirector (DT) to the Officer of the CIT, Chennai (VI), videletter dated 03.04.2014. The Assessing Officer, hassubmitted his response dated 10.04.2014 stating among otherthings that the assumption that there is no agreementbetween the assessee company and RSC is not correct and itwill not be possible to tax the advance received as arevenue receipt even without the service having beenrendered. ➔The Deputy Director, DTI has sent a reply for whichMr.K.Krishna Kumar, Income Tax Officer, Corporate Ward -6(3), Chennai-34, has sent his response dated 30.01.2015through proper channel stating among other things as to thejustification of the Assessment Order and requested fordropping of audit objection for all the Assessment Yearsviz., 2007-08 to 2010-11. ➔In the Assessment Order dated 31.03.2015, the AssessingOfficer, on an independent application of mind, had givencogent reasons as to the credit balance of Rs.5,30,00,960/-in the account of RSC as on 31.03.2007 as deemed income andthe audit objections pointed out did not dealt with thesaid issue at all and as such, reopening of the case onfactual error pointed out by the Audit Party is alsopermissible under law. ➔In sum and substance, it is the submission of the learnedhttps://hcservices.ecourts.gov.in/hcservices/ Senior Standing Counsel appearing for the appellant that inthe light of the points urged, the Substantial Question ofLaw raised in this appeal is to be answered positively infavour of the appellant. The learned Senior Standing Counsel appearing for the appellant,in support of his submissions, has placed reliance upon thejudgment rendered by the Hon'ble Apex Court in Commissioner ofIncome-Tax v. P.V.S.Beedies (P). Ltd.[(1999) 237 ITR 13 (SC)]. 5. Per contra, Mr.R.Sivaraman, learned counsel appearingfor the respondent/assessee/company made the followingsubmissions: ➔The Assessing Officer, in response to the audit objections,reiterated the grounds for completing the assessment and infact, response to the audit objections dated 30.01.2015 wassubmitted by Mr.S.Krishna Kumar, ITO, Corporate Ward -6(3),Chennai-34, but quite contrary to the said stand had passedthe re-assessment order dated 31.03.2015 under Section 143(3) read with 147 of the IT Act for the Assessment Year2007-2007 and it virtually amounts to change of opinion andit is totally impermissible under Law. ➔It is not even the case of the Assessing Officer that therespondent/assessee had failed to disclose truly and fullythe materials facts necessary for assessment and in theabsence of any such reason, the notice for reopening ofassessment under Section 143(3) r/w. 147 of the IT Actcannot be recorded as a valid material. ➔Admittedly, notice under Section 148 of IT Act came to beissued after 4 years from the end of the Assessment Yearand the Assessing Officer has also failed to furnishreasons for issuance of notice under Section 148 and onlyafter the representation was submitted, reasons werefurnished that too after the completion of the assessment. ➔It is not even the case of the Assessing Officer that therespondent/assessee had failed to disclose truly and fullythe materials facts necessary for assessment and in theabsence of any such reason, the notice for reopening ofassessment under Section 143(3) r/w. 147 of the IT Actcannot be recorded as a valid material. ➔Admittedly, notice under Section 148 of IT Act came to beissued after 4 years from the end of the Assessment Yearand the Assessing Officer has also failed to furnishreasons for issuance of notice under Section 148 and onlyafter the representation was submitted, reasons werefurnished that too after the completion of the assessment. ➔As regards the deemed dividend, the credit balance in theaccount of RSC cannot be treated as deemed dividend underSection 2(22)(e) of the IT Act for the reason that RSC hadenlisted the services of the assessee for the purpose ofselling road safety equipments which are basicallyinsurance products to promote road safety and the saidamount has been advanced to the assessee without anyinterest and debited to RSC account and the saidarrangement was supported by an agreement dated 01.04.2005and since it is in the nature of fresh advance for thepurpose of commercial transaction, the said advance do notattract Section 2(22)(e) of the said Act and the saidaspect was also considered by CIT (Appeals) and a directionwas given to delete the said addition. https://hcservices.ecourts.gov.in/hcservices/The learned counsel appearing for the respondent/assessee, in support of his submissions, has placed reliance upon thefollowing decisions:(i)Judgment dated 21.03.2017 made in Civil Appeal No.5390 of2007 [M/s.Larsen & Toubro Ltd. v. State of Jharkhand andOrs.] ;(ii) ICICI Home Finance co. Ltd. v. Assistant Commissioner ofIncome Tax [(2012) 25 taxmann.com 241 (Bom.)] (iii) Adani Infrastructure & Developers (P.) Ltd. v. AssistantCommissioner of Income Tax [(2019) 101 taxmann.com 256 (Gujarat)] Attention of this Court was also invited to InstructionNo.9/2006 dated 07.11.2006 issued by the Central Board of DirectTaxes (CBDT), New Delhi and modification of the instructionsNo.9/2009 dated 17.03.2016 issued by CBDT, New Delhi andCircularNo.19/2017issuedbyCBDTinF.No.279/Misc./140/2015/ITJ dated 12.06.2017. 6. This Court has carefully considered the argumentsadvanced on either side and also perused and considered thematerials placed as well as the decisions relied on either side. 7. In Income-Tax Officer, I Ward, Distt. VI, Calcutta andOthers v. Lakshmani Mewal Das [(1976) Vol. 103 ITR 437 (SC)],quashment of the notice issued under Section 148 of IT Act cameup for consideration and a perusal of the said judgment woulddisclose that the respondent/assessee made a challenge to thenotice issued under Section 148 of the IT Act before theCalcutta High Court and it was referred to a Full Bench ofCalcutta High Court reported in VI [1975] 99 ITR 296 , whichhad quashed the said notice and therefore, Revenue preferred aSpecial Leave Petition, which was entertained and converted asCivil Appeal. The Hon'ble Supreme Court of India, having takennote of Sections 147 and 148 of the IT Act, 1961 and Section 34(1)(a) and (b) of the Income Tax Act, 1922, observed inParagraph 445 as follows: “It would appear from the perusal of theprovisions reproduced above that two conditions have tobe satisfied before an Income-tax Officer acquiresjurisdiction to issue notice under section 148 inrespect of an assessment beyond the period of fouryears but within a period of eight years from the endof the relevant year, viz., [1] the Income-tax Officermust have reason to believe that income chargeable totax has escaped assessment, and [2] he must have reasonto believe that such income has escaped assessment byreason of the omission or failure on the part of theassessee [a] to make a return under section 139 for theassessment year to the Income-tax Officer, or [b] todisclose fully and truly material facts necessary forhis assessment for that year. Both these conditionsmust co-exist in order to confer jurisdiction on theIncome-tax Officer. It is also imperative for theIncome-tax Officer to record his reasons beforehttps://hcservices.ecourts.gov.in/hcservices/initiating proceedings as required by section 148[2]. Another requirement is that before notice is issuedafter the expiry of four years from the end of therelevant assessment years, the Commissioner should besatisfied on the reasons recorded by the Income-taxOfficer that it is a fit case for the issue of suchnotice. We may add that the duty which is cast uponthe assessee is to make a true and full disclosure ofthe primary facts at the time of the originalassessment. Production before the Income-tax Officerof the account books or other evidence from whichmaterial evidence could with due diligence have beendiscovered by the Income-tax Officer will notnecessarily amount to disclosure contemplated by law.The duty of the assessee in any case does not extendbeyond making a true and full disclosure of primaryfacts. Once he has done that his duty ends. It is forthe Income-tax Officer to draw the correct inferencefrom the primary facts. It is no responsibility of theassessee to advise the Income-tax Officer with regardto the inference which he should drawn from the primaryfacts. If an Income-tax Officer draws an inferencewhich appears subsequently to be erroneous, mere changeof opinion with regard to that inference would notjustify initiation of action for reopening assessment. The grounds or reasons which lead to theformation of the belief contemplated by section 147[a]of the Act must have a material bearing on the questionof escapement of income of the assessee from assessmentbecause of his failure or omission to disclose fullyand truly all material facts. Once there existreasonable grounds for the Income-tax Officer to formthe above belief, that would be sufficient to clothehim with jurisdiction to issue notice. Whether thegrounds are adequate or not is not a matter for theCourt to investigate. The sufficiency of the groundswhich induce the Income-tax Officer to act is,therefore, not a justifiable issue. It is, of course,open to the assessee to contend that the Income-taxOfficer did not hold the belief that there had beensuch non-disclosure. The existence of the belief canbe challenged by the assessee but not the sufficiencyof the reasons for the belief. The expression ''reasonto believe'' does not mean a purely subjectivesatisfaction on the part of the Income-tax Officer.The reasons must be held in good faith. It cannot bemerely a pretence. It is open to the court to examinewhether the reasons for the formation of the beliefhave a rational connection with or a relevant bearingon the formation of the belief and are not extraneousor irrelevant for the purpose of the section. To thislimited extent, the action of the Income-tax Officer instarting proceedings in respect of income escapingassessment is open to challenge in a court of law. [Seeobservations of this Court in the cases of Calcuttahttps://hcservices.ecourts.gov.in/hcservices/ Discount Co.Ltd Vs. Income-tax Officer [1961] 41 ITR191 and S.Narayanappa V. Commissioner of IncomeTax [1967] 63 ITR 219 , while dealing with thecorresponding provisions of the Indian Income Tax Act,1922].” 8. In New Excelsior Theatre Pvt. Ltd. v. M.B.Naik, IncomeTax Officer and Others [1990 Vol.185 ITR 159 (Bom.)], the WritCourt while quashing the notice issued under Section 147(a) ofthe IT Act has held that the condition for reopening ofassessment was that formation of belief that income had escapedassessment must be by reason of either the assessee's omissionto file a return of income or non-disclosure of full andmaterial facts necessary for assessment and having taken note ofthe fact that the assessee had furnished full particulars, hadquashed the notice. 9. In Commissioner of Income-Tax v. Akbarali Jummabhai[1992 Vol.198 ITR 69], Gujarat High Court had considered thereference made by ITAT under Section 256(2) of the IT Act foranswering the following Questions of Law: “1. Whether, on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal wasjustified in law in holding that the reopening ofassessment under Section 147(a) of the Income Tax Act,1961, was not justified? 2. Whether, on the facts and in the circumstances ofthe case, it can be said that the assessee haddisclosed fully and truly all the material necessaryfor the assessment and, therefore, the reassessmentunder Section 147(a) of the Income Tax Act, 1961, wasnot justified? The Assessing Officer therein had passed an Assessment Order andthereby, notice under Section 148 was issued on the assessee forthe reason that the income returned was understated compared tothe assets held by the assessee and it was overruled and passedrevised order of assessment and the assessee therein filed anappeal and the Appellate Assistant Commissioner allowed theappeal of the assessee holding that the Income Tax Officer wasnot within his power and jurisdiction to invoke Section 147A ofthe IT Act and the appeal filed by the revenue before the ITAThad ended in dismissal. It is relevant to extract theobservations made in Page No.75 of the said judgment: ''...Two distinct conditions precedent arerequired to be fulfilled before the AssessingOfficer can exercise jurisdiction under clause[a] of section 147, namely, [i] he must havereason to believe that income has escapedassessment, and [ii] he must have reason tobelieve that such escapement is by reason ofhttps://hcservices.ecourts.gov.in/hcservices/omission or failure on the part of the assessee to make a return or to disclose fully and trulyall the material facts necessary for hisassessment for the relevant years. to make a return or to disclose fully and trulyall the material facts necessary for hisassessment for the relevant years. The next question which is required to beexamined in order to arrive at a properdetermination of the questions referred to us isthe question as to what is meant by theexpression ''material facts'' which it is theduty of the assessee to disclose before theIncome Tax Officer at the time of assessment.In the case of Calcutta Discount Co.Ltd V. ITO[1961] 41 ITR 191, the Supreme Court hadoccasion to consider this very provision. Asper the said decision of the Supreme Court, the''material facts'' which are required to bedisclosed by the assessee at the time of hisassessment are ''primary facts'' mainlynecessary for the purpose of his assessment.The duty of the assessee is to disclose onlyprimary facts and it is for the AssessingOfficer to decide what inferences of facts canbe reasonably drawn from the primary facts, andwhat legal inferences must ultimately be drawnfrom the primary facts and other facts inferredfrom them. The assessee is not bound to tellthe assessing authority what inferences, whetherof fact or law, should be drawn and his failureto communicate to the assessing authority theproper and correct inferences to be drawn fromthe primary facts cannot be regarded as failureto disclose ''material facts''. The assessee isrequired to disclose only primary facts and theprimary facts to be disclosed by him must bematerial or relevant to the decision of thequestion before the assessing authority so thatthe non-disclosure of such facts would have amaterial bearing on the question of escapementof income from assessment. If the assessee hasdisclosed the primary facts which are materialand necessary for the purpose of his assessment,his assessment cannot be reopened by the Income-tax Officer by resorting to section 147[a], but,if there is omission or failure on the part ofthe assessee to disclose any material orrelevant primary facts and, in consequence,there is escapement of income from assessment,such income can be got taxed by the Revenue byreopening the assessment under section 147[a]. ...... From the aforesaid observations in the casebefore the Supreme Court, it becomes clear thatto confer jurisdiction under section 147[a] toissue notice in respect of an assessment beyondhttps://hcservices.ecourts.gov.in/hcservices/the period of four years from the end of the relevant year, two conditions have to besatisfied. The first is that the Income TaxOfficer must have reason to believe that incomechargeable to tax has escaped assessment, andthe second is that he must also have reason tobelieve that such escapement has taken place byreason of either [i]omission or failure on thepart of the assessee to make a return of hisincome under section 139, or [ii] omission onthe part of the assessee to disclose fully andtruly all the material facts necessary for hisassessment for that year. Both these conditionsare conditions precedent to be fulfilled for theIncome Tax officer to have jurisdiction to issuenotice for the assessment or reassessment beyondthe period of four years from the end of theassessment year.'' The High Court of Gujarat had found that the Tribunal as well asthe Appellate Tribunal were justified in holding that theAssessing Officer was not justified in exercising powers underSection 147(a) of the IT Act and accordingly, answered theQuestions of Law in favour of the assessee and against theRevenue. The High Court of Gujarat had found that the Tribunal as well asthe Appellate Tribunal were justified in holding that theAssessing Officer was not justified in exercising powers underSection 147(a) of the IT Act and accordingly, answered theQuestions of Law in favour of the assessee and against theRevenue. 10. In United Electrical Co. P. Ltd. v. Commissioner ofIncome-Tax and Others [2002 Vol.258 ITR 317 (Delhi)], a writpetition was filed before the Delhi High Court challenging thenotice dated 30.04.2002 issued under Section 148 of the IT Act.Hon'ble Mr.Justice D.K.Jain [As the Hon'ble Judge then was] hadspoken for the Bench and it is relevant to extract the following:“11. Section 147 of the Act authorises theAssessing Officer to assess or re-assess incomechargeable to tax, if he has reason to believe that thesaid income for any assessment year has escapedassessment. The power conferred under the said section,particularly after 1st April, 1989, is no doubt verywide but it cannot be said to be plenary. True, theamended provisions of Section 147 are contextuallydifferent from the pre-1989 provision, inasmuch as thecumulative conditions spelt out in Clause (a) of oldSection 147 namely, that income chargeable to tax hadescaped assessment by reason of: (i) omission orfailure on the part of the assessee to make a return ofhis income under Section 139 of the Act for anyassessment year or (ii) failure to disclose fully andtruly all material facts necessary for his assessmentfor that year, are not present in the new main sectionbut the crucial expression “reason to believe” stillexists in the new provision. The amended Section 147provides that where the Assessing Officer has reason tobelieve that any income chargeable to tax has escapedassessment for any assessment year, he may apply thehttps://hcservices.ecourts.gov.in/hcservices/provisions of Sections 148 to 153 and assess or re- assess the income which has escaped assessment. For thepresent purpose, only Sections 148 and 151 arerelevant. Cub-section (2) of Section 148 of the Actmandates that before issuing notice to the assesseeunder Subsection (1), for filing the return, theAssessing Officer shall record his reasons for doingso. Therefore, formation of reason to believe andrecording of reasons are imperative before theAssessing Officer can re-open the completed assessment.Proviso to Sub-section (1) of Section 151 of the Actprovides that after the expiry of four years from theend of the relevant assessment year, notice underSection 148 shall not be issued unless the ChiefCommissioner or the Commissioner, as the case may be,is satisfied, on the reasons recorded by the AssessingOfficer concerned, that it is a fit case for the issueof such notice. These are some in-built safeguards toprevent arbitrary exercise of power by an AssessingOfficer to fiddle with the completed assessment. 12. In Bawa Abhai Singh v. Deputy Commissioner ofIncome-tax, (2002) 253 ITR 83, a Division Bench of thisCourt, speaking through Chief Justice Arijit Pasayat(as his Lordship then was), has said that the crucialexpression “reason to believe” predicates that theAssessing Officer must hold a belief…….by the existenceof reasons for holding such a belief. In other words,it contemplates existence of reasons on which thebelief is founded and not merely a belief in theexistence of reasons, including the belief. Such abelief may not be based merely on reasons but it mustbe founded on information. 13. In Ganga Saran & Sons P. Ltd. v. Income TaxOfficer, (1981) 1.30 ITR 1 SC, their Lordships of theSupreme Court, inter alia, observed that the expression“reason to believe” is stronger than the expression “issatisfied”. The belief entertained by the AssessingOfficer should not be irrational or arbitrary.Alternatively put, it must be reasonable and must bebased on reasons which are material. 13. In Ganga Saran & Sons P. Ltd. v. Income TaxOfficer, (1981) 1.30 ITR 1 SC, their Lordships of theSupreme Court, inter alia, observed that the expression“reason to believe” is stronger than the expression “issatisfied”. The belief entertained by the AssessingOfficer should not be irrational or arbitrary.Alternatively put, it must be reasonable and must bebased on reasons which are material. 14. Thus, existence of tangible material, for theformation of opinion is a prerequisite for initiationof action under Section 147 of the Act. Therefore, whatSection 147 of the Act postulates is that the AssessingOfficer must have reason to believe that income hasescaped assessment. There should be facts before hi???that reasonably give rise to the belief, but the factson the basis of which he entertains the belief need notat this stage be rebuttably conclusive to support histentative conclusion. In case of challenge, it is opento the Court to examine whether there was materialbefore the Assessing Officer, having rationalconnection or relevant bearing to the formation of thebelief that is claimed to have been held at the timewhen he issued the notice. But the Court cannot for thehttps://hcservices.ecourts.gov.in/hcservices/ purpose of ascertaining validity of the notice examinethe sufficiency of the reasons for the belief (See: S.Narayanappa v. Commissioner of Income-tax, Bangalore,(1967) 63 ITR 219). 15. Explaining the scope of the expression“information”, in the background of Section 132 of theAct, which logic is equally applicable to a case underSection 147 of the Act, in L.R. Gupta v. Union ofIndia, (1992) 194 ITR 32, a Division Bench of thisCourt observed thus: “The expression “information” must be somethingmore than a mere rumour or a gossip or a hunch. Theremust be some material which can be regarded asinformation which must exist on the file on the basisof which the authorising officer can have reason tobelieve that action under Section 132 is called for anyof the reasons mentioned in Clauses (a), (b) or (c).When the action of issuance of an authorisation underSection 132 is challenged in a Court, it will be opento the petitioner to contend that on the facts orinformation disclosed, no reasonable person could havecome to the conclusion that action under Section 132was called for. The opinion which has to be formed issubjective and, therefore, the jurisdiction of theCourt to interfere is very limited. A Court will notact as an Appellate Authority and examine meticulouslythe information in order to decide for itself as towhether action under Section 132 is called for. But theCourt would be acting within its jurisdiction in seeingwhether the act of issuance of an authorisation underSection 132 is arbitrary or mala fide or whether thesatisfaction which is recorded is such which shows lackof application of mind of the Appropriate Authority.The reason to believe must be tangible in law and ifthe information or the reason has no nexus with thebelief or there is no material or tangible informationfor the formation of the belief, then, in such a case,action taken under Section 132 would be regarded as badin law.” 16. It is thus, trite that when a challenge ismade to the action under section 147 of the Act whatthe court is required to examine is whether somematerial exists on record for the Assessing Officer toform the requisite belief and the reasons for thebelief have a rational nexus or a relevant bearing tothe formation of such belief and are not extraneous orirrelevant for the purpose of the said section. Butthe sufficiency of the grounds, which induced theAssessing Officer, to act under the said section is notsection is not a justiciable issue.'' 11. In Commissioner of Income Tax and Another v. Foramerhttps://hcservices.ecourts.gov.in/hcservices/France [2003 Vol.264 ITR 567], the issue relating to notice of 16. It is thus, trite that when a challenge ismade to the action under section 147 of the Act whatthe court is required to examine is whether somematerial exists on record for the Assessing Officer toform the requisite belief and the reasons for thebelief have a rational nexus or a relevant bearing tothe formation of such belief and are not extraneous orirrelevant for the purpose of the said section. Butthe sufficiency of the grounds, which induced theAssessing Officer, to act under the said section is notsection is not a justiciable issue.'' 11. In Commissioner of Income Tax and Another v. Foramerhttps://hcservices.ecourts.gov.in/hcservices/France [2003 Vol.264 ITR 567], the issue relating to notice of assessment issued beyond 7 years as well as re-assessment noticeespecially for failure on the part of the assessee to disclosetrue and full particular necessary for assessment came up forconsideration. The Hon'ble Apex Court had dealt with the saidissues in the appeal filed by the Revenue, challenging the orderof the Allahabad High Court reported in Foramer v. CIT [(201)247 ITR 436] and dismissed the civil appeals with costs. It isrelevant to extract the above cited decision of the AllahabadHigh Court which came to be confirmed by the above citeddecision of the Apex Court as under: “From the decision of the High Court [see (2001)247 ITR 436] that (i) section 147 substituted in theIncome Tax Act, 1961 by the Direct Tax Laws (Amendment)Act, 1987, had made a radical departure from theoriginal Section 147, inasmuch as clauses (a) and (b)had been deleted and under the proviso thereto noticefor reassessment would be illegal if issued more thanfour years after the end of the assessment year, if theoriginal assessment were made under Section 143(3);(ii) section 153 related to the passing of an order ofassessment and not to the issuing of a reassessmentnotice under Section 147/148 (iii) the direction orfinding contemplated by Section 153(3)(iii) had to be afinding in relation to the particular assessee and theparticular year and to be a finding it had to bedirectly involved in the disposal of the case; (iv) onthe facts, the notices issued under Section 148 onNovember 20, 1998; to the assessee for reopening theoriginal assessments for the assessment years 1988-89,1989-90 and 1990-91, on the basis of the AppellateTribunal's decision rendered in the case of BoudierChristian relating to the assessee's techniciansdeputed to India, the income of the assessee was to betreated as fee for assessments for those assessmentyears, were without jurisdiction as they were barred bylimitation in view of the proviso to section 147, asamended by the Direct Tax Laws (Amendment) Act, 1987,as that was the provision that was applicable onNovember 20, 1998, when the reassessment notices wereissued, and admittedly there was no failure on the partof the assessee to disclose fully and truly allmaterial facts for assessment ; (v) on the facts,notices were bad as they were only on the basis of achange of opinion and the law that an assessment couldnot be reopened on a change of opinion was the 1987, ofSection 147, and (vi) as the notices were withoutjurisdiction, the assessee should not be relegated tothe alternative remedy, the Department preferredappeals to the Supreme Court. The Supreme Court saw noreason to differ and dismissed the appeals.” 12. In Commissioner of Income-Tax v. A.V.Thomas ExportsLtd. [(2008) 296 ITR 603 (Mad)], a Division Bench of this Courthttps://hcservices.ecourts.gov.in/hcservices/had considered the challenge made to the notice issued after 4 12. In Commissioner of Income-Tax v. A.V.Thomas ExportsLtd. [(2008) 296 ITR 603 (Mad)], a Division Bench of this Courthttps://hcservices.ecourts.gov.in/hcservices/had considered the challenge made to the notice issued after 4 years viz-a-viz Sections 147 and 148 of the IT Act. TheDivision Bench of this Court has also considered the decision inCIT v. Foramer France [(2003) 264 ITR 566 (SC)] (cited supra) aswell as CIT v. Elgi Finance Ltd. [(2006) 286 ITR 674 (Mad)] andduring the course of arguments, had also extracted the relevantportion of the judgment in CIT v. Elgi Finance Ltd. [(2006) 2876ITR 674] as under: “5. Heard the counsel. The original assessment wascompleted under section 143(3) of the Act. TheAssessing Officer applied his mind and completed thesaid original assessment. There is no finding by theAssessing Officer that there is any failure on the partof the assessee resulting in the escapement of income.The Assessing Officer must give categorical finding forthe purpose of initiating reassessment under theproviso to section 147 of the Act. In this case thereassessment proceedings were initiated after March 31,1995, and hence the proceedings initiated by issue ofnotice under section 148 is ab initio barred bylimitation. In this case, the initiation of proceedingsis after a period of four years and the finding givenby the Tribunal is that no income has escapedassessment by reason of failure on the part of theassessee. Hence, there is no jurisdiction to reopen theassessment under the proviso of section 147 of the Act.The scope of the said provision has been considered bythis court in the case of CIT v. Elgi Finance Ltd.,[2006] 286 ITR 674, and the same reads as follows (page678): “The law relating to the reassessment hasundergone a change from April 1, 1989. The change wasbrought in by the Direct Tax Laws (Amendment) Act,1987. Two sets of provisions were available undersection 147 in clause (a) and clause (b). Thisdistinction has now been taken away by the AmendmentAct. Previously, the line of distinction was alimitation period of four years and the limitationperiod exceeding four years. The Assessing Officerwould reopen a back assessment within a period of fouryears as long as he had reason to believe inconsequence of any information, that income has beenunderassessed or income has escaped assessment. In thecase of limitation, providing for a period exceedingfour years, there should have been a failure on thepart of the assessee to disclose fully and truly allmaterial facts leading to the escapement of income. Butas a result of the amendment brought with effect fromApril 1, 1989, the above distinction had beenobliterated and the Assessing Officer could reassessthe income as long as he had reason to believe thatincome chargeable had escaped assessment. The new lawhas inserted a proviso to section 147 in the followingwords: https://hcservices.ecourts.gov.in/hcservices/ ‘Provided that where an assessment under sub-section(3) of section 143 or this section has been madefor the relevant assessment year, no action shall betaken under this section after the expiry of four yearsfrom the end of the relevant assessment year, unlessany income chargeable to tax has escaped assessment forsuch assessment year by reason of the failure on thepart of the assessee to make a return under section 139or in response to a notice issued under subsection (1)of section 142 or section 148 or to disclose fully andtruly all material facts necessary for his assessmentfor that assessment year.’ https://hcservices.ecourts.gov.in/hcservices/ ‘Provided that where an assessment under sub-section(3) of section 143 or this section has been madefor the relevant assessment year, no action shall betaken under this section after the expiry of four yearsfrom the end of the relevant assessment year, unlessany income chargeable to tax has escaped assessment forsuch assessment year by reason of the failure on thepart of the assessee to make a return under section 139or in response to a notice issued under subsection (1)of section 142 or section 148 or to disclose fully andtruly all material facts necessary for his assessmentfor that assessment year.’ In addition to the time-limits provided for undersection 149, the law has provided another limitation offour years under the proviso to section 147. As far asthe above proviso to section 147 is concerned, the lawprescribes a period of four years to initiatereassessment proceedings, unless the income alleged tohave escaped assessment was made out as a result offailure on the part of the assessee to disclose fullyand truly all material facts necessary for theassessment.” In the said judgment, the Division Bench of this Court has dealtwith the issue relating to mere change of opinion and reliedupon the decision rendered by a Division Bench of this Court inCIT v. Annamalai Finance Ltd. [(2005) 275 ITR 451 (Mad)],wherein it was held that “section 147 of the Act does notpostulate conferment of power upon the Assessing Officer toinitiate reassessment proceedings upon a mere change of opinion.It is incumbent on the Assessing Officer to prove that there wasa failure to disclose material facts necessary for theassessment for the issuance of notice beyond the period of fouryears.” 13. Let this Court considers the decisions cited by thelearned coun