Suraj Auto Service Center Vs. Income Tax Officer - Court Judgment

Excerpt:
1. this appeal by the assessee arises out of the order passed by the cit(a) on 17th feb., 2006 in relation to the asst. yr. 2002-03.2. first three grounds challenge the legality of the initiation of the reassessment proceedings.3. briefly stated, the facts of the case are that the assessee furnished its return of income on 31st oct., 2002 claiming refund of rs. 1,02,507. the ao treated the return as defective and issued notice on 31st march, 2003 enquiring about the contract receipts on which tds of rs. 1,38,400 was claimed. the assessee vide his reply dt. 20th may, 2003 explained the entire position that the gross contract receipts amounted to rs. 65,94,595 and after considering certain expenses and making some further adjustments, the net freight receipts amounted to rs. 8,59,685.42, which was to be reflected in the p&l a/c furnished along with the return for the year in question. in this reply, the assessee also furnished details of gross receipts, other adjustments and expenses resulting into net freight of rs. 8,59,685. thereafter, the ao issued intimation under section 143(1) after processing the return accepting the return declared as such. thereafter, a notice under section 148 was issued pursuant to which the assessment was completed at an income of rs. 3,84,422. the learned cit(a) allowed relief of rs. 1,32,187, thereby determining the income at rs. 2,52,235 as against declared income of rs. 1,00,542.4. the learned counsel for the assessee contended that the proceedings were wrongly initiated by the ao under section 148 as the reasons recorded by him for issuance of notice under section 148 did not establish any link between the income escaping the assessment and the facts not disclosed by the assessee. he invited my attention towards the copy of reasons for initiating proceedings under section 148(2). it was contended that the reasons so recorded by the ao did not satisfy the contentions of reassessment and hence the assessment deserves to be annulled. he also relied on an order passed by the jodhpur bench of the tribunal in the case of the dy cit v. yakub ali gopal singh & party (wine contractor) in ita no. 402/jd/2000 reported at (2005) 98 ttj (jd) 821--ed. in which the revenue's appeal against quashing of reassessment proceedings was dismissed. on the contrary, the learned departmental representative has relied on the impugned order.5.1 have heard both the sides and perused the relevant material on record. in order to appreciate the contention of the learned authorised representative as regards validity of reassessment, it would be in the fitness of things if the reasons recorded by the ao under section 148(2), copy placed at p. 14 of the paper book, are perused, which read as under: the assessee filed a return declaring total income of rs. 1,00,542 and claimed refund of rs. 1,02,507. the refund claimed as above was allowed after processing the return.scrutiny of the assessee's record indicated that contract receipts on which tds of rs. 1,38,400 was claimed were not shown in the p&l a/c.the auditor in his audit report has not made comments on the issue.however, before issue of refund, a clarification was sought from the assessee and it was stated by the assessee that the assessee has received from transportation amounting to rs. 65,94,595. on the contract receipt tds was made and in the p&l a/c tanker freight (net) at rs. 8,59,685 was declared. the clarification was delivered on 5th june, 2003 by, shri s.c. kedia, authorised representative of the assessee but he has not certified it true as chartered accountant. it is found that the assessee's accounts were audited by shri s.c. kedia, chartered accountant but he did not render proper account of the tankers as per audit standard fixed by the institute.details furnished in the reply dt. 5th june, 2003 indicated that a sum of rs. 4,60,437 was claimed as shortage. it is not understood how a carrier is in any way responsible for shortage in transit while carrying petrol or diesel. thus, the claim is prima facie bogus. it is also noticed that the assessee has received total sum of rs. 73,39,163 from transportation. against these receipts, the assessee has neither rendered any account along with the audit report nor has the auditor certified any account having been maintained or examined by him for quantifying the income from tankers. obviously the assessee has intended to avoid payment of tax on contract receipts and whatever income he has shown was subject to deduction of depreciation in the p&l a/c claimed with other assets.normally in the transport business, on transport gp approximately 15 to 20 per cent is declared or applied by the ao. thus, on contract receipts of rs. 65,94,595, the profit should have been declared at rs. 9,89,189 against which the assessee has disclosed rs. 8,59,685 and in this way income of rs. 1,29,504 was under-disclosed in the return of income.in the depreciation chart the assessee has shown cost of tanker upto 30th sept., 2001 at rs. 1,33,365 and after 30th sept., 2001 at rs. 71,500. it is not understood how cost of tanker was bifurcated in two periods. the assessee has claimed depreciation of 40 per cent on part of tanker's cost.the above facts clearly indicated that prima facie it is a case where the income was heavily understated by the assessee and for failure on part of the assessee to disclose correct in the return of income of the assessee as aforesaid has escaped assessment. accordingly notice under section 148 of the it act is hereby issued." 6. from the above, it is noticed that the first reason is against contract receipts of tds of rs. 1,38,400 which was claimed but not shown by the assessee in the ao's opinion. here, it would be relevant that on this very count the ao had issued deficiency letter dt. 31st march, 2003. the assessee furnished a detailed reply on 20th may, 2003 showing the gross contract receipts and the determination of the net amount of freights at rs. 8.59 lakhs which found its way in the p&l a/c. the ao got satisfied and processed the return as such on 18th aug., 2003 by accepting the income declared. it shows that the ao got fully satisfied on this point. his subsequent action by way of issuance of notice on this count is merely a change of opinion, which does not find its place in the scheme of reassessment.the second reason taken note of by the ao is about shortage of rs. 4,60,437 shown by the assessee vide its reply dt. 20th may, 2003 in response to letter of deficiency issued by the ao on 31st march, 2003.this information was again made available by the assessee himself from his books of account which was accepted by the ao while finalising the return under section 143(1). by no stretch of imagination this information can be construed as genuine ground for the issuance of notice under section 148. here, i would like to make it clear that the regular assessment proceedings are distinct from the reassessment proceedings. whereas the scope of assessment under section 143(3) is to ensure that the assessee has not understated the income. section 147 comes into picture when the ao has reason to believe that any income chargeable to tax has escaped assessment. the verification of the return by way of making assessment under section 143(3) or section 144 does not lay down any precondition about the escapement of income. the ao is empowered to scrutinise the return in order to verify that the assessee has furnished correct particulars of income. in contrast, section 147 presupposes the belief of the ao about the escapement of income. if there are no reasons to believe that the income chargeable to tax has escaped assessment, the ao cannot invoke his jurisdiction by issuing notice under section 148. he is, however, competent to make assessment under section 143(3) or 144 notwithstanding any reasons to believe about the escapement of income. from the above, it is palpable that both the proceedings operate in different fields though the common outcome is the determination of correct income. different sets of provisions have been enshrined in the act which guide the making of assessment and reassessment. when the ao is empowered to make regular assessment but he fails to do so within the stipulated time period, section 147 does not come to his assistance to cover up the lapse on his part. as discussed above, scope of reassessment is confined to taxing the escaped income on the belief of the ao that there has been an escapement. the ao does not get licence to initiate reassessment proceedings in order to verify or scrutinise the return of income unless he is of the opinion that there is an escapement of income. it is further made clear that the reassessment excludes the change of opinion by the ao. to put it simple, where he has applied his mind in an earlier proceeding to a particular point and comes to a definite conclusion as regards taxability or otherwise of the income, he cannot review his earlier decision and issue notice under section 148.adverting to the facts of the case, i find that both the above reasons amounted to the change of opinion on the facts which were already made available by the assessee vide its letter dt. 20th may, 2003. in such circumstances, these two grounds cannot be considered as germane to the issuance of a valid and legal notice under section 148.the reason no. 3 of the ao as regards applicability of a particular gp rate again does not fall within the purview of section 147 as it does not contemplate any specific income which, in the opinion of the ao has escaped assessment. such type of facts can be verified only when the regular assessment is made.the last reason taken note of by the ao is about the depreciation chart in which the assessee has shown cost of tanker at rs. 1,33,365 upto 30th sept., 2001 and rs. 71,500 after this date. it is obvious that according to the prevalent scheme for depreciation at the material time, the rate of depreciation was to be scaled down by 50 per cent, if the asset was not put to use for a period of 180 days. here, the assessee has shown a particular cost of tanker upto 30th sept., 2001 and other amount after the said date. it is not a case of bifurcation of the cost of one tanker into two periods for the claim of depreciation. be that as it may, i again observe that it is an aspect which can be verified and examined only during the regular assessment proceedings and in no case needs to the issuance of notice under section 148 unless there is another material on record to show that the treatment given by the assessee is false. it is observed that the ao has ventured to scrutinise the return of the assessee beyond the period prescribed under section 143(2) in the garb of the proceedings under section 147. the ao was well within his competence to consider and examine these aspects within the stipulated period in making the regular assessment. having not done so, he could not give time and do the same again in the pretext of reassessment proceedings.i am, therefore, of the considered opinion that all the reasons taken note of by the ao do not justify the initiation of the reassessment proceedings. my view is fortified by the aforenoted decision of the division bench of the tribunal in the case of dy. cit v. yakub ali gopal singh & party (supra). by setting aside the impugned order, i quash the notice under section 148 and the resultant proceedings flowing therefrom.

Judgment:
1. This appeal by the assessee arises out of the order passed by the CIT(A) on 17th Feb., 2006 in relation to the asst. yr. 2002-03.

2. First three grounds challenge the legality of the initiation of the reassessment proceedings.

3. Briefly stated, the facts of the case are that the assessee furnished its return of income on 31st Oct., 2002 claiming refund of Rs. 1,02,507. The AO treated the return as defective and issued notice on 31st March, 2003 enquiring about the contract receipts on which TDS of Rs. 1,38,400 was claimed. The assessee vide his reply dt. 20th May, 2003 explained the entire position that the gross contract receipts amounted to Rs. 65,94,595 and after considering certain expenses and making some further adjustments, the net freight receipts amounted to Rs. 8,59,685.42, which was to be reflected in the P&L a/c furnished along with the return for the year in question. In this reply, the assessee also furnished details of gross receipts, other adjustments and expenses resulting into net freight of Rs. 8,59,685. Thereafter, the AO issued intimation under Section 143(1) after processing the return accepting the return declared as such. Thereafter, a notice under Section 148 was issued pursuant to which the assessment was completed at an income of Rs. 3,84,422. The learned CIT(A) allowed relief of Rs. 1,32,187, thereby determining the income at Rs. 2,52,235 as against declared income of Rs. 1,00,542.

4. The learned Counsel for the assessee contended that the proceedings were wrongly initiated by the AO under Section 148 as the reasons recorded by him for issuance of notice under Section 148 did not establish any link between the income escaping the assessment and the facts not disclosed by the assessee. He invited my attention towards the copy of reasons for initiating proceedings under Section 148(2). It was contended that the reasons so recorded by the AO did not satisfy the contentions of reassessment and hence the assessment deserves to be annulled. He also relied on an order passed by the Jodhpur Bench of the Tribunal in the case of the Dy CIT v. Yakub Ali Gopal Singh & Party (Wine Contractor) in ITA No. 402/Jd/2000 reported at (2005) 98 TTJ (Jd) 821--Ed. in which the Revenue's appeal against quashing of reassessment proceedings was dismissed. On the contrary, the learned Departmental Representative has relied on the impugned order.

5.1 have heard both the sides and perused the relevant material on record. In order to appreciate the contention of the learned Authorised Representative as regards validity of reassessment, it would be in the fitness of things if the reasons recorded by the AO under Section 148(2), copy placed at p. 14 of the paper book, are perused, which read as under: The assessee filed a return declaring total income of Rs. 1,00,542 and claimed refund of Rs. 1,02,507. The refund claimed as above was allowed after processing the return.

Scrutiny of the assessee's record indicated that contract receipts on which TDS of Rs. 1,38,400 was claimed were not shown in the P&L a/c.

The auditor in his audit report has not made comments on the issue.

However, before issue of refund, a clarification was sought from the assessee and it was stated by the assessee that the assessee has received from transportation amounting to Rs. 65,94,595. On the contract receipt TDS was made and in the P&L a/c tanker freight (net) at Rs. 8,59,685 was declared. The clarification was delivered on 5th June, 2003 by, Shri S.C. Kedia, Authorised Representative of the assessee but he has not certified it true as chartered accountant. It is found that the assessee's accounts were audited by Shri S.C. Kedia, chartered accountant but he did not render proper account of the tankers as per audit standard fixed by the institute.

Details furnished in the reply dt. 5th June, 2003 indicated that a sum of Rs. 4,60,437 was claimed as shortage. It is not understood how a carrier is in any way responsible for shortage in transit while carrying petrol or diesel. Thus, the claim is prima facie bogus. It is also noticed that the assessee has received total sum of Rs. 73,39,163 from transportation. Against these receipts, the assessee has neither rendered any account along with the audit report nor has the auditor certified any account having been maintained or examined by him for quantifying the income from tankers. Obviously the assessee has intended to avoid payment of tax on contract receipts and whatever income he has shown was subject to deduction of depreciation in the P&L a/c claimed with other assets.

Normally in the transport business, on transport GP approximately 15 to 20 per cent is declared or applied by the AO. Thus, on contract receipts of Rs. 65,94,595, the profit should have been declared at Rs. 9,89,189 against which the assessee has disclosed Rs. 8,59,685 and in this way income of Rs. 1,29,504 was under-disclosed in the return of income.

In the depreciation chart the assessee has shown cost of tanker upto 30th Sept., 2001 at Rs. 1,33,365 and after 30th Sept., 2001 at Rs. 71,500. It is not understood how cost of tanker was bifurcated in two periods. The assessee has claimed depreciation of 40 per cent on part of tanker's cost.

The above facts clearly indicated that prima facie it is a case where the income was heavily understated by the assessee and for failure on part of the assessee to disclose correct in the return of income of the assessee as aforesaid has escaped assessment. Accordingly notice under Section 148 of the IT Act is hereby issued." 6. From the above, it is noticed that the first reason is against contract receipts of TDS of Rs. 1,38,400 which was claimed but not shown by the assessee in the AO's opinion. Here, it would be relevant that on this very count the AO had issued deficiency letter dt. 31st March, 2003. The assessee furnished a detailed reply on 20th May, 2003 showing the gross contract receipts and the determination of the net amount of freights at Rs. 8.59 lakhs which found its way in the P&L a/c. The AO got satisfied and processed the return as such on 18th Aug., 2003 by accepting the income declared. It shows that the AO got fully satisfied on this point. His subsequent action by way of issuance of notice on this count is merely a change of opinion, which does not find its place in the scheme of reassessment.

The second reason taken note of by the AO is about shortage of Rs. 4,60,437 shown by the assessee vide its reply dt. 20th May, 2003 in response to letter of deficiency issued by the AO on 31st March, 2003.

This information was again made available by the assessee himself from his books of account which was accepted by the AO while finalising the return under Section 143(1). By no stretch of imagination this information can be construed as genuine ground for the issuance of notice under Section 148. Here, I would like to make it clear that the regular assessment proceedings are distinct from the reassessment proceedings. Whereas the scope of assessment under Section 143(3) is to ensure that the assessee has not understated the income. Section 147 comes into picture when the AO has reason to believe that any income chargeable to tax has escaped assessment. The verification of the return by way of making assessment under Section 143(3) or Section 144 does not lay down any precondition about the escapement of income. The AO is empowered to scrutinise the return in order to verify that the assessee has furnished correct particulars of income. In contrast, Section 147 presupposes the belief of the AO about the escapement of income. If there are no reasons to believe that the income chargeable to tax has escaped assessment, the AO cannot invoke his jurisdiction by issuing notice under Section 148. He is, however, competent to make assessment under Section 143(3) or 144 notwithstanding any reasons to believe about the escapement of income. From the above, it is palpable that both the proceedings operate in different fields though the common outcome is the determination of correct income. Different sets of provisions have been enshrined in the Act which guide the making of assessment and reassessment. When the AO is empowered to make regular assessment but he fails to do so within the stipulated time period, Section 147 does not come to his assistance to cover up the lapse on his part. As discussed above, scope of reassessment is confined to taxing the escaped income on the belief of the AO that there has been an escapement. The AO does not get licence to initiate reassessment proceedings in order to verify or scrutinise the return of income unless he is of the opinion that there is an escapement of income. It is further made clear that the reassessment excludes the change of opinion by the AO. To put it simple, where he has applied his mind in an earlier proceeding to a particular point and comes to a definite conclusion as regards taxability or otherwise of the income, he cannot review his earlier decision and issue notice under Section 148.

Adverting to the facts of the case, I find that both the above reasons amounted to the change of opinion on the facts which were already made available by the assessee vide its letter dt. 20th May, 2003. In such circumstances, these two grounds cannot be considered as germane to the issuance of a valid and legal notice under Section 148.

The reason No. 3 of the AO as regards applicability of a particular GP rate again does not fall within the purview of Section 147 as it does not contemplate any specific income which, in the opinion of the AO has escaped assessment. Such type of facts can be verified only when the regular assessment is made.

The last reason taken note of by the AO is about the depreciation chart in which the assessee has shown cost of tanker at Rs. 1,33,365 upto 30th Sept., 2001 and Rs. 71,500 after this date. It is obvious that according to the prevalent scheme for depreciation at the material time, the rate of depreciation was to be scaled down by 50 per cent, if the asset was not put to use for a period of 180 days. Here, the assessee has shown a particular cost of tanker upto 30th Sept., 2001 and other amount after the said date. It is not a case of bifurcation of the cost of one tanker into two periods for the claim of depreciation. Be that as it may, I again observe that it is an aspect which can be verified and examined only during the regular assessment proceedings and in no case needs to the issuance of notice under Section 148 unless there is another material on record to show that the treatment given by the assessee is false. It is observed that the AO has ventured to scrutinise the return of the assessee beyond the period prescribed under Section 143(2) in the garb of the proceedings under Section 147. The AO was well within his competence to consider and examine these aspects within the stipulated period in making the regular assessment. Having not done so, he could not give time and do the same again in the pretext of reassessment proceedings.

I am, therefore, of the considered opinion that all the reasons taken note of by the AO do not justify the initiation of the reassessment proceedings. My view is fortified by the aforenoted decision of the Division Bench of the Tribunal in the case of Dy. CIT v. Yakub Ali Gopal Singh & Party (supra). By setting aside the impugned order, I quash the notice under Section 148 and the resultant proceedings flowing therefrom.