1. This appeal by the revenue is directed against the order of CIT(A)-I, Bhopal dt. 16.7.03 for AY 97-98 on the following ground: On the facts and in the circumstances of the case, the ld. CIT(A) has erred in annulling the assessment made in pursuance to notice Under Section 148 of the Income Tax Act, 1961 for the AY 1997-98 holding that the reasons recorded by the Assessing Officer for reopening the assessment was inadequate and as such the AO had no proper justification to reopen the assessment.
2. Briefly, the facts of the case are that the assessee is a partnership firm engaged in the business of construction as civil contractor along with the business of transportation (truck plying) and return for the assessment year under appeal was filed on 31.10.97 declaring total income of Rs. 1,35,174/- along with copy of the audited accounts (Form 3CB and 3CD). The return was processed Under Section 143(1) (a) on 30th Dec, 98 and later after finding that assessee has declared less profit then the rate provided under provisions of Section 44AD (sic) the case was reopened. The assessee objected to the reopening of the case which as over-ruled by the AO relying upon decision of M.P. High Court in the case of Triple A Trading And Investment Pvt. Ltd. v. CIT 249 ITR 109, in which it was held that assessment made Under Section 143(1) could be reopened under the provisions of Section 147. According to the/AO, assessee did not produce books of account at the re-assessment stage Accordingly income was computed with the aid of Section 44AD by applying net profit rate of 8% on the gross receipt. The income was computed accordingly at Rs. 5,70,746/-. The assessee challenged the reopening of the assessment and invoking the provisions of Section 44AD and 44AE. The assessee contended before the CIT(A) that reopening of the assessment Under Section 147/148 is un-lawful and unjustified and AO is not justified in invoking the provisions of Section 44AE and 44AD. It was further submitted that the reasons mentioned in the assessment order did not warrant initiation of proceedings Under Section 147 because assessee had maintained detailed books of account and since the gross receipts from the business of the assessee exceeded the limit prescribed Under Section 44AB, it got audited the books of account and enclosed audit report along with the return. Therefore, net profit rate Under Section 44AD and 44AE is not applicable to the assessee's case as books of account were audited. The CIT(A), considering the above facts, found that the assessee prepared consolidated account for construction work and truck running receipts and that the gross receipts for the constn.
work as stated earlier were Rs. 33,69,719/-, whereas in respect of truck running business, the gross receipts are Rs. 14,50,719.50 and the net profit is declared at Rs. 1,35,174/- as per profit and loss account after deducting the expenses. The CIT(A) found that the decision cited by the AO is clearly distinguishable because in the case referred to by AO it was found that lease rent was excessively paid in contravention of provisions of Section 40A. Therefore, reopening was held to be justified. The CIT(A), however, found in the present case that no such contravention has been brought on record by the AO and that reopening is made merely on the ground that net profit was not in accordance with the provisions of Section 44AD, which could not be considered as a valid ground for reopening the assessment unless the AO was in possession of information or material facts necessary for assessment or that income chargeable to tax has escaped assessment, The CIT(A) relied upon decision of Punjab & Haryana HighCourt in the case of Vipin Khanna v. CIT 255 ITR 221, in which it was held that subsequent enquiry Under Section 147 seeking information to verify return was not valid. The CIT(A), considering the reasons and facts of the case, agreed with assessee that AO had no justification to reopen the assessment. The CIT(A) accordingly annulled the assessment. The CIT(A) as regards addition on merit with regard to application of net profit rate Under Section 44AD referred Board circular No. 684 dt. 11.6.94 in which it was clarified that scheme Under Section 44AD and 44AE is optional.
4. Ld. DR submitted that sufficiency of the reasons for reopening the assessment could not be challenged. He has further submitted that books of account were not produced before the AO at the re-assessment stage.
Therefore, reopening was justified. He has further submitted that if AO has reason to believe that income has escaped assessment, the AO is justified in reopening the assessment. Ld. DR submitted that even if return is processed Under Section 143(1)(a), reopening is justified.
Ld. DR further submitted that even if assessee has given all particulars in the return of income, re-assessment could be directed in the matter. Ld. DR in support of his contention relied upon several decisions, which we shall take up later on in this order.
5. Ld. counsel for the assess, on the other hand, supported the order of CIT(A) and filed paper book containing reasons for reopening Under Section 148 of the I.T. Act and also referred to Board circular No. 684 (supra) in which it was clarified that scheme Under Section 44AD and 44AF are optional. Ld. AR submitted that assessee maintained proper books of account and got the accounts audited and audited report was filed along with the return of income. Therefore, provisions of Section. 44AD and 44AE are not applicable and as such CIT(A) was justified in annulling the re-assessment. Ld. counsel for the assessee further submitted that AO cannot make roving enquiries to verify the return of income Under Section 147 of the I.T. Act.
6. We have considered the rival submissions and material available on record and the case laws cited by the parties. It is not in dispute that the assessee is a partnership firm engaged in the business of construction as civil contractor along with business of transportation (truck plying) and from both the sources assessee filed audited balance-sheet along with the return of income declari(sic) an income of Rs. 1,35,174/- from both the sources, copy of the audit report is filed in the paper book in which it is certified by the C.A. (Auditor) that the P(sic) a/c for the year ended on 31.3.97 is in agreement with the books of account maintained by the assessee at H.O. As per the P & L a/c the receipts of the assessee from contractor business was below Rs. 40 lakhs. Section 44AD(1) of the I.T. Act provides special provisions for computing profit and gains of business of civil construction etc.
and provides notwithstanding any thing to the contrary contained in Section 28 to 43C. In the case of assessee engaged in the business of civil constn, or supply of labour for civil construction, a sum equal to 8% of the gross receipt paid or payable to the assessee in the previous year on account of such business or as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profit and gains of the business chargeable to tax under the head 'profits and gains of business or profession'. Proviso provides that nothing contained in this Sub-section shall apply in the case aforesaid gross receipts paid or payable exceed an amount of Rs. 40 lakhs. Sub-section (5) of Section 44AD provides: Nothing contained in the foregoing provisions of this section shall apply where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in Sub-section (1), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under Sub-section (3) of Section 143.
7. Section 44AE of the I.T. Act provides special provisions for computing profits and gains of business of plying the hiring or leasing good carriages and provides notwithstanding anything to the contrary contained in Section 28 to 43C in the case of assessee, who owns not more than 10 good carriages in any previous year and who is engaged in business of plying, hiring or leasing suchgoods carriages, the income of such business chargeable to tax under the head 'profits and gains of business or profession' shall be deemed to be the aggregate of profits and gains from all the goods carriages owned by him in previous year, computed in accoreance with the provisions of Sub-section (2).
Sub-section (2) provides profits and gains from each goods carriage being a heavy goods vehicle shall be an amount equal to Rs. 3,500/- for every month during which the heavy goods vehicle is owned by the assessee and in case of other than heavy goods vehicle, the amount equal to Rs. 3,150/- per month shall be income of the assessee.
Sub-section (6) to Section 44AE provides: Nothing contained in the foregoing provisions of this section shall apply where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in Sub-sections (1) and (2) and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under Sub-section (3) of Section 143.
8. In both the sections, the deduction allowable under the provisions of Section 30 to 38 shall be deemed to have been already given effect.
But it is provided that where the assessee is a firm, salary and interest paid to partners shall be deducted from the income computed under Sub-section (1), subject to conditions and limits specified in Clause (b) of Section 40.
9. Considering the above provisions contained Under Section 44AD (5) and 44AE (6), it is clear that, in case assessee claims and produces evidence to prove that profits and gains from the aforesaid business commencing on 1.4.97 are lower than the profits and gains specified in Sub-section (1), the aforesaid provisions of Section 44AD(1) and 44AE shall not apply and thereupon the AO shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under Sub-section (3) of Section 143. In the case of the assessee, assessee has filed audited profit and loss account and balance sheet along with the return of income and claimed through this evidence to prove that profits and gains from the aforesaid business was lower than the profits mentioned in Sub-Section (1) to Section 44AD and 44AE. If the AO was not satisfied with the return of income and profit and loss account duly audited, then the AO should have proceeded to make assessment Under Section 143(3). The assessee, therefore, has rightly claimed the lower profit as compared to Section 44AD(1) and 44AE(1) on the basis of Sub-Section (5)/of Section 44AD and Sub-Section (6) of Section 44AE. The claim of the assessee was raised in accordance with the above provisions of law. The AO, therefore, cannot direct the assessee to disclose profit as per Section 44AD(1) and 44AE(1). The CIT(A) was, therefore, justified in referring to the Board circular No.684 dt. 11.6.94 through which it was clarified that scheme Under Section 44AB and 44AE is optional. Ld. counsel for the assessee filed copy of the reasons recorded for issue of notice Under Section 148 of the I.T. Act dt. 26.7.2000 in the paper book. The same is reproduced as under: The assessee derives income from civil construction work. As per Section 44AD of the I.T. Act, 61 the profit has to be assessed at 8% of the gross receipts. The instant case the assessee's gross receipts from civil construction work amounted to Rs. 33,69,719/-.
In addition the assessee has derived income from trucks running receipt and misc. receipts etc. The income return by the assessee is Rs. 1,35,174/-. As per Section 44AB the profit @ 8% on contract receipts works out to Rs. 2,59,577/-. Besides, in respect of the income from truck plying applicability of provision of Section 44AE are to be examined. Since the assessee has returned income much below, as per Section 44AD/44AE, I have reason to believe that the income chargeable to tax has escaped assessment vide explanation 2(b)(c) to Section 147 of I.T. Act, 61 on account of omission/failure on the part of the assessee to disclose full and true particulars of its income for asstt. year 97-98. Issue notice Under Section 148.
10. Considering the above discussion and the reasons recorded for issue of the notice Under Section 148, it is clear that AO reopened the assessment Under Section 148 because the assessee has to be assessed at the rate of 8% of the gross receipts as per Section 44AD and similarly provisions of Section 44AE are to be examined with regard to truck plying. The AO in view of the provisions of Section 44AD and 44AE formed his opinion that income escaped assessment. This itself shows that AO has not applied his judicial mind to the relevant provisions of the law. The claim of the assessee in the return of income was on the basis of Section 44AD(5) and 44AE(6) because assessee claimed lower profits on the basis of evidence on record as compared to deeming provisions of computation of income under Sub-section (1) of Section 44AB and 44AE. The reasons given by the AO for reopening the assessment are, therefore, clearly incorrect and non-existent because these provisions referred to by the AO are not applicable in the case of the assessee. If the AO was not satisfied with the return of income filed on the basis of audit report on the strength of books of account, then it is provided in Section 44AD(5) and 44AE(6) to proceed for assessment Under Section 143(3), which the AO did not do in the matter. Hon'ble Punjab & Haryana High Court in the case of CIT v. Atlas Cycle Industries 180 ITR 319 considering the facts that for the AY 72-73, the accounting year of the assessee was the calendar year ending on Decemeber 31, 1971. The assessee paid advance tax of Rs. 19,30,000/- up to December 15, 1971, and paid Rs. 6,01,750/- in March, 1972, that is to say, after the expiry of its accounting year but before the end of the financial year. The Income-tax Officer charged interest on the assessee under Section 215. He also started reassessment proceedings on the grounds that benefit under Section 80G was granted in excess. In reassessment proceedings, the Income-tax Officer did not find any merit in the said two grounds but made addition on some other ground. The Tribunal (sic)ook into account the payment of advance tax after the end of the accounting year but before the end of the financial year and held that no interest was payable by the assessee Under Section 215. It also held that the grounds on which the reassessment notice was issued were non-existent and cancelled the reassessment, on a reference: Held(i) that the Tribunal was right in cancelling the reassessment as both the grounds on which the reassessment notice was issued were not found to exist, and, therefore, the Income-tax Officer did not get jurisdiction to make a reassessment.
11. Hon'ble Punjab & Haryana High Court in the case of Vipan Khanna v.CIT 255 ITR 221, at page 233 held: From the letter dated July 30, 1998, it is evident that the Assessing Officer was seeking general information on other issues merely to verify the return. As already observed such general inquiry could only be made by issuing a notice under Sub-section (2) of Section 143 within the stipulated period which in the present case had already expired. Admittedly it is not the case of the Revenue that during the course of proceedings Under Section 147 of the Act it had come across the material relating to the items mentioned in the impugned letter dated July 30, 1998, suggesting escapement of income under any of those heads. In this view of the matter, the petitioner would be justified in claiming that the letter dated July 30, 1998, issued by the Assistant Commissioner is tantamount to making fishing inquiries on concluded matters unconnected with the issue on the basis of which proceedings Under Section 147 had been initiated. This indeed is not permissible under the law.
12. Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das 103 ITR 437, Held: The reasons for the information of the belief contemplated by Section 147(a) of the Income-tax Act, 1961, for the reopening of an assessment must have a rational connection or relevant bearing on the information 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 Income-tax Officer and the information of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening the assessment. At the same time, we have to bear in mind; that it is not any and every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.
It is, of course, open to the assessee to contend that the officer did not hold the belief that there had been such non-disclosure, the existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part Of the Income-tax officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.
To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.
13. Hon'ble Supreme Court in the case of Raymond Woollen Mills Ltd. v.ITO 236 ITR 3 4, Held: In determining whether commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the Department could reopen the case.
14. Considering the above discussion and material on record, it is clear that AO reopened the assessment only on the basis of application of provisions of Section 44AD(1) and 44AE(sic) which are not applicable in the case of the assessee because assessee claimed lower profits on the basis of maintenance of books of account and audited profit and loss account and balance sheet. There was no material available with the AO to show that it is a case of escaped assessment. Prima facie there was no material on record to justify the reopening of assessment.
The reasons for reopening the assessment are non-existent and incorrect. Therefore, the aforesaid decisions are clearly applicable to the facts of the case in favour of the assessee and against the revenue.
(1) Raymond Woollen Mills Ltd. (supra). This decision would not support contention of ld. DR. (2) Praful Chunilal Patel, 236 ITR 832, in which on subsequent discovery of mistake in assessment, re-assessment within four years was held to be permissible.
(3) stock Exchange v. ACIT 227 ITR 906. It was held that if reasons have direct and rational connection with formation (sic) belief, re-assessment proceedings were validly initiated because finding was that assessee was not entitled to exemption Under Section 10(23A).
(4) Bawa Abhai Singh v. DCIT 117 Taxman 12. In this case, it was held that subsequent report of the DVO indicating under-statement of capital gain was held to be information within the meaning of Section 147.
(5) Rakesh Aggarwal v. ACIT 225 ITR 496 in which finding in the assessment for another year was that assessee was given a low rent for a property and as compensation had received certain benefits and p(sic)uisites, re-assessment was held to be valid.
(6) B.S. Agricultural Industries (India) v. ACIT 88 ITD 1 (Agra), in which it was held that if the AO for whatever reasons has reason to believe that income has escaped assessment, it confers jurisdiction on him to reopen assessment.
(7) sume(sic)pur Truck Operators Union v. ITO 89 ITD 89, in which it was held that AO can reopen assessment Under Section 147 even if assessee has disclosed all material fact in return filed by it.
(8) ITO v. Honey Enterprises 89 ITD 301, in which it was held that mere assessment in a routine manner would not lead to inference that an opinion was formed by Assessing Office in respect of all issues involved in assessment.
(9) DCIT v. Murrah Live Stock Agency 91 ITD 198 (THIRD MEMBER), in which it was held that to form a reasonable belief that income has escaped assessment, it is not necessary that there should be ample evidence on record to establish actual escapement.
(10) Som Datt Builders (P) Ltd. v. DCIT 98 ITD 78, in which reopening on the basis of substantial reasoning pointed out by revenue audit was held to be permissible under law.
(11) Consolidated Photo & Finvest Ltd. v. ACIT 151 Taxman 41, in which it was held by Delhi High Court that even if AO gathered his reasons to believe from very same record which was subject matter of the completed assessment - reopening is permissible, (12) 101 ITD 16. We have considered the above case laws cited by ld. DR but none of them is applicable to the issue before us because the AO in the present case has formed his opinion that income chargeable to tax has escaped assessment on incorrect and non-existent reasons and has no material whatsoeve(sic) his possession showing that any chargeable income has escaped assessment. Therefore, the formation of the belief of the AO has no nexus or rational connection with the reasons for reopening. The assessee can challenge the existence of the belief. Considering the above discussion, we are of the view that CIT(A) was justified in annulling the assessment in the matter. We confirm the same and dismiss the appeal of the revenue.