K.C. Singhal, J.M.
1. Though various grounds have been taken in memo of appeal, the main ground taken in these appeals relates to the validity of reassessment proceedings under Section 147.
2. The assessments for asst. yrs. 1983-84 and 1984-85 were completed on 14th March, 1985, and 22nd Oct., 1986, on the total income of Rs. 21,03,550 and Rs. 12,80,000, respectively. The assessee had claimed deduction of Rs. 1,28,614 for asst. yr. 1983-84 and Rs. 1,06,828 for asst. yr. 1984-85 on account of del credere commission paid to M/s Antler Corporation. Such claims were allowed by the AO for both the years while completing the assessments under Section 143(3). Subsequently, these assessments have been reopened by the AO on 22nd June, 1989, after recording the following reasons :
“M/s Chandan Metal Products (P) Ltd., F-14, Gita Co-op. Housing Society, Pune-1. Asst. yr. 1983-84.
Reasons for the belief that income has escaped assessment While hearing the appeal of M/s Chandan Metal Products (P) Ltd. for the asst. yr. 1987-88, the CIT(A)-I, Pune noticed that the assessee had paid commission at a fixed rate to M/s Antler Corporation, a partnership firm, the partners of which are either sons or wives of the directors of the assessee-company or the Directors themselves are partners in the capacity of Karta in their HUF. Despite sufficient opportunity having been given, the assessee could produce no evidence to show that M/s Antler Corporation had rendered any services to the assessee-company against the amount received as commission. The CIT(A) came to the conclusion that the transaction of payment of commission by the assessee to M/s Antler Corporation, the sister concern was the same and was a device to avoid tax.
2. From the case records of the assessee it is found that the assessee claimed an amount of Rs. 1,28,614 as del ciedre commission paid to M/s Antler Corporation during the asst. yr. 1983-84 which was allowed. On the basis of the facts brought on record by the CIT(A), I have reason to believe that the amount of Rs. 1,28,614 which was chargeable to tax has escaped assessment for the asst. yr. 1983-84 which needs reassessment.
Dy. CIT, Special Range-1,
Pune : 22nd June, 1989″
3. The contention raised on behalf of assessee is that initiation of reassessment proceedings was barred by the period of limitation and, therefore, the notices issued under Section 148 were illegal. According to the learned counsel for the assessee, action under Section 147 could be taken within a period of four years on the basis of information received by him. However, no action under Section 147 could be taken after four years where the assessment had been completed under Section 143(3) and (sic-unless) the income chargeable to tax had escaped by reason of failure on the part of assessee either to make a return under Section 139 or in response to notice issued under Section 142(1) or under Section 148 or to disclose fully and truly all material facts necessary for his assessments for that assessment year. According to him, the AO must record his reasons in this regard after referring to the material coming into his possession subsequent to the original assessment. So, if no such reasons are recorded, then notice issued under Section 148 would be invalid. On the other hand the learned Departmental Representative has opposed such contention by relying on the Judgment of Calcutta High Court in the case of Mohammad Serajuddin & Bros. v. ITO and Ors. (1980) 122 ITR 465 (Cal), which lays down :
“Section 148 of the IT Act, 1961, does not require that the ITO when recording his reasons should state that he has formed the belief that, by reason of the omission or failure of the assessee, income has escaped assessment. This belief of his can be inferred from the reasons recorded and the manner in which the recording has been made.”
4. Rival submissions of the parties have been considered carefully. There is no dispute between the parties about the applicability of the amended provisions of Section 147. The relevant portion of the said section reads as under:
“147. If the AO 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.”
Section 148(2) provides as under:
“(2) The AO shall, before issuing any notice under this section, record his reasons for doing so.”
The combined reading of the aforesaid provisions, in our opinion, clearly shows that following conditions must be satisfied :
1. That income chargeable to tax has escaped assessment.
2. The AO has reasons to believe for forming such opinion.
3. Where assessment has been framed under Section 143(3), the action has to be taken within a period of four years unless the escapement of income chargeable to tax is by reason of the failure on the part of assessee to make a return under Section 139 or in response to notice under Section 142(1) or under Section 148 or to disclose fully and truly all material facts necessary for his assessment.
4. That such reasons are recorded before issuing notice under Section 148. In our opinion, the provisions of Section 148(2) cannot be read in isolation. The reasons mentioned in Section 148(2) are the reasons on the basis of which the AO forms his opinion about the escapement of income chargeable to tax under Section 147. Therefore, in our considered opinion, the AO must record his reasons under Section 148(2) that the income chargeable to tax had escaped assessment on account of failures mentioned in the proviso to Section 147. This provision has been enacted by way of check on the powers of the AO, so that such powers are not exercised arbitrarily. Therefore, failure to record the reasons in terms of the proviso to Section 147 would, in our opinion, vitiate the reassessment proceedings. This view of ours is fortified by the decision of the Supreme Court in the case of Phool Chand Bajrang Lal and Anr. v. ITO and Anr. (1993) 203 ITR 456 (SC). The relevant portion appears at p. 477 and the same is reproduced for the benefit of this order as under:
“From a combined review of the judgments of this Court, it follows that an ITO acquires jurisdiction to reopen an assessment under Section 147(a) r/w s. 148 of the IT Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that by reason of omission of failure or the part of the assessee to make a true and full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to Income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts.”
No doubt, the aforesaid observations were made with reference to unamended provisions of Section 147 but the same are still applicable to the amended provisions of Section 147 inasmuch as the requirements of unamended Section 147(a) and of proviso to amended Section 147 are the same. Hence, these observations of Supreme Court would be fully applicable to the amended Section 147.
5. Applying the aforesaid principle to the facts of the present case, we are of
the view that proceedings initiated by the AO under Section 147 were barred by the
period of limitation since the reasons recorded by the AO are not in terms of
the proviso to Section 147. The assessments have been reopened merely on the basis
of information in the form of order of the CIT(A) for asst. yr. 1987-88. The
reasons recorded do not mention any material on the basis of which, it could be
said that income chargeable to tax had escaped assessment on account of
failures mentioned in the proviso to Section 147. It is also not the case of the AO that
either the particulars furnished by the assessee in the course of original
assessment proceedings were false or full particulars were not disclosed in such
proceedings. No doubt, order of CIT(A) for asst. yr. 1987-88 could be the basis
for reopening the assessment but on that account, such reopening could be
made validly within a period of four years. But after the expiry of four years, the
AO was bound to record reasons in terms of the proviso to Section 147 with
reference to relevant material coming into his possession. Admittedly, notices
were issued much after the expiry of four years without recording reasons in
terms of the proviso to Section 147. Accordingly, we are unable to uphold the action
of the AO since the reassessment proceedings were void ab initio on account of
the period of limitation. Consequently, the orders of both the authorities below
are set aside and the reassessment proceedings are cancelled.
6. In the result, both the appeals are allowed.