INCOME TAX ACT, 1961

Reassessment- Notice under section 143(1)(a)-Notice after four years-Non-disclosure of material facts

Assessee-firm was engaged in the business of manufacture of laptop computers at Jammu and Kashmir. It filed the returns of income claiming deduction under section 80-IA for the relevant assessment years. AO processed the said returns under section 143(1)(a). He reopened the said assessments by issuing the notices under section 148. AO completed the reassessments and disallowed the claim of the assessee for deduction under section 80-IA. CIT (A) also denied deduction under section 80-IA. Held:As per he provisions of section 147 AO can initiate reassessment proceedings, if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, subject to the provisions of sections 148 to 153. In such a case, AO is empowered to assess or reassess such income. Such escapement of income could be due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. As per the proviso to section 147 in case the assessment completed under section 143(3) or 147 is to be reopened after the expiry of four years from the end of the relevant assessment year, AO can take recourse to such action only if the escapement of income chargeable to tax was on account of assessees failure to disclose fully and truly all material facts necessary for assessment. In case such an assessment, completed under section 143(3) or 147, is to be reopened within a period of four years from the end of the relevant assessment year, the escapement of income, due to omission and failure on the part of the assessee to disclose fully and truly all material facts, is not required to be established. Similarly, such a requirement is also not to be established in a case where an assessment has been completed under section 143(1)/return has been processed under section 143(1)(a). Explanation 2(c) of section 147 deals with deemed escapement of income where the assessment has been made, but income chargeable to tax has been under-assessed or such income has been assessed at too low rate or such income has been made the subject-matter of excessive relief under the Act or excessive loss or depreciation allowance or any other allowance under the Act has been allowed. Thus, the reopening of the assessment is to be seen on the date when AO initiated action under section 147. In the present case, the material gathered by AO during the course of assessment proceedings or enquiry made by him during the remand proceedings could not be taken into account for the purpose of deciding the validity of the initiation of the reassessment proceedings. The duty of CIT (A) was also to confine himself to the material on record on the date when AO initiated the proceedings and not to look into the material subsequently gathered by AO during the assessment and remand proceedings. The assessee had filed returns for the relevant assessment years, claiming deduction under section 80-IA. Since the revenue on any other ground had raised no objection, it was clear that the claim of the assessee was supported by audit report of the auditors. Further, the assessee was engaged in the business of manufacture of laptop computers and the project was approved by the Ministry of Industries, Government of India, the State Excise Department, Sales-tax Department and the assessee had also obtained loan from the State Bank of India. It was also a fact that AO had processed the returns under section 143(1)(a ). Before that the assessee did not file any return. Section 143(2) empowers AO to issue a notice in a case where a return has been furnished under section 139, or in response to a notice under section 142(1) and AO has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible. AO is required to issue such notice within a period of one year from the end of the month in which return is filed by the assessee. The time limit for issue of notice under section 143(2) for the first relevant assessment year expired on 30-10-1995 and for the remaining two assessment years on 31-10-1997. As AO did not issue notices under section 143(2) for any of the assessment years, there were no proceedings pending in the present case. Then AO initiated the proceedings under section 148 by recording identical reasons for all the three assessment years. The reasons recorded by AO showed that the expression reason to believe -a pre-requisite for initiating reassessment proceedings, had been missing in the reasons recorded for all the three assessment years. Therefore, the reopening of the assessment on the basis of reasons recorded suffered from major legal infirmity. Since no search and seizure action under section 132(1) and survey action under section 133A were carried out, in the present case, the statement could not be considered to have been recorded under section 132(4) or under section 133A. In the present case, no notice under section 143(2) had been issued for any of the assessment years. No other proceedings were pending before AO, as apart from those assessment years, no other return had been filed by the assessee. Therefore, the visit of AO to the premises of the assessee and recording of the statement of P without service of notice under section 143(2), summons under section 131 without making any entry in the order-sheet was not in conformity with the letter and spirit of the law. Even for selection of a case under scrutiny, AO is required to obtain approval of the higher authorities. Therefore, the provisions of section 147 cannot be resorted to by AO with a view to circumvent the legal requirement/procedure, more so when there is no such material to warrant initiation of the reassessment proceedings. In other words, there was no material or information in the statement of P to support the conclusion that claim for deduction under section 80-IA, in respect of the period when such business was carried on by the assessee, was not genuine. Therefore, the initiation of the reassessment proceedings by relying on the statement of P could not be held to be valid and legal.