ORDER
Mahavir Singh, J.M.
1. This appeal of the assessee is directed against the order of the CIT(A), Coimbatore, dt. 2nd July, 1999. The relevant assessment year involved in this appeal is 1987-88.
2. In this appeal of the assessee, two issues are raised by way of three grounds which read as under :
“1. The CIT(A) erred in confirming the validity of reopening and in confirming the addition of Rs. 19,57,500 being interest income for which the assessee adopted the cash system of accounting. He ought to have observed that to reopen the assessment under Section 147, the AO should have “reason to believe that income chargeable to tax has escaped assessment” and the invoking of the provisions of Section 147 (either under the old provisions at the time of filing the return or under the new provisions) is not tenable in law.
2. The CIT(A) ought to have observed that the AO has not brought on record any new material or new information warranting a reopening of the assessment and hence the reopening is only consequent to change of opinion of the AO.
The CIT(A) ought to have followed the decision of the Delhi High Court, in Jindal Photo Films Ltd. v. Dy. CIT and Anr. .
3. Notwithstanding what is stated above, your appellant submits that the assessee had the right to adopt the method of accounting provided under Section 145 of the IT Act which was exercised.”
3. First we will deal with the issue of jurisdiction as to whether the reopening under Section 147/148 is valid and as to whether the AO has brought on record any new material or new information warranting a reopening of the assessment and as to whether the reopening is only consequent to change of opinion of the AO.
4. The facts of the case are that the original return was filed by the assessee on 5th Oct., 1987 and the assessment was completed under Section 143(3) of the Act on 15th March, 1989. Subsequent to the original assessment, it was noticed by the AO that the assessee has failed to show an income of Rs. 19,57,500 on account of interest on the balance of purchase consideration payable by its wholly-owned subsidiary company viz., M/s Burnside Tea Produce Co. Ltd. to which the assessee has transferred part of its assets and liabilities in accordance with the scheme of amalgamation as sanctioned by the Hon’ble High Court of Madras. The assessee has filed 32nd annual report of directors and statement of accounts for the year ended 31st Dec., 1986, along with the original return. In this statement of accounts and the annual report, the assessee has made a disclosure note on accounts as regards to treatment of interest. The relevant annual report of the directors for the year ended 31st Dec., 1986, is being reproduced as it is :
"Report of the directors for the year ended 31st Dec., 1986 (contd.) Revenue As regards the observation of the auditors in their report balance of recognition : purchase consideration which had to be calculated @ 15 per cent pursuant to the orders of the Madras High Court, the directors have decided to treat this on receipt basis as in the previous year. Finance : The directors wish to place on record their thanks for the financial support and assistance received from the company's bankers. The directors commend to the shareholders resolution under item No. 2 of the notice relating to increase in the borrowing powers. By Authority of the Board S. Padmanabhan Chairman" Coonoor, 26th June, 1987.
According to the AO, the assessee has failed to show the interest income on the balance of purchase consideration and, therefore, there is escapement of income as the assessee was following mercantile system of accounting for the relevant assessment year, in earlier years and in subsequent years also. The assessee’s business is that of lease rent and interest. In view of this, the AO initiated proceedings under Section 147 and accordingly a notice under Section 148 of the Act was issued on 3rd Jan., 1997. Subsequently, reassessment proceedings were started and notice under Section 143(2)/143(1) of the Act was issued calling for the details of interest income on the balance of purchase consideration: Before the AO, it was contended that in view of the notes on accounts in the report of directors and statement of accounts, it was clearly decided by the directors that the interest is to be accounted for on receipt basis. According to him, the assessee ought to have admitted the interest income on accrual basis. The AO has rejected the claim of the assessee that it is entitled to follow hybrid system of account under Section 145 of the Act for interest income. The AO has also rejected the contention of the assessee that the very basis of proceedings under Section 147 of the Act which is an audit objection based on the opinion of the audit party, are not valid. Aggrieved, the assessee preferred an appeal before the CIT(A). The CIT(A), on merits, found that the transaction was between the holding company and its subsidiary company and the fact that it claimed the expenditure on mercantile basis whereas when it comes to accounting for the income on account of interest, the assessee has changed the system of accounting from mercantile system to receipt basis. He found that the assessee was following mercantile system of accounting and having chosen to employ regularly that system, i.e., mercantile system, it is not open to the assessee unilaterally change the same at any time to follow in respect of a particular transaction and dismissed the appeal of the assessee. Aggrieved, the assessee is in appeal before the Tribunal.
5. We have heard both the sides and gone through the case records as well as the case law cited by both the parties. The assessee’s counsel, has mainly taken up the issue of reopening vis-a-vis adoption of method of accounting as provided under Section 145 of the Act. The original assessment in this case was framed under Section 143(3) of the Act on 15th March, 1989 and the reopening under Section 147 along with Section 148 of the Act was initiated vide notice under Section 148 of the Act, dt. 3rd Jan., 1997. This reopening is done almost after nine years. The assessee was following mercantile system of accounting but the AO has seen from the notes and statement of accounts for the year ending 31st Dec., 1985, filed along with the return of income that as on 1st Sept., 1985 part of the assets and liabilities of the assessee-company stood transferred as a going concern to its wholly-owned subsidiary company, M/s Burnside Tea Produce Co. Ltd. for a consideration of Rs. 158 lakhs in accordance with the scheme of arrangement sanctioned by the Hon’ble High Court vide order dt. 19th Dec., 1986. In this scheme the consideration was partly to be satisfied by way of issuance of shares of 2 lakhs equity shares of Rs. 10 each at par as fully paid and the balance consideration of Rs. 138 lakhs to be paid with interest at the rate of 15 per cent. The original assessment was completed first of all on 15th March, 1989 but subsequently, rectification was also carried out under Section 154 of the Act on 17th Jan., 1992 to set off the carried forward loss and after nine years, notice under Section 148 of the Act for escaped income as the interest of Rs. 20.70 lakhs on the balance of purchase consideration had accrued to the assessee for the year ending 31st Dec., 1985. According to the AO this sum has been accrued to the assessee during the relevant assessment year and the assessee is following mercantile system of accounting but it has not admitted this income in its return of income and this income has escaped assessment.
6. We have gone through the notes on accounts which is available in the annual report of directors. As per the order of the Hon’ble Madras High Court, on the balance of purchase consideration, the interest at the rate of 15 per cent has been decided and accounted for the same on receipt basis in the previous year. The relevant portion which is at p. 6 of the 32nd annual report of the directors has already been reproduced in para 4 above. The Hon’ble High Court has given its sanction to the scheme of arrangement vide order dt. 19th Dec., 1986. The assessee in its return of income filed a statement of accounts and notes on accounts, wherein it is clearly admitted that it will account for the interest on the balance of purchase consideration on the basis of receipt in the previous year. These notes on accounts were available with the AO while framing the assessment under Section 143(3) of the Act, i.e., original assessment which was completed on 15th March, 1989. The interest income was not declared in the original return for taxation due to the reason that the board of directors have decided to treat the same on receipt basis even though other transactions are accounted for on mercantile system of accounting. Now, the question arises as to whether reopening of assessment in the above mentioned facts is valid or not and even though the assessee is following mercantile system of accounting as to whether the assessee is entitled to follow hybrid system of accounting or not under Section 145 of the Act in regard to one source of income particularly after giving notes on accounts in the statement of accounts of the relevant assessment year. The learned Counsel for the assessee stated that once the true and complete disclosure with regard to interest income has been made in the notes attached to the statement of the accounts, then there is no question of escapement of income particularly when original assessment was framed under Section 143(3) of the Act on the same set of facts. The learned Counsel for the assessee also stated that even though the assessee is following mercantile system of accounting, it can follow hybrid system of accounting, i.e., cash system for one transaction like interest from subsidiary company on the balance payment of consideration in view of the scheme of amalgamation approved by the Hon’ble High Court.
7. Now, we have to discuss the case law cited by both the parties. The Hon’ble Supreme Court in the case of CIT v. Foramer France , cited by the assessee’s counsel, has affirmed the decision of the Allahabad High Court in Foramer v. CIT (2001) 247 ITR 436 (All) and similar appeals were dismissed with costs and their Lordships held that “We see no reason to interfere with the decision of the High Court.” The Hon’ble Allahabad High Court has considered the Direct Tax Laws (Amendment) Act, 1987, and the amended provisions of Section 147 with effect from 1st April, 1989. It has also considered amendment which is a radical departure from the original Section 147, inasmuch, as Clauses (a) and (b) had been deleted and under the proviso thereto notice for reassessment would be illegal if issued more than four years after the end of the assessment year, if the original assessments were made under Section 143(3) of the Act. The Hon’ble High Court has also laid down that Section 153 of the Act relates to the passing of an order of assessment and not to the issuing of a reassessment notice under Section 147/148 and the directions or findings contemplated by Section 153(3)(ii) had to be a finding in relation to the particular assessee and the particular year and to be a finding it had to be directly involved in the disposal of the case. Further, the Hon’ble Allahabad High Court has laid down that notice issued under Section 148 of the Act to the assessee for reopening the original assessment on the basis of Tribunal’s decision rendered in a different case relating to the assessee’s technicians deputed to India, the income of the assessee was to be treated as fee for technical services and not as business income as assessed in the original assessments for those assessment years, were without the jurisdiction as they were barred by limitation in view of the proviso to Section 147, as amended by the Direct Tax Laws (Amendment) Act, 1987, as that was the provision that was applicable at the time of issuance of notice under Section 148 of the Act. In the present case also, the reassessment notice under Section 148/147 of the Act was issued almost after nine years and the same set of facts were available at the time of original assessment with the AO. The original assessment was completed under Section 143(3) of the Act on 15th March, 1989 and the reassessment notice was issued on 3rd Jan., 1997.
8. The Full Bench of the Hon’ble Delhi High Court in the case of CIT v. Kalvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB), which is relied on by the assessee’s counsel, has deliberated that where reassessments were made, mere change of opinion was not held to be a ground for reassessment. It is further held that even the amendment of Section 147 of the Act by the Direct Lax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989 does not alter the position what was prior to the amendment as regards to change of opinion of the AO. The scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, by the Direct Tax Laws (Amendment) Act, 1987, and subsequently, amended by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989, as also of ss. 148 to 152 have been elaborated in Circular No. 549, dt. 31st Oct., 1989. A perusal of Clause 7.2 of the Circular No. 549, makes it clear that the amendments had been carried out only with a view to allay fears that the omission of the expression “reason to believe” from Section 147 would give arbitrary powers to the AO to reopen past assessments on a mere change of opinion. It is, therefore, evident that CBDT wants that a mere change of opinion cannot form the basis for reopening a completed assessment. In the present case in hand, the assessee has declared the accounting system and changed the method of accounting for the interest income on balance of consideration in view of scheme of amalgamation approved by the Hon’ble Madras High Court which is receipt basis instead of mercantile system of accounting.
9. Again, the learned Counsel for the assessee relied on the decision of the Hon’ble Delhi High Court in the case of Coca Cola Export Corporation v. S.C. Tewari, ITO and Anr. , wherein the Hon’ble High Court has decided the issue that reopening under Section 147(a) read with Section 148 is without jurisdiction and held as under :
“A perusal of the reasons given by the ITO for reopening the assessment would show that it is really seeking to reopen the point, namely, losses on exchange, which was the subject-matter of the assessment proceedings for the year 1967-68 and which was decided against the Revenue right upto the Tribunal and even reference was refused by the High Court. It will be recalled that in that year also the assessee had claimed loss on exchange by the retranslation in terms of dollars which, though disallowed by the ITO, was allowed on appeal by the AAC and upheld by the High Court. I am not saying that the IT authorities are necessarily debarred from taking a different view in the subsequent years because it is well-settled that each assessment year is a separate unit and there is no res judicata or estoppel before the IT authorities for the subsequent years. It is not necessary to define upto and, to what extent it is open to the authorities concerned to take a different view in the subsequent assessment years because, it was not even disputed that they are not debarred per se from taking a different view even if the circumstance and material brought to their notice subsequently point to a conclusion otherwise. But these principles may well be applicable if the assessments were being made for the first time. The infirmity in the action of the respondent springs from the fact that the respondent seeks to reopen these assessments which have already been concluded and that can only be permitted if the conditions precedent exist. It is the petitioner’s case that those conditions do not exist. It is well-settled that the ITO can only issue a notice under Section 148 if the prerequisite conditions of Section 147(a) are available and the Court is not precluded from examining whether the jurisdictional facts which confer jurisdiction do exist. [See Genl. Mrigendra Shum Sher Jung Bahadur Rana v. ITO and Ors. : C.W. 926 of 1970 decided on 12th Sept., 1979]. Now, one of the essential preconditions is that the income chargeable to tax should have escaped assessment and such escapement should have been occasioned by the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that year. It will be seen that in the earlier years right from 1960 onwards, profit on exchange and loss on exchange in the relevant assessment returns were being regularly assessed or claimed. Upto 1973-74, it had thus offered for tax profit on exchange to the tune of Rs. 13,37,381.55 and claimed deduction on account of loss on exchange to the extent of Rs. 43,35,097.95. The ITO had taxed the amounts of the profit on exchange, but had, however, refused deduction of loss on exchange. The assessment for 1967-68 by the ITO was not accepted and the assessee went up in appeal and deduction on loss on exchange was allowed by the AAC. The Revenue took up the matter before Tribunal and the High Court, but failed. For the subsequent years, the ITO continued to allow this loss on exchange apparently because for the earlier years it had been allowed. It is thus clear that the ITO was fully aware of the particular system of accounting followed by the petitioner. This accounting procedure shows that profit on exchange and loss on exchange was shown by the petitioner-assessee year after year in IT returns. From the record, it is quite clear that at no point of time, the fact that the loss on exchange was being claimed on account of retranslation of the outstanding liability in dollars at the end of the year was kept away from the notice of the ITO who made the assessment. As a matter of fact, the assessment orders clearly show that all these details were within the knowledge of the ITO. Now, reasons for the belief of the ITO that the income has escaped assessment must extend not only to the escapement of income to assessment but also to the escapement being occasioned by an omission or failure on the part of the assessee by not producing fully and truly all relevant material. It is not even suggested that information as to how loss on exchange was claimed as deduction was withheld. The duty of the assessee no doubt, and it may even be insisted upon strictly, is to supply all the primary facts when the assessments are being made. The only justification for reopening the assessment on this point seems to flow from the opinion mentioned in the reasons that unless loss is occasioned by actual remission, nothing is claimable by converting and retranslating the losses in dollars, at the end of the year. But this was the precise reason for disallowing the loss in 1967-68, but which was reversed in appeal and decided against the Revenue. But ail that this comes to is that the ITO wishes to take a different view of the matter from that taken earlier. Now whatever may be the position about the jurisdiction of the ITO to take a different view of the matter on the same point for the subsequent years, because of the inapplicability of principle of estoppel in tax matters, different considerations apply about the jurisdiction when reopening old assessments. It is well-settled that escapement of income from assessment either due to a particular view of law or facts taken by the ITO or due to a mistake otherwise on the part of the ITO is not an escapement relevant to Section 147(a) as such escapement is not on account of the omission or failure of the assessee to discharge his obligation under Section 147(a). Nowhere in the reasons given by the ITO is there any suggestion of any overt or covert act in concealing or keeping back the fact, on the basis of which loss on exchange was being claimed. That this information was being supplied by the assessee and even discussed by the ITO and formed part of assessment order for all these years and was an important part of 1967-68 assessment order and subsequent appellate proceedings cannot be denied. In this background, it is not permissible now for the ITO to invoke the provisions of Section 148 read with Section 147(a) to order reassessment on the items of expenses on account of loss on the fluctuation in the rate of exchange.”
In the present case also, the facts regarding the change of accounting system in respect of interest income on balance of purchase consideration was available with the AO at the time of framing of original assessment. No doubt, the assessee was following mercantile system of accounting but in its statement of accounts, the notes attached clearly mentioned while filing the return of income that for interest on balance of purchase consideration, the income will be declared on receipt basis. The AO has initiated proceedings under Section 147 read with Section 148 on 3rd Jan., 1997 after expiry of nine years.
10. The learned Counsel for the assessee, further relied on the decisions of the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. v. R.B. Wadkar , Karnataka High Court in CIT v. Corporation Bank Ltd. , Allahabad High Court in Juggilal Kamlapat, Bankers v. CIT , Calcutta High Court in CIT v. Bengal Waterproof Ltd. and Andhra Pradesh High Court in CIT v. Margadarsi Chit Funds (P) Ltd. to support her contention.
11. The learned Departmental Representative relied on the decision of the Hon’ble Madras High Court in the case of G. Padmanabha Chettiar & Sons v. CIT , wherein it is held that same system to be adopted for receipts and payments and the assessee cannot adopt mercantile system to claim deduction of amounts payable by it. Further, he relied on the decision of the Hon’ble Allahabad High Court in the case of Smt. Radha Devi v. CIT, wherein it is held that it is not open to the assessee to change the method of accounting if the assessee has not shown that it has changed to cash system from mercantile system of accounting. In the present case in hand, the assessee has already shown the change of accounting system while filling the return of income and the materials were available with the AO while framing the original assessment. Therefore, the ratio of the decisions relied on by the learned Departmental Representative is not applicable to the present case as the facts are distinguishable.
12. Now, the question arises as to what facts are material and necessary for assessment which differ from case to case. In every assessment proceedings, the AO for the purpose of computing or determining the tax due from the assessee requires to note the facts which help him in coming to the correct conclusion to arrive at an income. If there were, in fact, some reasonable grounds for thinking that there had been any non-disclosure in primary facts which could have a material bearing in the question of assessment or underassessment that will give sufficient reasons for invoking the jurisdiction under Section 147(a) of the Act to the AO. There can be no doubt that it is the duty of the assessee to disclose all primary facts relevant to the issue to be decided by the AO. The assessee is bound to disclose such material facts which are material for its assessment for the relevant assessment year and not those facts which are wholly extraneous for the purpose of assessment. If the AO finds reasons to believe that income has escaped assessment and that has been caused by the fact that the assessee has not disclosed the material facts truly, then that would be given jurisdiction to reopen the assessment. It is necessary that before issue of a notice the AO concerned must apply his mind to the facts of the case. Any notice issued without due application of his mind is without jurisdiction. In the present case in hand, the assessee has made a disclosure of accounting system in its notes on accounts that the assessee will disclose the interest income on receipt basis and this resolution was passed by the board of directors and this resolution forms part of the accounts which was enclosed with the return of income and the assessment was framed under Section 143(3) of the Act. These material facts were available before the AO at the time of original assessment, hence issuance of reassessment notice under Section 147/148 is without due application of mind and without jurisdiction. From the case laws discussed above and from the facts of the case, it is clear that even after amendment of Section 147 of the Act, the AO cannot make reassessment. Even the AO has not brought on record any new material to support his finding. The reassessment proceedings under Section 147 of the Act were initiated merely on audit objection. In view of the above discussions and the facts and circumstances of the case, we are of the considered opinion that reassessment under Section 147/148 of the Act is bad in law. Accordingly, the orders of the lower authorities are quashed.
13. In the result, the assessee’s appeal is allowed.