These two appeals by the Revenue and two cross-objections by the assessee for the asst. yrs. 1985-86 and 1986-87 against the orders of the CWT(A), raise a common point. These were heard together and are being disposed of through this consolidated order.
2. The assessee, a private limited company, became liable to be assessed under the WT Act, in terms of s. 40 of the Finance Act, 1983, for the asst. yrs. 1985-86 and 1986-87, with which we are concerned.
The assessee submitted net wealth of Rs. 11,790 and Rs. 10,890 for the asst. yrs. 1985-86 and 1986-87. The above wealth included value of car disclosed at Rs. 62,331 and Rs. 49,870 for asst. yrs. 1985-86 and 1986-87. From the above value, the assessee deducted proportionate value of debts of Rs. 50,353 and Rs. 38,983, respectively. The basis of deduction of proportionate liability for asst. yr. 1984-85, on the basis of the balance sheet as on 30th June, 1984, is as under : Similar deduction was claimed in asst. yr. 1986-87. The AO accepted returned wealth in both the years under s. 16(1) of the Act, vide orders dt. 28th February, 1989.
3. Subsequently, the AO found that the assessee was not entitled to deduction of proportionate liabilities, as none of the debts owed by the company were secured on or were incurred in relation to the assets in the hands of the company. The AO initiated proceedings under s. 17 of the Act, by issuing notices dt. 9th March, 1990. The said notices were served on the assessee on 14th March, 1990. The assessee filed returns for both the years on 16th March, 1990.
4. In reassessment proceedings, the WTO rejected the claim of the assessee regarding proportionate liability. It was conceded before the AO that no loan was raised for the purchase of the car. The AO held that, as per s. 40(2) of Finance Act, 1983, the debts were to be allowed only if those were secured on or raised against taxable assets.
Accordingly, liabilities claimed were disallowed in both the years in reassessment proceedings.
5. The assessee challenged the reassessment proceedings in appeal before the CWT(A). It was contended that even under amended s. 17 of the Act, the AO must have reason to believe. In the present case, all basic and primary facts were placed on record and proceedings have been initiated merely on change of opinion. The reassessment proceedings, in the above background, were invalid. The assessee relied upon large number of decisions, reproduced by the CWT(A) at page 3 of the order.
After considering the relevant facts and the statutory provisions, the learned CWT(A) held that the assessee was not entitled to deduction of proportionate liability in terms of s. 40(2) of the Finance Act, 1983.
She accordingly held that the assessee had no case on merits. However, the learned CWT(A) was convinced that the reassessment proceedings were taken in this case merely on a change of opinion. She was of the view that full facts of the case, which included working of proportionate liability, were disclosed by the assessee at the time of original assessment. The reopening of proceedings was carried merely on change of opinion and effected finality of proceedings. The reassessments were accordingly held to be bad in law and invalid. The appeals of the assessee in both the years were allowed on the above grounds. The Revenue has come up in appeals, whereas the assessee has filed cross objections in support of the orders of the CWT(A).
6. We have heard submissions of both the parties at great length. The learned Departmental Representative, Mrs. Hardeep Srivastava, drew our attention to sub-s. (2) of s. 40 of the Finance Act, 1983, which reads as under : "(2) For the purposes of sub-s. (1), the net wealth of a company shall be the amount by which the aggregate value of all the assets referred to in sub-s. (3), wherever located, belonging to the company on the valuation date is in excess of the aggregate value of all the debts owed by the company on the valuation date which are secured on, or which have been incurred in relation to the said assets." She contended that the debts which are secured on or which have been incurred in relation to the taxable assets, are permissible deductions.
In the present case, it has been conceded by the assessee that no loan or debt was incurred for acquiring the motor car, i.e., taxable asset.
In the above situation, debts could not be allowed. The case of the assessee was accepted under s. 16(1) of the Act, without application of mind by the WTO. However, as soon as correct facts were discovered and it was found that the deduction was allowed in total disregard of the statutory provisions, notices under s. 17 were issued. The validity of notices is to be judged under the amended s. 17(1) of the Act, which came into force w.e.f. 1st April, 1989. In the new provisions, there are no cls. (a) or (b), as was the position under the unamended section. The AO is to have only reason to believe that the wealth chargeable to tax has escaped assessment (whether by reason of underassessment or assessment at too low a rate or otherwise). It was a clear case of underassessment and thus reassessment was fully justified in both the years. The learned Departmental Representative relied upon the decision of the Honble Madras High Court in the case of M. A.Chidambaram v. CIT (1995) 216 ITR 175 (Mad).
7. Shri Sudhir Sehgal, learned counsel for the assessee, vehemently opposed the above submissions. He argued that complete facts as well as basis of deduction of liability was furnished in original assessment proceedings. As assets related to the debt owed by the assessee, it can be presumed that these assets had connection with each of the debt and, therefore, on proportionate basis, debts were rightly claimed. At any rate, reassessment proceedings were based merely on change of opinion and were invalid under the law. Sh. Sehgal relied upon the case law cited before the learned CWT(A). Sh. Sehgal also attacked the initiation of reassessment proceedings on the ground that reasons required to be recorded in accordance with law, were not recorded.
According to him, the WTO recorded the following reasons before initiation of proceedings : "The assessee-company was having a car in the relevant period. The wealth of the assessee-company was thus liable to wealth-tax, which has escaped assessment. Issue notice under s. 17 of the WT Act, 1957. There was no loan against the car." As per the above reasons, the AO was perhaps of the belief that the assessee did not file any return according to Sh. Sehgal. He did not mention that the proceedings were initiated after discovery of any fact from the assessment record of the assessee for the asst. yr. 1988-89.
Sh. Sehgal also attacked notices under s. 16 as invalid. He drew our attention to the said notices dt. 9th March, 1990, for the asst. yr.
1985-86, calling upon the assessee to file return upto 15th March, 1990. Thus, period of 30 days mentioned in s. 17 for complying with the notices under the said section, was illegally curtailed. On account of this defect, the notices became invalid. Sh. Sehgal, in this connection, relied upon the decision of the Madras High Court in the case of CIT v. Gobald Motor Service (P) Ltd. (1975) 100 ITR 240 (Mad), Bombay High Court in the case of Commr. of Agrl. IT v. Ramkuvar & Ors.
(1983) 141 ITR 85 (Bom) and a decision of the Tribunal in the case of H. G. Narayan (1994) 50 ITD 456 (Bang). On merits, Sh. Sehgal relied upon the case of Moga Bros. in which case the AO had allowed similar proportionate liability. Sh. Sehgal accordingly submitted that the order of the learned CWT(A) should be upheld for both the years.
8. We have given careful thought to the rival submissions of the parties. Sec. 40 of the Finance Act, 1983, reintroduced levy of wealth in the case of closely-held companies. The assets which were charged to tax were specified in sub-s. (3) of said s. 40. The net wealth of a company liable to tax was defined in sub-s. (2), which sub-section has already been reproduced above. From the aggregate value of all assets, referred to in sub-s. (3), aggregate value of all debts owed by the company on the valuation date, which were secured on or which have been incurred in relation to the said assets (taxable asset), was to be deducted. In the present case, there is no dispute that the car, which was subjected to tax, was not acquired through loan or other debts secured on such car. The liability claimed also had no relation or nexus with the acquisition of the car. Even the learned CWT(A) in the impugned order has decided the appeal against the assessee on merits.
The contention of Sh. Sehgal that all debts should be presumed to be connected with all assets and, therefore, liability should be allowed on proportionate basis, has no force and cannot be accepted. Therefore, on facts, it has to be held that the assessee-company was not entitled to proportionate liability, as claimed in the returns in the two years under appeal. Thus, on merits, we concur with the decision of the learned CWT(A).
9. The other question required to be considered is whether the AO validly initiated proceedings under s. 17(1) of the Act. Said sub-section was amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989. Prior to its substitution, the sub-section had two clauses - (a) and (b) - which regulated powers of the AO regarding initiation of reassessment proceedings. In fact, these clauses placed restrictions on the powers of the AO to initiate assessment/reassessment proceedings to bring to tax the wealth escaped in assessment. Under cl. (a), the AO could act only if there was omission on the part of the assessee to disclose fully and truly all material facts necessary for assessment; and under cl. (b), the AO could act in consequence of any information in his possession. To justify action under s. 17, the onus laid on the Revenue to prove that the conditions set forth in either of the abovementioned clauses, were satisfied.
After substitution w.e.f. 1st April, 1989, s. 17(1), without proviso, reads as under : "17(1). - If the AO has reason to believe that the net wealth chargeable to tax in respect of which any person is assessable under this Act has escaped assessment for any assessment year (whether by reason of underassessment or assessment at too low a rate or otherwise), he may, subject to the other provisions of this section and s. 17A, serve on such person a notice requiring him to furnish within such period, not being less than thirty days, as may be specified, in the notice, a return in the prescribed form and verified in the prescribed manner setting forth the net wealth in respect of which such person is assessable as on the valuation date mentioned in the notice, along with such other particulars as may be required by the notice, and may proceed to assess or reassess such net wealth and also any other net wealth chargeable to tax in respect of which such person is assessable, which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section for the assessment year concerned (hereafter in this section referred to as the relevant assessment year), and the provisions of this Act shall, so far as may be, apply as if the return were a return required to be furnished under s. 14." Although the expression reason to believe has been retained, the other conditions provided under cls. (a) and (b) have been removed. The AO now has only to have reason to believe that the wealth has escaped assessment. It may be on account of any reason and this fact is more than clear from the words put in the bracket, ending with the word otherwise. Thus, it is no more necessary for the AO to show that he has information in his possession and, on account of that information, he has reason to believe that the chargeable wealth had escaped assessment. The question that the action was not based merely on change of opinion but on definite information is not material. By removing cls. (a) and (b), the above requirement of section has been done away.
The AO now has unfettered powers to initiate action under s. 17, in case he has reason to believe that the assessable wealth had escaped assessment. Thus, in the changed situation, the case law under old provision, is no more applicable. In the present case, there is no dispute that the assessee had wrongly claimed deduction of proportionate liability, which was not secured on or incurred in connection with taxable assets. In fact, in the details furnished along with the return, it was not disclosed that the liability deducted from the value of assets were not debts which were not secured on or not incurred in relation to the assessable assets. The calculation furnished with the return gave the impression that the assessee had incurred liability in connection with the car and other non-taxable assets shown in the balance sheet and separate figure of such liability was not available and, therefore, the liability on proportionate basis was being claimed. The WTO accepted this claim, by making assessment under s. 16(1) of the Act. Subsequently, the fact was discovered that none of the debts shown in the balance sheet was secured on or incurred in relation to the motor car disclosed as the assessable asset. On getting the above information, the WTO could rightly have the reason to believe that the net wealth chargeable to tax had escaped assessment, to justify action under s. 17 of the Act. On facts, in our opinion, the AO rightly initiated action under s. 17. We have also considered the reasons recorded by the AO. We do not find any jurisdictional error in the reasons or in the manner in which these are recorded. It is duly reflected in the reasons that the assessee had taken no loan against the car but still claimed proportionate deduction of liabilities. The facts give full authority to the AO to take action under s. 17, which was validly taken in this case. We, therefore, reject the objection raised on behalf of the assessee.
10. Another question required to be considered is whether valid notices were issued under s. 17 of the Act. As already noted, under sub-s. (1) of s. 17, the AO is to issue, on such person a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice. Thus, it is requirement of the section to prescribe minimum of 30 days time to the assessee to furnish the return. The above prescribed time is a condition precedent for the notice to be a valid notice. In case the prescribed period is curtailed, the notice would become invalid and illegal and any action taken thereunder would also be without jurisdiction. In the present case, the AO issued notice under s. 17 on 9th March, 1990, requiring the assessee to file returns of wealth before 15th March, 1990. Thus, about a weeks time was given to the assessee to comply with the notice under s. 17. This action, in our opinion, was illegal. The AO had no jurisdiction to alter any of the conditions specified in s. 17 of the Act. He could not curtail the minimum period of 30 days notice specified in the sub-section. His action in curtailing the period, made the notice illegal and invalid. When the notices are invalid, the returns filed in response to and the assessment completed under the said notices, are also invalid. Consequently, this objection of the assessee is valid and is required to be accepted. Although, we do not agree with the reasoning given by the learned CWT(A) in the impugned order, we cancel reassessment proceedings on account of the reason given above. Our aforesaid action in holding notices issued under s.
17(1) as invalid, is supported by the three decisions cited by the learned counsel for the assessee. In view of the aforesaid discussion, the action of the learned CWT(A) is upheld in both the years.
11. In the result, both the appeals and the cross objections are rejected.