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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.