1. These are three appeals - two of which are filed by the Revenue - one for the assessment year 1998-99 and other for the assessment year 1999-2000 and third, i.e., ITA No. 02/Agr./2003 is filed by the assessee for the assessment year 1998-99. Since all the three appeals relate to the inter-connected issues, we take them together for the sake of convenience.
2. In this appeal, the assessee has mainly raised grounds against re-opening of assessment Under Section 147/148 and against confirming of an addition of Rs. 6,00000/- towards bogus purchases from M/s. Saraf Medicinal Botanical Garden. The other issues relate to confirmation of initiating penalty proceedings Under Section 271(1)(c) and charging of interest Under Section 234A & 234B. The grounds raised by the assessee read as under: 1.1. That the proceedings Under Section 147 are bad in law and facts having been initiated on suspicion and without application of mind.
1.2. That the proceedings Under Section 147/148 are without jurisdiction and bad in law and facts.
1.3. That the ld. CIT(A) erred in holding the action Under Section 147 taken by the A.O. was correct.
2.1. Ld. CIT(A) erred in not holding that A.O.'s order was bad having been passed in haste and without proper opportunity.
2.2. That the assessment order is initiated having passed on basis of invalid return and invalid reopen of case.
3.1. Ld. CIT(A) erred in confirming the addition of Rs. 6,00,000/- towards bogus purchase from M/s. Saraf Medicinal Botanical Garden.
4.1. Ld. CAT (A) erred in confirming action of A.O. in initiating proceedings Under Section 271(1)(c).
4.2. Ld. CIT(A) erred in upholding the direction of A.O. to charge interest Under Section 234A & 234B. 4.3. Ld. CIT(A) order in confirming the order of A.O. is bad in law & facts.
3. The assessee is a Co-operative Society dealing in medicines and herbs. A survey Under Section 133A was carried out in the premises of M/s. Saraf Gramodyog Sansthan on 07.10.99. During the course of survey various documents and large .number of bank statements were found and impounded. On the basis of documents found during the course of survey, the Assessing Officer recorded the reasons and issued notice Under Section 148 on 27.03.2000, The return of income was filed on 26.04.2000 declaring nil income. During the course of assessment proceedings, notices Under Section 143(2)/142(1) were issued by the Assessing Officer. He noted that the assessee had shown purchases of Rs. 6,00,000/- of Herbs from M/s. Saraf Medicinal and Botanical Garden, which is a concern run by Shri Jugal Kishore Soni who is also the President of M/s. Saraf Gramodyog Sansthan, i.e., the assessee's Co-operative Society. A payment of Rs. 1,22,000/- was made during the Financial Year 1997-98 against those purchases and balance sum was shown as liability in the balance sheet. The Assessing Officer noted that M/s. Saraf Medicinal & botanical garden could not supply Herbs to the assessee because entire crop of Herbs cultivated by it (i.e., M/s.
Saraf Medicinal & Botanical Garden) was devastated on 08.12.1997 due to thunderstorm, hence, the said concern was not in a position to sell these items to the assessee during the financial year 1997-98. During the course of survey on 07.10.1999, no bills or challans could be traced, which could substantiate the sales made by this concern to the assessee. All the payments in relation to these purchases are stated to be made in cash. Even where it is shown that payment is made by DD, there are no details about the DD number or bank. Thus, the assessee has shown purchases from a sister concern, which he could not justify.
The Assessing Officer accordingly treated the purchases of Rs. 6,00,000/- as bogus and added the same to the income of the assessee.
The Assessing Officer also noted from the impounded documents No. 56, 57 & 58 that the assessee made payment of Rs. 85,000/- to Shri S.K.Jain, C.A. and of Rs. 2,00,000/- to various other persons, which were not explained. The assessee denied that the transactions belonged to him. The Assessing Officer was of the view that the assessee was doing business in the name of 29 concerns and was maintaining more than 70 bank accounts. Since, according to the Assessing Officer, these entries were not explained, they were treated as unexplained expenditure and an addition of Rs. 2,85,000/- was made by him. He also made another addition of Rs. 56,700/- Under Section 40A(3) and thus worked out total income of the assessee at Rs. 9,41,700/-.
4. In appeal, the assessee, inter alia, challenged the re-opening of assessment Under Section 148 on the ground that in the reasons recorded for re-opening of the assessment, reference has been made to bank account No. OD A/C 686 and a deposit of Rs. 1,02,047/- therein, but that Bank Account does not relate to the assessee. On the other hand, bank account No. CC-5 in Central Bank of India from where the assessee has taken a loan of Rs. 2.5 lakhs against the credit limit of Rs. 10 lakhs belonged to the assessee. From that account No. CC-5, the assessee had made withdrawals of Rs. 6,08,026/-. Out of these withdrawals, a sum of Rs. 1 lakh and more was credited back. Thus according to the assessee, the reasons recorded Under Section 147 could not result into a bonafide belief as there is no link between the material available and formation of belief about escapement of income.
The assessee relied on the decisions of Hon'ble Supreme Court in ITO v.Lakhmani Mewal Das 103 ITR 437 (SC), of Delhi High Court in Jindal Photo Films Ltd. v. DCIT 234 ITR 170 (Del.) and of Calcutta High Court in Rawatmal Harakchand v.CIT 129 ITR 346 (Cal.).
5. Before ld. CIT(A), the Assessing Officer defended the reasons so recorded on the ground that there was clerical mistake in mentioning the bank account number in the reasons. The correct bank account No. is CC-5 and not OD A/C 686. The correct bank account number has been subsequently mentioned in all the correspondence made by the Assessing Officer with the assessee. According to the Assessing Officer, the action Under Section 148 was taken mainly on the ground that the assessee was not assessed to tax and no return of income was filed by him for the assessment year 1998-99.
6. The learned CIT(A) rejected the grounds of the assessee against re-opening of the assessment by observing as under: I have carefully considered the facts of the case, submissions of the AR, comments of the Assessing Officer and the position of law.
In my opinion, this ground of appeal deserves to fail. From the reasons recorded by the A.O. and the perusal of records it is clear that the appellant was not assessed to tax earlier. For the year under reference no return was filed by it. In the absence of any return, the A.O. had no occasion to verify the deposits shown in the bank account. The only course left with the A.O. to verify the deposits in bank account was to obtain a return of income for the year under reference by taking action Under Section 148 of the Act.
I find considerable force in the A.O.'s view that since no return was filed for this year the department had no occasion to examine the deposits in the bank account. Considering these facts, since action Under Section 148 was taken for obtaining the return for the first time particularly on account of the deposits shown in bank account, in my opinion, there was no infirmity in the A.O.'s action.
It is, therefore, held that the A.O. was justified in taking action Under Section 148 of the Act. This ground of appeal, therefore, fails.
7. Before us, the learned A.R. for the assessee submitted that action Under Section 148 has been taken only on the suspicion and in a mechanical manner and not under a bonafide belief. As per reasons recorded Under Section 148, the deposit of Rs. 1,02,047/- was made in the bank account No. OD A/C 686, which is neither allotted nor related to the assessee. In any case, the learned Assessing Officer had no evidence or material on record while recording the reasons that the deposits represented undisclosed income of the assessee. The ld. A.R.relied upon the decision of Hon'ble Allahabad High Court in Jamuna Lal Kabra v. ITO for the proposition that it is not open to the Assessing Officer to refer to reasons other than those recorded by him pursuant to Section 148(2). He was referring to the assertion of the Assessing Officer that he has wrongly mentioned by clerical mistake a different bank account other than what he intended to refer and that he has correctly; mentioned the correct bank account in subsequent proceedings with the assessee. According to the learned A.R., such reference in subsequent proceedings and on that basis an intention to mention correct bank account in the reasons is not permissible in view of the decision of Hon'ble Allahabad High Court referred by him.
8. The learned A.R. further submitted that the basic premise, on which the assessment was re-opened does not stand to reason because the Assessing Officer did not make any addition of Rs. 1,02,047/- as it was subsequently satisfactorily explained as recorded in the regular books.
In other words, if the Assessing Officer had initially checked up that the said amount was recorded in the regular books, then he could not have reopened the assessment.
9. On the other hand, the ld. D.R. submitted that the Assessing Officer has correctly made allegations about the income having escaped assessment because the assessee had not filed the return of income and hence whatever deposits he had in the bank account remained unexplained and liable to be assessed as income of the assessee. Secondly, clerical mistake made by the Assessing Officer while recording the reasons would be taken care of by Section 292B. The intention of the Assessing Officer has to be seen while recording the reasons. The intention was to mention that deposit in the bank account were not explained, as the assessee had not filed the return of income and therefore, income has escaped assessment Circumstantial evidence available with the Assessing Officer in this regard has also to be seen, which are that more than 70 bank accounts were found during the course of survey on the basis of which the Assessing Officer inferred that income chargeable to tax has escaped assessment. He relied on the decision of Hon'ble Delhi High Court in Rakesh Agarwal v. ACIT 225 ITR 496 for the proposition that after amendment in 1989, there is substantial change in the provisions relating to re-opening of assessment and now the Assessing Officer can legitimately .reopen the assessment in respect of income which has escaped assessment. Under the amended provisions, the power to re-open the assessment is much wider and can be exercised even if the Assessing Officer has disclosed fully and truly all material facts. The ld. D.R.submitted that the mistake can be taken care of by Section 292B.10. We have considered the rival submissions and perused the material on record. Let us examine the reasons recorded by the Assessing Officer before reopening the assessment for the A.Yr. 1998-99. The reasons are as under: A survey operation Under Section 133 A of the IT. Act 1961 was carried out at the business premises of Shri Jugal Kishore Soni, Forest Range Barrier, Jhansi Raod, Talbehat district Lalitpur.
During the course of survey operations, huge quantity of books of account and bank pass books/cheque book were found and later on impounded. It has been gathered on perusal of these papers/books of account that the above named asses see was maintaining Account Number OD A/C 686 with Central Bank of India, Jhansi. The copy of account of this account obtained from the bank shows that deposits amounting to Rs. 1,02,047/- have been made in the said account during the financial year 1997-98 relevant to asstt. year 1998-99.
2. Since the assessee firm has not filed its return of income for the asstt. year 1998-99 and the amount deposited in the above account exceeded the maximum amount which is not chargeable to income-tax, 1 have reasons to believe that the amount of Rs. 1,02,047/- has escaped assessment. In order to assess the income escaping assessment, issue notice Under Section 148 of Income-tax Act, 1961.
(i). During the course of survey, huge quantity of books of accounts, bank pass books, cheque books were found and impounded.
(ii). Assessee is maintaining bank account No. OD A/C 686 in Central Bank of India.
(iii). Copy of account No. OD 686 obtained from the bank shows deposits of Rs. 1,02,047/-for the relevant year.
(iv). The assessee has not filed return of income and hence, income has escaped assessment.
(i). Whether the Assessing Officer had adequate material to form belief to initiate reassessment proceedings.
(ii). Whether those materials had rational connection with the formation of belief.
(iii). Whether the Assessing Officer had formed the proper belief, which he is required under law before assuming jurisdiction.
(iv). Whether Assessing Officer can refer to subsequent material/proceedings to justify the re-opening of the assessment.
(v). Whether any mistake in recording the reasons can be deemed to have been corrected or taken care of Section 292B.13. Regarding first question, we find that a survey was carried out by the Assessing Officer and large amount of material like bank pass book etc. were found and impounded. The assessee had not filed the return of income for this assessment year. Therefore, one could say that the Assessing Officer had enough material to justify the initiating action Under Section 148(1).
14. Regarding the question No. 2, we notice that while recording the reasons, the Assessing Officer had only confined to Bank Account No. OD A/C 686 with Central Bank of India and deposit therein of Rs. 1,02,047/-. Subsequent events clearly make out that reference to this bank account number was incorrect and it has also been admitted by the Assessing Officer and also by the learned D.R. Then the supplementary question which arises is whether mentioning of wrong bank account number is fatal for assumption of jurisdiction by the Assessing Officer. In any case, this depends upon the fact as to whether mentioning of wrong fact is so vital that if that fact is removed from the reasons recorded then the Assessing Officer could not come to the conclusion that income had escaped assessment. Thus in absence of those facts in the reasons so recorded, the Assessing Officer could not have come to the conclusion about escapement of income and therefore, then assumption of jurisdiction to re-open assessment would be invalid.
Subsequent issuance of notice Under Section 148(1) and assessment made thereafter would also be invalid. But where mentioning of wrong fact is not so fatal and other facts mentioned therein are adequate enough still to hold the reasons together then it can be said that reopening of assessment was valid. In other words, if the removal of the fact, which is incorrect, is taken out from the reasons so recorded, would make the reasons fall flat then assumption of jurisdiction to re-open assessment will be incorrect/invalid, but if reasons would still stand at its own inspite of wrong facts taken out of the reasons then reopening of assessment would not be invalid.
15. In the present case, if we take out the fact of account No. OD A/C 686 with Central Bank of India from the reasons recorded, then what survives in those reasons is that there is a deposit of Rs. 1,02,047/- in the bank account and assessee has not filed return of income. Then this fact alone would be sufficient to justify the reopening of assessment because mere inadequacy of material for formation of belief would not make re-opening of assessment invalid provided facts recorded in the reasons justify the inference that income chargeable to tax has escaped assessment. For the proposition that adequacy of material could not be questioned, we derive support from the decisions of Hon'ble Calcutta High Court in ITO v. Shri Bajrang Commercial Co. Pvt. Ltd. , of Hon'ble Allahabad High Court in CIT v. Hindustan Metal work and of Hon'ble Allhabad High Court in K.M.Bansal v. CIT 195 ITR 247 (Alld.). There are many other authorities supporting this view. Thus, we hold that reference to a wrong bank account number alone in the reasons so recorded will not make assumption of jurisdiction to re-open the assessment as invalid. Other references can also lead to formation of belief that the income has escaped assessment.
16. The next question is whether formation of belief was legally proper on the basis of material brought in the reasons. For this purpose let us refer to Section 147- 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 recomputed 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).
17. The crucial expression for assumption of jurisdiction Under Section 147 is "any income chargeable to tax has escaped assessment for any assessment year". Thus, the Assessing Officer has to record in the reasons that a particular item was chargeable to tax has escaped assessment. In the present case, the Assessing Officer has written that a sum of Rs. 1,02,047/- deposited in the bank account has escaped assessment. This belief he has arrived on the basis of the fact that return of income has not been filed, but where the income is not above the minimum amount assessable, i.e. where income is below exemption limit, the return is not required to be filed and therefore, any deposit in a bank account will not automatically lead to the inference that it was chargeable to tax. The Assessing Officer ought to have verified from the books of accounts whether this deposit was recorded in regular books or not. If it was recorded in the regular books, then it could not be said that this deposit was automatically liable to taxed. Deposit in the bank account can be covered by various receipts recorded in the cashbook. Without verifying the deposits in the bank statement with the regular books maintained by the assessee one cannot come to the inference that such bank deposits were chargeable to tax.
No doubt, the deposits in the bank account are investment covered by Section 69 and where they are not explained they are liable to be added as deemed income of the assessee. But mere deposit of an amount alone in the bank account cannot give an inference that this was liable to be taxed as income and assessee has not disclosed the same and therefore, it has escaped assessment. No question has been asked from the assessee before reopening the assessment as to the source of the deposits in the bank account.
18. Once survey Under Section 133A is being done and the Assessing Officer has, as stated, found books of accounts and documents, it was incumbent upon the Assessing Officer to ask the assessee as to the source of these deposits and as to whether they are recorded in the regular books of accounts. In a case where deposits in the bank account are recorded in the regular books of accounts then there is an explanation, which is satisfactory and one could not come to the conclusion that they were chargeable to tax. If any deposit in the bank account was not recorded in the regular books then certainly, there is prima facie material to form a belief that such deposits were liable to be taxed Under Section 69 and hence, income chargeable to tax has escaped assessment. Therefore, we are of the considered view that unless the Assessing Officer asked for an explanation from the assessee before initiating action Under Section 148(1) and recorded the reasons there for or verifies the deposits with the books of accounts, if maintained, the Assessing Officer could not have come to the belief that income chargeable to tax has escaped assessment. Filing of return or not filing of return would depend whether final income as per Profit & Loss account drawn by the assessee on the basis of books of accounts reflect taxable income or not. Merely not filing of return of income will not result; into an inference that any deposit in the bank account was chargeable to tax and therefore, had escaped assessment, even if that amount exceeded minimum amount chargeable to tax, i.e., exceeded the exemption limit. We derive support for this conclusion from the decision of M.P. High court in Biaora Constructions (P) Ltd. v.Director of Income Tax (Inv.) for the proposition that if an amount as recorded in the regular books then it cannot be said to be concealed. Thus, where an amount is recorded in the regular books, it will not be automatically inferred that it was chargeable to tax and it has escaped assessment. Thus, we hold that formation of belief by the Assessing Officer for reopening the assessment was not legally proper as on the basis of facts recorded in the reasons he could not have come to the inference that sum of Rs. 1,02,047/- has escaped assessment. We, thus, hold that Assessing Officer has not formed a proper belief on the basis of material brought in the reasons so recorded and therefore reopening of the assessment was without jurisdiction and invalid. The assessment on that basis is required to be annulled.
19. The next question which requires to be answered is whether the Assessing Officer could refer to the material other than what is mentioned in the reasons so recorded for justifying reopening assessment. Our considered view is that he cannot. Subsequent reference to the material cannot justify re-opening of assessment as assumption of jurisdiction to re-open the assessment can be examined only on the basis of material mentioned in the reasons so recorded. For this proposition, we derive support from the decision of Allahabad High Court in Jamuna Lal Kabra v. ITO , as referred by the ld. Counsel for the assessee.
20. Regarding the issue raised by the learned D.R. that clerical mistake in recording the reasons can be taken care of by Section 292B, we are of the considered view, that Section 292B cannot take care of any mistake in recording the reasons because that section refers to "return of income, assessment, notice, summons or other proceedings".
It does not refer to the reasons recorded by the Assessing Officer.
Section 292B reads as under: No return of income, assessment, notice summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.
21. Thus, as per this section any clerical mistake in the notice or summons or proceedings undertaken by the Assessing Officer will not be held invalid merely because of any mistake defect or omission if they are in conformity with or according to the intent and purpose of the Act. Recording of reasons for reopening of the assessment is an act anterior to initiating proceedings Under Section 148(1), which start with issue of notice under that section. Thus, any mandatory requirement for assumption of jurisdiction cannot be said to be covered by Section 292B which comes into operation only when valid proceedings are initiated. Any invalid proceedings for assumption of jurisdiction cannot be corrected by Section 292B. For this proposition, we rely on the decision of Hon'ble Allahabad High Court in Sri Nath Suresh Chand Ram Naresh v. CIT 280 ITR 396 (Alld.). In that case, the notice was issued in the name of wrong person. Assessment proceedings were held not valid. This shows that act of assumption of jurisdiction Under Section 148(1) extends upto the issuance of correct notice, in the name of correct person. Such mistakes could not be taken care by Section 292B. Only inference from this is that any mistake in the process of assumption of jurisdiction Could not be deemed to be corrected by Section 292B. In the decision of Hon'ble Calcutta High Court in Sun Rolling Mills Pvt. Ltd. v. ITO 160 ITR 412 the assessment was reopened Under Section 147(b). The reasons recorded therefore were not considered as reasons for proceedings Under Section 147(a). Thus, we reject the contention of the Revenue that mentioning of wrong bank account number in the reasons could be deemed to be corrected by Section 292B.22. There is one more aspect of the issue, which is required to be considered. The deposit in the bank account of Rs. 1,02,047/- was considered by the Assessing Officer in the re-assessment proceedings and was found explained, as the same was found recorded in the regular books. Admittedly, no addition to the total income was made by the Assessing Officer on this issue. Thus, the argument of the ld. Counsel for the assessee that had the Assessing Officer verified those deposits from the regular books before reopening the assessment then he could not have reopened the assessment, assumes importance. In a situation where assessee does not produce books of account when asked for and Assessing Officer is not able to verify whether the deposit in the bank a/c is recorded in the books or not and therefore, whether it is explained or not, then he certainly gets jurisdiction to reopen the assessment. Subsequent production of the books by the assessee before the Assessing Officer during the course of assessment proceedings will not be relevant for assuming jurisdiction at the time of reopening the assessment. What is relevant is whether at the time of reopening of the assessment and assuming jurisdiction, the amount in question was explained or not. When books are not produced before the Assessing Officer or they are not made available to him then certainly amount in question would be prima facie unexplained and assumption of jurisdiction will be proper. But where books were available with the Assessing Officer as they were found during the course of survey and they were reportedly impounded by him then without verification with the books, it could not be said that. amount in question was not explained. The fact that the deposit of Rs. 1,02,047/- is explained, is borne out from the verification of the regular books during assessment proceedings. Had the Assessing Officer really verified the deposit with the regular books before issuing notice Under Section 148(1) then he could not have got jurisdiction to reopen the assessment. It is, therefore, clear that the assessing officer avoided to verify the deposit with the regular books and intended to reopen the assessment.
This cannot be said to be a valid assumption of jurisdiction.
23. In this regard we consider it appropriate to refer to some decisions given by various courts, which support our view, we have taken in the present case.
(i). In Das Friends Builders Pvt. Ltd. v. DCIT the Hon'ble Allahabad High Court held that belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable and based on reasons, which are relevant. It must be in good faith & not mere pretence, should have a rational connection and relevant bearing on the formation of belief, and should not be extraneous or irrelevant. The material should be relating to the particular year for which assessment is sought to be reopened. It not any and every material, howsoever vague and indefinite or distant, remote and far fetched, which would warrant the formation of belief regarding escapement of income. In that case, there was a deposit from customers to the extent of Rs. 46,77,190.35 The Assessing Officer had reopened the assessment in order to tax that sum and Hon'ble Allahabad High Court had made above observations in this regard.
Officer had reopened the assessment to tax certain benefit allowed earlier by the Assessing Officer. In the reasons recorded, the Assessing Officer had mentioned that that particular amount had escaped assessment. On this, Hon'ble Calcutta High Court held that by simply saying that he had reason to believe that amount of income (mentioned in the reasons) had escaped assessment, the authorities would not be empowered to assume jurisdiction to initiate proceedings. The requirement of recording reasons would not stand satisfied if without mentioning any reason, the authority simply writes that he has reason to believe that income had escaped assessment.
the Assessing Officer wanted to re-assess depreciation already granted by issuing notice Under Section 148(1). Hon'ble Delhi High Court in this regard observed as under: The validity of initiation of reassessment proceedings has to be judged with regard to the material available with the authority at the point of time of issuing the notice under Section 148 of the Income-tax Act, 1961. When the assessee has disclosed fully and truly all material facts necessary for the assessment and on the basis of which the assessment is made, then exercise of powers under Section 148 of the Act contemplates that : (a) there must be material for the belief regarding escape of income from taxation; (b) circumstances must exist and cannot be deemed to exist for arriving at an opinion; (c) reasons to believe must be honest and not based on suspicion, gossip, rumour or conjecture; (d) reasons referred to must disclose the process of reasoning by which the Assessing Officer holds "reasons to believe" and change of opinion does not confer jurisdiction to reassess; (e) there must be nexus between material and belief; and (f) reasons recorded must show application of mind by the Assessing Officer. Where an assessment has been made and there is purported excessive depreciation, its allowance would require examination of facts and that must be reflected in a well reasoned document before issuance of notice for reassessment.
Similarly, in the present case, examination would be required to come, to the inference that deposit in the bank account were chargeable to tax and hence, they have escaped assessment. No such examination is recorded in the reasons so recorded in the present case.
Gauhati High Court held that the Assessing Officer should have reason to believe that because of the eventualities enumerated in clause (a) and/or (b), the income chargeable tax has escaped assessment and the reasons in support of such belief had to be recorded by him before issuing notice Under Section 148. The above requirements are mandatory. The reasons have to be cogent, convincing and existing and should not be unreal or imaginary. The belief has to be bona fide and not a pretence.
(v). In ITO v. Electro-steel Castings (P) Ltd. 246 ITR 410 (Cal.) Hon'ble Calcutta High court held that validity of initiation of proceedings or assumption of jurisdiction in the initiation of proceedings has to be judged on the basis of reasons recorded on the date of assumption of jurisdiction if the reasons so recorded on the date when jurisdiction was assumed, are valid then initiation of such proceedings could not become invalid on account of subsequent facts. Thus, subsequent facts could not invalidate or validate the assumption of jurisdiction-on the date when jurisdiction was assumed on the basis of facts available on that date.
(i). Enough material was found by the Assessing Officer during the course of survey on the basis of which he could have reopened the assessment, but the material used for reopening the assessment was not proper so as to justify the reopening. It had no connection with the belief that the income has escaped assessment.
(ii). Even though sufficiency of material for reopening the assessment cannot be adjudicated by the court, but court is duty bound to examine the link of the material used in the reasons with escapement of income.
(iii). Every item or transaction does not lead to inference that the same or income there from is chargeable to tax and therefore, one cannot come to the conclusion that income has escaped assessment.
(iv). In respect of bank deposits, it is necessary that a finding be recorded in the reasons that the same is not found recorded in the regular books before inferring that the same was chargeable to tax and hence, it has escaped assessment.
(v). Mere non-filing of return does not lead to inference that any deposit in the bank account would be chargeable to tax. It has to be seen and shown in the reasons that those deposits were not recorded in the regular books or were not reflected in Profit & Loss Account, Balance Sheet filed with the return.
(vi). For issuing notice Under Section 148(1) on the ground that the assessee has not filed return of income, it has to be shown in the reasons that the assessee's income was more than the minimum amount chargeable to tax.
25. The ld. Counsel for the assessee insisted that the case should be decided on merits also even if it is held that the assessment was not validly reopened. On merits we find that the Assessing Ofticer added the sum of Rs. 6,00,000/- as bogus purchases. The ld. Counsel for the assessee submitted that the CIT(A) has wrongly confirmed the addition because he ignored the fact that the Assessing Officer has himself given finding that the assessee might have made purchases from elsewhere. Thus, it could not be a case of bogus purchases, but the purchases not verifiable.
26. On the other hand, the ld. D.R. supported the order of the Assessing Officer and CIT(A).
27. After considering the rival submissions, we are of the view that entire addition of Rs. 6,00,000/- cannot be sustained. It is because the declared sales of the assessee are of Rs. 4,52,819/- and closing stock is of Rs. 15,50,000/-. The closing stock is valued at cost. The Gross Profit rate declared by the assessee on sales of Rs. 4,52,819/- is Rs. 2,26,786,which is about 50%. If the purchases of Rs. 6,00,000/- are added then profit will jump to Rs. 8,26,786/- which would be about 182.50%. This is unreasonable and cannot be sustained in law. Further, we notice that the Assessing Officer in the assessment order mentions that the assessee had made purchases from various persons, but purchase of Rs. 6,00,000/- has been shown from Saraf Medicinal and Botanical Garden. In other words, it was not a case of bogus purchases, but was a case of unverifiable purchases. For unverifiable purchases books can be rejected and profit can be estimated. Since the profit declared by the assessee is about 50% and there is no material to show that he assessee would have earned more profit then addition made by the Assessing Officer and confirmed by the CIT(A) cannot be sustained. As a result, on merits also the addition of Rs. 600000/- cannot survive.
28. Regarding ground relating to penalty proceeding Under Section 271 (l)(c) and charging of interest Under Section 234A & 234B, we decline/to interfere because it would depend upon th^factS' of each case. But once the assessment does not survive, the penalty -proceedings will also not survive.
30. In this appeal, the Revenue has challenged the deletion of addition of Rs. 2,85,000/-. In this year, the additions were made Under Section 69C, as the said payments were not explained by the assessee. We have held in assessee's appeal that the assessment was not validly reopened and the same has been annulled, then the question of considering the Revenue's grounds therein does not arise.
1. That the Commissioner of Income Tax (Appeals)-II, Agra erred in law and on facts in annulling the assessment made under Section 147/143(3) holding that the material relied upon by the A.O. had no live link with the formulation of belief about the escapement of income ignoring the prime fact available on records.
(a). The assessee had a bank account in the Central Bank of India - Jhansi.
(b). The said bank account contained deposits not disclosed to the department.
2. That the Commissioner of Income Tax (Appeals)-II, Agra erred in law and on facts in annulling the assessment without appreciating the provisions of Section 292B of the Income Tax Act 1961 wherein no proceedings taken in pursuance shall be invalid merely by reason of any mistake or omission.
3. That the finding of the Ld. Commissioner of Income Tax (Appeals)-II, Agra is bad in law and on facts as he same are contrary to the ratio of decision of the Honble Supreme Court in the case of Raymond Woollen Mills Ltd. v. ITO it was held that sufficiency and correctness of material need not to be looked at initial stage for initiating re-assessment proceedings.
4. That the decision of the Ld. Commissioner of Income Tax (Appeals)-II, Agra being erroneous in law as well as on facts be setaside and hat of the assessment order be restored.
33. The facts relating to this case are similar to the facts mentioned in appeal of the assessee for the assessment year 1998-99. The assessment was re-opened by recording following reasons: In this case, a survey under Section 133A of the Income Tax Act 1961 was carried out by the Department at the business premises Shri Jugal Kishore Soni, Forest Range Barrier, Talbehat, Distt. Lalitpur on 7/10/99. During the course of survey operations, various incriminating documents, bank Pass-books/Cheque books and Books of A/c were found at the premises, which were inventorised and later on impounded. On the perusal of these papers/books of a/c it has been gathered that the above named person was maintaining OD. A/c No. 686 with Central Bank of India, Jhansi. The copy of this bank account obtained from the said bank shows that deposits amounting to Rs. 2,81,730/- have been made in the said account in the financial year 1998-99 relevant to the assessment year 1999-2000. It has been gathered from this office records that M/s. Sarraf Gramodyog Sans than has filed its return of income on 26.04.2000 in compliance to a notice Under Section 142(1) of the Income Tax Act 1961 after the survey operations at the premises of Shri Jugal Kishore Soni on 7.10.99. In its return of income, the income has been shown as "NIL" The assessee has shown its nature of business as 'Processing of Herbs'. No accounts have been enclosed with the return so as to determine the gross receipt etc. from the business. Therefore, it is apparent that the deposits amounting to Rs. 2,81,730/- are nowhere accounted for.
2. Looking to the facts narrated above, I have the reasons to believe that the income amounting to Rs. 2,81,730/- has escaped assessment for the assessment year 1999-2000. Therefore, action under Section 147 of the Income Tax Act 1961 is being taken. Issue Notice under Section 148I of the IT Act, 1961.
34. These reasons are more or less similar to those recorded for the assessment year 1998-99. The Assessing Officer refers to deposit of Rs. 2,81,730/-. The return of income was filed by this assessee on 26.04.2000. The allegation of the Assessing Officer is that no account books have been enclosed with the return so as to determine the gross receipts from business. Therefore, the deposits of Rs. 2,81,730/- are nowhere accounted for. In framing the assessment, the Assessing Officer made an addition of Rs. 11,05,000/- on account of bogus purchases. The learned CIT(A) annulled the assessment observing as under: 5.4.1. I have considered the above mentioned submissions of the A.O. There is no quarrel about the proposition that in view of legal position any other escaped income which comes to the notice of the A.O. during the course of reassessment proceedings, can be considered by the A.O. while finalizing the reassessment. However, on this basis, one cannot justify or cure the defect in the reasons recorded by the A.O. Here the issue is as to whether the reasons had any live link with the formation of belief or not. For this purpose, one only has to see the reasons recorded by the A.O. Any lacuna or deficiency it, such reasons cannot be cured for removed by any subsequent act or material. This view finds support from the Gujrat High Court's decision in the case of Sarad Bhai M. Lakhani v. ITO in 231 ITR-779. In the aforesaid decision it has been held that the validity or otherwise of the reasons should be gone into on the basis of facts mentioned therein. It is not open to the authorities to justify the action on the basis of further reasons supplied in the form of affidavits. In this case, before the High Court it was contended that the reopening was done mainly on the basis of the High Court's decision in the case of Banyan & Berry v. CIT 222 ITR-831. The Court found that there was no reference of this decision in the reasons recorded by the A.O. On these facts, the High Court held that in the absence of mention of that decision in the order, it was not open to the department to justify the same by making reference to the said decision. Similarly, the Hon'ble Supreme Court in the case of Mohinder Singh Gill v. Chief Election Commissioner has held that when a statutory functionary makes an order based on certain grounds, its validity or propriety must be judged by the reasons so mentioned and cannot, on challenge, be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge got validated by additional grounds later brought out. It was further stated that it is this fact a quasi judicial order has to stand on its own legs; it has to sustain itself on its own reasons recorded therein. Its validity has to be judged by the reasons so mentioned and fresh reasons in the shape of subsequent affidavits cannot be allowed to supplement and buttress the same.
5.5 The above judicial pronouncements clearly show that any judicial or quasi judicial order has to sustain itself on the basis of reasons recorded earlier. In view of this legal position, the A.O.'s submissions that there were other papers which were found during the course of survey on the basis of which action Under Section 148 could be taken cannot be accepted. As mentioned earlier, s the reasons recorded by the A.O. formed foundation for issuance of notice under sec. 148, one has to see those reasons only while considering the validity of such notice.
Without prejudice to this, the assessment records do not suggest that while recording the reasons and issuing notice under sec. 148, the A.O. had these papers in mind. There is nothing on the assessment record to support this contention. The A.R., therefore, is correct when he says in the rejoinder that the belief was formed in reference to other documents is not based on any material on record.
5.6. In view of the above discussion, position of law and the submissions of the A.R., I am of the opinion that notice issued by the A.O. Under Section 148 was not valid. Before issuing the notice, not only the reasons were not properly recorded but also the material relied upon by the A.O. had no link with the formation of belief about the escapement of income. It is, therefore, held that the notice issued under sec. 148 was bad in law. Since the notice itself has been held to be bad in law, the subsequent actions including the finalization of assessment also become bad in law. The assessment framed by the A.O. is, therefore, annulled. It may, however, be added that the A.O. would be free to take action under sec. 148 after recording proper reasons based on relevant material, as per law.
35. Thus, the learned CIT(A) held the proceedings to be invalid on the ground that the reasons were not properly recorded and the material relied upon by the Assessing Officer had no link with the formation of belief about escapement of income.
36. The learned D.R. raised the same arguments as he has taken in the year 1998-99 to support the order of the Assessing Officer.
37. On the other hand, the learned A.R. submitted that the return of income was filed on 26.04.2000. Thus, assessment was pending and in the meantime, notice Under Section 148 was issued on 04.12.2000. Thus, during the course of pendency of return, notice Under Section 148 could not be issued and for this proposition, he relied on the decision of Hon'ble Calcutta High Court in C.E.S.C Ltd. v. DCIT and of Hon'ble Bombay High Court in CIT v. Rajendra G. Shah 247 ITR 772 (Bom.) 38. We have considered the submissions of the ld. A.R. and D.R. The facts regarding issuance of notice Under Section 148(1) during the pendency of assessment proceedings on the basis of return filed on 26.04.2000 are not disputed by the learned D.R., but he insisted that the Assessing Officer could still reopen the assessment and for this proposition, he relied on the decision of Hon'ble Delhi High Court in Rakesh Agarwal's case (supra). We do not agree with the contention of the ld. D.R. Once assessment proceedings are pending, the question of making re-assessment does not arise and all the aspects of assessment can be considered by the Assessing Officer while framing assessment on the basis of return filed. The question of re-assessment arises only when return has been processed and proceedings closed or return has not been filed and no assessment proceeding is pending. None of the two situations are present in this case. As the assessment proceedings are pending by virtue of return filed, the Assessing Officer could not have initiated re-assessment proceedings. The ld. A.R. has rightly relied upon the decision of Hon'ble Calcutta High Court and Bombay High Court.
In the case of CIT v. Rajendra G. Shah (supra), the Hon'ble Bombay High Court held as under: It was found that all the proceedings were taken pursuant to the reopening of the assessment in 1985, losing sight of the fact that the main return was pending assessment: The Tribunal was right in annulling the assessment proceedings. No substantial question of law arose.
39. In CESC Ltd. V. DCIT (supra) Hon'ble Calcutta High Court held as under: The notice Under Section 148 was issued on Mach 20, 2001 while the assessment was completed on March 30, 2001. The notice under Section 148 before the assessment against the principal was complete was wholly without jurisdiction.
40. As a result, we confirm the order of the CIT(A) and dismiss the appeal of the Revenue.