Full Judgment
2. The first two common grounds relate to legality and validity of the reassessment proceedings initiated in this case under Section 147 of the IT Act, 1961 (in short 'the Act'), which read as under: 1. That, whether on the facts and circumstances of the case the AO is justified in invoking the provisions of Section 147 of the IT Act, 1961.
2. That in respect of the facts and circumstances of the case the learned CIT(A) has erred by not holding that the assessment proceedings are null and void on the basis that the notice under Section 148 was issued without any jurisdiction.
3. The facts of the case are that the assessee filed the return of income for the asst. yr. 1994-95 on 31st Oct., 1994 declaring therein nil income after claiming deduction under Section 80-IA amounting to Rs. 30,44,436. The assessee also filed the returns of income for the asst. yrs. 1995-96 & 1996-97 on 22nd Oct., 1996 and 30th Oct., 1996 declaring therein income of Rs. 1310 and Rs. 7,00,860 respectively after claiming deductions under Section 80-IA amounting to Rs. 54,82,688 and Rs. 4,39,388 respectively. These returns were processed under Section 143(1)(a). Notices under Section 143(2) were not issued for any of these assessment years. However, subsequently, the AO initiated reassessment proceedings under Section 147 on the ground that in order to verify the correctness of the claims of the assessee for deductions under Section 80-IA, the AO visited business premises of the assessee and recorded the statement of the person who was residing at the given address and found out that no business activities were being carried out at the given address. He also noticed that no such activities were also being carried out in the past. Thus, the AO observed that the assessee had not fulfilled the conditions laid down under Section 80-IA and, therefore, he was satisfied that the income chargeable to tax to the extent of claim made for deduction under Section 80-IA had escaped assessment. Accordingly, the AO, issued notices under Section 148 for the asst. yr. 1994-95 on 22nd Sept., 1998 and for the asst. yrs. 1995-96 and 1996-97 on 26th Feb., 1999.
Thereafter, the reassessments were completed by the AO under Section 143(3) r/w Section 147 on 5th March, 2001 determining the income at Rs. 30,45,967, 54,83,998 and Rs. 11,40,248 for the asst. yrs. 1994-95, 1995-96 and 1996-97 respectively. While completing the reassessments, the AO disallowed the claim of the assessee for deductions under Section 80-IA for all the above mentioned assessment years.
4. Being aggrieved, the assessee filed the appeals against the assessment orders before the CIT(A) where inter alia action of the AO for initiating the reassessment proceedings under Section 147 was challenged for all the assessment years. It was submitted before the CIT(A) that the AO failed to establish and to place any material on record which formed the basis of reopening the assessments. It was argued that reassessment proceedings have been initiated merely on the basis of suspicion and hearsay. For reopening the assessments, he AO has referred to some statement of third party recorded in the absence of the assessee, without allowing an opportunity to cross-examine the party and also without supplying a copy of. the statement. Further, proper proof of the identification of the wife of the deceased land-lord Sh. M.K. Mattu was submitted before the AO and the same was ignored by the AO. It was also stated that even the AO had admitted in the assessment order that even if it was assumed that Smt. Dulari Mattu had let out the premises to the assessee, she had no locus standi to certify that a valid manufacturing activity was being carried out from the said premises. Therefore, it was submitted that no reliance could be made on her statement for the purpose of initiating the reassessment proceedings. The AO also wrongly relied on the statement of Sh. Pawan Raina inspite of the fact that he has never resided at the premises used by the assessee from 1993 to 1996, when the business was being carried out. He rented out the part of the premises only after the assessee had closed down the business. The AO failed to take notice of the fact that the assessee had obtained clearance from Ministry of Industries, Government of India, New Delhi, for the purpose of manufacturing activity carried out by the assessee at Jammu. It was also submitted that the unit was inspected by the officials of the customs and central excise at regular intervals and the proper excise duty had also been paid on the items manufactured. The assessee had also furnished proof for import of raw-material and export of finished goods from Jammu in support of the contention that the assessee had indeed carried on manufacturing activities at the said premises.
However, the AO failed to establish that the assessee had not carried on any manufacturing activities at the said premises. It was also submitted that the unit of the assessee was registered with Industries Department, Sales-tax, Excise and Customs Officials and was being inspected by such authorities at periodical intervals. Therefore, inference drawn by AO that no manufacturing activity was being carried on at the premises was without basis. It was also submitted that since there was no material, or information which could show that income chargeable to tax had escaped assessment, the reassessment proceedings initiated by the AO were merely on the basis of suspicion and, therefore, the same were bad in law and void ab initio.
5. The learned CIT(A) considered these submissions and referred the same to the AO. The AO submitted his remand report vide his letters dt.
5th Sept., 2002 and 30th Sept., 2002 stating therein that he had examined gate-pass register. But the same did not indicate any local manufacturing activity carried out by the assessee at Jammu. The gate pass was signed by the Inspector, Excise Department Jammu. He further stated that on the basis of further local enquiries made by him, it was learnt that no manufacturing activity was being carried out by the assessee. He also inspected the premises and noted the items lying there. He also stated that though the assessee purchased machinery worth Rs. 3.5 lakhs required for manufacture of laptop computers, yet there was no evidence to show that the same was transported to the site of the manufacture. The explanation of the assessee was that the machinery required was very light and the same was transported from Delhi to Jammu as personal luggage of Sh. Anjai Mandal who travelled by Air. He also reported that the assessee also got its books of accounts audited from M/s Shinghal Ashok & Associate, CA, Delhi. As regards the raw materials, the AO reported that though address given in the bills for purchase of raw material was of Jammu, but the assessee got the same released at Delhi Airport itself and there was no further evidence to show that the said material was actually transported to Jammu. The assessee's explanation for the same was that the raw material was so light, it was transported by car/air from Delhi to Jammu. Though the assessee was asked to produce books of account yet it stated that the assessee had only maintained computerized accounts. The learned CIT(A) considered the rival contentions and came to the conclusion that reassessment proceedings were validly initiated in this case. The reasons given in his consolidated order are briefly as under: (i) The claim of the assessee that reassessment proceedings have been initiated without any material was not correct because before initiating such proceedings, the AO had recorded the detailed reasons for initiating such action which also inter alia mentioned that he had visited site/place of business and found that no manufacturing activity was carried on by the assessee.
(ii) Since the notices under Section 148 had been issued within a period of four years from the end of the assessment years concerned and the returns were processed under Section 143(1)(a) only, there was no requirement for the AO to establish that income chargeable to tax had escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.
(iii) Since the AO had not completed the original assessments under Section 143(3) and returns were processed under Section 143(1)(a) only, there was no question of any change of opinion as contended by the assessee.
(iv) The central issue in this case was whether the assessee was entitled to deduction under Section 80-IA. However, the material placed on record indicated that no such activity was carried on by the assessee at Jammu. This was clear from the statement of Smt. Raj Kishori Mattu wife of the landlord recorded on 3rd June, 1999. In fact, the assessee filed an affidavit of Smt. Raj Dulari Mattu, claimed to be the wife of the owner of the property. However, the assessee failed to produce lady before the AO. Besides, the AO had also relied on the statement of Sh. Pawan Raina who was tenant of House No. 10, Bhagwati Nagar, Jammu. He also stated that there was no manufacturing/business activity being carried out by the assessee from the said premises.
(v) The learned CIT(A) also observed that the place from where the manufacturing activity was being carried out did not have any telephone connection. The only one connection was in the name of Smt. Mohmi Raina, without any STD facility. Since all the partners were residing at Delhi and manufacturing activity was claimed to have been carried out from Jammu, the absence of telephone connection caused serious doubts about the manufacturing activities having been carried out from Jammu.
(vi) The assessee was not able to furnish any concrete evidence to show that machinery and raw material purchased were transported to Jammu where the manufacturing activity was being carried on.
Thus, taking note of the above mentioned facts, the learned CIT(A) upheld the action of AO for reopening the assessments and denying deduction under Section 80IA claimed by the assessee in the returns.
The assessee is aggrieved with the order of the CIT(A). Hence, these appeals before us.
6. The learned Counsel for the assessee, Sh. V.K. Tulsian, submitted that during the course of assessment proceedings, the AO did not supply the reasons recorded by the AO for initiating the reassessment proceedings under Section 147. Even the copies of the statements relied upon by the AO for initiating the action under Section 147 were not supplied to the assessee. It was only at the intervention of the Bench that copies of the reasons recorded have been made available and copies of the statements of Smt. Raj Kishori Mattu, Sh. Pawan Raina and Sh.
M.L. Sarup, have been made available. He submitted that the assessee had filed the return of income for the asst. yr. 1994-95 on 31st Oct., 1994 and returns for the asst. yrs. 1995-96 and 1996-97 on 22nd Oct., 1996 and 31st Oct., 1996 respectively. He submitted that these returns were processed under Section 143(1)(a). He submitted that time limit for issue of notices under Section 143(2) for the asst. yr. 1994-95 was 31st Oct., 1995 and for the asst. yrs. 1995-96 and 1996-97 on 31st Oct., 1997. He submitted that these notices had not been issued by the AO within time prescribed under the Act. This shows that the AO was satisfied with the correctness of the claim of the assessee for deduction under Section 80-IA. He submitted that for the purpose of initiating the reassessment proceedings under Section 147, there must be definite information or material available with the AO which should enable him to form a 'reason to believe' that income chargeable to tax had escaped assessment. He submitted that the machinery of reassessment proceedings cannot be used by the AO for making fishing and roving enquiries. He drew our attention to copies of reasons recorded by the AO which are identical for all the assessment years for initiating reassessment proceedings. He submitted that in the reasons recorded, the AO has mentioned that in order to verify the correctness of the contention of the assessee and the business activities being carried out by the assessee firm, then AO holding jurisdiction over the case had visited business premises to find out whether business activities were being carried on by the assessee. He submitted that during his visit, he recorded statement of the person who was residing at the given address. On the basis of his visit and statement of the person and the subsequent visit of the successor AO, the AO learnt that no business activity was being carried out by the assessee from the said premises and, therefore, the AO entertained a belief that income chargeable to tax by claiming deduction under Section 80-IA for these three assessment years had escaped assessments. He submitted that the reasons recorded by the AO are vague and unspecific. He submitted that neither the AO has given the date of the visit of the predecessor AO nor his own visit at the premises. He submitted that this fact is also not borne from the record. He has also not given the name of the person whose statement was recorded and under what section the same was recorded. He submitted that the condition precedent for initiating reassessment proceedings is that the material which comes in possession of the AO must have a direct nexus with the reason to believe that income chargeable to tax had escaped assessment. He submitted that in this case, the AO has invoked the provisions of Section 147 only for the purpose of verification and making roving and fishing enquiries, which is not permitted under the provisions of the Act.
6.1 He further submitted that the assessee had only filed the returns of income for the asst. yrs. 1994-95, 1995-96 and 1996-97. Since the assessee had closed down the business at Jammu in February, 1996, no return for the subsequent assessment years was filed. He further drew our attention to a copy of the statement of Sh. Pawan Raina recorded on 12th March, 1997. He submitted that Sh. Pawan Raina stated that he was a migrant engineer and started living at the place since February, 1996. He submitted that nowhere the AO has mentioned the section under which such statement was recorded, the place and the name of the person in whose presence such statement was recorded. He further stated that even the name of the officer who recorded the statement is not mentioned. It is not known whether the statement was recorded by an AO or his Inspector. He further stated that the assessee carried on the business at the premises from the years 1993-94 to 1995-96 and closed down the business in February, 1996. Sh. Pawan Raina shifted to Jammu and started residing at the said premises since February, 1996 when the business of the assessee had already been closed. He further stated that how could he state whether any business activity was being carried on at the said premises from the years 1993 to February, 1996 when he was not even residing at Jammu. He further stated that in reply to a question. Sh. Raina stated that three rooms of the said premises were locked and he was not sure who were operating the rooms. Since the business had already been closed, his reply to the question that he had not seen any goods being loaded or unloaded from the same premises had no relevance. Likewise, he could not say whether any machinery was installed or not. Thus, he submitted that on the basis of such statement, the AO could not have formed a 'reason to believe' that claim for deduction under Section 80-IA was not genuine and consequently income chargeable to tax had escaped assessment.
6.2 He further referred to the statement of Sh. M.L. Sarup, CA recorded by the AO on 30th March, 1997. He stated that in this case also, the name of the authority who recorded the statement is not known. There is no mention about the place where the statement was recorded. There is no name of the witness present at the time of recording the statement.
It is also not known whether the statement was recorded by the AO or by an Inspector. He further referred to the answers given by Sh. M.L.
Sarup, where he stated that he was attending to consultancy and related matters like excise, sales-tax and income-tax for which he was charging fees of Rs. 5,000. He also stated that the audit was being done by the auditors at Delhi. Full name and address was also mentioned. He particularly drew our attention to answer of Sh. M.L. Sarup where he stated that the assessee was in the business of manufacture of Laptop computers and he further gave the name of the working partner. He submitted that nowhere Sh. Sarup has stated that assessee was not carrying on any business at Jammu. Thus, how it could be believed that assessee was not carrying on any manufacturing business at Jammu. He also referred to the statement of Smt. Raj Kishori Matto, which does not even indicate who had recorded the statement, when the statement was recorded and under what section the same was recorded on 3rd June, 1999. It does not even bear the signatures of the officer who recorded the statement. Thus, he submitted that there was absolutely no definite information or material available with the AO to form a reason to believe that income chargeable to tax had escaped assessment. He further submitted that if the AO was to rely on these statements, which were recorded before 31st March, 1997 for initiating the reassessment proceedings, he could have simply issued notices under Section 143(2) for the asst. yrs. 1995-96 and 1996-97 for which the time was available with the AO till 31st Oct., 1997. There was no need for him to resort to provisions of Section 147. This only shows that the AO cooked up the evidence and taken shelter behind the so-called statements for initiating the reassessment proceedings which were illegal and void ab initio. He also relied on the following judgments: (i) Gehna v. Union of India (2003) 184 CTR (Raj) 446 : (2003) 132 Taxman 592 (Raj) where it was held that since the petitioner has already sought reasons from the concerned authorities, it is expected from them to supply the reasons for issuing notice under Section 148 to the petitioner within a reasonable time. Since the above procedure has not been followed by the AO, the respondents are now directed to supply reasons for issuing notice.
where it was held that when all the relevant materials were produced by the assessee during the original assessment and there has been no failure on this part to disclose primary or material facts for effecting the assessment, than the proceedings initiated under Section 147 of IT Act were unsustainable and without jurisdiction.Janki Prasad Garden Enclave (P) Ltd. v. Asstt. CIT (2005) 93 TTJ (Lucknow) 123 : (2005) 92 ITD 47 (Lucknow) where it was held that 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 reason 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 opening of assessment.
In this case, it was held that mere reason to suspect is not enough to reopen assessment but AO should have 'reason to believe' that any income chargeable to tax has escaped assessment. Since the notice was based on vague statement of any person and no live link or nexus between statement and belief and if the notice issued under Section 148 is invalid for any reason, the entire proceedings taken by the AO would become void for want of jurisdiction.
In this case, it was held that since there was no other material with the AO for initiating the reassessment proceedings except District Valuation Officer's report, so the report of DVO for determining cost of construction could not be made the sole basis for reopening of assessment.
(vi) ICICI Bank Ltd. v. K.J. Rao, Dy. CIT (2004) 188 CTR (Bom) 380 : (2004) 136 Taxman 669 (Bom) In this case, it was held that if there is no failure to disclose material facts, then even if there is excess relief granted, the assessment cannot be reopened beyond the period of 4 years from the end of relevant assessment year. If the legal inference drawn from the material facts is erroneous it cannot be said that there is failure on the part of the assessee to disclose material facts.Parikh Petrol Chemical Agencies (P) Ltd. v. Asstt. CIT (2003) 183 CTR (Bom) 243 : (2003) 129 Taxman 574 (Bom) In this case, it was held that although under Expln. 2 to Section 147, grant of excess relief could be a ground for reopening the part of the assessee to disclose fully and truly all material facts, concluded assessments cannot be reopened. In the event, there is no material whatsoever on the record to show that there was any failure on the part of the petitioner to disclose fully and truly all material facts necessary for the assessment. So the deeming provision contained in Expln. 2 to Section 147 has no application.
In this case, it was observed that at the time of submission of the original returns, as per the requirements of the law, the assessee submitted certificates from the chartered accountant in the prescribed forms claiming exemptions. Thus, the primary facts were before the AO when he made the assessments under Sub-section (3) of Section 143 and it was not open to him to invoke the provisions of Section 147 of the said Act to reopen the assessment because he might have omitted to notice certain facts by oversight. For change of opinion, the provisions of Section 147 of the said Act cannot be put to service.
(ix) CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617 : (2002) 256 ITR 1 (Del)(FB) The High Court observed that an order of assessment can be passed either in terms of Sub-section (1) of Section 143 or Sub-section (3) of the Section 143. When a regular order of assessment is passed in terms of said Sub-section (3) of the Section 143 a presumption can be raised that such an order have been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of Clause (e) of Section 114 of the Indian Evidence Act, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon AO to reopen the proceedings without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.
Hence it is clear that Section 147 of the Act does not postulate conferment of power upon the AO to initiate reassessment proceedings upon a mere change of opinion.
(x) Dy. CIT v. Narendra Mohan Bagroy (2004) 84 TTJ (Pat)(TM) 570 : (2004) 90 ITD 90 (Pat)(TM) In this case, it was held that the expression 'reason to believe' does not mean 'reason to suspect'. The expression 'reason to believe' in Section 147 does not mean purely subjective satisfaction on the part of the AO. The belief must be held in good faith; it cannot be merely a pretence. There must be rational connection between the reasons for the belief and the relevant material.
(xi) G.B. Bros. & Konda Rajagopala Chetty Beedi Factory (P) Ltd. v. ITO (2002) 176 CTR (AP) 572 : (2003) 132 Taxman 737 (AP) It was held that once the assessee has filed/disclosed fully and truly all the material facts regarding situation of office, site then there is no occasion to invoke Section 147 subsequently. The Hon'ble High Court by following the apex Court decision in the case of Parashuram Pottery Works Co. Ltd. (1997) 106 ITR 1, observed that "the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends. It is for the ITO to draw the correct inference from the primary facts. It is not responsibility of the assessee to advise the ITO with regard to the inference which he should draw from the primary facts.
In this case, the Hon'ble High Court referred the judgment of Grover Nursing Home (2001) 248 ITR 493 and observed that "even though the report of the Departmental Valuer cannot be made the sole basis for Section 147 r/w Section 148 because the valuation report is based on estimate which is matter of opinion.
(xiii) RRB Securities Ltd. v. Jt. CIT (2004) 91 TTJ (Del) 883 : (2004) 141 Taxman 49 (Del)(Mag) where it was held that reassessment proceedings could not be initiated for further verification of income shown in the return or otherwise, and that could be done by issuing notice under Section 143(2) of the Act.
Thus, the assessee has stated that assessments reopened merely on the basis of statement of Shri Pawan Raina was illegal, invalid and void ab initio.
7. The learned senior Departmental Representative Sh. Darshan Singh, on the other hand, relied on the orders of the authorities below and submitted that the AO correctly initiated reassessment proceedings on the basis of statement recorded and personal visit made by AO to see that no manufacturing activity was being carried out at the premises of the assessee. Thus, he submitted that reopening of the assessment under Section 147 r/w Expln. 2(c) of Section 147 of the Act by the AO was valid and justified.
8. We have heard both the parties at some length and given our anxious consideration to the rival contentions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below and referred to the relevant pages of the paper book to which our attention has been drawn. We have also referred to the relevant judgments cited at the bar. Now the first issue that requires to be decided by this Bench is whether the AO was justified in initiating the reassessment proceedings on the basis of evidence and material placed on record. Before recording our findings on this issue, we consider it appropriate to reproduce hereunder the provisions of Section 147 of the IT Act, 1961 r/w Expln. 2(c) of Section 147, which read as under: 147. If the AO 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 and 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 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 and 153 referred to as the relevant assessment year).
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 2--For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
A bare reading of the above provisions of the Act shows that the AO can initiate reassessment proceedings, if he has, 'reason to believe' that any income chargeable to tax has escaped assessment for any assessment year subject to the provisions of Sections 148 to 153 of the Act. In such a case the AO is empowered to assess or reassess such income. Such escapement of income could be due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Such escapement of income could also be without any omission or failure on the part of the assessee to disclose fully and truly all material facts. The proviso to Section 147 provides that in case the assessment completed under Sections 143(3) or 147 is to be reopened after the expiry of four years from the end of the relevant assessment year, the AO could take recourse of such action only if the escapement of income chargeable to tax was on account of assessee's failure to disclose fully and truly all material facts necessary for assessment. In case such assessment completed under Section 143(3) or 147 is to be reopened within a period of four years from the end of the relevant assessment year, the requirement to establish the escapement of income due to omission and failure on the part of the assessee to disclose fully and truly all material facts, is not required to be established. Similarly, such requirement is also not required to be established in a case where assessment has been completed under Section 143(1)/return has been processed under Section 143(1)(a). But the conditions precedent for initiating the reassessment proceedings must exist before such action could be initiated by the AO. Explanation 2(c) deals with deemed escapement of income where assessment has been made, but income chargeable to tax has been underassessed or such income has been assessed at too low a rate or such income has been made the subject-matter of excessive relief under this Act or excessive loss or depreciation allowance or any other allowance under this Act has been allowed.
8.1 The expression used in Section 147 is that if the AO has 'reason to believe' that any income chargeable to tax has escaped assessment. The expression "reason to believe" used in Section 147 has special significance. It does not mean 'reason to suspect'. It is reasonable belief of a honest and reasonable person based upon reasonable grounds.
The expression used is not 'satisfied'. The 'reason to believe' requires higher level of evidence and material than the requirement of 'satisfaction' of the AO which essentially means the material which comes to the notice of AO must be a definite, specific and direct and not unspecific or vague. This issue was considered by the Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Dass where the apex Court observed that "reason to believe" does not mean "reason to suspect". The reasons for the formation of the belief contemplated under Section 147 necessary for reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct, nexus or live link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee. The apex Court further observed that it was not every material, howsoever vague and indefinite or distant, remote and far fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. Again this issue was considered by the Hon'ble Supreme Court in the case of Ganga Saran & Sons (P) Ltd. v. ITO , where the apex Court observed that expression "reason to believe" was stronger than the words 'satisfied'. The belief entertained by the AO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. If there is no rationale and intelligible nexus between the reasons and belief, the reopening of the assessment would be without jurisdiction and bad in law.
8.2 The basis for initiating the reassessment proceedings is to be judged solely on the basis of reasons recorded by the AO and the material and information referred to by the AO in the reasons for initiating such action. It is settled law that AO cannot initiate the reassessment proceedings merely on the basis of suspicion or for the purpose of making verification. The AO cannot support the reopening of the assessment by collecting the material or by making enquiry subsequently after the date of initiation of the proceedings. Thus, the reopening of the assessment is to be seen on the date when the AO initiated action under Section 147. In the present case, the material gathered by the AO during the course of assessment proceedings or enquiry made by him during the remand proceedings cannot be taken into account for the purpose of deciding the validity of the initiation of the reassessment proceedings. The duty of the learned CIT(A) was also to confine himself to the material on record on the date when the AO initiated the proceedings and not to look into the material subsequently gathered by the AO during assessment and remand proceedings.
8.3 In the present case also, whether the AO was justified in initiating reassessment proceedings or not has to be decided on the basis of material and evidence placed on record and the legal position discussed above. The undisputed facts of the case are that the assessee had filed returns for the asst. yrs. 1994-95, 1995-96 and 1996-97 claiming deduction under Section 80-IA of the amount mentioned in the preceding paragraphs. Since no objection has been raised by the Revenue on any other ground, it is clear that the claims of the assessee were supported by audit report of the auditors. Further, it is also a fact that the assessee was engaged in the business of manufacture of Laptop computers and the project was approved by the Ministry of Industries, Government of India, State Excise Department, Sales-tax Department and assessee had also obtained loan from State Bank of India. These facts are not in doubt. It is also a fact that the AO had processed the returns under Section 143(1)(a). The learned Counsel for the assessee submitted before us that subsequent to asst. yr. 1996-97, no return of income had been filed because the assessee closed its business in Jammu in February, 1996. No return prior to asst. yr. 1994-95 had also been filed. Section 143(2) of the Act empowers the AO to issue a notice in a case where a return has been furnished under Section 139, or in response to a notice under Sub-section (1) of Section 142 and the AO has 'reason to believe' that any claim of loss, exemption, deduction, allowance or relief made in the return was inadmissible. The AO is required to issue such notice within a period of one year from the end of the month in which return was filed by the assessee. The time limit for issue of notice under Section 143(2) for the asst. yr. 1994-95 expired on 30th Oct., 1995 and for the remaining two assessment years on 31st Oct., 1997. Admittedly, in this case, the AO did not issue notices under Section 143(2) for any of the assessment years. In other words, there were no proceedings pending in this case. Now the AO initiated the proceedings under Section 148 by recording identical reasons for all the three assessment years. It would be in the fitness of things to reproduce herein the reasons recorded by the AO for the asst. yr. 1994-95 which are same as for the subsequent assessment years also. These are as under: This is the case of the partnership firm and the business of the firm is marketing of computer system accessories, electronic equipments and software. During the year under consideration the assessee-firm has drawn the balance sheet and as per P&L a/c net profit has been shown at Rs. 30,44,436. However, after claiming the exemption under Section 80-I(A) of the IT Act, 1961 being an industrial undertaking located in an industrially backward state of Jammu and Kashmir as 'specified in the eighth schedule. 100 per cent exemption has been claimed under the said section and net income chargeable to tax has been shown at nil.
2. In order to verify the correctness of the contention of the assessee and the business activities being carried out by the assessee-firm, my predecessor (ITO, Ward-1, Jammu) who was previously holding jurisdiction over the case had visited the place of business activities and the statement of the person who was residing at the given address was also got recorded by him. After going through all these facts and the statements recorded, it is clearly established that no business activities are being carried out in the given address in the State of Jammu and Kashmir. I had personally also visited the given address and made inspection of the activities being carried out, but it was noticed that no such activities were ever being carried out in the said premises.
3. Taking into consideration all these facts, it is clearly established that since assessee has failed to establish any industrial unit on the given address as has been alleged by him, therefore, it has clearly contravened the provisions of Section 80-I(A) of the IT Act, 1961 and hence is not entitled to any deduction under the said provisions of the Act. Accordingly, I am satisfied that income which was chargeable to tax has escaped assessment within the meaning of Section 147 of the IT Act, 1961 and accordingly income of Rs. 30,44,436 has escaped assessment on account of wrong claim of deduction under Section 80-IA of the IT Act. Hence to bring this income to tax, notice under Section 148 is being issued in this case.
A bare reading of the above reasons shows that the basis of the AO for initiating reassessment proceedings was as under: (i) The predecessor AO visited the premises of the assessee in order to verify the correctness of the contention of the assessee to see whether any business activity was being carried out at the premises.
No date of the visit has been mentioned in the reasons either by the predecessor AO or by successor AO, who initiated the reassessment proceedings. It is also significant to note that when such visits were undertaken, no proceedings under the Act were pending, as the assessee had filed the returns which were processed and notices under Section 143(2) had not been issued.
(ii) The reasons recorded show that during the visit of the AO, he recorded the statement of the person residing at the given address.
The name of the person, the date on which statement was recorded and the section under which such statement was recorded have not been mentioned. The place at which statement was recorded and in whose presence such statement was recorded have not been mentioned.
(iii) Subsequently, the AO mentions that after going through these facts and the statements recorded (again he does not mention the name of the person on whose statement he was relying upon) for the inference that no business activities were being carried out on the given address, the section under which such statement was recorded and the place where such statement was recorded.
The AO has finally recorded that in the light of these facts, "I am satisfied that income which was chargeable to tax had escaped assessment within meaning of Section 147 of the Act.
The expression 'reason to believe' a prerequisite for initiating reassessment proceedings has been missing in the reasons recorded for all the three assessment years. We have already drawn distinction between the expression "satisfied" and the 'reason to believe' as highlighted by the Hon'ble Supreme Court in the case of Ganga Saran (P) Ltd. v. ITO (supra). Therefore, even on this point also, reopening of the assessment on the basis of reasons recorded suffers from major legal infirmity.
8.4 In the reasons recorded, the AO has referred to the statement of Sh. Pawan Raina, who was residing at the premises where business was carried on by the assessee. A copy of the statement placed before us does not mention the section under which his statement was recorded on 12th March, 1997. It does not show the place at which the statement was recorded. There is no entry in the order-sheet to show the date of visit of the AO to the premises of the assessee. There is no entry about the fact of recording the statement. As per provisions of the Act, the statement could be recorded under Section 131 of the Act.
However, the assessment records called for from the AO did not show issue and service of summons on Sh. Pawan Raina. The statement could also be recorded during the course of search action under Section 132(4) of the Act or it could even be recorded under Section 133A by an IT authority. Since no search and seizure action under Section 132(1) and survey action under Section 133A were carried out in this case, the statement could not be considered to have been recorded under Section 132(4) or under Section 133A. The other provisions which enables the AO to make enquiry is Sub-section (2) of Section 143/142(1) of the Act.
Here also, it is mandatory that the AO should have first issued a notice under Section 143(2) before embarking upon such enquiry. In the present case, admittedly no notice under Section 143(2) had been issued for any of the assessment years. No other proceedings were pending before the AO as apart from these assessment years, no other return had been filed by the assessee. It is not the claim of the Revenue that it was a complaint case and, therefore, enquiries were initiated by the AO on such basis. There is neither any entry in the order-sheet nor any such material has been placed before us. The exercise of powers vested with the AO is circumscribed by the provisions of the Act and the AO is expected to observe proper procedure and keep in view the requirement of law. The law does not confer unbridled powers on the AO to visit the premises of the assessee at any time for verification of the claim which he could have done only by issue of notice under Section 143(2).
Therefore, the visit of the AO to the premises of the assessee and recording of the statement of Sh. Pawan Raina without service of notice under Section 143(2)/summons under Section 131 and also without making any entry in the order-sheet was not in conformity with the letter and spirit of law.
8.5 It is relevant to mention that even for selection of a case under scrutiny, the AO is required to obtain approval of the higher authorities. Therefore, the provisions of Section 147 cannot be resorted to by the AO with a view to circumvent the legal requirement/procedure more so when there is no such material to warrant initiation of reassessment proceedings. Be that as it may, we have referred to the statement of Sh. Pawan Raina, where he stated that he was a migrant engineer and had been putting up at that place since February, 1996 onwards. The claim of the assessee is that in February, 1996, the assessee had already closed down the business. Therefore, the reliance on his statement for the purpose of initiating reassessment proceedings that no business was carried on when in fact, the business already stood closed has no meaning. His answer that he had never seen any goods being received or loaded from the premises is to be seen in the context that business already stood closed. In reply to a question that the signboard of the assessee was existing at the premises, he had simply stated that he had no knowledge about the activity being carried out there in the premises. This fact again is to be seen in the context that business had already been closed. Further, the fact that Sh. Pawan Raina shifted to this place only in February, 1996, how could he tell about the fact whether any business was being carried out from the said premises in the past or not. Thus, even on the basis of facts stated by Sh. Pawan Raina, it could not be inferred that the claim of the assessee for deduction under Section 80-IA was bogus. In other words, there is no material or information in the statement of Sh. Pawan Raina to support the conclusion that claim for deduction under Section 80-IA in respect of the period when such business was carried on by the assessee was not genuine. Therefore, initiation of reassessment proceedings by relying on the statement of Sh. Pawan Raina could not be held to be valid and legal.
8.6 In the reasons recorded, the AO has referred to the statement of Sh. Pawan Raina. However, in para 2, he further mentions "statements" we find that there is statement of Sh. M.L. Saroop recorded on 13th March, 1997. Sh. M.L. Saroop was CA looking after sales-tax, excise and income-tax matters of the assessee at Jammu. A copy of his statement is also placed before us. This also does not indicate the place at which the statement was recorded and a copy of the summons issued to Sh.
Saroop is also not on record. The name of the officer who recorded the statement has also not been mentioned. Be that as it may, he had stated that the audit was being done by CA' at Delhi for which the name and address of the auditors were also given. It is the choice of assessee as to whom to engage for audit work and who should attend to his other matters. Such fact cannot be held against the assessee. Now the very fact that the audit was being done by some other CA at Delhi does not lead to the conclusion that no business activity was being carried out at the premises of the assessee. He was specifically asked as to what business was being carried out by the assessee. His reply is as under: No further question as to the place where such business activity was being carried out was asked from Sh. Saroop. Thus, the statement of Sh.
M.L. Saroop supports the case of the assessee that the assessee was indeed carrying on such business. Nowhere, he has stated that such business was not being carried out by the assessee at Jammu.
8.7 The next statement placed on our record is that of Smt. Raj Kishori Matto. which reads as under: Statement of Smt. Raj Kishori Mattu w/o late Sh. M.K. Mattu, G. 190 A/D, Gandhi Nagar, Jammu recorded on 3rd June, 1999 It is certified that there was no company under the name and style of M/s Pyramid Software & Technologies was ever functioning at 190 A/D, Gandhi Nagar, Jammu.
A perusal of the statement extracted above, does not at all show as to who had recorded the statement and the place where such statement was recorded. Even the signature of the AO who recorded the statement does not exist. A copy of summon issued to Smt. Raj Kishori Matto is not on record. It is also not known whether the statement was recorded under Section 131 or some other section. Therefore, this statement is not valid in the eye of law and cannot form the basis of initiating the reassessment proceedings. Further, the statement bears the date on which it was recorded as 3rd June, 1999. A copy of the reasons recorded by the AO for the asst. yr. 1994-95 furnished by the learned Departmental Representative vide his letter dt, 25th Aug., 2005 along with other statements shows that the reasons were recorded on 22nd Sept., 1998. Obviously, this statement was not available at the time when the AO initiated action under Section 147 and issued a notice under Section 148 for this assessment year. Obviously, therefore, this statement could not form the basis of initiating reassessment proceedings for the asst. yr. 1994-95. Copies of the reasons recorded for the asst. yrs. 1995-96 and 1996-97 furnished by the learned Departmental Representative show that these are the replica of reasons recorded for the asst. yr. 1994-95. No reference has been made to the statement of Smt. Raj Kishori Matto in the reasons recorded. Therefore, it also does not form the basis of initiating reassessment proceedings for any of these assessment years. Be that as it may, the context in which her statement is recorded and the questions asked are also not known. Moreover, the AO has himself observed in the assessment order on p. 3 of the assessment order that Smt. Dulari Mattu had not locus standi to certify that a valid manufacturing activity was carried out by the assessee from the said premises. Therefore, no cognizance can be taken of the statement recorded of Smt. Raj Kishori Matto and in any case how could this be the basis of initiating the reassessment proceedings.
8.8 In fact, there is a grave doubt as to whether the statements were recorded on the dates mentioned therein. We find that notices under Section 143(2) for the asst. yrs. 1995-96 and 1996-97 could have been issued upto 31st Oct., 1997. The statements of S/Sh. Pawan Raina and M.L. Saroop were recorded on 12th March, 1997 and 13th March, 1997 respectively. Thus, the AO had sufficient time available with him to issue notices under Section 143(2) for these two assessment years rather than initiating the reassessment proceedings. But no such action for issue of notices under Section 143(2) was taken for the asst. yrs.
1995-96 and 1996-97. Moreover, in case the statements were recorded on 12th March, 1997 and 13th March, 1997, the AO could have initiated reassessment proceedings in the year 1997 immediately after he found that no manufacturing activity was being carried out by the assessee.
We find that reassessment proceedings for the asst. yr. 1994-95 were initiated on 22nd Feb., 1998, i.e., after a year from recording the statements and for the subsequent assessment years on 26th Feb., 1999, i.e., after two years. The reasons for such delay are beyond our comprehension. Coupled with this is the fact that the order-sheet entries for all the three assessment years do not show the factum of visits of the AO and the statements recorded by the AO. Thus, these facts lend grave doubt about the dates on which statements were stated to have been recorded.
8.9 Be that as it may, the conditions necessary for initiating reassessment proceedings are that there must be a direct nexus between the information and material becoming available to the AO which enables him to form a 'reason to believe' that income chargeable to tax had escaped assessments. In the present case, the material placed on record does not show any nexus between the statements and the formation of belief by the AO that income chargeable to tax had escaped assessment.
The AO cannot initiate the reassessment proceedings on the bass of suspicion, vague or unspecific information. It is trite law that where the AO had no specific basis for his belief that income chargeable to tax had escaped assessment, the reassessment proceedings initiated by the AO simply for the purpose of making further verification of the claim of the assessee would be without jurisdiction, illegal and invalid. If the AO wanted to verify such claim, he could have done so by issue of notices under Section 143(2) within the period prescribed under the Act. The machinery of reassessment proceedings could not be resorted to, for covering the legal lacuna/procedure or even for patch up work by the AO. In the present case, we are of the considered opinion that there was no information/material available with the AO for entertaining a belief that income chargeable to tax had escaped assessment. The ratio of various judgments relied upon by the learned Counsel as summarized above and also the judgments of Supreme Court in the case of ITO v. Lakhmani Mewal Dass (supra) and Ganga Saran & Sons (P) Ltd. v. ITO (supra) lend support to the fact that initiation of reassessment proceedings by the AO was illegal, bad in law, without jurisdiction and void ab initio.
8.10 In the light of above detailed discussions in the preceding paragraphs and the legal position discussed above, we are of the considered opinion that the learned CIT(A) was not justified in sustaining the action of the AO for initiating the reassessment proceedings, which were illegal and void ab initio. Accordingly, we quash the reassessments completed by the AO under Section 143(3) r/w Section 147 and consequent order of the CIT(A) for all the assessment years. Therefore, respective grounds of appeal for all the assessment years are allowed.
9. The assessee has also disputed the addition, i.e., disallowance of claim of the assessee for deduction under Section 80-IA, as upheld by the CIT(A). Considering the fact that we have quashed the reassessment orders of the AO and the consequent order of CIT(A) on the ground that the same were illegal and bad in law, we do not consider it necessary to record our findings on the merits of the addition made. Therefore, these grounds are disposed of in these terms.