ORDER
B.P. Jain, A.M.
1. These are cross-appeals of the assessee as well as of the Revenue arising from the order of learned CIT(A)-I, Jaipur, dt. 7th May, 2004 for the asst. yr. 2000-01. The grounds raised by the assessee are as under:
1. The learned CIT(A) has erred in law as well as on facts in upholding the reopening of the case under Section 148 of IT Act, 1961 by the AO.
2. The learned CIT(A) has erred in law as well as on facts in upholding the additions made by AO amounting to Rs. 40,000 regarding disallowing the penalty imposed by Customs Department on goods received as samples from the party.
3. The learned CIT(A) has erred in law as well as on facts in upholding the disallowance by AO the deductions under Section 80HHC on the counter sales made to foreign tourist and realized in foreign convertible exchange and ignoring the fact that the Hon’ble High Court of Rajasthan has held in the own case of the appellant that the assessee is eligible for deduction under Section 80HHC of such sales.
The Revenue has raised the following grounds of appeal:
On the facts and in the circumstances of the case, the learned CIT(A)-I, Jaipur, has erred:
1. in deleting following additions made by the AO under reassessment proceeding under Section 147 of IT Act:
(i) Trading addition of Rs. 25,48,728 by invoking provisions under Section 145(3) of IT Act and holding that the assessee has suppressed the profits and sales shown in the audited accounts, and manipulated the accounts according to his suitability.
(ii) Disallowance out of manufacturing expenses paid to Mr. Leela Dhar Bhati amounting to Rs. 1,79,250.
(iii) Disallowance out of foreign travel expenses amounting to Rs. 65,407.
(iv) Disallowance out of telephone and telex expenses amounting to Rs. 23,090.
(v) Disallowance out of travelling expenses amounting to Rs. 65,000.
(vi) Additions under Section 68 of the Act of the total unexplained deposits in partner’s capital account amounting to Rs. 22,12,679.
2. in not holding that language of Section 147 itself makes it clear that AO may assess or reassess not only income escaping assessment in respect of which he has reason to believe but also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceeding under Section 147. All the above items of additions, in fact came to the notice of AO during reassessment proceedings.
2. We have heard the parties and perused the material placed on record. Briefly stated, facts of the case are that the assessee derives income from manufacturing and sale of gold, silver jewellery and precious stones. The original return of income was filed on 19th Dec, 2000 which was processed on dt. 28th March, 2001. Upon the information received on dt. 12th Feb., 2002 from the customs authorities about confiscation of goods belonging to the assessee valuing Rs. 1,18,717 and imposition of penalty of Rs. 1,00,308. The reassessment proceedings were initiated by issuing a notice under Section 148 of the Act on dt. 7th March, 2002, the service of which is undisputed. The AO observed that since the penalty amount was not an admissible deduction, the amount was required to be added back to the total income and accordingly the AO recorded the reasons for initiation of the proceedings stated here under:
Return declaring Rs. 44,620 on 19th Dec, 2000 which was processed under Section 143(1)(a) on 28th March, 2001 vide D&CR No. 147/36 of Jt. CIT, Spl. Range-4, Jaipur. As per the information received from Asstt. CIT (CIB), Jaipur, vide letter No. Asstt. CIT/CIB/JPR/2001-02/1093, dt. 12th Feb., 2002 that during the financial year 1999-2000 relevant to asst. yr. 2000-01, penalty of Rs. 1,00,308 was imposed by the customs authority on confiscated goods of the value of Rs. 1,18,717 and deposited the same on 20th Nov., 1999. The scrutiny of the audited accounts filed along with the return revealed that the said penalty paid is not verifiable from the details. Obviously, the penalty has been paid out of the sources other than the sources declared in the audited accounts. I am, therefore, satisfied that income to the tune of Rs. 1,00,308 has escaped assessment and, therefore, the assessment for asst. yr. 2000-01 is reopened under Section 147.
Issue notice under Section 148.
The AO issued notice under Section 143(2) of the Act and during the course of the proceedings, it was observed that the assessee has declared a GP rate of 13.67 per cent on a total turnover of Rs. 5,01,11,809 as against GP rate of 15.67 per cent on a total turnover of Rs. 6,04,97,127 in the immediate preceding year. As per audit report the assessee was not maintaining stock register. The assessee was required vide letter No. 352, dt. 14th Nov., 2002 to explain the fall in GP rate and to file the inventories of opening and closing stock. The assessee did not file the details of inventories and did not file the details for work-in-progress and raw material issued to workers and when they were received after manufacturing of jewellery and whether the same has been included in the finished product or not. The assessee submitted an explanation that it was not possible to keep a record for each item-wise purchase, expenses, sales and profit. As regards the fall in GP rate, it was submitted by the assessee vide letter dt. 8th Jan., 2003 that due to such competition, margins are decreasing year after year and due to increasing competition buyers were in a better bargaining position, which was attributable to the declining profitability additionally affecting the assessee’s profits margin and the cost of material has increased whereas the rates of sales likewise did not increase.
Further, it was contended that export sales having more margins have decreased during the impugned year. The AO observed inflation in the manufacturing expenses and was of the view that the correctness of profit declared is not verifiable from the books and accordingly invoked the provisions of Section 145(3) of the Act. The explanation given by the assessee was found unsatisfactory by the AO and it was observed that the assessee has declared reduced profit by way of declaring lower sales whenever counter sales to the foreign tourists increased and therefore the AO applied the average rate of GP of preceding 3 years and worked out a GP of Rs. 93,99,905 by recasting the trading account at p. 6 of his order as against GP of Rs. 68,51,176 declared by the assessee and made a trading addition of Rs. 25,48,729 to the income of the assessee.
3. The assessee was required to file the details of manufacturing expenses. The confirmations from some of the workers were sought. In case of one Leela Dhar Bhati, copy of account was confirmed by Sh. Vasu Deo Bhati. No cogent explanation was given by the assessee and the AO disallowed Rs. 1,79,250 and added the same to the income of the assessee on the said account.
4. While examining the foreign travel expenses, two vouchers were prepared on plain papers and signed by partners which were without supporting vouchers for which no cogent explanation was given by the assessee and the AO disallowed Rs. 65,407 on account of foreign travel expenses. Similarly, in the absence of proper explanation the AO disallowed Rs. 23,090 on account of telephone and telex expenses and Rs. 65,000 on account of travelling expenses.
5. The AO also treated Rs. 27,250 as unexplained credit since Smt. Seema Patni was not an IT assessee as per confirmation filed by the assessee. The AO also treated Rs. 22,12,679 being a deposit in the account of the partner since the assessee could not file the explanation of deposits/withdrawals as required by the AO vide letter No. 352, dt. 14th Nov., 2002.
6. The AO disallowed the deduction under Section 80HHC for counter sales made to the tourists and the same was not treated export turnover in view of Tribunal, Jaipur, decision in the case of ITO v. Chirali in ITA No. 1350/Jp/1996, dt. 31st Jan., 2003.
7. On perusal of the order of Addl. Commr. (Customs) dt. 20th April, 1999, the AO found that the penalty was leviable for Rs. 40,000 only. The assessee has claimed that the payment has been made and the same has been reflected in the cash book. The AO observed that the penalty was for an illegal activity i.e. the assessee was caught evading customs duty claiming that a parcel contained duty-free goods and therefore the penalty of Rs. 40,000 was levied which is not an allowable deduction and therefore the AO disallowed Rs. 40,000 and added the same to the income of the assessee.
8. Before the learned CIT(A), the assessee assailed the initiation of reassessment proceedings, invoking provisions of Section 145(3) of the Act and various additions made vide ground Nos. 1 to 11 before the learned CIT(A). The learned CIT(A) vide pp. 8 to 11 of his order, after hearing the learned Authorised Representative observed as under:
I have considered the submissions of the Authorised Representative and find that the Hon’ble Punjab & Haryana High Court in the case of Vipin Khanna v. CIT (2002) 175 CTR (P&H) 335 have clearly discussed the case of the CIT v. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 and have come to the conclusion that looking to the law laid down by the Supreme Court, when proceedings under Section 147 of the Act are initiated, the proceedings are open only qua items of underassessment. Further, finality of assessment proceedings on other issues remains undisturbed. As per judgment, it makes no difference whether the assessment proceedings have become final on account of framing of an assessment under Section 143(3) of the Act or on account of non-issue of notice under Section 143(2) of the Act within the stipulated time. The amendment made in Sections 143 and 147 of the Act w.e.f. 1st April, 1989 also do not in any manner negate this proposition of law as enumerated by the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. (supra).
In the present case, it is seen that no assessment was framed under Section 143(3) nor notice under Section 143(2) was issued within the time allowed and, therefore, other issues which are not covered by the escaped income cannot be disturbed. The finality of assessment proceedings on other issue remains undisturbed. It is seen that while passing reassessment order, the AO has made various inquiries from the assessee. He has issued a letter dt. 11th/14th Nov., 2002 in which various queries were raised and assessee was required to explain the many issues which are not emanating from the reasons recorded by the AO. It has been held in the case of Vipin Khanna v. CIT (supra) that such fishing inquiry could only be made by issuing a notice under Section 143(2) within the stipulated period which in the present case had already expired. I have seen that ground Nos. 2, 3, 4, 5, 6, 7 and 9 are on account of fishing inquiries and, therefore, keeping in view the aforesaid reasoning in the judgment relied upon, the additions made and assailed in ground Nos. 2, 3, 4, 5, 6 and 9 above are deleted.
Ground No. 8 relates to the addition of Rs. 40,000. The Authorised Representative in the written submissions has mentioned that the levy of penalty was merely a case of difference of opinion by the customs authorities. It has been mentioned that the assessee received a parcel containing samples which were to be used in the items being made for the buyer. These were duty-free goods as they were samples, necessary papers, confirmation by the buyer was made to the customs authorities but they were not convinced and imposed penalty amounting to Rs. 40,000. However, penalty was imposed and paid by the assessee. But this is an allowable expense incurred by the assessee during the course and conduct of business.
I have considered the submissions of the Authorised Representative and find that the levy of penalty is on account of infringement of law which is not allowable and, therefore, looking to the facts and circumstances of the case, the addition made by the AO at Rs. 40,000 is sustained.
Perusal of ground Nos. 10(i) and (ii) reproduced above shows that the AO has not allowed deduction under Section 80HHC of the counter sales made to foreign tourists. Before deciding this ground of appeal here it is mentioned that although the AO has not mentioned that this escaped income came to his knowledge during the course of reassessment proceedings but it is clear that this was on account of investigation, regarding levy of penalty by the Customs Department and, therefore, this is clearly related to the reasons recorded by the AO. This is clearly an escaped income detected during the course of reassessment proceedings on the point of levy of penalty. So far as the allowability under Section 80HHC is concerned, it has been mentioned by the Authorised Representative that the appellant’s case is covered by the judgment of the Hon’ble Supreme Court based in the case of the appellant itself. A copy of the order of the Hon’ble Supreme Court has been filed in which the Hon’ble Supreme Court has mentioned that there is no dispute between the parties that the transactions of counter sales effected by the petitioners involved customs clearance within the meaning of Expln. (aa) to Section 80(4B) of the Act and further that the sales were in convertible foreign exchange.
The Authorised Representative has also relied upon the case of ITO v. Vaibhav Textiles in Tax World Vol. XXIX, p. 147, that the appellant is eligible for deduction under Section 80HHC on the counter sales made to the foreign tourists for which the payments were realized in foreign convertible exchange.
I have considered the submissions of the Authorised Representative and have also gone through the assessment order. Before the AO the assessee relied on the Allahabad High Court decision in the case of Ram Babu & Sons v. Union of India (1997) 141 CTR (All) 310, the Special Leave Petition against which was rejected by the Hon’ble Supreme Court. The reliance is also placed on the Hon’ble Rajasthan High Court in the case of Silver & Arts Palace Ltd. v. CIT . Learned AO has relied upon the order of the Tribunal, Jaipur Bench, Jaipur, based in the case of ITO v. Chirali and Ors. in ITA No. 1350/Jp/1996.
I have gone through the judgment of Hon’ble Rajasthan High Court. The cases were decided keeping in view that there was no dispute between the parties for customs clearance on counter sales. I have also gone through the order of the Tribunal, Jaipur Bench, and find that the Hon’ble Tribunal Members have discussed the cases relied upon by the AO but have given a finding that the claim of sale in a shop or emporium or other establishment situated in India is not eligible for deduction under Section 80HHC. This order has been passed in the later point of time than the above judgment and therefore, following the same I confirm the disallowance made by the AO.
In ground No. 10(iii), the appellant has claimed that deduction under Section 80HHC should be allowed on addition made under Section 68 of the Act. In this connection it is mentioned that the addition under Section 68 has been made by the AO which addition has been agitated by the appellant in ground No. 9(i). This addition has been deleted in view of the decisions in the cases of Sun Engineering Works (P) Ltd. (supra) and Vipin Khanna v. CIT (supra). Therefore, this does not require any separate discussion. These additions have already been deleted in the above discussed paras and therefore, this ground of appeal is dismissed.
Ground No. 11 relates to initiation of penalty proceedings under Section 271(1)(c) of the Act. Since penalty proceedings are independent and separate proceedings, it is premature to make any comment on this point. Therefore, this ground of appeal is dismissed.
9. We have perused the facts of the case. The assessee has mainly challenged the validity of issuance of notice under Section 148 of the Act and consequently the assessment framed by the AO under Section 147 of the Act. The learned Authorised Representative argued that the payments of customs duty and penalty are very normal event in the business of the assessee and therefore the AO does not have any specific material to enable him to have a bona fide belief that some taxable income has escaped assessment and therefore the issuance of notice under Section 148 of the Act is bad in law. The goods were the samples sent by the foreign buyers which were claimed by the assessee as without duty. The customs authorities did not agree to the contention of the assessee and imposed penalty amounting to Rs. 40,000 which was a normal course in the assessee’s business. Therefore, the said transaction is not the escapement of income but a routine transaction and also this being a small amount as compared to the total volume and the net profit declared by the assessee, cannot be a reason for issuance of notice under Section 148 of the Act. The learned Departmental Representative, on the other hand, relied upon the order of the AO.
10. We have gone through the reasons recorded by the AO and find that the assessee has declared the amount of Rs. 40,000 paid in the P&L a/c as an allowable expenditure, whereas the said amount of Rs. 40,000 being a penalty is not an allowable expenditure. The arguments of learned Authorised Representative cannot be accepted that the transaction is a routine transaction in the course of business carried on by the assessee. If a disallowable expenditure is incurred during the course of business, it cannot be said to be an allowable expenditure on the plea that the same has been incurred during the course of business. The said amount of Rs. 40,000 was a disallowable expenditure which was wrongly claimed by the assessee as allowable expenditure, which came to the knowledge of the AO consequent upon information received from customs authorities. Therefore, the AO has valid reasons to reopen the assessment by issuance of notice under Section 148 of the Act. Hence, it cannot be said that the assessment framed by the AO under Section 147 of the Act is void ah initio. The AO has rightly disallowed the penalty paid amounting to Rs. 40,000.
Thus, ground Nos. 1 and 2 of the assessee are dismissed.
11. The grounds of the Revenue are that the learned CIT(A) has erred in not holding that AO may assess or reassess not only the income escaping assessment in respect of which he has reasons to believe but also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceedings under Section 147 of the Act and further erred in deleting the various additions made by the AO under reassessment proceedings under Section 147 of the Act. The main argument of the Revenue is that the AO may assess or reassess any income chargeable to tax which has escaped assessment in respect of which he has reasons to believe but also other incomes which come to the notice subsequently in the course of reassessment proceedings under Section 147 of the Act.
12. The learned Counsel for the assessee, Dr. S.L. Jain having pleaded at length that the AO could call upon the assessee within 12 months, as provided under Section 143(2) of the Act, to produce any evidence on which the assessee may rely in support of the return filed by him. Since the AO as per proviso to Section 143(2) of the Act, failed to issue notice within 12 months from the end of the month in which the return is furnished, the returned income would be deemed to be accepted. The incomes sought to be reassessed as per the reasons disclosed are in respect of the penalty imposed by the Customs Department in respect of samples received from the foreign country. Therefore, the Department can seek information only in respect of the claim of the assessee with respect to the penalty amounting to Rs. 40,000 paid to the Customs Department and not in respect of other claims since the assessment proceedings in respect of other items of income have become final on account of non-issue of notice under Section 143(2) of the Act within stipulated period. The letter No. 352, dt. 14th Nov., 2002 issued by the AO asking for various details will tantamount to fishing inquiries which are not permitted in reassessment proceedings for which no reasons have been recorded by the AO. Dr. S.L. Jain, the learned Authorised Representative, relied upon the decision of Division Bench judgment of Hon’ble Court of Punjab and Haryana in the case of Vipin Khanna v. CIT .
13. After hearing the parties, we find that the Revenue’s arguments are that the AO’s jurisdiction was not restricted only to the portion of escaped income in respect of which reassessment proceedings have been initiated by recording reasons and issuance of notice under Section 148 of the Act, but to all other items of income which may have escaped assessment, whereas the arguments on behalf of the assessee are that the AO is authorized to confine his inquiry in the proceedings under Section 147 of the Act in respect of underassessed income/income escaping assessment and the AO is not permitted to make fishing inquiries to probe if any other income had escaped assessment or not.
14. The pleading with regard to the non-commencement of reassessment proceedings when the notice is not issued under Section 143(2) is unsustainable since there has not been placed any such proposition of law with regard to the said pleading supporting the assessee, hence the same is rejected.
15. In the present case, the AO has recorded the reasons with respect to the penalty of Rs. 1,00,308 imposed by customs authority on confiscated goods of the value of Rs. 1,18,717 which was deposited on 20th Nov., 1999. The AO had issued letter No. 352, dt. 14th Nov., 2002 in which the assessee was required to file various details viz. details relating to inventories, manufacturing expenses, foreign travel expenses, travel expenses, telephone and telex expenses, cash credits and counter sales to foreign tourists, etc. The issue on legality is being dealt with at the outset which is whether the AO is permitted to make inquiry for other items vide letter No. 352, dt. 14th Nov., 2002 mentioned herein before.
16. Before we decide the issue, the provisions contained in Section 147 of the Act reads as under:
If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the 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).
On the bare reading of the provision, the AO is empowered to assess or reassess any income chargeable to tax which has escaped assessment. The AO is not empowered to make the assessment of the total income of the assessee but any income which has escaped assessment and also any other income chargeable to tax which has escaped assessment which comes to his notice subsequently in the course of the proceedings under this section. The scope of reassessment proceedings under Section 147 of the Act is qua the reasons recorded being germane to the commencement of proceedings whereby during the continuation of proceedings, the income coming to the knowledge of the AO, being not disclosed and/or underassessed can be a part of reassessment proceedings but not the total income as provided in the statute under Section 4 of the Act for the chargeability of the total income. Since in a fiscal statute, there cannot be an interpolation of the words and strictly the statute has to be read as such which proposition has been settled by Hon’ble Supreme Court of India in the case of State of West Bengal v. Kesoram Industries Ltd. and Ors. and in the case of Nathu Ram Agarwal v. State of Madhya Pradesh . The said issue has also been resolved by the Hon’ble Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. which the decision of the Supreme Court in the case of V. Jaganmohan Rao and Ors. v. CIT has been explained and decision of Hon’ble Supreme Court in the case of Esthuri Aswathah v. ITO was relied upon and various other decisions of various Courts were considered. The relevant extracts of the decision of Hon’ble Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra) at pp. 319 to 321 are reproduced as under:
The principle laid down by this Court in V. Jaganmohan Rao v. CIT , therefore, is only to the extent that once an assessment is validly reopened by issuance of a notice under Section 22(2) of the 1922 Act (corresponding to Section 148 of the Act), the previous underassessment is set aside and the ITO has the jurisdiction and duty to levy tax on the entire income that had escaped assessment during the previous year what is set aside is, thus, only the previous underassessment not the original assessment proceedings. An order made in relation to the escaped turnover does not affect the operative force of the original assessment, particularly if it has acquired finality, and the original order retains both its character and identity. It is only in cases of underassessment’ based on Clause (a) to (d) of Expln. 1 to Section 147, that the assessment of tax due has to be recomputed on the entire taxable income. The judgment in V. Jaganmohan Rao’s case (supra), therefore, cannot be read to imply as laying down that, in the reassessment proceedings validly initiated, the assessee can seek reopening of the whole assessment and claim credit in respect of items finally concluded in the original assessment. The assessee cannot claim recomputation of the income or redoing of an assessment and be allowed a claim which he either failed to make or which was otherwise rejected at the time of original assessment which has since acquired finality. Of course, in the reassessment proceedings, it is open to an assessee to show that the income alleged to have escaped assessment has in truth and in fact not escaped assessment but that the same had been shown under some inappropriate head in the original return, but to read the judgment in V. Jagmohan Rao’s case (supra), as laying down the reassessment wipes out the original assessment and the reassessment is not only confined to ‘escaped assessment’ or ‘underassessment’ but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters which he had lost during the original assessment proceedings, which had acquired finality, is not only erroneous but also against the phraseology of Section 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India , this Court cautioned (at p. 578 of AIR).
It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fail to be answered in that judgment.
Although Section 147 is part of a taxing statute, it imposes no charge on the subject but deals merely with the machinery of assessment and in interpreting a provision of that kind, the rule is that, that construction should be preferred which makes the machinery workable. Since the proceedings under Section 147 of the Act are for the benefit of the Revenue and not an assessee and are aimed at garnering the “escaped income” of an assessee, the same cannot be allowed to be converted as “revisional” of “review” proceedings at the instance of the assessee, thereby making the machinery unworkable.
As a result of the aforesaid discussion, we find that, in proceedings under Section 147 of the Act, the ITO may bring to charge items of income which had escaped assessment other than or in addition to that item or items which have led to the issuance of the notice under Section 148 and where reassessment is made under Section 147 in respect of income which has escaped tax, the ITO’s jurisdiction is confined to only such income which has escaped tax or has been underassessed and does not extend to revising, reopening or reconsidering the whole assessment or permitting the assessee to reagitate questions which had been decided in the original assessment proceedings. It is only the underassessment which is set aside and not the entire assessment when reassessment proceedings are initiated. The ITO cannot make an order of reassessment inconsistent with the original order of assessment in respect of matters which are not the subject-matter of proceedings under Section 147. An assessee cannot resist validly initiated reassessment proceedings under this section merely by showing that other income which had been assessed originally was at too high a figure except in cases under Section 153(2). The words ‘such income’ in Section 147 clearly refer to the income which is chargeable to tax but has ‘escaped assessment’ and the ITO’s jurisdiction under the section is confined only to such income which has escaped assessment. It does not extend to reconsidering generally the concluded earlier assessment claims which have been disallowed in the original assessment proceeding cannot be permitted to be reagitated on the assessment being reopened for bringing to tax certain items which had escaped assessment because the controversy on reassessment is confined to matters which are relevant only in respect of the income which had not been brought to tax during the course of the original assessment. A matter not agitated in the concluded original assessment proceedings also cannot be permitted to be agitated in the reassessment proceedings unless relatable to the item sought to be taxed as “escaped income”. Indeed, in the reassessment proceedings for bringing to tax items which had escaped assessment, it would be open to an assessee to put forward claims for deduction of any expenditure in respect of that income or the non-taxability of the items at all. Keeping in view the object and purpose of the proceedings under Section 147 of the Act which are for the benefit of the Revenue and not an assessee, an assessee cannot be permitted to convert the reassessment proceedings as his appeal or revision, in disguise, and seek relief in respect of items earlier rejected or claim relief in respect of items not claimed in the original assessment proceedings, unless relatable to “escaped income”, and reagitate the concluded matters. Even in cases where the claims of the assessee during the course of reassessment proceedings relating to the escaped assessment are accepted, still, the allowance of such claims has to be limited to the extent to which they reduce the income to that originally assessed. The income for purposes of “reassessment” cannot be reduced beyond the income originally assessed.
17. The decision of the Hon’ble apex Court has been followed by the Hon’ble High Court of Punjab and Haryana in the case of Vipin Khanna v. CIT (supra) and the relevant paras at pp. 232 to 234 are reproduced as under:
Thus, it is evident that the Board itself concedes that if the assessee after furnishing the return of income does not receive a notice under Section 143(2) of the Act within the stipulated period he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return. Here, it needs to be clarified that in the Board’s circular [see \ the stipulated period has been referred to as six months as it was the period specified originally when the new provision was introduced w.e.f. 1st April, 1989. However, vide amendment made by the Finance (No. 2) Act, 1991, this period was enhanced to twelve months w.e.f. 1st Oct., 1991. In the present case, it is an admitted position that no notice under Section 143(2) of the Act had been served to the petitioner within the stipulated period and as such his return had become final.
In the background of this settled position, we may now examine the validity of the letter dt. 30th July, 1998 (Annex. P-5), issued by the Asstt. CIT which has been upheld by the Dy. CIT vide his order dt. 26th Oct., 1998 (Annex. P-7). There can be no dispute about the argument advanced on behalf of the Revenue that in view of the amendment made in Section 147 of the Act w.e.f. 1st April, 1989, the AO could not only assess or reassess the escaped income in respect of which proceedings under Section 147 have been initiated but also any other income chargeable to tax which may have escaped assessment and which comes to his knowledge subsequently in the course of such proceedings. This proposition is not even disputed by learned Counsel for the petitioner. However, what is disputed is the action of the AO in embarking upon fresh inquiries on issues which are unconnected with the issue which forms the basis of proceedings under Section 147 of the Act. From the letter dt. 30th July, 1998, it is evident that the AO was seeking general information on other issues merely to verify the return. However, the provisions and the propositions of law with regard to the issue on and after the amendment shall apply as such as held in the case of CIT v. Kelvinator of India Ltd. (2002) 174 CTR (Del)(FB) 617: (2002) 256 ITR 1 (Del)(FB).
As already observed such general inquiry could be made in the regular assessment proceedings and the present is not for assuming powers for covering the lapses and latches on the part of the AO which having let so would grant a leverage not spelled under the statute.
Admittedly, it is not the case of Revenue that during the course of proceedings under Section 147 of the Act, it had come across any material relating to the items mentioned in the impugned letter dt. 30th July, 1998, suggesting escapement of income under any of those heads. In this view of the matter, the petitioner would be justified in claiming that the letter dt. 30th July, 1998, issued by the Asstt. CIT is tantamount to making fishing inquiries on concluded matters unconnected with the issue on the basis of which proceedings under Section 147 had been initiated. This indeed is not permissible under the law. The petitioner has rightly relied on the decision of the Supreme Court in the case of CIT v. Sun Engineering Works (P) Ltd. to contend that the jurisdiction of the ITO in proceedings under Section 147 of the Act is confined only to such income which has escaped tax or has been underassessed and does not extent to revising, reopening or reconsidering the whole assessment. In the present case, the impugned letter dt. 30th July, 1998 requiring the petitioner to furnish information on issues in respect of which there is no allegation of any escapement or underassessment of income either in the reasons recorded or during the course of proceedings under Section 147 of the Act is tantamount to reviewing the whole assessment. This could not be done. The returns filed in response to notices under Section 148 of the Act were the same as filed originally. The AO had the option to issue a notice under Section 143(2) of the Act requiring the assessee to produce evidence in support of the returns if he considered it necessary to ensure that the assessee had not understated the income or had not computed excessive loss or had not underpaid the tax in any manner. Such a notice could be issued only within twelve months from the end of the month in which the respective returns had been filed originally. Admittedly, no such notice had been served on the petitioner within the stipulated period and, therefore, it has to be held that the AO had not found it necessary to require the petitioner to produce any evidence in support of the returns. Thus, the returns filed by the petitioner had become final. This finality could not be disturbed even in proceedings under Section 147 of the Act in respect of issues on which there is no material on record suggesting any escapement of income. In the present case, except for the excessive claim of depreciation there is no material to suggest any underassessment or escapement of income under any other item. There is no gainsaying the fact that in proceedings under Section 147 of the Act it is only the escaped income which has to be assessed or reassessed. Thus, we are of the considered view that as per the law laid down by the apex Court in the case of Sun Engineering Works (P) Ltd. (supra), when proceedings under Section 147 of the Act are initiated, the proceedings are open only qua items of underassessment. The finality of the assessment proceedings on other issues remains undisturbed. According to us, it makes no difference whether the assessment proceedings have become final on account of non-issue of a notice under Section 143(2) of the Act within the stipulated period. The amendments made in Sections 143 and 147 of the Act w.e.f. 1st April, 1989, do not in any manner negate this proposition of law as enunciated by the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra).
18. The said decision of the Hon’ble apex Court in the case of Sun Engineering Works (P) Ltd. (supra) has been followed by Hon’ble High Court of Punjab and Haryana in the case of Amrinder Singh Dhiman v. ITO , dt. 4th Sept., 2003, and in the case of CIT v. M.P. Iron Traders (2004) 189 CTR (P&H) 154 dt. 20th Nov., 2002 and the judgments of the various co-ordinate Benches of the Tribunal by which we are bound by the rule of consistency as held in the cases of Gyarsi Lal Gupta & Sons v. ITO (2005) 95 TTJ (Jp) 386, Dy. CIT v. Smt. Ranjit Kaur and Ors. (2003) 81 TTJ (Chd) 269: (2004) 2 SOT 523 (Chd), Poonam Rani Singh v. Dy. CIT (2006) 99 TTJ (Del) 1167 and Asstt. CIT v. Mali Chand Baid (2006) 99 TTJ (Nag) 1016.
CIT v. M.P. Iron Store (supra). Here, the assessment was completed under Section 143(1) and the basis for reopening was the enquiry about the purchase and the sales whereby the AO travelled to cash credit which Departmental appeal was dismissed by the Tribunal and the judgment of the Tribunal was confirmed by the Hon’ble jurisdictional High Court wherein the additions as in the impugned case on account of cash credit were deleted.
Gyarsi Lal Gupta & Sons v. ITO (supra), wherein the assessment was completed under Section 143(1)(a) and the issue in dispute was with regard to the depreciation and the assessing authority travelled towards the trading additions which has been reversed by the Tribunal by another co-ordinate Bench.
Dy. CIT v. Smt. Ranjit Kaur and Ors. (supra), wherein the assessment was under Section 143(1) and the reassessment was for taxing the NRI gifts; like in the present case, there was also some information and the additions were not sustained on account of the credit and household withdrawals and the Department could not convince the Bench whereas in the impugned case the amount having been duly disclosed, declared, accounted, recorded as a matter of record which as an onus stands duly discharged.
Poonam Ram Singh v. Dy. CIT (supra), wherein the proceedings were under Section 143(1)(a) and the appeal of the assessee was allowed whereby as per the provisions of Section 147, the word used is any other income and not the entire income or the total income wherein the proceedings were held to be invalid since there was no external or internal source and/or material or information for coming at a general probe, thus the proceedings were held to be invalid.
Asstt. CIT v. Mali Chand Baid (supra), wherein the Departmental appeal for the asst. yr. 1998-99 in which the assessment was completed under Section 143(1)(a) and the reopening was restricted qua the items for the initiation of the reassessment proceedings and not the items having no rational nexus with the reason recorded.
19. In view of the various decisions on the controversy settled, we are of the view that the AO had the option to issue a notice under Section 143(2) of the Act requiring to the assessee to produce evidence in support of the return, if he considered it necessary and ensures that the assessee had not understated the income or had not computed excessive loss or had not underpaid the tax in any manner. Such a notice could be issued only within 12 months from the end of the month in which the respective returns had been filed originally. Admittedly, no such notice had been served on the assessee within the stipulated period and it has to be held that the AO had not found it necessary to require the assessee to produce any evidence in support of the return. Therefore, the return filed by the assessee had become final. Therefore, in view of the Hon’ble apex Court decision in the case of Sun Engineering Works (P) Ltd. (supra) when proceedings under Section 147 are initiated the proceedings are open only qua items of underassessment and the finality of assessment proceedings on other issues remains undisturbed. To read the judgment in V. Jaganmohan Rao’s case (supra) as laying down that reassessment wipes out the original assessment and that reassessment is not only confined to ‘escaped assessment’ or ‘underassessment’ but to the entire assessment for the year and starts the assessment proceedings de novo giving the right to an assessee to reagitate matters which he had lost during the original assessment proceedings, which had acquired finality is not only erroneous but also against the phraseology of Section 147 of the Act and the object of reassessment proceedings. Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The finality of the assessment, as observed by the Hon’ble apex Court in the case of Vipin Khanna v. CIT (supra) it makes no difference whether assessment proceedings have become final on account of framing of an assessment under Section 143(3) or on account of non-issuance of a notice under Section 143(2) within the stipulated period. The amendments made under Sections 143 and 147 w.e.f. 1st April, 1989 do not in any manner negate this proposition of law as enunciated by the Supreme Court in the case of Sun Engineering Works (P) Ltd. (supra). Therefore, the AO is not permitted to make fishing inquiries to probe if any other income had escaped assessment or not and such inquiries can only be permitted if in the first instance some material comes to his notice to suggest that some other item of income may have escaped assessment or had been underassessed. In the present case, the AO is not permitted to make the fishing inquiry vide letter No. 352, dt. 14th Nov., 2002 and therefore the AO cannot exceed his jurisdiction over and above the underassessed/escaped income except the penalty levied by customs authorities for confiscation of goods. Therefore, we do not find any infirmity in the order of learned CIT(A) who has rightly deleted the trading addition and addition on account of various expenses i.e. manufacturing expenses amounting to Rs. 1,79,250, foreign travel expenses Rs. 65,407, telephone and telex expenses Rs. 23,090, travelling expenses Rs. 65,000 and unexplained deposit in partner’s capital account Rs. 22,12,679. The decision of the learned CIT(A) in confirming the decision of the AO in not treating the counter sales as export sales is reversed since the said findings of the AO cannot be said to be forming part of underassessed/escaped income in view of our decisions here in before.
20. Thus, ground Nos. 1 and 2 of the Revenue are dismissed and ground No. 3 of the assessee is allowed.
21. In the result the appeal of the assessee in ITA No. 426/Jp/2004 is partly allowed and the appeal of the Revenue in ITA No. 415/Jp/2004 is dismissed.