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CASE NO.:

Appeal (civil) 2830 of 2007

PETITIONER:

Assistant Commissioner of Income Tax

RESPONDENT:

Rajesh Jhaveri Stock Brokers Pvt. Ltd.

DATE OF JUDGMENT: 23/05/2007

BENCH:

Dr. ARIJIT PASAYAT & D.K. JAIN

JUDGMENT:

J U D G M E N T

CIVIL APPEAL NO. 2830 OF 2007

(Arising out of S.L.P. (C) No.24482 of 2005)

Dr. ARIJIT PASAYAT, J.

1. Leave granted.

2. Challenge in this appeal filed by the revenue is to the

correctness of the decision rendered by a Division Bench of the

Gujarat High Court allowing the Special Civil Application filed

by the appellant.

3. Background facts in a nutshell are as follows:

4. The respondent-a Private Limited Company filed its

return of income for Assessment year 2001-02 on 30th

October, 2001 declaring total loss of Rs.2,70,85,105/-. The

said return was processed under Section 143(1) of the Income

Tax Act, 1961 (in short the \021Act\022) accepting the loss returned

by the respondent. Notice under Section 148 of the Act was

issued on the ground that claim of bad debts as expenditure

was not acceptable. On 12th May, 2004 a return of income

declaring the loss at the same figure, as declared in the

original return, was filed by the respondent under protest.

Copy of the reasons recorded was furnished by the appellant

on the respondents\022 request some time in November, 2004.

The respondent raised various objections, both on jurisdiction

and merits of the subject matter recorded in the reasons. On

4th February, 2005 the appellant disposed of the objections

holding that the initiation of reassessment proceedings was

valid and he had jurisdiction to undertake such an exercise. It

is in the aforesaid backdrop of facts that the impugned notice

under Section 148 of the Act dated 12th May, 2004 was

challenged by the respondent.

5. The High Court allowed the writ petition following the

decision of the High Court in Adani Exports v. Deputy

Commissioner of Income Tax (Assessment) (1999) 240 ITR

224.

6. In support of the appeal learned counsel for the appellant

submitted that the factual position involved in Adani Exports\022

case (supra) was entirely different. That was a case relating to

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Section 143 (3) of the Act and the present case relates to

Section 143(1) of the Act. It is pointed out that return was

filed by the respondent for the concerned assessment year i.e.

2001-2002 on 30.10.2001. The return was processed under

Section 143 (1) of the Act on 26.11. 2001. The revenue audit

raised an objection relating to a debit of Rs.1285.72 lakh as

bad debt out of total expenditure of Rs.1307.64. Since the

conditions stipulated under Section 36(1)(vii) read with Section

36(2) of the Act were not fulfilled, the assessing officer

reopened the assessment by issuing a notice in terms of

Section 148 of the Act on the ground that it has reason to

believe that the income assessable to tax had escaped

assessment within the meaning of Section 147 of the Act. The

respondent asked for the reason for re-opening the

assessment. On 31.5.2004 a return of income declaring the

loss of the original return was filed by the respondent under

protest and raised various objections relating to jurisdiction

and merits of the subject matter. The same was disposed of

by the assessing officer holding the initiation of re-assessment

proceedings was valid and the assessing officer had

jurisdiction to undertake the exercise. Thereafter a writ

petition was filed as noted above. The High Court relying on

the decision in Adani Exports\022 case (supra), which had no

application, allowed the writ petition.

7. According to the learned counsel for the appellant the

distinction between the position as under Section 143(1) of the

Act vis-a-vis under Section 143(3) of the Act has been

completely lost sight of by the High Court. Adani\022s case (supra)

related to a case under Section 143(3) of the Act.

8. Learned counsel for the respondent on the other hand

supported the order.

9. In order to consider the rival submissions, it is necessary

to take note of Section 143(1) (as it stood before and after

amendment with effect from June 1, 1999), 147 and 148. The

provisions read as follows:

After amendment:

\023143. Assessment- (1) Where a return has been

made under section 139, or in response to a notice

under sub-section (1) of Section 142,-

(i) if any tax or interest is found due on the basis of

such return, after adjustment of any tax

deducted at source, any advance tax paid, any

tax paid on self-assessment and any amount paid

otherwise by way of tax or interest, then, without

prejudice to the provisions of sub-section (2), an

intimation shall be sent to the assessee

specifying the sum so payable, and such

intimation shall be deemed to be a notice of

demand issued under Section 156 and all the

provisions of this Act shall apply accordingly; and

(ii) if any refund is due on the basis of such return,

it shall be granted to the assessee and an

intimation to this effect shall be sent to the

assessee:

Provided that except as otherwise

provided in this sub-section, the

acknowledgment of the return shall be deemed

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to be an intimation under this sub-section

where either no sum if payable by the assessee

or no refund is due to him:

Provided further that no intimation under

this sub-section shall be sent after the expiry

of two years from the end of the assessment

year in which the income was first

assessable\005.\024

Before amendment:

10. Section 143(1) as it stood at the point of time when the

intimation was given under the said provision, so far as

relevant, read as follows:

\023143. (1)(a) Where a return has been made under

section 139, or in response to a notice under sub-

section (1) of section 142,\027

(i) if any tax or interest is found due on the basis of

such return, after adjustment of any tax deducted

at source, any advance tax paid and any amount

paid otherwise by way of tax or interest, then,

without prejudice to the provisions of sub-section

(2), an intimation shall be sent to the assessee

specifying the sum so payable, and such intimation

shall be deemed to be a notice of demand issued

under section 156 and all the provisions of this Act

shall apply accordingly; and

(ii) if any refund is due on the basis of such return,

it shall be granted to the assessee:

Provided that in computing the tax or interest

payable by, or refundable to, the assessee, the

following adjustments shall be made in the income

or loss declared in the return, namely :\027

(i) any arithmetical errors in the

return, accounts or documents

accompanying it shall be rectified;

(ii) any loss carried forward, deduction,

allowance or relief, which, on the basis of

the information available in such return,

accounts or documents, if prima facie

admissible but which is not claimed in

the return, shall be allowed;

(iii) any loss carried forward, deduction,

allowance or relief claimed in the return,

which, on the basis of the information

available in such return, accounts or

documents, is prima facie inadmissible,

shall be disal1owed:

Provided further that an intimation shall be

sent to the assessee whether or not any adjustment

has been made under the first proviso and

notwithstanding that no tax or interest is due from

him:

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Provided also that an intimation under this

clause shall not be sent after the expiry of two years

from the end of the assessment year in h the income

was first assessable.

147. Income escaping assessment.\027If the

Assessing Officer, has reason to believe that any

income chargeable to tax has escaped assessment

for any assessment year, he may, subject to the

provisions of sections 148 to 153, assess or

reassess such income and also any other income

chargeable to tax which has escaped assessment

and which comes to his notice

subsequently in the course of the proceedings under

this section, or recompute the loss or the

depreciation allowance or any other allowance, as

the case may be, for the assessment year concerned

(hereafter in this section and in sections 148 to 153

referred to as the relevant assessment year):

Provided that where an assessment under sub-

section (3) of section 143 or this section has been

made for the relevant assessment year, no action

shall be taken under this section after the expiry of

four years from the end of the relevant assessment

year, unless any income chargeable to tax has

escaped assessment for such assessment year by

reason of the failure on the part of the assessee to

make a return under section 139 or in response to a

notice issued under sub-section (1) of section 142 or

section 148 or to disclose fully and truly all material

facts necessary for his assessment for that

assessment year.

Explanation 1.\027Production before the Assessing

Officer of account books or other evidence from

which material evidence could, with due diligence,

have been discovered by the Assessing Officer will

not necessarily amount to disclosure within the

meaning of the foregoing proviso.

Explanation 2.\027For the purposes of this section,

the following shall also be deemed to be cases where

income chargeable to tax has escaped assessment,

namely:

(a) where no return of income has been furnished by

the assessee although his total income or the total

income of any other person in respect of which he is

assessable under this Act during the previous year

exceeded the maximum amount which is not

chargeable to income-tax;

(b) where a return of income has been furnished by

the assessee but no assessment has been made and

it is noticed by the Assessing Officer that the

assessee has understated the income or has

claimed excessive loss, deduction, allowance or

relief in the return;

(c) where an assessment has been made, but\027

(i) income chargeable to tax has been

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under-assessed ; or

(ii) such income has been assessed at

too low rate ; or

(iii) such income has been made the

subject of excessive relief under this Act ;

or

(iv) excessive loss or depreciation

allowance or any other allow- ance under

this Act has been computed.

148. Issue of notice where income has escaped

assessment.\027(1) Before making the assessment,

reassessment or recomputation under section 147,

the Assessing Officer shall serve on the assessee a

notice containing all or any of the requirements

which may be included in a notice under sub-

section (2) of section 139; and the provisions of this

Act shall, so far as may be, apply accordingly as if

the notice were a notice issued under that sub

section.

(2) The Assessing Officer shall, before issuing any

notice under this section, record his reasons for

doing so.\024

11. It is to be noted that substantial changes have been

made to section 143(1) with effect from June 1, 1999. Up to

March 31, 1989, after a return of income was filed the

Assessing Officer could make an assessment under section

143(1) without requiring the presence of the assessee or the

production by him of any evidence in support of the return.

Where the assessee objected to such an assessment or where

the officer was of the opinion that the assessment was

incorrect or incomplete or the officer did not complete the

assessment under section 143(1), but wanted to make an

inquiry, a notice under section 143(2) was required to be

issued to the assessee requiring him to produce evidence in

support of his return. After considering the material and

evidence produced and after making necessary inquiries, the

officer had power to make assessment under section 143(3).

With effect from April 1, 1989, the provisions underwent

substantial and material changes. A new scheme was

introduced and the new substituted section 143(1) prior to the

subsequent substitution with effect from June 1, 1999, in

clause (a), a provision was made that where a return was filed

under section 139 or in response to a notice under section

142(1), and any tax or refund was found due on the basis of

such return after adjustment of tax deducted at source, any

advance tax or any amount paid otherwise by way of tax or

interest, an intimation was to be sent without prejudice to the

provisions of section 143(2) to the assessee specifying the sum

so payable and such intimation was deemed to be a notice of

demand issued under section 156. The first proviso to section

143(1)(a) allowed the Department to make certain adjustments

in the income or loss declared in the return. They were as

follows:

(a) an arithmetical error in the return, accounts and

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documents accompanying it were to be rectified;

(b) any loss carried forward, deduction, allowance or

relief which on the basis of the information available

in such return, accounts or documents, was prima

facie admissible, but which was not claimed in the

return was to be allowed;

(c) any loss carried forward, relief claimed in the

return which on the basis of the information as

available in such returns accounts or documents

were prima facie inadmissible was to be disallowed.

12. What were permissible under the first proviso to section

143(1)(a) to be adjusted were, (i) only apparent arithmetical

errors in the return, accounts or documents accompanying the

return, (ii) loss carried forward, deduction allowance or relief,

which was prima facie admissible on the basis of information

available in the return but not claimed in the return and

similarly (iii) those claims which were on the basis of the

information available in the return, prima facie inadmissible,

were to be rectified/allowed/disallowed. What was permissible

was correction of errors apparent on the basis of the

documents accompanying the return. The Assessing Officer

had no authority to make adjustments or adjudicate upon any

debatable issues. In other words, the Assessing Officer had no

power to go behind the return, accounts or documents, either

in allowing or in disallowing deductions, allowance or relief.

13. One thing further to be noticed is that intimation under

section 143(1)(a) is given without prejudice to the provisions of

section 143(2). Though technically the intimation issued was

deemed to be a demand notice issued under section 156, that

did not per se preclude the right of the Assessing Officer to

proceed under section 143(2). That right is preserved and is

not taken away. Between the period from April 1, 1989 to

March 31, 1998, the second proviso to section 143(1)(a),

required that where adjustments were made under the first

proviso to section 143(1)(a), an intimation had to be sent to the

assessee notwithstanding that no tax or refund was due from

him after making such adjustments. With effect from April 1,

1998, the second proviso to section 143(1)(a) was substituted

by the Finance Act, 1997, which was operative till June 1,

1999. The requirement was that an intimation was to be sent

to the assessee whether or not any adjustment had been made

under the first proviso to section 143(1) and notwithstanding

that no tax or interest was found due from the assessee

concerned. Between April 1, 1998 and May 31, 1999, sending

of an intimation under section 143(1)(a) was mandatory. Thus,

the legislative intent is very clear from the use of the word

\023intimation\024 as substituted for \023assessment\024 that two different

concepts emerged. While making an assessment, the

Assessing Officer is free to make any addition after grant of

opportunity to the assessee. By making adjustments under the

first proviso to section 143(1)(a), no addition which is

impermissible by the information given in the return could be

made by the Assessing Officer. The reason is that under

section 143(1)(a) no opportunity is granted to the assessee and

the Assessing Officer proceeds on his opinion on the basis of

the return filed by the assessee. The very fact that no

opportunity of being heard is given under section 143(1)(a)

indicates that the Assessing Officer has to proceed accepting

the return and making the permissible adjustments only. As a

result of insertion of the Explanation to section 143 by the

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Finance (No. 2) Act of 1991 with effect from October 1, 1991,

and subsequently with effect from June 1, 1994, by the

Finance Act, 1994, and ultimately omitted with effect from

June 1, 1999, by the Explanation as introduced by the

Finance (No. 2) Act of 1991 an intimation sent to the assessee

under section 143(1)(a) was deemed to be an order for the

purposes of section 246 between June 1, 1994, to May 31,

1999, and under section 264 between October 1, 1991, and

May 31, 1999. It is to be noted that the expressions

\023intimation\024 and \023assessment order\024 have been used at

different places. The contextual difference between the two

expressions has to be understood in the context the

expressions are used. Assessment is used as meaning

sometimes \023the computation of income\024, sometimes \023the

determination of the amount of tax payable\024 and sometimes

\023the whole procedure laid down in the Act for imposing liability

upon the tax payer\024. In the scheme of things, as noted above,

the intimation under section 143(1)(a) cannot be treated to be

an order of assessment. The distinction is also well brought

out by the statutory provisions as they stood at different

points of time. Under section 143(l)(a) as it stood prior to April

1, 1989, the Assessing Officer had to pass an assessment

order if he decided to accept the return, but under the

amended provision, the requirement of passing of an

assessment order has been dispensed with and instead an

intimation is required to be sent. Various circulars sent by the

Central Board of Direct Taxes spell out the intent of the

Legislature, i.e., to minimize the departmental work to

scrutinize each and every return and to concentrate on

selective scrutiny of returns. These aspects were highlighted

by one of us (D. K. Jain J) in Apogee International Limited v.

Union of India [(1996) 220 ITR 248]. It may be noted above

that under the first proviso to the newly substituted section

143(1), with effect from June 1, 1999, except as provided in

the provision itself, the acknowledgment of the return shall be

deemed to be an intimation under section 143(1) where (a)

either no sum is payable by the assessee, or (b) no refund is

due to him. It is significant that the acknowledgment is not

done by any Assessing Officer, but mostly by ministerial staff.

Can it be said that any \023assessment\024 is done by them? The

reply is an emphatic \023no\024. The intimation under section

143(1)(a) was deemed to be a notice of demand under section

156, for the apparent purpose of making machinery provisions

relating to recovery of tax applicable. By such application only

recovery indicated to be payable in the intimation became

permissible. And nothing more can be inferred from the

deeming provision. Therefore, there being no assessment

under section 143(1)(a), the question of change of opinion, as

contended, does not arise.

14. Additionally, section 148 as presently stands is

differently couched in language from what was earlier the

position. Prior to the substitution by the Direct Tax Laws

(Amendment) Act, 1987, the provision read as follows:

\023148. Issue of notice where income has escaped

assessment.\027(1) Before making the assessment,

reassessment or recomputation under section 147,

the Assessing Officer shall serve on the assessee a

notice containing all or any of the requirements

which may be included in a notice under sub-

section (2) of section 139; and the provisions of this

Act shall, so far as may be, apply accordingly as if

the notice were a notice issued under that sub-

section.

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(2) The Assessing Officer shall, before issuing any

notice under this section, record his reasons for

doing so.\024

15. Section 147 prior to its substitution by the Direct Tax

Laws (Amendment) Act, 1987, stood as follows:

\023147. Income escaping assessment.\027If\027

(a) the Assessing Officer has reason to believe that,

by reason of the omission or failure on the part of

an assessee to make a return under section 139 for

any assessment year to the Assessing Officer or to

disclose fully and truly all material facts necessary

for his assessment for that year, income chargeable

to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission

or failure as mentioned in clause (a) on the part of

the assessee, the Assessing Officer has in

consequence of information in his possession

reason to believe that 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 or

recompute the loss or the depreciation allowance, as

the case may be, for the assessment year concerned

(hereafter in sections 148 to 153 referred to as the

relevant assessment year).

Explanation 1.\027For the purposes of this section,

the following shall also be deemed to be cases where

income chargeable to tax has escaped assessment,

namely :\027

(a) Where income chargeable to tax has been

underassessed ; or

(b) where such income has been assessed at too low

rate ; or

(c) where such income has been made the subject of

excessive relief under this Act or under the Indian

Income-tax Act, 1922 (11 of 1922); or

(d) where excessive loss or depreciation allowance

has been computed.

Explanation 2.\027Production before the Assessing

Officer of account books or other evidence from

which material evidence could with due diligence

have been discovered by the Assessing Officer will

not necessarily amount to disclosure within the

meaning of this section.\024

16. Section 147 authorises and permits the Assessing Officer

to assess or reassess income chargeable to tax if he has

reason to believe that income for any assessment year has

escaped assessment. The word \023reason\024 in the phrase \023reason

to believe\024 would mean cause or justification. If the Assessing

Officer has cause or justification to know or suppose that

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income had escaped assessment, it can be said to have reason

to believe that an income had escaped assessment. The

expression cannot be read to mean that the Assessing Officer

should have finally ascertained the fact by legal evidence or

conclusion. The function of the Assessing Officer is to

administer the statute with solicitude for the public exchequer

with an inbuilt idea of fairness to taxpayers. As observed by

the Delhi High Court in Central Provinces Manganese Ore Co.

Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under

section 147(a) (as the provision stood at the relevant time)

fulfillment of the two requisite conditions in that regard is

essential. At that stage, the final outcome of the proceeding is

not relevant. In other words, at the initiation stage, what is

required is \023reason to believe\024, but not the established fact of

escapement of income. At the stage of issue of notice, the only

question is whether there was relevant material on which a

reasonable person could have formed a requisite belief.

Whether the materials would conclusively prove the

escapement is not the concern at that stage. This is so

because the formation of belief by the Assessing Officer is

within the realm of subjective satisfaction (see ITO v. Selected

Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ;

Raymond Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)].

17. The scope and effect of section 147 as substituted with

effect from April 1, 1989, as also sections 148 to 152 are

substantially different from the provisions as they stood prior

to such substitution. Under the old provisions of section 147,

separate clauses (a) and (b) laid down the circumstances

under which income escaping assessment for the past

assessment years could be assessed or reassessed. To confer

jurisdiction under section 147(a) two conditions were required

to be satisfied firstly the Assessing Officer must have reason to

believe that income profits or gains chargeable to income tax

have escaped assessment, and secondly he must also have

reason to believe that such escapement has occurred by

reason of either (i) omission or failure on the part of the

assessee to disclose fully or truly all material facts necessary

for his assessment of that year. Both these conditions were

conditions precedent to be satisfied before the Assessing

Officer could have jurisdiction to issue notice under section

148 read with section 147(a) But under the substituted

section 147 existence of only the first condition suffices. In

other words if the Assessing Officer for whatever reason has

reason to believe that income has escaped assessment it

confers jurisdiction to reopen the assessment. It is however to

be noted that both the conditions must be fulfilled if the case

falls within the ambit of the proviso to section 147. The case at

hand is covered by the main provision and not the proviso.

18. So long as the ingredients of section 147 are fulfilled, the

Assessing Officer is free to initiate proceeding under section

147 and failure to take steps under section 143(3) will not

render the Assessing Officer powerless to initiate reassessment

proceedings even when intimation under section 143(1) had

been issued.

19. Inevitable conclusion is that High Court has wrongly

applied Adani\022s case (supra) which has no application to the

case on the facts in view of the conceptual difference between

Section 143(1) and Section 143(3) of the Act.

20. Learned counsel for the respondent submitted that other

points are available to be raised. Since no other point was

urged before the High Court, we find no reason to examine if

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any other point was available. The appeal is allowed without

any orders as to costs.