ORDER
1. These are appeals filed by the Revenue and the cross-objections filed by the assessee against the order of the CIT(A) for the asst. yr. 1998-99. Since these appeals and the cross-objections involve, more or less, identical issues, they were heard together and are disposed of by this common order for the sale of convenience. We shall first deal with ITA No. 69/Nag/2003 filed by the Revenue and C.O. No. 51/Nag/2003 filed by the assessee.
ITA No. 69/Nag/2003 :
2. This is an appeal filed by the Revenue against the order of the learned CIT(A)-II, Nagpur, dt. 22nd Jan., 2003, for the asst. yr. 1998-99. The Revenue has raised the following grounds in its appeal :
“1. Whether, on the facts and the circumstances of the case, the CIT(A)-II, Nagpur, is correct on cancelling the assessment order passed under Section 143(3) r/w Section 147 by the AO when there is change in IT Act after 1962-63, moreso, when the plain reading of Section 147, Expln. 2(b) in respect of reassessment of income is as under :
When a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance of relief in the return.”
3. The facts, in brief, leading to the dispute are that the assessee-firm is engaged in the business of manufacturing of note books and long books. The assessee has submitted the return declaring net loss at Rs. 4,22,259 on 31st Oct., 1998. The loss was assessed by passing an order under Section 143(1)(a) on 21st Dec., ?000. A notice under Section 148 was served on the assessee on 9th March, 2000. On 9th Aug., 2000, the assessee had also received one letter alongwith it a valuation report of the Government valuer estimating the cost of construction at Rs. 27,48,663 and the objections of the assessee were invited to the valuation estimated by the valuation officer within one month from the date of receipt of the said letter. A survey operation under Section 133A was carried out on the business premises of the assessee on 13th Dec., 1999. At 4.00 a.m. on 14th Dec., 1999, a notice under Section 131 was served on the assessee and it was requested to produce the books of account as inventorised during the course of survey under Section 133A at the office of the AO. The aforesaid books of account were impounded by passing an order under Section 131(3) at the business premises of the assessee at 4.30 a.m. The assessee also submitted a letter in response to a notice under Section 131 that the books of account were handed over to the AO at the shop premises itself. In the assessment order, the AO, on examination of books of account of the assessee, made the following additions to the income of the assessee.
3.1 The learned AO has made an addition of Rs. 9,530 holding that there is no name on the said bill. This sum relates to construction expenses incurred by the assessee and debited in the books of account of the assessee and bill of M/s Janwani Rope Agency was also found at the time of survey. The aforesaid expenditure is duly recorded in the books of account of the assessee.
3.2 The assessee purchased a TV for a sum of Rs. 10,850 which was installed at the factory premises and the same is also recorded in the regular books of account maintained by the assessee. The learned AO made an addition of Rs. 10,850 on the ground that the TV purchased was not found fitted either in the factory or shop premises as noted in the inventory prepared at the time of survey and the same is also not shown in the balance sheet.
3.3 The cash bills dt. 12th July, 1997 and 13th July, 1997 were recorded by the assessee on 27th Oct., 1997. The aforesaid payments were made by the partners out of their individual funds and on 27th Oct., 1997, the same was recorded in the books of account. The learned AO, on the above facts, has made an addition of Rs. 13,467 although, according to the assessee, the aforesaid sum was recorded in the books of account of the assessee.
3.4 The AO made the additions of Rs. 3,600 and 1,900 for the reason that the aforesaid sums are not recorded in the exercise book whereas, according to the assessee, the aforesaid sums are duly recorded at P-26 of the exercise book maintained and available with the AO.
3.5 The learned AO made lump sum addition of Rs. 5,000 out of shop expenses on account of personal expenses. The AO has assessed a sum of Rs. 6,565 as interest accrued on bank FDR of Rs. 1,10,000.
3.6 The assessee had shown cost of construction in the books of account at Rs. 8,16,307. The assessee in the return submitted in response to notice under Section 148 on 14th March, 2002 offered additional sum of Rs. 2,50,000 which included part sum of Rs. 75,727 which on account of inadvertent mistake was shown as revenue expenditure in the books of account.
The total cost of construction thus according to assessee was Rs. 10,66,037. The assessee, in the course of the assessment proceedings, also submitted the valuation report from the approved valuer. The assessee filed the objections to the estimated cost of construction by the valuation officer. The contentions of the assessee before the AO were that the valuation officer had not given any opportunity before rejecting the objection of the approved valuer of the assessee and the valuation officer has not valued the property as per itemwise cost of construction. The AO taking the estimated cost as per valuation report at Rs. 27,48,663 and reducing therefrom only Rs. 8,16,307 made an addition of Rs. 19,32,235.
3.7 The AO in para 12 has held that the depreciation cannot be entertained and so also the additional income offered by the assessee in response to the notice under Section 148 was also not considered.
3.8 The learned AO further has not granted deduction under Section 80-IA although the assessee has submitted the audit report in prescribed Form No. 10CCB in the course of the assessment proceedings.
Being aggrieved by the order of the AO, the assessee preferred appeal before the learned CIT(A).
4. Before the learned CIT(A), the order of the AO was challenged on various grounds. In ground Nos. 1 and 2 raised by the assessee before the learned CIT(A), the assessee has challenged the validity of the assessment order passed and notice issued under Section 148 of the IT Act, 1961. Before the learned CIT(A), it was submitted that the assessee had submitted the return of income on 31st Oct., 1998 declaring loss of Rs. 4,22,259. The aforesaid return was pending for disposal and has been disposed of under Section 143(1)(a) on 21st Dec., 2000. The proceedings under Section 147 were initiated and the notice was issued on 9th March, 2000. It was submitted that in view of the aforesaid facts, it could be seen that at the time of issue of notice under Section 148, the proceedings in respect of valid regular return of income submitted by the assessee on 31st Oct., 1998 were not terminated. It was also submitted that in view of there being pending proceedings with the AO, no valid notice under Section 148 of the IT Act, 1961, could be issued to the assessee. It was submitted that the notice issued under Section 148 was bad in law and thus the assessment was liable to be cancelled. The assessee relied on the decision of the apex Court reported in Trustees of H.E.H. The Nizam’s Supplemental Family Trust v. CIT (2000) 242 ITR 381 (SC) and also the decisions reported in CIT v. Rajendra G. Shah and D.S. Bahia & Bros. (HUF) v. ITO (2001) 116 Taxman 178 (Chd)(Mag). The learned CIT(A) considering the submissions of the learned Counsel for the assessee and going through the case laws cited by the assessee’s counsel before him, allowed the appeal of the assessee on ground Nos. 1 and 2 by observing as under :
“With a view to examine the contention of the appellant, the case records were called for from the AO and the copy of the order-sheet, wherein the reason recorded for reopening the assessment proceedings under Section 148 of the IT Act, 1961, was obtained and kept on record.
I have carefully gone through the facts of the case and submissions made by the appellant. It is noticed that return of income was furnished on 31st Oct., 1998 declaring loss at Rs. 4,22,259. The order under Section 143(l)(a) of the IT Act, 1961 was passed on 21st Dec., 2000. It is noticed that proceedings under Section 147 were initiated and notice was issued on 9th March, 2000. Since the proceedings were pending with the AO, no valid notice under Section 148 of the IT Act can be issued to the assessee. Respectfully relying upon the decision of the apex Court reported in Trustees of H.E.H. The Nizam’s Supplemental Family Trust v. CIT (2000) 242 ITR 381 (SC), I hold that the ratio as laid down by the apex Court squarely applies to the facts of the assessee’s case and a notice issued under Section 148 is bad in law and invalid. I, therefore, hold that the consequential assessment framed thereon is also bad in law. The AO’s order passed under Section 143(3) r/w Section 147 of the IT Act is, therefore, invalid and hence cancelled. The appeal on ground Nos. 1 and 2 is, therefore, allowed.”
Since the learned CIT(A) cancelled the assessment order holding the same bad in law, the learned CIT(A) did not consider the other grounds of appeal raised before him challenging the various additions made by the AO on merits. Aggrieved by the order of the learned CIT(A), the Revenue has filed the present appeal.
5. Before us, the learned Departmental Representative, Shri Santosh Kumar, filed written submissions. The learned Departmental Representative submitted that a survey was conducted under Section 133A in the factory premises and shop premises of the assessee on 13th Dec., 1999. During the course of survey, a valuation report was found which was related to the cost of construction of factory building. While examining the valuation report of the assessee, the survey team found that in this valuation report, the valuer of the assessee did not include certain items such as compound wall and drying platform. It was further found that the cost of construction made by the valuer of the assessee was based on estimation basis. Hence, the AO after recording the following reasons in detail, a copy (of) which has been filed on record, issued notice under Section 148 on 9th March, 2000 :
“9th Aug., 2000– Assessee had furnished return of income on 31st Oct., 1998 declaring loss of Rs, 4,22,259. A survey under Section 133A was conducted in the business premises of the assessee on 13th Dec., 1999. The factory building of the firm which is located at plot No. 1, Shobha Nagar, New Cotton Market, Amravati, was constructed by the assessee during the period from 2nd April, 1997 to 22nd Oct., 1997. Assessee had declared cost of construction at Rs. 8,16,000 approx. This has been supported by the valuation report of registered valuer, Shri Karva. However, on going through the report, it appears that the cost of construction has been prima facie understated since certain items such as, compound wall, drying platform, etc. have not been included in the report. Moreover, the cost of construction has been roughly estimated at Rs. 20 lakhs or more looking into the quality of construction and size of the building and plot. Therefore, I have reason to believe that the income consisting of undisclosed investment in the said factory building has escaped assessment. Such income which has escaped assessment is estimated at Rs. 12 lakhs.
Issued notice under Section 148.”
Thereafter, the assessment was completed under Section 143(3) r/w Section 147. Further, he invited our attention to the finding given by the learned CIT(A) in para 4 of his order and submitted that the learned CIT(A) has decided the case purely on technical viewpoint and not on merit. He further submitted that the decision of the apex Court relied (on) by the learned CIT(A), reported in (2000) 242 ITR 381 (SC) (supra), was not applicable to the facts of the present assessee at all. He submitted that in that case, the assessment year involved was 1962-63 and the assessee had claimed a refund for which order under Section 143(1), under the old provisions of the Act, (i.e., prior to asst. yr. 1989-90) was very much required but in the case of this assessee, the assessment year involved is 1998-99 and (in) this case, neither the refund was claimed by the assessee nor the tax was shown as payable in the return. He submitted that the AO was to process the return of the assessee if required under Section 143(1). He further submitted that the copy of intimation if required was not issued to the assessee by the AO at all. Inviting our attention to amendment made to Section 143(1), he submitted that Section 143(1) of the IT Act has been amended by the Finance Act, 1999 w.e.f. 1st June, 1999 and the proviso 1 of the amended section makes it clear that if no tax or interest is found due on the basis of return and if no refund is due on the basis of such return, the acknowledgement of return shall be deemed to be an intimation under Section 143(1). He submitted that the impugned processing of return was done by the AO on 21st Dec., 2000 and on this date, the provisions of old Section, i.e., 143(l)(a) are not available to the AO. He submitted that the proviso 1 of the amended section further says that no intimation under the amended Section 143(1) is required if either tax demanded is (not) due or refund is not payable. He submitted that the learned CIT(A) has wrongly mentioned in his order that the AO processed the return under Section 143(l)(a). According to him, the processing was done by the AO under Section 143(1) and not under Section 143(l)(a). Therefore, he submitted that the order of the learned CIT(A) is prima facie erroneous on this point,
6. He further submitted that the view taken by the CIT(A) that the proceedings were pending before the AO on the date of issuance of notice under Section 148 is not correct. He invited our attention to the provision of Expln. 2(b) to Section 147 which makes it clear that where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee had understated the income, a notice under Section 148 can be issued. He submitted that in this Explanation the word “assessment” has been used and now it is well-settled law that the processing cannot be treated as the assessment. In this regard, he referred to the decisions reported in CIT v. K.V. Mankaram & Co. , Pradeep Kumar Har Saran Lal v. AO , Kamal Textiles v. ITO and Ors. and Elegant Chemicals Enterprises (P) Ltd. v. Asstt. CIT (2004) 85 TTJ (Hyd) 441 and submitted that the intimation cannot be equated with the assessment. He, therefore, submitted that in the case of the present assessee, no intimation was issued by the AO. He submitted that the AO only affixed his seal on page No. 2 of the return which was not served upon the assessee at all, hence, there was no intimation at all. He, therefore, relying on the order of the AO, submitted that the reopening was not bad in law and the CIT(A) has wrongly held the notice under Section 148 as bad in law and invalid and consequential assessment framed as bad in law.
7. On the other hand, the learned Counsel for the assessee, Shri K.P. Dewani, submitted that the assessee filed the return of income on 31st Oct., 1998 and the return was processed under Section 143(l)(a) on 21st Dec., 2000. A notice under Section 148 of the Act was issued on 9th March, 2000 and the proceedings were pending on the date of issue of notice under Section 148 of the IT Act, 1961. He further submitted that the assessee submitted valid return and it is inconceivable to commence reassessment proceedings without terminating the valid return submitted by the assessee. Relying on the decisions reported in (2000) 242 ITR 381 (SC) (supra), CIT v. Ranchhoddas Karsondas , Satishchandra Arya v. ITO , (2001) 116 Taxman 178 (Chd)(Mag) (supra), CIT v. Rajendra G. Shah (supra) and Jhunjhunwala Vanaspati Ltd. v. Asstt. CIT , he submitted that reopening of assessment when valid proceedings were pending for disposal is unsustainable in law. He submitted that filing of return requires termination of proceedings by way of an order under Section 143(3) or 143(l)(a) of the Act. He, therefore, submitted that at the time of issue of notice under Section 148, the proceedings in respect of valid regular return of income submitted by the assessee on 31st Oct., 1998 were not terminated. In view of there being pending proceedings with the AO, no valid notice under Section 148 of the Act can be issued to the assessee. Inviting our attention to Expln. 2(b), he submitted that the said Explanation only raises a fiction that there is escapement of income and it does not authorise that reassessment can be commenced during the pendency of proceedings. He, therefore, strongly relied on the order of the learned CIT(A) and submitted that the learned CIT(A) was justified in cancelling the reassessment. He also relied on the decisions reported in Uttam Chand Nahar v. ITO (2002) 77 TTJ (Jd) 169, H.P. State Forest Corpn. Ltd. v. Jt. CIT (2002) 74 TTJ (Chd) 901 : (2002) 80 ITD 591 (Chd) and Punjab Tractors Ltd v. Jt. CIT . He submitted that the CIT(A) has not decided on merits of addition since he has cancelled the reassessment order made by the AO.
8. In reply to the arguments of the learned Counsel for the assessee, the learned Departmental Representative submitted that the argument of the learned Counsel for the assessee that the proceedings become pending on the very date of filing of the return by the assessee is not correct on law because the notice under Section 148 was issued on 9th March, 2000 and on this date, the amended provisions of Section 143(1) were only available to the AO in which acknowledgement of return was to be deemed to be an intimation. He, therefore, submitted that when the filing of return has been acknowledged, the intimation was deemed to have been issued when, there was neither any tax payable nor refund receivable. He also submitted that if the plea of the assessee that proceedings arise the moment a return is filed is to be accepted, then the conclusion that follows is that no notice under Section 143(2) can be issued to the assessee prior to conclusion of such proceedings under Section 143(1) of the IT Act which as per the scheme of the Act is to be done only of refunds due or demand payable. Even for argument sake, if at all the plea of the assessee is acceptable, then the proceedings in the case of the assessee stood concluded on the very day, the return of income was filed and no demand or refund was due on this return of income. This is very clear in view of Section 143(1) and 143(l)(a) of the IT Act, read with the first proviso.
He, therefore, submitted that the AO was well within his jurisdiction to issue the notice under Section 148 of the Act when the time-limit for issuance of notice under Section 143(2) had expired.
He, therefore, submitted that the order of the CIT(A) is erroneous both on law and the facts of the case and, hence the same may kindly be reversed and the order of the AO be restored.
9. We have considered the facts and circumstances of the case, submissions made by both the parties and carefully gone through the orders of the lower authorities. We have also deliberated upon the case laws cited at Bar on behalf of both the parties and the case laws relied upon by the lower authorities in their respective orders. The assessee submitted the return of income on 31st Oct., 1998 declaring loss of Rs. 4,22,259. According to the assessee, the order under Section 143(l)(a) of the IT Act 1961, was passed on 21st Dec., 2000 and the proceedings under Section 147 were initiated and a notice under Section 148 was issued on 9th March, 2000. It is the case of the assessee that since the proceedings were pending with the AO, no valid notice under Section 148 of the IT Act can be issued to the assessee. The learned Departmental Representative filed a xerox copy of page No. 2 of return of income before us in evidence of the fact that the processing was done by the AO under Section 143(1) and not under Section 143(l)(a). Therefore, the point for consideration before us is whether the proceedings were pending before the AO on the date of issuance of notice under Section 148.
10. The assessment year involved in this appeal is 1998-99. Section 143(1) of the IT Act, 1961, has been amended by the Finance Act, 1999, w.e.f 1st June, 1999 and proviso 1 of the amended section reads as under :
“Provided that except as otherwise provided in this sub-section, the acknowledgement of the return shall be deemed to be an intimation under this sub-section where either no sum is payable by the assessee or no refund is due to him.”
From the aforesaid proviso, it is clear that if no tax or interest is found due on the basis of the return and if no refund is due on the basis of such return, the acknowledgement of return shall be deemed to be an intimation under Section 143(1). It is seen from the record that the impugned processing was done by the AO on 21st Dec., 2000 and on this date, the aforesaid amended provisions are applicable. It is also seen that in this case neither the refund was claimed by the assessee nor the tax was shown as payable in the return. In view of the clear provision of proviso 1 to the amended Section 143(1) w.e.f. 1st June, 1999, the acknowledgement of return of income is deemed to be an intimation. Therefore, when the filing of return has been acknowledged, the intimation is deemed to have been issued when there was neither any tax payable nor refund receivable. We, therefore, do not find any substance in the plea of the assessee that it is inconceivable to commence reassessment proceedings without terminating the valid return submitted by the assessee. In our view, there were no proceedings pending for disposal when the AO issued notice under Section 148.
11. The plain reading of Section 147, Expln. 2(b) makes it clear that where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee had understated the income, notice under Section 148 can be issued. The judgments (supra), (supra), (supra) and (2004) 85 TTJ (Hyd) 441 (supra) have held that the intimation cannot be equated with the assessment. Now it is a well-settled law that the proceeding cannot be treated as assessment. Here in the case of the assessee, nothing was intimated and the AO only affixed his seal on page No. 2 of the return which was not served upon the assessee at all and hence, there was no intimation at all. We also do not find any substance in the contention of the assessee’s counsel that Expln. 2(b) of Section 147 only raises a fiction that there is escapement of income and it does not authorise that the reassessment proceedings can be commenced during the pendency of the proceedings in view of the fact that in this case no proceedings were pending for disposal when the AO issued notice under Section 148. We also do not agree with the conclusion of the learned CIT(A) that since the proceedings were pending with the AO, no valid notice under Section 148 of the IT Act, 1961, can be issued to the assessee.
12. So far as the decision of the Hon’ble Supreme Court reported in (2000) 242 ITR 381 (SC) (supra), relied upon by the learned CIT(A) in his order, is concerned, the same is not applicable in the cases of the assessee at all because in that case the assessment year involved was 1962-63 and the assessee has claimed a refund for which order under Section 143(1), under the old provisions of the Act, (i.e., prior to assessment year involved 1989-90) was very much required but in the case of this assessee, the assessment year involved is 1998-99 and in this case, neither the refund was claimed by the assessee nor the tax was shown as payable in the return. In view of the above, the decision of the apex Court cited above is clearly distinguishable on facts of the present case.
13. Coming to the decisions cited by the learned Counsel for the assessee, in which it has been held that the action under Section 147/148 was not valid when the valid proceedings were pending before the AO for disposal, these decisions are not applicable to the facts of the present case because in the present case, as stated above, no proceedings were pending when the AO issued notice under Section 148.
14. In view of the above facts and circumstances of the case and. discussions, we are of the considered opinion that the CIT(A) is wrong in holding that the order passed under Section 143(3) r/w Section 147 of the Act is invalid. We, therefore, quash the order of the learned CIT(A) holding reassessment as invalid. We uphold the reopening as valid in law.
15. The submission of the learned Counsel for the assessee that the learned CIT(A) has not decided on merits of the additions made by the AO is correct. Since the learned CIT(A) has not adjudicated upon various other grounds raised by the assessee on merits, in the interest of justice, we deem it proper to set aside the matter on other issues to the file of the learned CIT(A) for deciding the same on merit. Since the CIT(A) has not given any finding on merit upon the various grounds raised by the assessee before him, the matter on other issues is restored to the file of the learned CIT(A) with a direction to him to decide the various grounds raised by the assessee before him on merits in accordance with law after affording reasonable opportunity of being, heard to the assessee.
16. In the result, the appeal of the Revenue is allowed and the matter is restored to the file of the CIT(A) for decision on merits.
C.O. No. 51/Nag/2003:
17. The grounds raised by the assessee in its cross-objection read as under :
” 1. The learned CIT(A) ought to have decided the various grounds raised in the memo of appeal challenging the additions made by the AO.
2. The learned CIT(A) ought to have deleted the following additions made by AO :
(a) Rs. 5,000 out of shop expenses.
(b) Rs. 57,125 out of shop expenses.
(c) Rs. 9,530 out of expenses.
(d) Rs. 10,850 on account of expenses for purchase of TV.
(e) Rs. 13,467 and Rs. 5,500 under s. 69C.
(f) Rs. 6,565 as interest accrued.
(g) Rs. 57,125 and Rs. 9,530 addition made twice
(h) Rs. 19,32,235 unexplained investment as per valuation report of DVO.
3. The learned CIT(A) ought to have directed to grant deduction under Section 80-IA as claimed in the assessment proceedings.
4. The learned CIT(A) ought to have directed to grant depreciation on the asset used for the purpose of business.
5. The learned CIT(A) ought to have directed to delete interest levied under Section 234B of the IT Act.”
18. In the Revenue’s appeal in which the present cross-objection has been filed, we have restored the matter back to the file of the learned CIT(A) to decide the other grounds raised by the assessee before him on merits. In view of this, since all the grounds taken by the assessee in this cross-objection are not adjudicated upon by the learned CIT(A), the learned CIT(A) is directed to adjudicate upon these grounds on merit in accordance with law after affording an opportunity of being heard to the assessee.
19. In the result, the cross-objection filed by the assessee is treated to be allowed for statistical purposes.
ITA No. 70/Nag/2003 & C.O. No. 52/Nag/2003 :
20. This is an appeal filed by the Revenue against the order of the learned CIT(A)-II, Nagpur, dt. 3rd Feb., 2003 for the asst. yr. 1998-99 on the following solitary ground :
“Whether on the facts and the circumstances of the case, the CIT(A)-II, Nagpur, is correct in cancelling the order under Section 154, dt. 31st Oct., 2002 passed by the AO charging interest under Section 234A, without adjudicating the issue.”
In the cross-objection filed by the assessee, the assessee has merely supported the order of the learned CIT(A) against which the Revenue has filed the aforesaid appeal.
21. Since we have restored the matter to the CIT(A) for decision on merit in ITA No. 69/Nag/2003 and C.O. No. 51/Nag/2003, the issue involved in this Revenue’s appeal is also restored back to the file of the CIT(A) for deciding the same on merit since he has not decided the same on merit. He is also directed to afford reasonable opportunity of being heard to the assessee.
22. In the result, the appeal of the Revenue and the cross-objection filed by the assessee are treated to be allowed for statistical purposes.