1. These are two appeals, one by the assessee and the other by the Revenue. They both relate to the assessment year 1979-80. In the original assessment as made in the status of registered firm, which assessment order was passed an 17-8-1982 and which, assessment was made under the provisions of Section 144B after obtaining the directions of the IAC, the Income-tax Officer had brought to tax capital gains in respect of property sold in Malaysia. The gross sale amount was Rs. 6,48,000, The market value as on 1-1-1964 was deducted which was taken at Rs. 70 per cent of the gross sale amount. Thus, a deduction of Rs. 4,53,600 was given and capital gains of Rs. 1,94,400 was brought to tax. This assessment eventually went up by way of appeal and the Tribunal in ITA No. 525/Mds./84 dated 26th October, 1984, upheld the decision of the CIT(A) excluding capital gains from the assessment on the ground that such gains were not chargeable to tax in India by virtue of article 6 of the Agreement for the Avoidance of Double Taxation between India and Malaysia. In the meanwhile, the Audit had looked into the files and it would transpire that it was considered that it was not proper to substitute the value as on 1-1-1964.
Eventually, proceedings under Section 147 were initiated and the ITO deducted in making the reassessment on 5-3-1985 the cost as on 31-12-1969.
2. The assessee appealed to the CIT(A) and contended that the reopening was not in order. But the CIT(A) decided against the assessee on the ground that the ITO had committed a mistake in adopting the cost as on 1-1-1964 when it would appear that the property was acquired only later. On merits, the CIT(A) held that it was true that the Tribunal had taken the view that capital gains in Malaysia could not be taxed in India, but he was of the view that were the decision of the Tribunal to be reversed the ITO would be left with no remedy and, therefore, while the reopening of the assessment was upheld, on merits, following the decision of the Tribunal which had been rendered by then in the original assessment, the CIT(A) deleted the quantum of the capital gains included.
3. Both the assessee and the Revenue are in appeal. The assessee contests the validity of re-opening Under Section 147(6). Since the basic starting point for considering whether initiation of proceedings Under Section 147 is called for or not would be an examination of the reasons recorded for initiating the proceedings, at our instance, the particulars in this regard as available were culled out and were very fairly placed before us on behalf of the Revenue by the learned Departmental Representative. The order-sheet entries in full read as under : Please see unserved cover returned unserved with a postal Note "Deceased" reed, and filed. For orders.
Please issue a notice Under Section 148 to the firm rep. by the a's eldest son Sri R.M. Palaniappan.
Notice Under Section 148 put up to Shri R.M. Palaniappan, Kulipirai the other partner of the firm.
The submission of the learned Departmental Representative was that the entirety of material on record has to be seen to decide whether reasons had been recorded and it was not to be decided solely with reference to the order-sheet entries as to whether reasons were recorded or not. He accordingly relied on a letter dated 16-11-1983 addressed by the ITO, to CIT, Madurai through the I AC, and a copy of the IAC (Audit) I's memo dated 6-3-1984 to the ITO and finally a copy of the letter dated 7-10-1986 from the ITO to the Sr. A.R., ITAT, Madras. The final letter of the ITO dated 7-10-1986 to the Sr. A.R. reads as under : To the direct question as to whether the reasons for reopening the assessment Under Section 147(&) were recorded prior to issue of notice Under Section 148 the answer is submitted to be in the negative. However, it could be seen from the report dated 16-11-1983 submitted to the Commissioner of Income-tax, Madurai in connection with an audit objection raised by Internal Audit Party and the memorandum in C.No. 739/l(2)/PDK/82-83 dated 6-3-1984 of the Inspecting Assistant Commissioner of Income-tax (Audit) that the Income-tax Officer has applied his mind to this issue and after that the notice Under Section 148 was issued. Kind attention is also invited to the Commissioner of Income-tax (Audit) Order dated 6-5-1985 wherein it has been clearly held that the Income-tax-Officer misled himself or got misled into adopting the cost as on 1-1-1964, ignoring the fact that the properties were acquired subsequent and the cost figure as per books should have been adopted. It is clear from the original assessment order dated 17-3-1982 that the Income-tax Officer was very clear about taxing the Capital Gains arising in Malaysia. But, as stated above, the base value was wrongly adopted. This was sought to be set right by re-opening the assessment Under Section 147(6) after correspondence and discussion with the Higher Authorities and after seeking their approval.
2. As directed I am submitting this report and relevant records through special messenger.
(2) The Income-tax Officer shall, before issuing any notice under this section, record his reasons for doing so.
We would agree with the learned Departmental Representative that there is no requirement that the reasons should be recorded, only in the order-sheet. If, on going through the records as a whole, recording of reasons for re-opening can be ascertained and as envisaged by Section 148(2) is found to be fulfilled on considering all the material, that would satisfy the requirements of the said provision. In the present case, in his letter dated. 16-11-1983 to the CIT, the ITO had stated as under : The assessee is a firm. In the year of account relevant for 1979-80, the assessee-firm sold three immovable properties situated in Malaysia for an admitted consideration of Rs. 1,80,000. The assessee claimed as exempt the capital gains in respect of above sales under DITR with Malaysia, but as a measure of caution computed the capital gains at 30 per cent of sale proceeds and showed the same in the statements of course, claiming the capital gains as exempt. However, the contention of the assessee that the capital gains are not taxable in view of DIT agreement between India and Malaysia was not accepted. Similarly the claim of the assessee to have the benefit of taking the market value as on 1-1-1964 was not conceded and capital gains was not computed taking the cost of the property at $ 29,900 being the cost of the property as reflected in the trial balance filed. As the proposed addition exceeded Rs. 1,00,000 a draft assessment order was sent to the assessee and the objections were invited.
In response to the draft assessment order, the assessee-firm filed its objections. It contended that there has been no sale or exchange of properties by the partners to the firm at the time the firm was constituted and the partners have brought in the properties allotted to them on family partition of their share capital and as the properties were acquired by the partners of the firm at the time of the partition in the family-mode specified in Section 49 the benefit of substituting the fair of value as on 1-1-1964 under Section 55(2) for the cost of acquisition is available to the assessee. The draft assessment order together with the assessee's objections were forwarded to the Inspecting Asstt. Commissioner for instructions under Section 144B. The Inspecting Asstt. Commissioner directed that the market value as on 1-1-1964 should be taken as the cost of acquisition and 70 per cent of the sale proceeds be taken as the market value as on 1-1-1964. The assessment was completed accordingly. Now Internal Audit Party has raised an objection. It has objected to adopting the market value as on 1-1-1964 at 70 per cent of the sale proceeds and suggested that the cost of properties which are the subject matter of discussion of the audit is tenable in view of the decisions of the Madras High Court in the case of CIT v. RM.K.P.L. Firm (124 IT.R 340) wherein on similar facts it has been laid down that the cost of acquisition as recorded in books should be taken and Section 55(2) is not applicable. The objection is also acceptable in view of the decision of Madras High Court in the case of Additional Commissioner v. Govindoss Purushothamdoss (124 ITR 319) as assessment of income-tax originally made appears to be prejudicial to the interests of revenue in view of the decisions, cited, it is requested that the assessment for 1979-80 may be cancelled under Section 263.
From the aforesaid letter, it is clear that the ITO considered the audit objection tenable having regard to certain judicial pronouncements, namely, it could be considered that he was of the view that the value as on 1-1-1964 should not have been adopted. If a mistake has crept into an assessment order, there are several methods of rectifying it. Rectification could be made under the provisions of Section 154 if it was a mistake apparent from record. The error could be rectified by requesting the Commissioner to invoke his powers under Section 263. It could also be rectified by resorting to the provisions of Section 147. These were various alternatives which were before the ITO. In his letter of 16-11-1983, the ITO considered resorting to the provisions of Section 263 was appropriate. There is nothing to indicate that he had ever considered the applicability of the provisions of Section 147. Therefore, this letter cannot be construed as recording any reasons for forming any belief that the provisions of Section 147 were attracted and consequently it was necessary to issue notice under Section 148. In the IAC (Audits') memo, he stated as under : Since the properties came to be owned by the firm only with effect from 1-1-1969 i.e. after the crucial date, viz. 1-1-1964, the adoption of cost as on 1-1-1964 will not arise in the assessee's case, as has been held by the Madras High Court in the case of MRM. KPL. Firm 124 ITR 340 and Govindoss Purushothamdoss 124 ITR 319 as reported by the ITO. In the circumstances the ITO should initiate proceedings Under Section 147(5) for adoption of the correct cost for purposes of arriving at the capital gains in relying on the two Madras High Court decisions. Action Under Section 263 will not be possible since the very question of assessment to capital gains has been decided in appeal by the Commissioner of Income-tax (Appeals).
This was a direction by the IAC to the ITO to initiate proceedings Under Section 147(6). This letter is dated 6-3-1984. After that, on 8-3-1984, the notice Under Section 148 was put up and subsequently on 12-3-1984, the ITO directed issue of another notice Under Section 148 since the first partner of the firm to whom the notice had been addressed had died. We have already held that the letter of 16-11-1983 cannot be construed as recording of any reasons for initiating action under Section 147 for issue of notice under Section 148. Subsequent to the lAC's direction to initiate action under Section 147(6), we only find that the directive was complied with. Complying with the directions of the IAC and issuing a notice under Section 148 cannot be equated with the ITO fulfilling the mandatory requirement of recording his reasons for issuing the notice Under Section 148. The provisions of Section 148(2) require a positive action of putting on record a statement of reasons by the ITO for issuing notice Under Section 148.
The silent assent in compliance with the directive of the IAC could not be fulfilment of the statutory requirement under Section 148(2). Hence, on the facts, we have to hold that there was, in the present case, no recording of reasons by the ITO as to why he considered that notice Under Section 148 should be issued and the requirements of Section 148(2) were not satisfied. We are now left with the question as to what is the effect of such non-recording. There is the decision of the Supreme Court in the case of Union of India v. Rai Singh Deb Singh Bist [1973] 88 ITR 200 which states that the ITO should have reason to believe that there was escapement of income and further before issuing the statutory notice, he must have recorded the reasons for acting under Section 34(1)(a) which was the provision under consideration in that case. In the later judgment of the Supreme Court in Johri Lal (H.U.F.) v. CIT [1973] 88 ITR 439, the Supreme Court observed (again with reference to the proceedings Under Section 34(1)(a) of the Indian Income-tax Act, 1922), as under : The formation of the required opinion by the Income-tax Officer is a condition precedent. Without formation of such an opinion he will not have jurisdiction to initiate proceedings under Section 34(1)(a). The fulfilment of this condition is not a mere formality but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings. As held by this court in Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, the Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied, does not exist or is not material or relevant to the belief required by this section. It is true that the courts will not go into the sufficiency of the reasons which persuaded the Income-tax Officer to initiate proceedings under Section 34(1) (a) of the Act but the courts will examine the relevancy of the reasons which persuaded the Income-tax Officer to take proceedings under Section 34(1)(a). The formation of the required belief is not the only requirement. The Income-tax Officer is further required by Section 34 to record his reasons for taking action under Section 34(1)(a) and obtain the sanction of the Central Board of Revenue or the Commissioner, as the case may be.
In the instant case, as seen earlier, the Income-tax Officer did not choose to proceed under Section 34(1)(a). Consequently, he may or may not have recorded the reasons as required by this section nor do we know whether those reasons were submitted to the required authority and his sanction obtained on the basis of those reasons.
This court also has ruled that the Commissioner or the Board of Revenue, while granting sanction will have to examine the reasons given by the Income-tax Officer and come to an independent decision and the authority in question should not act mechanically. From the material on record there is no basis to hold that those requirements had been fulfilled. Possibly they could not have been fulfilled because the Income-tax Officer proceeded only on the basis of Section 34(1)(a) and not on the basis of Section 34(1)(a). He himself had declined to proceed on the basis of Section 34(1)(a) for whatever reason it may be. Therefore, it was not open to the Tribunal to justify the proceedings taken by the Income-tax Officer under Section 34(1)(a). The Tribunal could not have initiated proceedings under Section 34(1)(a). If the Tribunal converts the proceedings into one under Section 34(1)(a) then the conditions prescribed in Section 34(1)(a) cannot be satisfied.
Under the Income-tax Act, 1961 (there is no such express requirement under the Wealth-tax and Gift-tax Acts), it is expressly required by Section 148(2) that the ITO shall, before issuing any notice under this section, record his reasons for doing so. In the present case, we have already found that such reasons were not recorded by the ITO. The decision of the Supreme Court is authority for the proposition that the Tribunal could not initiate such proceedings by supplying any omission or curing any deficiency, if there is an inherent infirmity in satisfying the conditions precedent for initiating proceedings under Section 148 which remain to be satisfied by the ITO. Though in the present case the ITO may have had reasons to believe consequent to information in his possession that some income had escaped assessment (because we cannot go into the adequacy of the reasons for such belief) and one of the conditions for taking action under Section 147(b) was satisfied, since the second condition precedent, namely, that of recording of reasons, was not satisfied, we have no option but to hold that the initiation of action under Section 148 was invalid. We, therefore, set aside the order of the CIT(A) and quash the re-assessment order as made on 5-3-1985. In the view that we have taken, we do not express any opinion on grounds relating to merits. The appeal of the aseessee is, therefore, allowed. Since the re-assessment stands quashed, the appeal of the Revenue would be dismissed.