All the four appeals have been directed by the assessee against the separate orders of the learned CIT (A) dated 19-9-2002 pertaining to assessment years 1993-94, 1994-95, 1996-97 and 1997-98. As the common issue is involved in all the appeals, these are being disposed of by a consolidated order.
The assessee has challenged the initiation of proceedings under section 147 of the Act as well as the additions made in the re-assessment order.
Briefly, the facts of the case are that the assessee is a company which is engaged in the business of promotion and development of residential projects. The assessee maintains regular books of account which are subjected to audit and tax audit report. It filed the return of income of the respective years and these were processed under section 143(1)(a) of the Act. While the assessment for assessment year 1994-95 was made under section 143(3), no notice under section 143(2) appears to have been issued in respect of other three assessment years.
During the course of regular assessment proceedings for assessment year 1995-96, the assessing officer made a reference to the valuation officer under section 131 of the Act to estimate the cost of construction of the building owned by the assessee. On the basis of the report of the valuation officer, the necessary addition under section 69 of the Act was made in the assessment year 1995-96. As the construction was spread over a number of years including the assessment years in question before us, the assessing officer felt that the income chargeable to tax in these years have escaped assessment. The assessing officer, therefore, issued the notices under section 148 of the Act on 30-5-2001 for all the years after recording the following reasons : "In the course of assessment proceedings of M/s. Janki Prasad Garden Enclave (P) Ltd., 538, Sitapur Road, Lucknow, for assessment year 1995-96 a reference was made the District Valuation Officer for determining the cost of construction of certain properties constructed by the assessee vide his report dated 31-10-1997, the District Valuation Officer has estimated the investment in construction at Rs. 2,44,36,600 as compared to Rs. 2,37,51,936 shown by assessee. The details are as follows : The District Valuation Officer has further noted that this estimated cost does not include the cost of land, Transformer, Lift, Generator Phase III construction started after reference item of work not done stated to be sold on unfinished Flat No. B1-201, Al-25 & 26 and semifinished sold Flat Nos. A1-125, 225, A2-28, 127, B1-1, 2, 101, 102, 202, 226, 326, B2-4, 103, 104, 204, B3-5, 6, 105, 205, 306, B4-307 & 308. But includes the cost of W/S & S/I electric installation (without fans and fittings) external services, development of lawn and payment.
After accounting for the escalation mentioned by the District Valuation Officer in his report e.g. cost of land etc. the amount of understated 100 by the assessee shall be higher considering the facts the amount of superseded investment appears to be higher than the prescribed amount for issue of notice under section 148." When the re-assessment proceedings for all these four years commenced, the assessee challenged the assumption of jurisdiction by the assessing officer under section 147 of the Act on the basis of District Valuation Officer's report. A petition was also moved to the Addl. CIT, who, vide his instruction under section 144A of the Act, directed the assessing officer not to make any addition under section 69 of the Act on the basis of District Valuation Officer's report. Accordingly, no addition on account of undisclosed investment in the construction of property was made by the assessing officer. However, the assessing officer still passed orders under section 143(3)/148 of the Act by making the following additions : The issue was taken up in appeal before the learned CIT (A). Before the learned CIT (A), the initiation of proceedings under section 147 of the Act has been challenged. While relying on the decisions in Vipin Khanna v. CIT (2002) 255 ITR 220 (Punj. & Har) and CIT v. Sun Engineering Works (P) Ltd. (1992) 198 ITR 297 (SC), the assessee objected the assumption of jurisdiction under section 147 of the Act by the assessing officer. Even on merits, the assessee claimed that the books of account were maintained regularly. These were also subjected to audit and no ad hoc additions could be made in the re-assessment order.
It was also claimed that similar addition on the basis of District Valuation Officer's report was made by the assessing officer in assessment year 1995-96. But the Tribunal had deleted the addition made by the assessing officer. Thus, the disallowances made by the assessing officer were beyond the scope of reassessment. It was also pleaded that for assuming jurisdiction under section 147 of the Act, there should be cogent material for formation of belief that income chargeable to tax has escaped assessment. In the instant case, though there is no material except the valuation report, it is almost settled law that no proceedings under section 147 of the Act can be initiated on the basis of valuation report. However, these submissions did not find favour with the learned CIT (A), who upheld the initiation of reassessment proceedings as well as the additions on merits.
It is argued by the learned counsel that in order to attract the provisions of section 147, the assessing officer has to hold that he had reason to believe that income chargeable to tax has escaped assessment. From the perusal of the reasons recorded, it was clear that nowhere the assessing officer has held that income chargeable to tax has escaped assessment. Moreover, it was also necessary that the assessing officer should have enough material for formation of his belief that income chargeable to tax has escaped assessment. The existence of tenable material for the formation of belief is a pre-requisite for initiation of action under section 147 of the Act. He stated that the only material before the assessing officer was the valuation report which was not to be considered in view of the Hon'ble Supreme Court decision in the case of Smt. Amiya Bala Paul v. CIT (2003) 262 ITR 407 (SC). The learned counsel stated that as the very reference to the Valuation Officer was invalid, the assessing officer had no material for formation of belief that income chargeable to tax has escaped assessment. He, therefore, pleaded that the assumption of jurisdiction under section 147 of the Act itself was illegal.
On merits also, the learned counsel stated that the Addl. CIT had directed not to make any addition on account of valuation report. As such direction was binding on the assessing officer, he accepted the same. But instead, he made ad hoc additions in respect of other items.
He admitted that as per amended provisions of section 147 of the Act, the assessing officer could make addition on other issues also which comes to his knowledge during the course of re-assessment proceedings.
But the mandatory provisions still existed that the assessing officer had reason to believe that any income chargeable to tax has escaped assessment. The learned counsel stated that in two years, the assessing officer has made addition on account of popja expenses. Various courts have held that pooja expenses were allowable deduction under section 37 of the Act. In the original order, this was allowed also. Now, if the assessing officer feels that the same was not allowable, it is only change of opinion. The disallowance on the other heads were also ad hoc. Various courts have held that in case of a company, there cannot be personal user of the cars and telephones. Thus, ad hoc disallowance under these heads in the case of a company was not permissible. While relying on the decision in CIT v. Kelvinator of India Ltd (2002) 256 ITR 1 (Del) (FB), the learned counsel stated that the assessment cannot be reopened on the mere change of opinion. He argued that by no stretch of imagination, the income on these issues could be said to have escaped assessment. The learned counsel also stated that the assessing officer had made certain small additions on account of building material, electric material and building construction. The assessing officer, in his order has mentioned that during re-assessment proceedings, the bills to that extent were not produced though the vouchers for such expenses were available. How the assessing officer could form his belief that any income chargeable to tax has escaped assessment when the vouchers were available, was beyond the cannons of law. It was stated that it is not necessary that for petty items there has to be bills. In every case, the bill is not raised. Where the payments are made, the necessary vouchers are prepared. On this basis, it could not be said that any income chargeable to tax has escaped assessment. The additions made by the assessing officer were, therefore, notjustified and deserve to be deleted. On the other hand, the learned Departmental Representative supported the order of the learned CIT (A).
We have considered the rival submissions. The facts have been mentioned above. Section 147 of the Act which has been invoked by the assessing officer reads as under : "If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)." In the amended section 147, with effect from 1-4-1989, if the assessing officer has reason to believe that income chargeable to tax has escaped assessment, for any assessment year, he has been empowered subject to the provisions of sections 148 to 153 of the Act to assess or re-assess such income and any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under section 147 of the Act. The section, therefore, envisages two important concepts for initiation of re-assessment proceedings : (1) Reason to believe; and (2) Escapement of income.
Section 148 provides that before making assessment, re-assessment or re-computation of income, the assessing officer shall serve upon the assessee a notice. Sub-section (2) of section 148 provides that before issuing any notice under this section, the assessing officer shall record his reasons for doing so. The combined reading of sections 147 and 148 makes it clear that firstly the assessing officer must have "reason to believe that any income chargeable to tax has escaped assessment" and before issuing notice under section 148, the assessing officer shall have to record the reasons. Even under the Act of 1922, the recording of reasons was a precondition for assumption of jurisdiction. Since recording of reasons is a pre-condition for assumption of jurisdiction, there cannot be controversy or debate about the necessity thereof. But the nature and quality of the reasons recorded have been the subject-matter of judicial considerations. The reasons recorded for the sake of formalities to do so will not satisfy the requirement of law. The reason should be exhaustive and should adequately justify the re-opening of assessment. This view is supported by the decision in CIT v. Kerala State Cashew Development Corpn. (1992) 198 ITR 520 (Ker), CIT v. Sukh Lal Ice Cold Storage Co. (1992) 196 ITR 562 (All). The perusal of the reasons recorded as mentioned earlier, will clearly indicate that nowhere the assessing officer has satisfied the condition of reason to believe. Thus, in absence of this mandatory condition, the initiation of re-assessment proceedings itself was illegal.
The Honble Calcutta High Court in the case of Bibhuti Bhusan Ghosh v.ITO (1993) 203 ITR 536 (Cal), had considered similar issue and observed as under : "The words "reason to believe" are stronger than the words 'Is satisfied". The belief entertained by the assessing officer must not be arbitrary or irrational. It must be based on reasons which are relevant and material. If there is no rational or intangible nexus between the reasons and the belief, the conclusion could be inescapable that the assessing officer could not have reason to believe that any part of income has escaped assessment." The above view was also expressed by various courts in the cases in Ganga Saran & Sons (P) Ltd. v. ITO (1981) 130 ITR 1 (SC), ITO v.Lakhmani Mewal Das (1976) 103 ITR 437 (SC) and 97 ITR 237 (sic). The Hon'ble Supreme Court in the case of Ganga Saran & Sons (P) Ltd. (supra) has held that that reason should be such which can lead to a belief. This cannot be a mere pretense, fanciful or arbitrary or irrational. It is admitted position that the sufficiency of the material cannot be investigated but certainly, whether there was a material at all for formation of belief can always be examined by a court. The view finds support from the decision of Honble Rajasthan High Court in the case of Sardar Kehar Singh v. CIT (1992) 195 ITR 769 (Raj).Bawa Abhai Singh v. Dy. CIT (2002) 253 ITR 83 and in the case of United Electricals Co. (P) Ltd. v.CIT "crucial expression "reason to believe" predicates that assessing officer must hold a belief... by the existence of reasons for holding such a belief. In other words, it contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons inducing the belief. Existence of tenable material for the formation of belief is a pre-requisite for initiation of the action under section 147 of the Act." The Hon'ble Delhi High Court in the case of United Electricals Co. (P) Ltd. (supra) has observed as under : "It is, thus, trite, that when a challenge is made to the action under section 147 of the Act, what the court is required to examine is whether some material exists on record for the assessing officer to form the requisite belief and the reasons for the belief have a rational nexus or a relevant bearing to the formation of such belief and are not extraneous or irrelei ant for the purpose of the said section. But the sufficiency is not justiciable." Keeping in view the ratio laid down by various courts, we have seen the facts of the case. We find that in the reasons recorded, the assessing officer was of the opinion that due to report of the Valuation Officer, the income chargeable to tax has escaped assessment. As the construction period was spread over to different years and there was difference between the cost of construction declared by the assessee and estimated by the Valuation Officer, the assessing officer resorted to the provisions of section 147 of the Act in those years. The Honble Supreme Court in the case of Smt. Amiya Bala Paul (supra) has held that the reference to the Valuation Officer under section 131 of the Act for estimating the cost of construction was invalid reference. As the Hon'ble Supreme Court interprets the law from the date the provision was brought on the statute, the reference under section 131 of the Act itself was illegal and therefore, the report of the Valuation Officer cannot be a material for formation of belief. Thus the assumption of jurisdiction on the basis of such report was itself illegal as there was no material for formation of belief that any income chargeable to tax has escaped assessment.
There is another important factor in this case. Section 149 has prescribed the limit for the issue of notice under section 148. In case the assessment under section 143(3) was made, the notice beyond a period of four years could be issued only when the escapement of income exceeded Rs. 50,000. As the notice under section 148 was issued in 2001, certainly for assessment year 1994-95, it was beyond the period of four years. The total addition made in this year was less than Rs. 10,000. One may say that as there was difference of about Rs. 50,000 between the cost of construction declared by the assessee and estimated by the Valuation Officer, the escaped income exceeded Rs. 50,000 and therefore, the initiation of proceedings under section 147 was valid.
But as we have held that the valuation report was not a material at all for the formation of belief, the same has to be ignored. Similarly, for assessment year 1993-94, the addition made by the assessing officer did not exceed Rs. 25,000. In this year, the order was made under section 143(1)(a) of the Act. As per section 149 of the Act, the notice beyond a period of four years could be issued if the income chargeable to tax has escaped assessment amounts to Rs. 25,000. Thus, even in this year the assumption of jurisdiction under section 147 was invalid.
It may be mentioned that in the reasons recorded, the assessing officer has only relied on the Valuation Officer's report. He has not pointed out any other material which led to believe that any income chargeable to tax has escaped assessment.
We agree that as per amended section 148, the assessing officer could bring to tax certain other incomes also which comes to his notice during the course of re-assessment proceedings. This only means that even if in the reasons recorded, the assessing officer has not taken that issue he could make addition if something comes to his knowledge during the course of re-assessment proceedings. But the mandatory provision is that during the course of re-assessment proceedings, the assessing officer should have reason to believe that the income chargeable to tax has escaped assessment.
Section 147 which has been reproduced earlier provides that while making reassessment, the assessing officer will first assess or re-assess "such income" and such income was directly related with the words "reason to believe". In the instant case, presumably, the reason to believe was based on the valuation report. The assessing officer, has to therefore, make addition firstly on the basis of valuation report. The section has also used the words "and also any other income chargeable to tax". The use of the words "and also" is very important.
It means addition on account of escaped income and the other escaped income which comes to the notice of the assessing officer. Thus, unless the addition of "such income" is made, no addition in respect of "and also any income chargeable to tax" could be made. In the instant case, as no addition has been made on the basis of valuation report, which was the basis for formation of belief, no addition in respect of other items mentioned in the assessment order could be made. On this basis also it could be clearly said that the mandatory condition that the income chargeable to tax in respect of even those items has escaped assessment was not satisfied.
We have also gone through the additions made by the assessing officer.
We find that some year pooja expenses have been allowed. Various courts have held that pooja expenses were allowable deductions.
Thus, such amount could not be said to have escaped assessment.
Similarly, in the case of a company, there could not be any disallowance on account of vehicle and telephone. Such disallowance, therefore, cannot be said to have escaped assessment earlier. Similar is the position in respect of other items. Keeping in view these facts, we hold that the assumption of jurisdiction under section 147 of the Act itself was illegal. Even on merits, the addition made by the assessing officer could not be said to have escaped assessment earlier and therefore, re-assessing the same will amount to mere change of opinion and in view of Hon'ble Delhi High Court decision in the case of Kelvinator India Ltd. 256 ITR 1 (supra), the assumption of jurisdiction under section 147 of the Act was invalid. We, therefore, hold that the initiation of proceedings under section 147 of the Act as well as the additions made in the re-assessment order are invalid. The re-assessment order is, therefore, cancelled.