ORDER
Joginder Pall, A.M.
1. These cross-appeals-one by the assessee and another by the Revenue, have been filed against the order of the CIT(A), Jalandhar, for the asst. yr. 1990-91. Since the issues involved are common, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. First, we take up assessee appeal in ITA No. 429/2000. Ground Nos. 1 and 2 relate to sustaining the action of the AO for reopening the assessment under Section 147 which go to the very root of reassessment completed by the AO. These grounds are extracted as under:
1. That, on the facts and circumstances of the case, the learned CIT(A) has gravely erred in upholding the reopening under Section 147 as valid, which is bad in law and on facts and based on insufficient and inadequate material.
2. That, on the facts and circumstances of the case, the CIT(A) has gravely erred in holding that page No. 53 of Annex. A-9 of the seizure during search was the balance sheet of the business of the assessee. It is based on conjectures and surmises.
2.1 That, while holding as above, the CIT(A) has considered certain facts which could not be made a base as mentioned in paras 2.5 and 2.6 of his order, which has resulted in wrongly holding it as such.
2.2 That, while holding as above, the CIT(A) has ignored that there was neither any corresponding books of account to correlate the imaginary entries in this paper nor any asset found and seized during search pertaining to the year under assessment to corroborate the contemplated entries.
3. The facts of the case are that the assessee had filed return on 14th Sept., 1990 declaring therein total income of Rs. 52,019. The same was processed under Section 143(1)(a) on 31st Oct., 1990. Subsequently, the IT authorities carried out search action under Section 132(1) of the IT Act, 1961 (in short ‘the Act’) at the business premises and residential premises of the partners on 24th Oct., 1994 which resulted in seizure of number of incriminating documents relating to undisclosed business transactions. These seized documents also included p. 53 of Annex. A-9 seized during the course of search which was a balance sheet of the assessee relating to assessment year under consideration. The same indicated difference in the assets and liabilities amounting to Rs. 3,16,800 i.e. assets side was shown more than the liabilities side.
3.1 The AO, therefore, reopened the assessment under Section 147 on the basis of seized documents. In response to notice issued under Section 148, the assessee filed the return declaring total income of Rs. 52,020 on 27th March, 1998 i.e. at the same amount as declared in the original return. During the course of reassessment proceedings, the assessee was confronted with the entries in the seized documents. After considering the replies submitted by the assessee, the AO completed the reopened assessment on 31st March, 1990 on a total income of Rs. 13,53,000.
4. Being aggrieved, the assessee filed an appeal before the CIT(A), where the action of the AO for reopening the assessment was inter alia challenged. It was submitted before the CIT(A) that reasons recorded by the AO for reopening the assessment were not in accordance with law and facts. It was submitted that the AO has based his reasons on pp. 48 to 53 of Annex. A-9 seized during the course of search and the alleged balance sheet was for the asst. yr. 1991-92 onwards. Thus, it was contended that the reopening of the assessment for the asst. yr. 1990-91 by relying on the balance sheet for the asst. yr. 1991-92 was bad in law and without any basis. It was also argued that the AO had referred to detailed reasons mentioned in the assessment order for the asst. yrs. 1992-93 and 1993-94. These orders were quashed by the learned CIT(A) vide order dt. 27th July, 1998 and, therefore, no reliance could be placed on such orders. It was submitted that the reasons recorded by the AO had not been linked with the formation of the belief regarding income having escaped assessment and that the AO did not apply his mind to the facts of the case before reopening the assessment. The learned CIT(A) considered these submissions and observed that the search was conducted at the godown premises of the assessee which was evident from Panchnama dt. 25th Oct., 1994 and 14th Dec, 1994. Search was also conducted at the residential premises of the partners whereas survey was conducted at the shop premises of the assessee. The undisputed position was that the documents referred to in the reasons recorded were seized and, therefore, objection raised by the assessee was not material. He further referred to p.53 of Annex. A-9 which was a balance sheet for the assessment year under consideration and the said page indicated excess of assets over liabilities to the extent of Rs. 3,16,800. The learned CIT(A) observed that on the basis of such material and evidence, the AO rightly entertained a belief that income chargeable to tax had escaped assessment. He further observed that the objection of the assessee that assessment orders for the asst. yrs. 1992-93 and 1993-94 were quashed by the CIT(A) was without any merit because those appeals were decided in July, 1998 whereas assessment for the assessment year under consideration was reopened on 26th Feb., 1998. Thus, he upheld the action of the AO for initiating the reassessment proceedings. The assessee is aggrieved with the order of the CIT(A). Hence, this appeal before us.
5. The learned Counsel for the assessee, Sh. P.N. Arora, submitted that the AO has reopened the assessment without due application of mind. He referred to p. 3 of the Departmental paper book (in short ‘the DPB’) No. 2 which is a proforma in which proposal for reopening the assessment was submitted to Dy. CIT (Central) Amritsar. He submitted that col. 7 of the said proforma refers to the section under which the assessment is to be reopened as 147(b) of the Act. He submitted that the assessment was reopened on 26th Feb., 1998. Section 147(b) ceased to exist in the statute w.e.f. 1st April, 1989. As per amended provisions of the Act which came into force w.e.f. 1st April, 1989, there is only one section i.e. Section 147 for reopening the assessment. He submitted that on the same proforma, Dy. CIT, Central Cir. Amritsar, accorded his approval with the following remarks:
Yes, it is a fit case.
He submitted that since Section 147(b) did not exist in the statute at the time when assessment was reopened, the action of the AO without application of mind was illegal and bad in law. He further referred to the forwarding letter of Asstt. CIT, Central Cir. (2), Jalandhar for submitting the proposal to Dy. CIT, Central Cir. Amritsar. He submitted that while forwarding the proposal, the AO had sent case records for the asst. yr. 1991-92 and assessment record for the assessment year under consideration was not sent to Dy. CIT. He then referred to the reasons recorded by the AO for reopening the assessment, a copy placed at the backside of p. 3 of the DPB where he has referred to pp. 48 to 53 of Annex. A-9. He then referred to the detailed reasons recorded in the assessment order for the asst. yrs. 1992-93 and 1993-94 without mentioning the gist thereof. This again shows lack of application of mind by the AO. The learned Counsel, therefore, submitted that the initiation of reassessment proceedings under Section 147(b) when section did not exist in the statute was illegal and bad in law. For this proposition, he relied on the following judgment:
(i) In the case of Sunrolling Mills (P) Ltd. v. ITO .
He submitted that since it is a jurisdictional defect, the same could not be cured under Section 292B of the Act. He further submitted that the Dy. CIT, Central has accorded approval for reopening the assessment without due application of mind and, therefore, such action was illegal and bad in law. He relied on the following judgments:
(i) Chhugamal Rajpal v. S.P. Chaliha and Ors. .
(ii) Mohinder Singh Malik v. Chief CIT and Ors. .
The learned Counsel also submitted that the reopening of the assessment on the basis of subsequent assessment years was not valid. He relied on the following judgments:
(i) Dass Friends Builders (P) Ltd. v. Dy. CIT (2006) 201 CTR (All) 447 : (2006) 153 Taxman 282 (All);
(ii) Nitin P. Shah alias Modi v. Dy. CIT (2005) 194 CTR (Guj) 306 : (2005) 146 Taxman 536 (Guj);
(iii) Tribunal Patna Bench (Third Member) in the case of Dy. CIT v. Narendia Mohan Bagroy (2004) 84 TTJ (Pat) (TM) 570 : (2004) 90 ITD 90 (Pat) (TM).
He further submitted that recording of satisfaction before initiating the reassessment proceedings is a condition precedent for assuming jurisdiction before issue of notice under Section 148. He submitted that in the present case, the reasons recorded by the AO are vague and unspecific for the assessment year under consideration and, therefore, the reopening of the assessment was bad in law. He relied on the judgment of Hon’ble Rajasthan High Court in the case of CIT v. Shiv Ratan Soni (2005) 194 CTR (Raj) 126 : (2005) 146 Taxman 392 (Raj). He further argued that the AO could not make additions which do not form part of the reasons recorded at the time of issue of notice under Section 148. He relied on the following judgments:
(i) CIT v. Sun Engineering (P) Ltd.
(ii) Tribunal, Amritsar Bench in the case of D.D. Cotton (P) Ltd. v. Asstt. CIT in ITA No. 555/Asr/2004 for the asst. yr. 1999-2000.
(iii) The decision of Tribunal (SMC), Amritsar Bench in the case of Bishamber Dass Hari Kiishan v. ITO in ITA No. 127/Asr/2001 for the asst. yr. 1993-94.
(iv) Three judgments of Hon’ble Punjab & Haryana High Court in the case of Vipin Khanna v. CIT Singh Dhiman v. ITO and CIT v. Atlas Cycle Industries .
6. The learned Departmental Representative heavily relied on the orders of the authorities below. He submitted that all the arguments advanced by the learned Counsel are untenable in view of the fact that has not assailed the order of the CIT(A). He further submitted that Section 147(b) mentioned in the proposal submitted to the Dy. CIT for initiation of the reassessment proceedings no longer existed on the date when reasons for reopening the assessment were recorded. Thus, it was merely a technical mistake for which Section 292B would take care of. He further referred to p. 8 of the DPB which is a copy of p. 53 of Annex. A-9 seized during the course of search. He submitted that this document is a balance sheet of the assessee for the asst. yr. 1990-91. The same clearly shows the difference in the balance sheet amounting to Rs. 3,16,800 inasmuch as assets side of the balance sheet was higher than the liabilities side of the assessee. He further referred to p. 3 of the DPB which is a copy of the reasons recorded by the AO for initiating the reassessment proceedings. He submitted that the AO has specifically referred to pp. 48 to 53 of Annex. A-9 which also included balance sheet for the assessment year under consideration. Thus, the learned Departmental Representative submitted that there is a direct nexus between the material coming in possession of the AO as a result of search and formation of belief that income of Rs. 3,16,800 represented by excess of assets over the liabilities side in the balance sheet had escaped assessment. He submitted that the submission of the Authorised Representative that there was no material available with the AO to initiate the reassessment proceedings was without any merit. He further referred to p. 4 of the DPB which is a copy of letter dt. 9th/17th Feb., 1998 of the Asstt. CIT, Central Cir. 2, Jalandhar, to Dy. CIT, forwarding therewith proposal to reopen the assessment for the asst. yr. 1990-91. He submitted that in the enclosures indication of an (sic) for the asst. yr. 1991-92 is mentioned. This shows that assessment records for the asst. yr. 1990-91 had also been sent along with the proposal for reopening the assessment. Thus he submitted that the order of the CIT(A) for upholding the action of the AO to reopen the assessment does not warrant any interference.
7. We have heard both the parties at some length and given our thoughtful consideration to the rival submissions, examined the facts, evidence and material placed on record. We have also gone through the orders of the authorities below and referred to the relevant pages of the paper book to which our attention has been drawn. The first issue that requires to be decided by this Bench is whether the learned CIT(A) was justified in sustaining the action of the AO for reopening the assessment. The undisputed facts of the case are that in the return of income filed, the assessee had declared total income of Rs. 52,019. The balance sheet as per books of account prepared by the assessee is at p. 8 of APB. The same shows totals of debit and credit side at Rs. 14,72,749. Subsequent search action under Section 132(1) of the Act has resulted in seizure of certain incriminating documents which included p. 53 of Annex. A-9, which is a copy of balance sheet for the financial year 1989-90 relevant to asst. yr. 1990-91. The said balance sheet indicated the total of liabilities side at Rs. 17,02,700 and total of assets side aggregating to Rs. 20,19,500. The assets side is higher by Rs. 3,16,800. This could happen if the assessee had not disclosed the correct profit in the books of account maintained which should have found credited to the capital accounts of the partners. The difference may also represent the bogus liabilities shown in the regular books of account. However, in this case, on the same page the assessee has shown profit of Rs. 3,15,000 which means that the difference was partly on account of profit not shown in the regular books of account. In fact, the difference also appear in other accounts appearing on the credits and debits side i.e. capital account, sundry creditors sundry debtors etc. The AO has recorded the following reasons for reopening the assessment:
A search under Section 132 took place on the business premises of the assessee firm and residential premises of the partners. Pages 48 to 53 of Annex. A-9 are the balance sheets relevant to asst. yr. 1991-92 onwards. These disclose that the assessee had disclosed income as is evident from the excess of assets over liabilities and also the undisclosed sales mentioned therein. Further, as per the detailed reasons mentioned in the assessment order for the asst. yrs. 1992-93 and 1993-94,1 have reasons to believe that income to the tune of Rs. 3,16,800 has escaped assessment.
In the proposal submitted to the Dy. CIT, Central Circle, the AO has mentioned the section under which the assessment is to be reopened as under Section 147(b). This section did not exist in the statute w.e.f. 1st April, 1989. The Dy. CIT, Central Circle, accorded the approval by mentioning “Yes, it is a fit case”. A perusal of the forwarding letter of the AO to Dy. CIT, shows that only the assessment record for the asst. yr. 1991-92 where pp. 48 to 53 of Annex. A-9 seized from the residence of the partners have been referred to by the AO in the reasons. The assessment order for the asst. yr. 1991-92 was passed on 16th Jan., 1998. A proposal to reopen the assessment was sent to Dy. CIT (Central) on 20th Feb., 1998. It is, therefore, clear that same was on record. A perusal of the same shows that in para 5 of the said order, the AO has referred to seized documents pp. 48 to 53 which according to him reflect the balance sheets for the asst. yrs. 1990-91 to 1994-95. In fact, these balance sheets were confronted to Sh. Vinod Kakkar whose statement was recorded on 10th Nov., 1994, where he stated that these were rough balance sheets prepared for taking carried forward from M/s Eagle Flasks Industries Ltd. There is no denial that these documents do not belong to the assessee. Item No. (vii) of para 6 refers to entries recorded on p. 53 relating to asst. yr. 1990-91 where Rs. 40,000 have been reduced from Rs. 2,00,000 to show that the balance in the account of Sh. Yash Pal at Rs. 1,60,000. It also refers to the fact that the deposits of Rs. 2,00,000 taken from A.I. Enterprises does not find mention in the rough balance sheet. Further, the AO has referred to the sales for the asst. yr. 1990-91 shown in the return at Rs. 27,21,920 whereas the figure at p. 53 of Annex. A-9 indicates the sales at Rs. 42,20,000. On p. 4 of the assessment order, the AO has also worked out the difference in the balance sheet for the asst. yrs. 1990-91 to. 1993-94 and an amount of Rs. 3,16,800 referred to above relating to the assessment year under reference has been clearly mentioned. Obviously, the assessment record for the asst. yr. 1991-92 which also contained the assessment order accompanied the proposal for reopening the assessment. Now what is required to be seen whether the AO was justified for initiating the reassessment proceedings on the basis of these facts and evidence. Before recording our findings on this issue, we consider it appropriate to reproduce the provisions of Section 147 of the Act.
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 proceedings under this section or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year):
Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
Explanation 1…
Explanation 2.-For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:
(a)…
(b)…
(c) where an assessment has been made, but-
(i) income chargeable to tax has been under-assessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.
A bare reading of the above provisions of the Act shows that the AO can initiate reassessment proceedings, if he has, ‘reason to believe’ that any income chargeable to tax has escaped assessment for any assessment year subject to the provisions of Sections 148 to 153 of the Act. In such a case the AO is empowered to assess or reassess such income. Such escapement of income could be due to omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Such escapement of income could also be without any omission or failure on the part of the assessee to disclose fully and truly all material facts. The proviso to Section 147 provides that in case the assessment completed under Section 143(3) or 147 is to be reopened after the expiry of four years from the end of the relevant assessment year, the AO could take recourse of such action only if the escapement of income chargeable to tax was on account of assessee’s failure to disclose fully and truly all material facts necessary for assessment. In case such assessment completed under Section 143(3) or 147 is to be reopened within a period of four years from the end of the relevant assessment year, the requirement to establish the escapement of income due to omission and failure on the part of the assessee to disclose fully and truly all material facts, is not required to be established. In this case, the original return filed was processed under Section 143(1)(a) and no assessment under Section 143(3) had been made. Therefore, the requirement that escapement of income was due to omission and failure on the part of assessee to disclose fully and truly all material facts mentioned in proviso to Section 147 was not applicable.
7.1 The expression used in Section 147 is that if the AO has ‘reason to believe’ that any income chargeable to tax has escaped assessment. The expression “reason to believe” used in Section 147 has special significance. It does not mean ‘reason to suspect’. It is reasonable belief of a honest and reasonable person based upon reasonable grounds. The expression used is not ‘satisfied’. The ‘reason to believe’ requires higher level of evidence and material than the requirement of ‘satisfaction’ of the AO which essentially means the material which comes to the notice of AO must be a definite, specific and direct and not unspecific or vague. This issue was considered by the Hon’ble Supreme Court in the case of HO v. Lakhmani Mewal Dass 1976 CTR (SC) 220 : (1976) 103 FTR 437 (SC) where the apex Court observed that “reason to believe” does not mean “reason to suspect”. The reasons for the formation of the belief contemplated under Section 147 necessary for reopening of an assessment must have a rational connection or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee. The apex Court further observed that it was not every material, howsoever vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. Again this issue was considered by the Hon’ble Supreme Court in the case of Ganga Saran & Sons (P) Ltd. v. ITO , where the apex Court observed that expression “reason to believe” was stronger than the words ‘satisfied’. The belief entertained by the AO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. If there is no rational and intelligible nexus between the reasons and belief, the reopening of the assessment would be without jurisdiction and bad in law.
7.2 Now the case of the assessee also requires to be decided in the light of legal position discussed above. The first submission, of the assessee is that the AO has initiated the reassessment proceedings by invoking the provisions of Section 147(b) of the Act which did not exist in statute and, therefore, the assessment is illegal and bad in law. The learned Counsel has relied on the judgment of Hon’ble Calcutta High Court in the case of Sumolling Mills (P) Ltd. v. ITO (supra). We have referred to the judgment and we find that the same is of no help to the assessee. The facts of the case before the Hon’ble Calcutta High Court were that the AO had initiated the action under Section 147(b) and later by referring to the provisions of Section 292B had contended that the proceedings initiated in this case may be regarded as initiated under Section 147(a) of the Act. The Hon’ble High Court took notice of the fact that the basis of initiating the reassessment proceedings was that the assessee had not properly accounted for recovery waste material in the original assessment. However, the Hon’ble High Court noted that the assessee had disclosed all material facts necessary for the assessment and the AO had applied his mind to the facts and circumstances of the case while completing the original assessment. Therefore, the reopening of the assessment was merely a change of opinion which could not be justified under Section 147(a). The Hon’ble High Couit has held that the ‘ITO’ cannot convert a proceeding under Section 147(h) into a proceeding under Section 147(a) unless the facts and materials forming the basis of the reasons recorded under Section 148(2) satisfy the conditions precedent for assumption of jurisdiction under Section 147(a). The relevant findings recorded on p. 412 (headnotes) of the judgment of Hon’ble High Court are as under:
The reasons for initiating proceedings under Section 147(b) of the IT Act, 1961, cannot be the reasons for initiating proceedings under Section 147(a). The ITO cannot convert a proceeding under Section 147(b) into a proceeding under Section 147(a) unless the facts and materials forming the basis of the reasons recorded under Section 148(2) satisfy the conditions precedent for assumption of jurisdiction under Section 147(a) also, Section 292B does not empower the ITO to treat a proceeding taken under Section 147(b) as a proceeding under Section 147(a). This is not a mere technicality. It is a question of jurisdiction.
(Emphasis, italicised in print, supplied is ours)
A bare reading of the above para shows that the Hon’ble High Court has quashed the reassessment because the conditions precedent for assumption of jurisdiction under Section 147(a) were not met as the issues had been considered while completing the original assessment under Section 147(a). This means that if the conditions for reopening the assessment under Section 147(a) exist, the reopening of assessment can be considered even though the AO had initiated the proceedings under Section 147(b). Now Sub-section (b) of Section 147 did not exist in the statute. Therefore, the action of the AO can also be seen and considered in the light of provisions of Section 147 of the Act provided the conditions necessary for reopening the assessment exist.
7.3 Admittedly, Section 147(b) did not exist in the statute when the assessment was reopened. In fact, in the reasons recorded, the AO has not mentioned that the assessment was being reopened under Section 147(b) of the Act. The basis for reopening the assessment is the document at p. 53 of Annex. A-9 which showed the difference between the assets and the liabilities to the extent of Rs. 3,16,800 in the balance sheet. Admittedly, in the return of income filed, the position shown in the balance sheet was different from the same. There is a direct nexus between the information coming to the notice of AO by way of p. 53 of Annex. A-9 seized during the search and formation of belief that income of Rs. 3,16,800 represented by excess of assets over liabilities in the balance sheet had escaped assessment. Therefore, in the present case, the conditions for initiating the reassessment proceedings under Section 147 exist and reopening is bona Me. The mere fact that Section 147(b) was erroneously mentioned in the proforma would not vitiate the initiation of reassessment proceedings for the assessment year under consideration. Hence, this submission of the assessee is rejected.
7.4 The other plea of the learned Authorised Representative is that the reopening of the assessment on the basis of subsequent assessment years is not valid. He has relied on the judgment of Hon’ble Allahabad High Court in the case of Dass Ftiends Buildeis (P) Ltd. v. Dy. CIT (supra). The facts of the case before the High Court were that the original assessment for the asst. yr. 1995-96 was completed under Section 143(3). Subsequently, while completing the assessment for the asst. yr. 1996-97, the AO noticed certain defects in the books of account for which income was estimated by applying net profit rate of 10 per cent. By referring to his finding recorded in the assessment order for the asst. yr. 1996-97, the AO, then proceeded to initiate reassessment proceedings on the assumption that the similar defects in the books must have existed in the asst. yr. 1995-96. On these facts, the Hon’ble High Court held that the expression used in Section 147 is ‘reason to believe’ and not ‘reason to suspect’. It must be a reasonable belief based on information on record and in good faith and not in mere pretence for initiating the reassessment proceedings. Therefore, reopening of the assessment on the basis of asst. yr. 1996-97 was held to be invalid. These are not the facts of the present case. There is a seized document at p. 53 of Annex. A-9 found during the course of search which indicated the difference in the assets and liabilities to the extent of Rs. 3,16,800 in the balance sheet. The difference is direct and specific and not something vague or unspecific. The assessee has not denied the factum of seized document belonging to it. It only stated that the same was a rough working of carried forward from the earlier assessment years. Even the entries recorded therein and the name of partners show that the balance sheet relates to assessee. Thus, on the basis of entries recorded on the seized document, the AO was prima facie justified in entertaining a belief that the difference of Rs. 3,16,800 showing excess of assets higher than the liabilities side had escaped assessment. Thus, the reopening of the assessment in the present case is not based on mere suspicion or pretence or on the basis of assessment completed for the subsequent assessment year.
7.5 Be that as it may, the issue whether the assessment could be reopened on the basis of specific information obtained by AO in the assessment proceedings of the subsequent assessment year came to be considered by the Hon’ble Supreme Court and Hon’ble Punjab & Haryana High Court in the following cases:
(i) Raymond Woollen MiEs Ltd. v. ITO and Ors. (1999) 152 CTR (SC) 418 : (1999) 236 FTR 34 (SC): The case of the Revenue was that the assessee was charging to its P&L a/c, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals, etc. However, while valuing its closing stock, the elements of fiscal duty and the other direct manufacturing costs were not included. This resulted in undervaluation of closing stock and understatement of profits. The AO initiated the action for the earlier assessment years on the basis of the subsequent assessment completed by the AO for the subsequent assessment year. On these facts, the Hon’ble Supreme Court upheld the reassessment proceedings as valid though the same was opened by referring to the assessment completed for subsequent assessment year.
(ii) Ess Kay Engineering Co. (P) Ltd. v. CIT : In this case, the Hon’ble Supreme Court held that the mere fact that the case of the assessee was accepted as correct in the original assessment for the assessment year does not preclude the ITO to reopen the assessment for an earlier year on the basis of his findings of facts made on the basis of fresh materials obtained in the course of assessment for the next assessment year.
(iii) Shii Pal Jain v. HO : In this case, the Hon’ble Punjab & Haryana High Court held that the acquiring of fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment is different from drawing a fresh inference from the same facts and material which were available with the ITO at the time of the original assessment proceedings. The two situations are distinct and different. Thus, where the transaction itself, on the basis of subsequent information, is found to be bogus transaction itself, the mere disclosure of the transaction at the time of original assessment proceedings cannot be said to be a disclosure of the “true” and “full” facts in the case and the ITO would have the jurisdiction to reopen the concluded assessment in such a case.
Thus, from the ratio of the two authoritative pronouncements of the Hon’ble Supreme Court and Hon’ble jurisdictional High Court of Punjab & Haryana, it is clear that if there is a specific and definite information in regard to the concluded assessment and such information is obtained while completing the assessment, the AO by relying on the assessment order for the subsequent assessment year can reopen the assessment for earlier assessment year and such reopening would be legal and valid. The case of the Revenue stands on stronger footings for the reason that the information about difference in the balance sheet was found during the course of search carried out at the premises of the assessee at a much later stage in the year 1994. In the present case, the AO had not completed the original assessment under Section 143(3) and, therefore, it is not a case of change of opinion. Thus, the action of the AO for reopening the assessment by relying on such seized material found subsequently was legal and valid. Accordingly, this submission is also rejected.
7.6. The third objection of the learned Authorised Representative is that there must be a satisfaction recorded by the AO before reopening the case. The learned Counsel has relied on the judgment of Hon’ble Rajasthan High Court in the case of CIT v. Shiv Ratan Soni (supra) (copy placed at pp. 118 to 127 of the paper book). It is settled law that the formation of belief that income chargeable to tax has escaped assessment to tax is a condition precedent for assuming jurisdiction under Section 147 of the Act. For this purpose, it is mandatory on the part of the AO to record reasons under Section 148 before initiating action under Section 147. The action of the AO as to whether the AO correctly assumed jurisdiction for issuing of notice is to be seen solely on the basis of reasons recorded. But each case would need to be seen in the light of its own facts. The reasons recorded in the present case has been reproduced in the preceding paras of this order. In the reasons recorded, the AO has referred to pp. 48 to 53 of Annex. A-9 which are balance sheets relevant to the asst. yr. 1990-91 onwards. The AO has erroneously mentioned in the reasons the balance sheets for the asst. yr. 1991-92 onwards. However, the difference of Rs. 3,16,800 is based on seized document at p. 53 relating to assessment year under consideration. The details thereof have been duly mentioned in the assessment order for the asst. yr. 1991-92 for which the case records were also sent to the Dy. CIT, Central. Thus, the mere mention that these were balance sheets relevant to the asst. yr. 1991-92 onwards would not vitiate the reassessment proceedings. Reliance of the learned Authorised Representative on the judgment of Hon’ble Rajasthan High Court in the case of CIT v. Shiv Ratan Soni (supra) is misplaced because in that case, the AO had not recorded the reasons before issue of notice. He had recorded the reasons after notices had been issued and served on the assessee by antedating the same. There is no such charge made against the AO. The reasons have been recorded before issuing a notice under Section 148 and this is clear from the forwarding letter sent to Dy. CIT, Central, which is dt. 9th/17th Feb., 1998. The approval was accorded by the Dy. CIT, Central, on 20th Feb., 1998 and the notice under Section 148 was issued on 26th Feb., 1998. These facts are not disputed before us by the assessee. Therefore, the judgment of Hon’ble Rajasthan High Court in the aforesaid case is not applicable to the facts of the present case.
7.7. The next plea of the learned Authorised Representative is that the Dy. CIT, Central, has given the approval in a mechanical way under Section 151 of the Act. Therefore, such action of the Dy. CIT is illegal and bad in law. He has relied on the judgment of Hon’ble Punjab & Haryana High Court in the case of Mohinder Singh Malik v. Chief CIT (supra). The facts before the Hon’ble Punjab & Haryana High Court were that in the reasons recorded for reopening the assessment, the AO had referred that the claim of deduction of Rs. 87,746 from the incentive bonus received from the LIC was not allowable. The AO did not refer to any other items of escaped income in the reasons recorded by him. The Hon’ble High Court observed that the validity of notice issued under Section 148 had to be examined only on the basis of reasons recorded by the AO. Now the AO as per provisions of the Act could issue notice after expiry of four years from the relevant assessment year only if the escaped assessment was likely to be more than Rs. 1 lakh. But in the case before the Hon’ble Punjab & Haryana High Court, the income escaping assessment was found to be less than Rs. 1 lakh and, therefore, the reopening of the assessment was held to be bad in law and without jurisdiction. In this context, the approval granted by the superior officer without looking into the relevant provisions of the Act was held to be bad in law. In the present case, the reopening of the assessment is not being challenged on the ground that the AO had initiated the proceedings though the income specified in the reasons was below the limit laid down in the Act for initiating such reassessment proceedings. On the contrary, there is specific reference to the difference in the balance sheet and even the amount has been specified in the reasons recorded. Therefore, it cannot be said that the Dy. CIT, Central, has accorded the approval in a mechanical manner though he failed to notice mention of Section 147(b) in the proforma and reference to balance sheet for asst. yr. 1991-92 onwards. Section 292B will take care of such defect. But the same would not vitiate the action of AO for initiating the reassessment proceedings. Thus, the objection raised in this regard is also untenable.
7.8 The last plea of the assessee on which action for initiating the reassessment proceedings is challenged is that the AO has made the additions other than the ground on which assessment has been reopened and, therefore, such action of the AO is illegal and bad in law. The case of the assessee is that the AO initiated the reassessment proceedings by relying on p. 53 of Annex. A-9 seized during the search on the ground that there was difference in the balance sheet amounting to Rs. 3,16,800 i.e. excess of assets over the liabilities. However, the addition of Rs. 2,55,179 was made on the basis of entry of profit of Rs. 3,15,000 shown on p. 53 of the aforesaid seized document after reducing therefrom the profit of Rs. 59,821 declared in the regular return filed by the assessee. The assessee has contended that since the addition has not been made on the basis for which the assessment was reopened, all other additions made by the AO are illegal and bad in law. We have referred to p. 53 of Annex. A-9 (copy placed at p. 8 of the DPB). This is a balance sheet for the financial year 1989-90 relevant to asst. yr. 1990-91. The same shows total of assets side at Rs. 20,19,500 and liabilities side at Rs. 17,02,700. The exact difference between the credit and debit side worked out to Rs. 3,16,800. As mentioned earlier the assets side of the balance sheet can be greater than the liabilities side if the assessee had not accounted for the entire profit in the regular books OI account or certain other credits or the balance in the capital account of the partner has not been correctly shown. It could also be due to difference in the actual liabilities and those shown in the books of account. The p. 8 of the same paper book i.e. the same seized document further shows profit of Rs. 3,15,000. Admittedly, in the return of income filed, the assessee had shown profit from business at Rs. 59,821. Thus, the difference in the balance sheet to the extent of Rs. 2,55,179 is traced to the suppression of profit shown in the regular books of account and AO has made the addition of this amount. The AO has also made separate additions on account of difference in sundry creditors, deposit in the name of Sh. Yash Pal, Delhi, old stock credit difference, sundry debtors, cash in hand etc. The basis of such additions is the same balance sheet. Thus, the difference in the balance sheet to the extent of suppressed profit is directly related to the entry of profit found recorded on the same page relied upon by the AO for the purpose of initiating the reassessment proceedings. The AO could have not made the addition twice i.e. one amounting to Rs. 3,16,800 and another of Rs. 2,55,179 when the difference to the extent of Rs. 2,55,179 in balance sheet is directly covered by this entry. Thus, it is not correct on the part of the assessee to contend that no addition was made in respect of difference in balance sheet referred to by the AO for the purpose of initiating the reassessment proceedings. Therefore, to this extent, the submission of the assessee is also without any merit.
7.9 Now the question that requires to be considered is whether the AO could make additions except one for which assessment was reopened under Section 147. Section 147 has been amended by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989. Prior to the amendment, Section 147 stood as under:
If-
(a) the AO has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under Section 139 for any assessment year to the AO to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the AO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,
he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year).
Thus, pre-amended provisions contained two Sub-sections for reopening assessment i.e. under Sub-section (a) of Section 147 and Sub-section (b) of Section 147. Further, the power of the AO in the case of the reopened assessment was confined to assess or reassess such income or recompute the loss or depreciation allowance as the case may be for the assessment year concerned. The various Courts have interpreted the expression ‘such income’ means the income for which the assessment has been reopened. The judgment of Hon’ble Punjab & Haryana High Court in the case of CIT v. Atlas Cycle Industries (supra) and the judgment of Hon’ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (supra) relate to the pre-amended provisions. However, there could be more than one reopening of assessment provided conditions precedent for initiating such action exist.
7.10 There is material change in the amended provisions of Section 147. The amended Section 147 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 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.
(Emphasis, italicised in print, supplied is ours)
A bare reading of the aforesaid section shows that if the AO has initiated the reassessment proceedings in respect of income that has escaped assessment, he may 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. This means that apart from the issue on which assessment has been reopened, if the AO comes to know that some other income has also escaped assessment, he can reassess such income during the course of completion of already reopened assessment provided conditions precedent i.e. escapement of income exists. For this purpose, the AO is not required to initiate separate reassessment proceedings in order to bring to tax the escaped income not covered in the reasons recorded for initiating the action under Section 147. But, what is necessary is, that the issue for which assessment was reopened must result in addition before the other escaped income could be brought to tax. If the issue on which assessment was reopened does not result in any addition, no other addition can be made. In the case of Vipan Khanna v. CIT (supra), the Hon’ble High Court by referring to the judgment of Hon’ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (supra) has held that when proceedings under Section 147 of the Act are initiated, the proceedings are open only qua items of underassessment. The finality of assessment proceedings on other issues remains undisturbed. The Hon’ble High Court has held that the AO cannot rope in issues for making fishing and roving enquiries. Even in the case of Amrinder Singh Dhiman v. ITO (supra), the Hon’ble Punjab & Haryana High Court has held that when proceedings under Section 147 of the Act are initiated, the proceedings are open only qua items of underassessment. The High Court observed that the AO cannot seek material unconnected with the reasons for reassessing the income. Now the issue whether the addition made by the AO represents escaped income or the addition has been made on the basis of mere suspicion or by making roving enquiry needs to be examined by looking into the merits of each addition after hearing both the parties. As regards the reliance of the learned Authorised Representative on the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT v. Atlas Cycle Industries (supra), the same is applicable to the old provisions of the Act, which existed prior to 1st April, 1989. Thus, even on this score, we do not find any merit in the submissions of the assessee and the assessment could not be quashed on this ground itself. However, this is subject to the finding to be recorded on the merits of additions after hearing both the parties.
7.11 Before parting with this issue, we wish to mention that the assessment for the asst. yr. 1991-92 was reopened by issue of notice under Section 148 on the basis of seized material found during the course of search. The said assessment was quashed by CIT(A) on the ground that the reasons recorded by the AO regarding escapement of income did not pertain to the income sought to be assessed. Pending an appeal by the Department to the Tribunal, the AO issued second notice under Section 148 dt. 9th Feb., 1999 on the basis of undisclosed capital arrived at by comparison of the balance sheet seized during the search along with its return. The assessee filed a writ petition challenging the second notice for reassessment on the ground that the AO had recorded satisfaction about escapement of income of Rs. 3,20,900 which was the same income which had been included in the reassessment framed pursuant to the first notice and that fresh proceedings under Section 147 could not be initiated during the pendency of the Department’s appeal before the Tribunal. The Hon’ble Punjab & Haryana High Court dismissed the writ petition vide order dt. 15th Feb., 2002 reported as R. Kakkar Glass & Crockery House v. CIT and held that the second reassessment notice was valid because the first notice was vacated on a technical ground and the position of second notice was entirely different. The Hon’ble High Court further observed that no anomalous situation would arise if the Department succeeded in its appeal before the Tribunal. If the earlier assessment was to be restored, the second assessment in respect of the same addition would stand automatically vacated as in that event the fresh reassessment proceedings under Section 147 would be rendered infructuous. Thus, the reopening of the assessment by issue of second notice under Section 148 was upheld.
7.12 The subsequent second reopened assessment for the asst. yr. 1991-92 and also for the asst. yrs. 1992-93 and 1993-94 on the basis of the seized material came up in appeals before the CIT(A). The assessee challenged the action of the AO for these assessment years before the CIT(A). The learned CIT(A) quashed the reassessments completed by the AO for these assessment years. While doing so, the learned CIT(A) did not decide the grounds relating to specific additions made by the AO on merits. The Revenue filed appeals against the orders of CIT(A) before the Tribunal for quashing the reopened assessments. The assessee also filed cross-objections against the orders of the CIT(A) for not deciding the grounds on merits. The Tribunal, Amritsar (SMC) Bench vide its consolidated order dt. 27th Feb., 2004 set aside the orders of CIT(A) for quashing the reassessments and restored that of the AO. The appeals were restored to the CIT(A) for deciding the grounds relating to additions made by AO on merits. The relevant findings recorded by the Tribunal in ITA Nos. 570 to 572/Asr/1998 for the asst. yrs. 1991-92 to 1993-94 and corresponding CO Nos. 45 to 47/Asr/1998 are as under:
8. After considering the entirety of the facts and the circumstances and in the absence of any valid argument by the learned Counsel for the assessee even in the written submissions, I am of the view that the learned CIT(A) is not justified in quashing the assessments by holding that no valid reasons are recorded. To my mind, there was definite opinion and valid reasons were very much there, therefore, while applying the ratio of the decision of Hon’ble Supreme Court in the case of Phool Chand Bajrang Lal and Anr. v. ITO , the order of the learned CIT(A) cannot be held to be a proper order. As such, the same is vacated. Since the learned CIT(A) has not considered the case on merits and in COs, the assessees have not only supported the orders of the CIT(A) but also taken a specific plea of not deciding the cases on merits, so I, while accepting the COs of the assessees for all the years, set aside the orders of the learned CIT(A) and restore the matter back on his file with the direction to redecide the appeals on merits.
However, the assessee filed an appeal under Section 260A against the order of the Tribunal passed in ITA No. 570/Asr/1998 for the asst. yr. 1991-92 before the Hon’ble Punjab & Haryana High Court. The appeals against the order of the Tribunal for the asst. yrs. 1992-93 and 1993-94 were not filed. The Hon’ble Punjab & Haryana High Court vide its order dt. 1st May, 2006 in IT Appeal No. 274 of 2004 observed that the present appeal was arising out of order passed by the Tribunal in pursuance of the first notice to the assessee under Section 148 of the Act. However, proceedings for that assessment year had attained finality with the passing of the order by the Tribunal on 15th Sept., 2003 which was not challenged further by the Revenue. The effect of this has not been examined by Tribunal while passing order dt. 27th Feb., 2004. Therefore, the matter has been restored to the Tribunal for deciding the same afresh. From these facts, it emerges that the Hon’ble Punjab & Haryana High Court has upheld the reopening of the assessment by issue of second notice dt. 9th Feb., 2004 for the asst. yr. 1991-92 as reported in (2002) 173 CTR (P&H) 503 : (2002) 254 ITR 273 (P&H) (supra) where assessment was reopened by referring to the same seized material where the difference in the balance sheet seized during the course of search was Rs. 3,20,900. Further, the order of the Tribunal for the asst. yrs. 1992-93 and 1993-94 on the issue of reopening the assessments has not even been challenged by the assessee also support the case of the Revenue on the issue of reopening the assessment for the asst. yr. 1990-91.
8. Thus, in the light of these facts and circumstances of the case and the legal position discussed above, we are of the opinion that the learned CIT(A) was justified in sustaining the action of the AO for reopening the assessment. We do not find any justification to interfere with the order of the CIT(A). The same is upheld and these grounds of appeal are dismissed. Now both the appeals i.e. of the assessee and of the Revenue are fixed for hearing on 29th Jan., 2007 for deciding the grounds relating to specific additions made by the AO at the time of completing the reassessment for which separate notices are being issued. We order accordingly.
9. In the result, the grounds of appeal of the assessee relating to validity of the reopening of assessment are decided against the assessee and in favour of the Revenue.