M/S Jay Bharat Maruti Limited vs Commissioner Of Income Tax
2009 Latest Caselaw 1470 Del

*             THE HIGH COURT OF DELHI AT NEW DELHI

%                                  Judgment delivered on : 20.04.2009

                           ITA 501 /2007

M/s JAY BHARAT MARUTI LTD                                      ..... Appellant

                                       versus

COMMISSIONER OF INCOME TAX                                    ..... Respondent

Advocates who appeared in this case:

For the Appellant          :      Mr R. Santhanam, Advocate
For the Respondent         :      Mr R.D. Jolly, Advocate

CORAM :-

HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.    Whether the Reporters of local papers may
      be allowed to see the judgment ?                        Yes
2.    To be referred to Reporters or not ?                    Yes
3.    Whether the judgment should be reported                 Yes
      in the Digest ?

RAJIV SHAKDHER, J

1. This is an appeal preferred by the assessee under Section 260A

of the Income Tax Act, 1961(hereinafter referred to as the „Act‟)

against judgment dated 20.10.2006 passed by the Income Tax

Appellate Tribunal (hereinafter referred to as the „Tribunal‟) in ITA No

654/Del/2000 pertaining to assessment year 1993-94

1.1 By the impugned judgment the Tribunal has dismissed the

appeal of the assessee. It is pertinent to note that by the very same

impugned judgment the Tribunal has also dismissed the appeal of the

Revenue being ITA No 889/Del/2000 which also pertained to the same

assessment year, that is, assessment year 1993-94.

1.2 Before us presently only the assessee is in appeal. After hearing

the learned counsel for the assessee Mr R. Santhanam as well as the

learned counsel for the Revenue Mr R.D. Jolly we had indicated to

them that a substantial question of law as formulated below would

arise for consideration of this Court and that with their consent, after

framing a question of law we would proceed to a final disposal of the

present appeal. The submissions in the matter were heard, keeping

the above in mind. In accordance thereto we have framed the

following question of law for our consideration:-

"Whether the Tribunal misdirected itself in law in upholding as valid the initiation of reassessment proceedings and the consequent assessment order dated 26.03.1999 passed by the Assessing Officer in exercise of his powers under Section 147 read with section 148 and 143 of the Income Tax Act, 1961."

2. In order to deal with the present appeal the following facts need

to be noticed:

2.1 The assessee is engaged in the business of production of parts

and moulds which are used in the manufacture of automobile cars.

On 31.12.1993 the assessee filed its return of income whereby it

declared an income of Rs 5,35,250/-. The said return of income was

processed under Section 143(1)(a) of the Act whereupon the

Assessing Officer vide intimation dated 19.05.1994 granted to the

assessee a refund of Rs 1,81,176/- (inclusive of interest).

2.2 On 27.3.1997 the Assessing Officer issued a notice under

Section 148 of the Act to the assessee on the ground that he had

reason to believe that the assessee‟s income which was chargeable to

tax for assessment year 1993-94 had escaped assessment within the

meaning of Section 147 of the Act. Accordingly, by the said notice he

called upon the assessee to file his return in the prescribed form

within a period of 30 days from the date of service of the said notice.

2.3 The Section 148 notice was followed by a notice dated

8.01.1999 under Section 142(1) of the Act. By this notice the assessee

was called upon to file a true and correct return of its income in

respect of the assessment year under consideration. A blank return

form was also enclosed with the said notice.

2.4 In response to the notice under Section 142(1) of the Act issued

by the Revenue the assessee by a communication dated 06.02.1999

issued by its Chartered Accountant, M/s Mehra Goel & Co., inter alia,

objected to the issuance of notice under Section 142(1) of the Act as

also initiation of proceedings under Section 148 of the Act on the

ground that the MODVAT amount which remained unutilized was

debited to the Profit & Loss account as the assessee had paid the

same during the relevant assessment year and hence was entitled to

deduction under Section 43B of the Act. It was further submitted that

this fact was disclosed as part of its accounting policy and that there

was no new information or fact which had come to the notice of the

Revenue warranting initiation of proceedings under Section 147 read

with Section 148 of the Act. According to the assessee the entire

exercise was being conducted on a mere change of view adopted by

the Assessing Officer.

2.5 The assessee also relied upon judgments of the Gujarat High

Court in the case of M/s Lakhanpal National Ltd vs ITO; (1986)

162 ITR 240 as well as that of Delhi Bench B (Spl. Bench) of the

Tribunal in the case of Indian Communication Network (P) Ltd vs

IAC; (1994) 206 ITR 96 (AT) and ITO vs Food Specialities Ltd,

dated 02.02.1994 ITAT (Delhi) to contend that, it was the intention of

the legislature to allow deduction in respect of customs and excise

duty while computing the income of an assessee under Section 28 of

the Act in the year in which the said tax was actually paid by the

assessee. The only impediment being that the said amounts should

not have been allowed as a deduction in any earlier year.

2.6 The assessee, however, it seems as a measure of abundant

caution filed a revised return, even though under protest, under a

cover of its letter dated 19.02.1999. The point to be noted at this

stage is that the revised return was identical to the original return

filed by the assessee.

2.7 No sooner had the assessee filed the return on 23.02.1999, the

Assessing Officer issued a notice calling upon the assessee to attend

his office on 05.03.1999 at 11.00 a.m. for furnishing further

information in connection with the return submitted by the assessee.

The aforesaid was followed by yet another notice dated 10.03.1999

calling upon the assessee to show cause with respect to various other

items of income and expenditure, apart from the issue with respect to,

the sum of Rs 25 lacs (approx.) which was shown as a balance in the

MODVAT account of the assessee and had been debited to the Profit

& Loss account and which verily had formed the basis of the initiation

of reassessment proceedings.

2.8 The assessee immediately responded to the same by issuing a

rejoinder dated 17.05.1999, through its Chartered Accountant M/s

Mehra Goel & Co. The upshot of the assessee‟s rejoinder was that its

return having accepted under Section 143(1)(a) of the Act it had

attained finality. The assessee contended that the assessment could

be reopened only if conditions precedent for reopening as provided

under Section 147, exist. It was stated that the notice issued was not

in accordance with the law. The issuance of notice was on a specific

point, while the Department now sought to reopen the entire case.

2.9 It seems that the assessee despite this rejoinder dated

17.05.1999, also submitted a reply on merits on 24.03.1999 to the

information sought by the Revenue.

3. By an order dated 26.03.1999 the Assessing Officer passed an

assessment order under Section 143(3) and 147 of the Act. By this

order the Assessing Officer not only made an addition with respect to

the sum of Rs 25,75,000/- which was shown as a credit balance in the

MODVAT account and debited by the assessee in the Profit & Loss

Account but also with respect to expenses incurred by the assessee in

the sum of Rs 1,11,292/- on the ground that they were capital in

nature. Apart from the above the Assessing Officer also disallowed

deduction under Section 80-I of the Act on income received by way of

„interest‟ as according to the Assessing Officer, it was revenue of the

nature of „income from other sources‟ as against business income. On

reassessment consequential interest was also charged under Section

234B of the Act.

4. The assessee being aggrieved preferred an appeal with the

Commissioner of Income Tax (Appeals) [hereinafter referred to as the

„CIT(A)‟]. The CIT(A) by an order dated 04.11.1999 allowed the

appeal of the assessee in part. On the aspect of reopening of

proceedings under Section 147 read with Section 148 of the Act, the

CIT(A) was of the view that the assessee‟s return had been processed

under Section 143(1)(a) of the Act and the fact that the assessee had

claimed the entire amount expended towards duty on purchase of

raw-material as well as the excise duty paid on goods manufactured

by it, when it had a credit balance of Rs 25 lacs in the MODVAT

account supplied a reasonable ground to the Assessing Officer to form

a belief that assessee‟s income which was chargeable to tax had

escaped assessment. On merits the CIT(A), however, disallowed the

addition of Rs 25,75,000/- on account of MODVAT paid. The CIT(A)

agreed with the assessee that it was entitled to deduction under

Section 43B of the Act as it was nothing but duty paid during the

assessment year under consideration. In respect of disallowance of

Rs 1,11,292/- on account of canteen equipment, the CIT(A) partially

sustained the order of the Assessing Officer. The CIT(A) out of the

aforesaid sum sustained a disallowance of Rs 27,912/- which was an

expense which the assessee had incurred for purchasing a vertical de-

freezer. The CIT(A) agreed with the view of the Assessing Officer that

this was in the nature of a capital expenditure. The CIT(A),

accordingly, while sustaining the disallowance directed that the

assessee would be entitled to depreciation on the said equipment as

permissible under law. The CIT(A) also deleted the disallowance of a

sum of Rs 10,000/- incurred by the assessee as general expenses by

holding that it was supported by relevant vouchers and bills and that

none of the items represented non-business expenditure. As regards

expenses on the visit of the Managing Director of the assessee to the

Switzerland, the CIT(A) dismissed the said ground of appeal by

observing that even though in the body of the order the Assessing

Officer had made an observation which suggested that an addition

ought to have been made, however, in the computation of income, no

such addition had been made and hence the assessee could not have

been aggrieved by a mere observation of the Assessing Officer. The

last issue with regard to whether interest income would qualify for

deduction under Section 80-I of the Act, the CIT(A) partially sustained

the conclusion reached by the Assessing Officer by excluding the

interest received by the assessee on bank deposits for relief under

Section 80-I of the Act. The CIT(A), however, agreed with the

assessee that interest received on letters of credit and bank margin

with the bank would qualify for deduction under Section 80-I of the

Act. For this purpose the CIT(A) relied upon the Tribunal‟s judgment

in the assessee‟s case for the assessment year 1994-95. The CIT(A)

concluded by directing that interest under Section 234B of the Act

being consequential, would be recomputed by the Assessing Officer

after necessary effect is given and/or necessary adjustments are made

as per the order passed by him.

5. By an order dated 24.03.2000 the Assessing Officer passed a

consequent order pursuant to CIT(A)‟s order dated 04.11.1999, under

Section 250/254 of the Act. By virtue of the same the assessee‟s

revised income was assessed at Rs 7,34,592/- (rounded to Rs

7,34,590).

6. Both the assessee as well as the Revenue were aggrieved by the

order of the CIT(A). As indicated above, appeals were preferred to

the Tribunal by both the assessee as well as the Revenue. The

Tribunal by the impugned judgment has dismissed both the assessee‟s

as well as the Revenue‟s appeal.

7. Being aggrieved the assessee has preferred the present appeal

to this Court. The learned counsel for the assessee has in the hearing

before us confined his submissions to only one aspect of the matter,

which is that both the initiation of the reassessment proceedings and

the consequent order passed by the Assessing Officer were bad in

law. The Assessing Officer‟s jurisdiction to initiate proceedings under

Section 147 read with Section 148 of the Act is predicated on the

reasons which form the basis for initiation of re-assessment

proceedings. It was the contention of the learned counsel for the

assessee that a perusal of the reasons would show that the Assessing

Officer initiated proceedings under Section 147 read with Section 148

of the Act on the ground that the credit balance lying in the MODVAT

account of the assessee had been debited to the Profit & Loss

account. The learned counsel submitted that a bare perusal of the

reasons disclosed would show that a credit balance in the MODVAT

account and its consequent debit in the Profit & Loss account could

never ever have formed a basis for reason to believe that the

assessee‟s income had escaped assessment. In order to buttress his

submission the learned counsel relied upon the judgment of the

Supreme Court in CIT vs Indo Nippon Chemicals Co Ltd; (2003)

261 ITR 275 to the effect that the balance MODVAT credit would

never amount to income amenable to tax under the Act.

7.1 In addition to above the learned counsel forcefully con ` tended

that the initiation of reassessment proceedings would not give a

carte-blanche to the Assessing Officer to reopen the assessment

proceedings on ground „A‟ then proceed to make additions to income

or disallowances of expenditure in respect of other grounds which did

not form the basis for reopening the assessment proceedings.

7.2 As against this the learned counsel for the Revenue has

contended that the assessee‟s income had been processed under

Section 143(1)(a) of the Act. The Assessing Officer had only issued an

intimation of acceptance of the return. Therefore, as long as the

Assessing Officer had reasons to believe that assessee‟s income

chargeable to tax had escaped assessment the validity of the initiation

of reassessment could not be questioned. It was his contention that at

the stage of initiation of proceedings under Section 147 read with

Section 148 of the Act, the Assessing Officer‟s belief is not one which

is a fact supported by legal evidence. It was contended that once a

gateway is found by the Assessing Officer to reopen the proceedings

he would be well within his jurisdiction to bring within his net any

item of income which had escaped assessment or disallow any

expenditure which ought not to have been allowed in the first

instance. It was the contention of the learned counsel for the

Revenue that in the instant case it could not be said that there was a

change of opinion in view of the fact that admittedly the assessee‟s

original return had been processed under Section 143(1)(a) of the Act.

OUR ANALYSIS

8. In the background of the facts narrated above and the

submissions made by the learned counsel for the parties, according to

us, the following undisputed facts and circumstances emerge in the

case:-

8.1 The assessee had filed a return on 31.12.1993 for the

assessment year, in issue, the acceptance of which was duly intimated

to the assessee on 19.05.1994 by an intimation issued by the Revenue

under Section 143(1)(a) of the Act. It transpires that on 27.03.1997

the Assessing Officer, based on information in his possession, formed

a belief that the assessee‟s income in respect of which it was

assessable to tax had escaped assessment and accordingly a notice

under Section 148 of the Act was issued to the assessee.

8.2 It is pertinent to note at this stage the reasons which propelled

the Assessing Officer to issue a notice under Section 148 of the Act.

These are appended as annexure 5 to the present appeal being crucial

to the case, are extracted hereinbelow:-

"During the course of examination of excise and MODVAT account, it was found that in A.Y. 1993-94 there was closing balance of Rs 25 lakhs in MODVAT. This amount was charged into P&L A/c. By this method, the assessee reduced it profit in the A.Y. 93-94 by Rs 25 lakhs. The balance in the MODVAT account at the end of PY relevant for AY 93-94 should have been carried forward and shown as loans and advances on the asset side of the balance sheet.

I have reasons to believe that the above said income chargeable to tax has escaped assessment for AY 93-94 by reasons of the failure on the part of the assessee for not disclosing fully and truly all material facts necessary for his assessment for AY 93-94.

This case is reopened u/s 147 of the I.T. Act. Issue notice u/s 148."

8.3 It cannot be disputed and it is not the case of either side that

the reasons extracted hereinabove did not precede the issuance of

notice under Section 148(1) of the Act. The requirement for recordal

of reasons by the Assessing Officer before issuing a notice is provided

for under sub-section (2) of Section 148 of the Act.

8.4 A perusal of the reasons would thus show that the Assessing

Officer was of the view that the assessee‟s income chargeable to tax

had escaped assessment in the relevant assessment year by virtue of

the fact that the assessee had charged to its Profit & Loss account the

sum of Rs 25 lacs (approx.) which was the closing balance in its

MODVAT account. The Assessing Officer was of the view that the

balance in the MODVAT account at the end of the previous year,

relevant for the assessment year, in issue, ought to have been carried

forward and shown as "loans and advances" on the asset side of the

balance sheet. This fact alone propelled the Assessing Officer to form

a reason to believe that the assessee‟s income chargeable to tax had

escaped assessment by virtue of what he termed as the failure on the

part of the assessee in not disclosing fully and truly all material facts.

8.5. Thus the issue which arises for consideration is firstly, what is

the scope of the expression "reason to believe" in Section 147 of the

Act. Secondly, where an Assessing Officer issues a notice under

Section 148(1) of the Act based on one particular item which forms

the basis of his reasons under sub-section (2) of Section 148, is he

then empowered to bring within his net other items of income or

expenditure which are totally un-connected with the item which

formed the basis of issuance of notice under Section 148(1) of the Act.

8.6 In so far as the first issue is concerned we do not have to go far

but to look the judgment of the Supreme Court in ACIT vs Rajesh

Jhaveri Stock Brokers (P) Ltd; (2007) 291 ITR 500. The Supreme

Court while enunciating the law on the width and ambit of the

provision of Section 147 of the Act stated in no uncertain terms stated

that the word "reason" in the phrase "reasons to believe" would mean

cause or justification. In other words if the Assessing Officer has

cause or justification to know or suppose that income had escaped

assessment it can be said to have "reason to believe" that income had

escaped assessment. The Supreme Court went on to say that the

expression cannot mean that the Assessing Officer should have finally

ascertained the fact by legal evidence or conclusion. The Court also

observed that the final outcome of the proceedings is not relevant. In

other words at the initiation stage what is required is reason to

believe and not an established fact of escapement of income. The test

thus laid down by the Supreme Court is that at the stage of issue of

notice the only aspect to be examined is whether there was relevant

material before the Assessing Officer, based on which a reasonable

person could have formed the requisite belief. One is not concerned

at this stage whether the material would conclusively prove

escapement and such a formation is within the realm of subjective

satisfaction of the Assessing Officer.

8.7 Applying the aforesaid principle, it is clear that while the

Supreme Court has conferred a wide discretion on the Assessing

Officer for reopening the proceedings whether to assess, re-assess or

to re-compute income it is predicated on a test whether a reasonable

person would form a belief that there was relevant material for

initiating proceedings under Section 147 of the Act. In the instant

case if the test of the reasonable person is applied, it is clear that no

reasonable person could have come to a conclusion that there was

relevant material available with the Assessing Officer to have reason

to believe that assessee‟s income chargeable to tax had escaped

assessment only by virtue of the fact that the assessee had charged to

its profit and loss account the credit balance available in its MODVAT

account. It is rudimentary that MODVAT is nothing but credit of duty

paid by a person on input used by the assessee for manufacture of its

final product. The notice under Section 148(1) could not have been

based on a ground as tenuous as the one disclosed by the Revenue. If

we were to accept such a ground as the one obtaining in the present

case then it would virtually amount to giving power to the Assessing

Officer to reopen the proceedings at his own whim and fancy. Their

Lordships in Rajesh Jhaveri Stock Broker (supra) have, while

giving the widest width and amplitude to the Assessing Officer to

initiate proceedings under Section 147 read with Section 148 of the

Act incorporated a caveat; which is as to how a reasonable man would

view the articulated reasons (as prescribed under Sub-Section (2) of

Section 148) which formed the basis of a notice under Section 148(1)

of the Act. In our view this by itself would suffice in declaring the

proceedings bad in law.

9. However, since the other issue has also been raised, that is,

whether the Assessing Officer could reopen the proceedings based on

a particular item and thereafter proceed to bring to tax items which

are not connected with what was initially indicated in the reasons

disclosed under Section 148(2) of the Act for the purposes of issuance

of notice under Section 148(1) of the Act.

10. In this regard, it is important to note that the Assessing Officer,

as indicated above, had proceeded to issue a notice under Section

148(1) of the Act by recording contemporaneous reasons that

assessee‟s income chargeable to tax had escaped assessment by

virtue of the fact that the assessee had charged to its profit and loss

account, the closing balance in the sum of Rs 25 lacs (approx.)

appearing in its MODVAT account. The Assessing Officer, as noticed

above, had issued a notice dated 08.01.1999 under Section 142(1) of

the Act followed by a notice dated 10.03.1999. By the first notice the

Assessing Officer called upon the assessee to file its return, however,

by the second notice, that is, notice dated 10.03.1999 it asked the

assessee to show cause as to why certain items of income and

expenditure (which were unconnected to the aspect of the assessee

debiting the sum of Rs 25 lacs lying in the MODVAT account to the

Profit & Loss account) should not be added or disallowed. The

assessee by a response dated 17.03.1999 categorically took the

following stand:-

(i) that it would like to know the information which was in the

possession of the Department which justified reopening of its

assessment;

(ii) since the assessment made under Section 143(1)(a) of the Act

had attained finality the Revenue could not reopen it unless it fulfilled

the condition precedent as provided under Section 147 of the Act; and

(iii) most importantly, since the assessment had been reopened on a

specific point it could not by this methodology reopen the same in the

entirety.

11. As noted above, the Assessing Officer undeterred, without

dealing with any of the objections raised by the assessee, passed the

impugned assessment order dated 26.03.1999. Even though, the

CIT(A) partially allowed the appeal, in our view he did not examine

the matter from the angle as to whether the Assessing Officer could

bring to tax items or disallow expenditure which were totally

unconnected with the reasons articulated under Section 148(2) of the

Act at the time of issuance of notice under Section 148(1) of the Act.

The Tribunal did likewise and on this aspect of the matter dismissed

the appeal of the assessee. In our view a bare reading of sub-ection

(2) of Section 148 of the Act would show that before issuing a notice

under Section 148(1) of the Act the Assessing Officer is required,

under sub-section (2) of Section 148 of the Act, to record his reasons

for doing so. Therefore, it is clear the recordal of reasons precede the

issuance of notice under sub-section (1) of Section 148 of the Act. The

proceedings under Section 147 read with Section 148 do not wipe out

or set aside the original proceedings. As a matter of fact the law on

the scope of Section 147 can be summarized based on the principles

enunciated by the Supreme Court in the case of CIT vs Sun

Engineering Works P. Ltd (1992) 198 ITR 297. A reading of the

judgment would show broadly the following principles of law have

been enumerated:-

(i) Initiation of reassessment proceedings would not mean that the

original assessment proceedings are set aside or wiped out. The

decision of the Supreme Court in Jaganmohan Rao (V.) vs CIT;

(1970) 75 ITR 373 is explained.

(ii) The proceedings under Section 147 of the Act are for the benefit

of the Revenue and not for the assessee.

(iii) The assessee cannot convert reassessment proceedings into

review, appeal or revisional proceedings to re-agitate in reassessment

proceeding matters which are finally concluded in the original

assessment proceedings and are unconnected with the escaped

income.

(iv) The assessee can claim consideration of only those items

which are directly connected to the under-assessed income,

(v) and lastly, under no circumstances can the reassessed income

be less than income of the assessee which was originally assessed and

brought to tax.

12. Applying the aforesaid principle, it is clear that the proceedings

under Section 147 of the Act cannot impinge upon items which have

no connection or relation with items of income and/or expenditure

which form the basis of a notice under Section 148(1) of the Act. In

the instant case the items referred to in the Assessing Officer‟s notice

dated 10.03.1999 had no relation with the reasons recorded on

27.03.1997. As a matter of fact the assessee was allowed by the

CIT(A) the deduction of the amount of Rs 25 lacs (approx.) charged to

its profit & Loss account on the basis of the provisions of Section 43B.

The other items with respect to which additions and disallowances

had been made and which are discussed in the body of our judgment

while discussing the orders of the authorities below had no connection

with the reasons articulated on 27.03.1997 which form the basis of

the notice issued under Section 148(1) of the Act. In our view the

assessment order in so far as it dealt with items other than those

which formed the basis of the reasons disclosed on 27.03.1997 are

bad in law or stood vitiated in law.

13. The Division Bench of the Kerala High Court in the case of

Travancore Cements Ltd vs ACIT; (2008) 219 CTR 359 came to

the same conclusion. The observations of the Division Bench in

paragraphs 8 to 11 at pages 366 - 367 being apposite are extracted

hereinbelow:-

"It is trite law that the provisions in a taxing statute have to be construed in accordance with the clear intention of the legislature which is to make the charge levied effective. Validity of Exts.P6, P7, P8 and P12 is to be adjudged in the light of Sections 147 and 148 read with Section 143 of the Act. At the outset we may point out that we find no infirmity in the Department issuing Ext.P3 under Section 148 or Ext.P6 communication disclosing reasons for reopening the assessment. ExtP3 is a notice issued under Section 148 of the Act proposing to reassess the income of the petitioner for the assessment year 2000-

01. But no reasons were recorded in Ext.P3 notice as required Sub-section (2) of Section 148. Later on a request made by the petitioner, reasons were disclosed by Ext.P6 letter dated 17.10.2005. Still the moot question is whether the assessing authority without following the procedure under Sub-section (2) of Section 148 to assess or reassess any income chargeable to tax which virtually has no connection with the reasons already disclosed in the notice issued under Section 148(2). Admittedly no notice under Sub-section (2) of Section 148 was issued in respect of the income which is stated to have escaped for which notice under Section 143(2) and 142 was issued by Exts.P7 and P8. For example, in Ext.P8 it is stated that the assessing authority has proposed to add back Rs. 46,13,711/- being provision for shortage of lime shell stock, which is totally unconnected with the reason stated in the notices issued under Section 148, vide Exts.P5 and P6. Can the assessing authority under the guise of proceeding under Section 147 make a scrutiny of assessment under Section 143(3), which proceeding was barred by limitation? Petitioner specifically states that his return was accepted under Section 143(1)(a) under Ext.P2 intimation. Consequently the assessing authority was entitled to complete the regular assessment under Section 143(3) on or before 31.3.2003. Petitioner further submits that the assessing authority having chosen not to complete the regular assessment under Section 143(3) cannot be permitted to verify all the statements under the guise of assessing escaped income. Petitioner submits that Exts.P7 and P8 requiring him to produce books of accounts and furnishing information on various points are not warranted in a proceeding under Section 147 of the Act.

Section 148 deals with issue of notice where income has escaped assessment. It states that before making the assessment, reassessment or recomputation under Section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the

prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. Sub-section (2) of Section 148 states that the assessing officer shall before doing so record his reasons for issuing such notice. Recording of reasons before issuing notice is a mandatory requirement. Assessing officer is also empowered under Section 147 to 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 Section 147. Assessing officer gets jurisdiction under Section 148 to assess or reassess the income which has escaped assessment only after Sub-section (2) of Section 148 is complied with. The question is whether Sub-section (2) of Section 148 has to be complied with if any other income chargeable to tax has escaped assessment, or which comes to his knowledge subsequently in the course of the proceedings. In other words, when proceedings are already on in respect of one item in respect of the income for which he had already recorded reasons is it necessary that he should record reasons for assessing or reassessing any of the items which are totally unconnected with the proceedings already initiated. Suppose under two heads, income has escaped assessment and those two heads are interlinked and connected, the proceedings initiated or notice already issued under Sub-section (2) of Section 148 would be sufficient if the escaped income on the second head comes to the knowledge of the officer in the course of the proceedings. But if both the items are unconnected and totally alien then the assessing authority has to follow Sub-section (2) of Section 148 with regard to the escaped income which comes to his knowledge during the course of the proceedings. The expression "subject to the provisions of Sections 148 to 153" in Section 147 lends support to the above view.

When we apply the above principles to the present case, it is evident that the reasons stated were under Sub-section (2) of Section 148 only. In Ext.P6 those reasons are unconnected with the reasons stated in Ext.P8. The assessing authority has therefore no jurisdiction to proceed with the items covered by Exts.P7 and P8 due to non compliance of Sub-section (2) of Section 148. We may in this connection refer to the decision of the Apex Court in GKN Driveshafts' case (supra) wherein the Apex Court has held that when a notice under Section 148 of the Income Tax Act is issued, the proper course of action for the assessee is to file a return and if he so desires, to seek reasons for issuing notices and the assessing authority is bound to furnish reasons within a reasonable time. So far as this case is concerned the assessee was not served with

any notice under Section 148; nor the assessing officer recorded reasons as provided under Sub-section (2) of Section 148 for the points highlighted in Exts.P7 and P8.

The Punjab and Haryana High Court had occasion to consider an identical issue in Vipin Khanna v. Commissioner of Income Tax (supra). That was a case where proceedings under Section 147 were initiated. The question arose as to whether assessing officer was justified in launching an inquiry into the issues which were not connected with the issue of depreciation. The court held that the assessee can claim credit in respect of items finally concluded in the original assessment and the letter dated 30.7.1998 issued by the assessing officer in so far as it relates to matters unconnected with the issue of depreciation and also the directions issued by the Deputy Commissioner of Income TAx under Section 144A cannot be sustained. We are in agreement with the reasoning given in Vipin Khanna's case (supra)."

14. In view of our analysis above we are of the opinion that the

question as framed has to be answered in favour of the assessee and

against the Revenue. In the result the appeal is allowed and

consequently the impugned order of re-assessment is set aside.

However, there shall be no orders as to cost.

RAJIV SHAKDHER, J

VIKRAMAJIT SEN, J April 20, 2009 kk